Republic of the Philiprfines Court of Tax Appeals Quezon City — Oe W.R. Grace Inc., et al. vs. Commissioner of Internal If Revenue, et al.

DECISION -

CTA CASE Nl.1 . 3836 Tax due then?on Less: Ta:-: due and paid per- return De·ficiency incane ta:{ - 2 - 14/. int. fr. 4/16/79 - 7/31/80 20/. int. fr. 8/.1./B) - 4/16/82 Total Ana..ll'lt Due 8< C"...ollectible P3,2B3, 12.1. .67 .. _::;~, .. m,~!

... .. ~;Q p 49~240.67 8~900.35 ·--··-· ·--~1:> .. ,§!.1.:...E! .. !.~4. ~=::Z~:~,~~~:,:§g Petitioner~ t.hru counsel, protested the said assessment in a letter dated February 23~ 1984 claiming that the disallowed deductions of .and PlOO~OOO.OO~ representing ta>:es/licenses and other e>:penses (relocation) respectively, were erroneous since these ta>:es and .. ..

1 icenses were proper 1 y c:ledLtc tec:l in 1978, the year they were actually paid although they were related to the years 1974~ 1975, 1976 and 1977; while the relocation e>:pense of P100~000.00 arose out of the difference between the r·elocat.icm e>:pense of P400~000.00 which was debited as an eNpense (E::hibit 1--a, p.

1~ BIR record) and the provision for relocation amounting to P300~000.00 which was added back to income (Exhibit 3 - a~ p.

44~ BIR record) .

Petitioner alleged that the a mount actually reserved for relocation exp~nse was in truth and in fact only P300,000.00 and not P400~000.00, hence the amount added back to income was only P300,000.00. No deduction for relocation expense was thus claimed. On ~1 ·.1 ly 26, 1984, petitioner received the letter of respondent denying the protest of petitioner dated February 23, 1984. Hence~ this instant petition for review filed on August 24, 1984.

The i.ssues presented for resolution are the fo ll o~~<d . n~}:

1.

Whether or not petitioner can deduct taxes/licenses for 1974-1977 in 1978, the year when said tc::n:es and 1 icenses were paid, it being under the accrual basis of accounting; and 2.

Whether or not the relocation e:-:pense of F'lOO~OOO.OO can be deducted in 1978, the taxable year in question.

We deal r first with the first issue.

The records of the case show that the taNes and licenses sought to be disallowed by respondent comprise of the following items found in the Schedule of Taxes and Licenses Paid and Accrued for the year- ended Dec: ember 31, 1978: (E>:hibit 2, p.

34- 37, BIR record) 5C

DECISION -

CTA CASE NO. 2836 ee!

1974-1977 FTIR - as exporter and importer (Exhibit S-a,

p. 395, BIR record) . F 8,263.85 1976-1977 FTR - as contractor/ lessor ~- personal property (Exhibit S-b, p. SS, BIR record) “+ 179.40 1976-1977 Fercentage tax as contractor/lessar —- personal property (Exhibit @-c, p. 35, BIR record) 14,687.85 Total Respondent asserts that the taxes/licenses incurred fr the years 1974-1977 cannot be deducted as expenses in 1978, the taxable year under review, since these expenses refer to the years 1974-1977, pursuant to Gections 30(c)(1) and 40 of the Tax Code as implemented by Section 171 of Revenue Requlatians No. 2, which provide:

"Sec. SO. Deductions from gross income.- In computing net income there shall be allowed as deduction. — HAA HM x

(c) Taxes!

YAH wR “mH.”

"Sec. 40, Feriod for which deductions and credits taken.- The deductic orovic which. "pa, a" :

Mee ALG OF :

dependent upon the method of accounting upon the basis of which the net income is computed, unless in order· to c 1 early deduc ticns sh::uld be period.

X II .

- 5 - reflect taken as the of income the a different "Sec. 171.

