REPUBLIC OF H PHI IPPINES OURT OF TAX APPEALS QUEZON cx · y WARNER BROS. <F. E., INC6, PHILIPPINE BRANCH, P e t i t i o n e t' vs. THE COMMISSIONER OF INTERNAL REVENUE, Respond ent. X - - - - -- -· -· ·~· - -- X D E C I S a N Th i case is an app l to tt e decision or the r pondent as sing th p titioner 'for al l eged de ici n cy inco~ae t X, withholding t X t source on royalty expenses, thre p rc:::ent 3?(.) contr ·ctor's and fix d t ><, inclusive of surcharge and int rest for fiscal ye r nded November 30, 1979. Petitio r is a or ign corporation duly li e n d to eng g in the local distribution of 'foreign ril s in ·the Philippine •

DECISION —

In a letter, dated Nove which 29, 1989, for respondent assessed aber 24, 1988, was received by petitioner on January petitioner the following alleged deficiency taxes, inclusive of interest and surcharge:

"Deficiency Withholding Tax at Source on Royalty Expens Deficiency 3% Contractor's ta Deficiency Fixad Tax swanneoue Total @..+PL13, 987. 42 Meee 2,992.69 en te BF P117, 224, 98" (See Exh. C) and then modified petitioner's alleged Deficiency Income Tax Agssessaent from PS572, 785.51 follows:

"Net Income per return Addi Unallowable Cost of Advertising accesso~ ries sold (rented) Income Tax plus CDT Less: Tax already assessed Deficiency Income Tax Add: 14% Interest (4/14/80- 7/31/80) 2O* Interest 4/15/83) Max.

TOTAL AMOUNT DUE AND

COLLECTIBLE (ibid) (8/01/80—- And, since the letter of already considered by the “our final decision on this petitioner thus filed this review on February & 1989.

O44 to anly P30, &24. &6, computed as P2, 128,757.13 enn By 709. BS P2,177, 466. 38 P B60, 986.00 mend 4hy HOS. OO FP 19,483. 00 801.47 mene wnt Dg. 4D 0 199 E. anos BE4. BE assessment was respondent as case" Cibid), petition for

DECISION -

CTA CASE NO.

4~3 4 - 3 - In oppo ing t e as es ed def'iciency income ta>< of P30,824.86 based on the disallowance of "Cost of' Advet't ising Accessori " titian r ubmitted that ' "ch t'ges to cost o'f advert ising accessot'ies - 11 ow bl • deduc tio from its g'f'OSS i nco t e s i ·1 c t se co i t- princi ally or T\ ... ight, axes, duti es a d brolH!rage eHpenses i curred upon ill Or'tat ion by p~tition r to tt a Pt :i.lippines 0 advert ising ac e5s s ·to Sec.

30 a> < 1 > and <c> he then ationa Intern 1 Revenue Code a d Sec.

80 of the Revenu R !iJUlat io s No.

2" <see Petitione\·"' 5 Memora duu, pp~ 1- 2) ..

The 'fir t issu - i whether" not cust ms dut i s, t iH:!

't t' e i g h t age , brol-<et'•age, sto age and other e s i ncu ... , ... ed in the imp rtation advet't ising acce s SOl" i e s, ch t' ged to nd constituting "Cost or A vertising Acc~ssories" consid red allowable d e ductions. Petiti ne sub itted that these eHpens~s should be allowed as deductions since they "are charges neces at'i 1 y incurred by p titioner to secure the DECISION a release of the above imported advertising accessories from customs custody (Exhibit B,' p. 9)", (ibid, p. 8)3 “these expenses are “ordinary and necessary’ for these are normally incurred in the business of the petitioner, and are appropriate and helpful it the development of its business" (ibid,

p. 9).

We agree.

The deductions af the above-wentioned expenses are apparently justified under Sec. 30a) (1) af the applicable National Internal Revenue Code, which states:

"GeQ. GO. Deductions from gross incoue.~ In camputing net incote, there shall te allowed as deductions ~ (a Expense. ™ (4) Business expenseger (AX o> ALL oavdinary and HECeBesary ekpehoes paid ar incurred duving the taxable year in carrying on any trade or businusa, « x xe" The deduction of taxes and duties paid in connection with the iwportation of advertising accessories is supported by Sec. 30c) (1) of the then National Internal Revenue Code, thugs "Sea. Ga. Deductions from gross income.:: In computing net incowe there Shall be allowed as deductions -

KH HK KKK

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(co) Taxes.- (1) In general.- Taxes paid or accrued within the taxable year in connection with the taxpayer's profession, trade or business x x x."

It is even further buttressed by Sec. 80 of Revenue Regulations No. &, thus:

"Sec, 80. Taxes in general.- As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit deduction. x KK" "Inport duties paid to the proper customs officers, and business, oceupation, license, privilege, excise and stamp taxes» and any other taxes of évery name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. »% x x" Respondent’*s contention that the “Cost oF Advertising Accessories" are considered as capital expenditures, hence, cannot be deducted from gross income but should be instead capitalized and subjected to annual depreciatian, is witheut basis in fact and in law. The “Coast of Advertising ' Accessories" cannot be considered as capital expenditures since they neither materially add to the value of the advertising accessories nor appreciably Prolong their life. They are not even considered as replacements. Hence, such 044

DECISION --

- 6 - contention is simply p rceived by this Court as erroneous.

Petit i onel'"', likewi .. e, opposed the assessm nt on th all g d deficiency withholding tax at ourcEt on royalty xpensEts 1n th · aunt 0 P1 13, 987 . 42,,· allegedly because o'f its failur to withho ld and l"'e mit the s 11 to the Bu t~eau of Inter n al Reven ue.

Petition r , however, submitt d that "t prop r withholding tax at source on royalty s s had already be n w thheld nd to the ..... espondent. •• <ibid.)

Ttl s cond issu i whether or not the assessm nt f deficiency with ldi1 g tax at so urce 0 t oyalty ex pens inclusive of i terest and su charge is proper. In a lettet"', d ted ~lat"'c h 1, 1985, respondent ass ss d petitio er o'f defici ency withholding ta>< at source comput ed s f oll ows:

DECISION ~

Royalty Expense P4,489, 566.590 Tax due thereon 1,122, 391,62 Less: Withholding Tax paid ds 969, 776. 81 Deficiency withholding tax 61,614. 8 Add: 25% surcharge (15,403. 71 Interest (Maximum) cnn es 93GB, BD

AMOUNT STILL DUE AND

(sea Petitioner's Exh. A, p. &) which was protested