"Paid or incurred" .:md "Paid or accn..ted" . - (a) The terms "paid or incurred" and "paid or· accn..ted" will be ccnstn..ted according to the metJ1e:x::l of acc:o...trJt.ing up<..-n the basis of which Ue net. income i s cr.xnp...tt.ed by the ta:-:payer. The deduc:ti.c:ns and cred.i ts rrust · be taken fc.1r the tm:able year in which "paid or accn..ted" or "paid or· incurred", unless in or·der clearly to reflect tte inconE such deduc:ticns or credits sl-o...tld be taken as of a different period. If a ta:·:payer des.ir·es to claim a deduction or a credit as of a period other thc:~n Ue period in which it was "paid or accn.ted" or "paid or incurred", l"e shall attach to his return a statement setting for·th his r·equest for· c:cnsicleraticn of the case by the ['.,c:xTmi.s si.cner of Internal Revenue together· with a complete stateTEnt of the facts upon which he n ?l.i.es.

~.?ver · , in his inconJe ta:-: retum he shall take the dE;~:h.tc:ticrl or credit cnly for the ta>:able period in which it was actually "paid or incur-red" or "paid or· accrued", as the :::ase lll<::\Y be.

Upcr1 the .. audit of tie retum , the Cr.:xmlissicr1er of Internal Revenue will decide ~t-Jhether the ci'lc:-.G is ~t-li thin the e:·:cepticn provided by la~t-J, and the taxpayer ~t-lill be advised as to Ue pe r·ic.lCi for which the deduction or credit is prope1'··1y allc:x.-~able. (lhder·scoring supplied.) Petitioner contends, however, that it can validly claim as a deduction the taxes/licenses for 1974- 1977 representing the F'TR as an exporter and importer amounting to P8,263.85, since it is on an accrual basis of reporting it·s income and · ..

expenditures.

Henc:e, any 1 iabi 1 i ty which remains to be contingent., that is, not fi>:ed dr absolute 503 DECISION .....

CTA CASE NO. 38 3 6 - 6 - cannot be claimed as a deduction for it has not yet accrued.

According to pet.i tioner the contingency lies in the conflict. between Sections 192(2) and 202(e) of the Tax Code, and BIR Ruling No. 65-099 dated Augus t 28, 1965 and BIR Ruling dated March 15' 1973.

We find no mer-it. in petitioner's contention. The ques tion of whether or not petitioner is liable to pay the graduated fixed taxes as an exporter for 1974- 1977 never- was in doubt, thus, the 1 iabi 1 i ty was fixed at the time they were incurred. Under the accrual method, the "existence of a d e finite liability is the essence of accrual".

(Mer-tens, Vol.

2 , par .

12.61, Revised edition.) The is allowable the liability ther-efor- became fixed, and the amoun-t is either ascertained or ascertainable in the ta}:able year (u.s.

vs.

Ander-s on, 269 u.s.

422;

Lucas vs.

American Code Co.;

280 u.s.

445;

Brown vs.

Helvering, 291 U. S. 193). In case at bar, the liability of petitioner to pay the graduated fixed tax is d e finite pursuant to Sections 202(e) and 192(2) of

DECISION -···

CTA CASE NO.

383~ ~ - 7 -- the Tax Code then in force at the time, which are hereby reproduced as follows: ''£'1f.?C.

202.

Articles not subject to per·centage tax c::n sales. -- The following shall be exempt from Ue per-centage taxes imposed in f':>ec t..ions 194, 195, 1. 96, 1. 97, 1. 98, 1. 99 and 201. : XX}!

(e) Articles shipped or e>:port.ed by the manufacturer or pr-oducer, irrespective of any shippinq ar-rangement t.h-~t may be agreed upc:n lf-Jhich may influence or deter-mine the transfer of CWler··ship of Ue artie les_.so exported. XHX XXH."

"Sec.

.192.

F i :-:ed taxes.- ( .1 ) Persons subject to t::er·c:en te~ge tax • - x x x (2) Pen:=-..cns not subject to percentage ta:·: . -- Every perscn who is not rE.'f.:tuin:d to pay tte pE •rentage t.a:-: pre£".,cr-i.bed tu·1der this Ti t.le shall 1 w for- each cala·tdar year in which the rerscn shall a1gage in t:usiness a fi>:ed annual ta}: based upcn h.i.s gross annual sales during the pn,-:ceding cala1dar year, as followsc xxx."

BIR Ruling No.

65--099 dated August 28, 1.965 and BIR Ruling dated March 1.5, 1973 never were in conflict with the above-cited provisions of the Tax Code.

The doubt as claimed by petitioner was never apparent because it is clear from a careful perusal of BIR Ruling No.

65-099 dated August 28, 1965, that the said ru 1 ing app 1 ies on 1 y to gr.:g_c,j __ l,\.£.1:'?r_!?_::. f:'?_~: . P..9Lt. .~.t.=.?. .. _ .... 9..L .... J.9.9 .. ?.. , while on the other hand BIR

- 8 -

Ruling

dated March 15, 1973, applies only to corporations engaged in the production of consumption and e>:port.

Here~ petitioner is thus~ beyond the purview of said administrative rulings. For better appreciation of the legal and factual aspects involved in this case~ incorporated hereunder are th~ complete te>:ts of BIR Ruling 65- 099 dated August 28~ 1965 and BIR Ruling dated March 15~ 1973~ as follows: BIR K'l.l..If\13 f\0. 65- (>99 Dated A..tgust. 28, 1965 Mr. D.:nrado M. Alabastro Cert.i. f ied F'ubl i.e Ac:co...ntant R-·-~'09 Pacific Rlilding RosariCJ, Mani).a Sin In r·eply to your letter dated Pugust l .. , , 1964, I have the honor to inform ycx..t t hat producers-i'?l·:rx:>rters of logs are not st.tbjE?Ct to the graduated fi>:ed annual (C-- 1.3) ta>:.

Their C-1.4 privilege ta>:- receipt covers bc.1t.h their local and e>:rx:>rt sales. 5 (}() DECISION a Dm All previous rulings inconsistent herewith are hereby superseded.

Very truly yours, (SGD.) BENJAMIN N. TARIOS Acting Commissioner of Internal Revenue March 15, 1973 Atty. Raquel Ramirez-Habitan Froject 7, Quezon City Madam:

This refers to your letter dated February 6, 1973 requesting clarification on the following matters:

"th.

nor wn 2 Is a corporation that may engage in agricuiture (say, production of bananas) liable for the payment of privilege tax?

If it is subject to the privilege tax, is it subject to the graduated fixed tax or the percentage tax? If so, what is the basis for the tax and the rates applicable? bead the tax be the same if the agricultural products were for export? for local consumption?

If ait falls under the percentage tax section, can it avail of the provisions of Section 188 of the National Internal Revenue Code, which provides as follows:

Transaction and persons not subject to percentage taxs- In computing the tax imposed in Sections 184, 186-4 and 186-B, transactions in the following commodities shall be excluded, 4 «x x.

- .10 - Agr-icultur-al gcx:x::l pr-Oducts, etc.

X}!X In r-eply, I have tre honor- to infor-m you that a cor-por-ation which is engaged in pr-cx:lucing agr-icultur-al pn:lducts, such as bc.-v1anas for- local ccrlst.lmpticn and e>:por-t is e:·:empt fr-an tre payment of tre per-centage ta:·:es ~:ur-suant to Section .188(b) , · f theTa:·: Ca:le.

Accor-dingly, it is e>:empt t .~ .::m the payment of the fh:ed ta>: or- the gr-aduated f .i>:ed ta:·:. Ver-y tn.t 1 y yc:x..1r-s, ( SGD. )

M I SPEL P. 'v£HA ConYnissioner- of Internal Revenue At any r-ate, petitioner-'s attempt to draw suppor-t fr-clln the alleged con·flict of the e >: pr-ess pr-ov .i. si ons of the Ta >:

Code and r-espondent's administrative r-uling s for its failure to accr-ue or- deduct the taxes in question in the year-s 1974 to 1977 ha s little or no weight with the Cour-t.

Invoking a ll eged conflict of administr-ative r-ulings with the plain ~n~ clear provisions of tax laws to j ust.i fy late or- ncm - paymen t.

of ta:·:es ignor-es the basic and settled r-u--le that r-~gulations or- r-ulings in conflict ......

W::! . ... n law ar-e null and void.

(Gr-eenfield vs. Meer-, 77 Phil. 394; Wi s e & Co. vs. Meer-, 78 Phi 1. 655. )

Petitioner- eventua 11 y paid its tax liability as an expor-ter- in 1978 allegedly DECISION CTA CASE NO. 383 6 - 11 - as a matter of business prudence, but nobody pays hi s taxes because of prudence. A tax is in no way dependent upon the wi 11 or consent of the person Insofar as the fixed taxes and the percentage taxes are concerned for the years 1976- 1977 as contractor/less or of personal property (equipment) amounting to P179.40 and P23,101.10 respectively, petitioner, following the same line of reasoning as previously discu~s!d, claims that as a manufacturer it never vJas pen-:e i ved nor understood by it that the rental income derived from the lease of an equipment would establish a liability to pay the f i>:ed annual tax under Section 192(1) and pe rcentage tax as contractor under Section 205(17) of the Tax Code considering that the rental income fr·om the lease of personal proper-ty was merely an i s olated transaction. Again, this contention of petitioner fails to persuade this Court.

Section 188, 192(1) and 205(17) of the Tax Code provide: 'T:>ec • 188.

f.:~y[@IJ __ t___q_f..P.r:.!.Y:i.:.!§'9~ .. J::i.:'2:~f?..?.. - A privilege ta:-: ITJ...Ist be paid before any l:x..1siness hereinafter specified can oo lawfully begun or p...1r·sued.

The.• ta:-: en l:x..1siness is payable for every separ·a te or distinct establishnent or place

DECISION -

where business subject to the tax is conducted; and one line of business does not become. exempt by. being conducted with some other business for The tax on a business mist be paid by the person, tirm, or company conducting the same."

"Ger, 192. Fixed taxes. - (1) Persons provided, every person engaging in husiness on which the percentage tax is impose} shall pay a fixed annual tax of one hundred pesos.

yeu wesese wey, ae OSPsFe rar eeey HHH 0 “Se. 205. Contractors, proprietors.or operators.of dockyards, and. others.~ A contractor’s tax of three per centum of the gross receipts is hereby impased on the following:

YAK HH HA

(17) Lessors of personal property, except nonresident awners of property subject to the final tax under Section 24(b)(vii) of this Code. paren KAK Moe The proviso in Section 188 that “one line of business does not become exempt by being canducted with some other business for which such tax has been paid" contemplates a case where a person is engaged in two or more separate and distinct occupations or businesses, but may have only one place of business or office for their operation, as is the situation of the petitioner. Such being the case, it is liable to the payment of as many taxes - DECISION

CTA CASE

) . :3836 - 13 - as there are occupations or lines of businesses in which it is engaged, although jointly conducted in a sing 1 e off ice for purposes of its operations. (!lagan & Alejandrino vs. The Collector of Internal Revenue, CTA Case No. 43, July 25, 1956, which was affirmed by the Supreme Court in G.R. Nos. L-11113 and L- 11134, September 30, 1959, 106 Phil. 277. ) It is then~ ·fore a complete misconception of the 1 a~-<1 on the part o ·f petitioner to aver that being a manufacturer, petitioner could not have realized in 1976-to 1977 th~t in leasing equipment fr .. om which it derived rental revenue it ~-<lould be li ab le for the t .:n: as a contractor. For all its pr-etenses, petitioner resorted to strained construction of the law to delay the payment of its ta }: liabilities.

And since petitioner had been engaged in the business o ·f 1 easing pro perty since 1976, ·for petitioner· to c 1 aim that such business activity as a contractor is an isolated transac tion is to incur in se lf -co ntradictio~~ Anent the second issue as to whether or not the P.lOO,OOO.OO r-·elocati.OA e}:pense can be deducted .in 1978, the ta}:ab J. e year in question, petitioner maintain s and arg~es that the amount actually 11

- 14 - reserved for relocation expense was P300,000.00 and not P400,000.00 as alleged by respondent, hence, the f.i.r-m only added back to income the amount of P300,000.00 as shown in the reconciliation of net income.

Thus, no deduction was ever claimed in the income tax return.

We do not agree with petitioner. The Bureau of Internal Reve~ue records disclose the fact that indeed P400,000.00 was actually deducted as per investigation conducted by the BIR e;;aminer. The pertinent portion of the worksheet of the BIR e:·:aminer is herE.~under r-epr-oduced:

p. l, BIR n~cnn:f) ::? • OthE?r-·s, r1et Interest Inc:ane-·- O ... Itsiders F. E>:chamJe Loss P Rent.al Incane Other· Incane Interr·est E:·:rl!?.nse Sh::w·t term debt 1 , :zoe, 611. Z2 Relc:x:::atia1 E:-:pense 400,(X)0.00 "' 0...1stans Claims __ .. .!.~:~::_1 1 ~-~~.~~~ !_QQ ~~"~Zh,:§::~.9S~~,:1z This is even supported by evidence showing the amount o·f (E>:hibit 1--a, 593.08 288, (X)(I. 00 673.39 petitioner:s P1~422,742.00 (Others, net.) , where the amount of P400,000.00 relocation expense was included, and which was unden .i.ab 1 y der.:fuc ted by petitioner under Cost and

DECISION -··

CTA CASE NO. 3 836 -·- 15 - Expen s es from its Net Sales for the year ended 1978, to wit:

(Exhibit P, p. 55, BIR record ) 1-<J.R. ffiPCE (FHILIFf'II\ES) If\.C. STATEI"':Nl fF 11\CCl"F.~ PND FET'AINED E.Pf~II\ES 1\ET SPLf~S CDST PND EXF'f.J\EF..:S f'.,ost o ·f goods sold Selling General and adminis trative Depreciat.ion I!~ amortizatic:n Other~ net Year Ended __ 1.9.7f:J._ P22,749,764 1,008,325 1,976,587 122,426 * --···· ··!,4Z?.,?4~ E::?7.,.47_9.,.§44 Nowhere in the recor-ds of the case show that the amount actually reserved for relocation expense was only P300,000.00 as claimed by petitioner. All presumptions are in favor of the correctness of tax assessments.

The good faith of tax assessors and the v a l.idi ty of their- actions are pres umed. They will be pn~sumed to have taken into consideration all the facts to which their attention was called. No presumption can be indulged that all of the public officials of the state in the various count.r-.i.es who have to do with the assessment of property for- ta:-:a ticm wi 11 knowing 1 y v io 1 ate the du ti.f?.S imposed upon them by 1 aw ( Cornrni ssioner of 516 -

- 1.6 -- Internal Revenue vs.

Construction Resources of Asia, Inc:. and the Court of Ta:-: Appeals, 1.45 SCRA 671).

It is incumbent upon the ta:-:payer to show c 1 ear· 1 y that the ta:-: asse.ssmen t is erroneous in order to be relieved from it (Collector of Internal Revenue vs.

Boho 1 Land Tr-.::tnsporta ti:on Co. , Bohol Land Tran s portation Co., vs. Collector of Internal Revenue, 107 Phil. 965). In_this case, petitioner has not overcome the burden of proof cast upon it. No evidence whats oever was presented by petitioner, either· or· a l or· documen t;:::~ry, which wou 1 d show that P300, 000. (H) actually reser·ved.

we are th~::> r· efon2 con ~, .. rained to hold that the relocation e xpen s e of P100,000.00 cannot be allowed as a deduction.

Accor·d .i.ng 1 y, pet..i.t..i.oner I.&J. R.

Grace (Philippines ) Inc .

.i.s hereby ordered to pay to respondent Commi s sioner of Internal Revenue th~ sum of P74,959.26 as deficiency income tax due for the year 1.978 plus 10% surcharge and 20% annual interest from January 12, 1984 up to the date of full payment but not exceeding three (3) years pursuant to Section 51 of the Tax Code, as amended . .:.

l\FCI~J Jot-1 CTA CASE NO . 3836 -··· 1.7 -·- J;JHEF:FFOPE ~ Cot.tr"t.

den i.f:?S petition for review for l ac k of merit and af firm s the deci s ion a ppealed from at petitioner's costs.

WE CONCUR:

.~QUIN ,'Judg(·:?

1 f ..

....

AMANTE F

Pt-esid inq

DEC IS I 0 1\1

····

-- 18 - C E R T I F I C A T I 0 N I he reby certify that this decision reached a fter due con s ultation among the me mbers of the Court o f Tax Appea l s in accordance with Section 13, Article VIII of t he Constitution.

AMANTE FI

Presiding Court of TaN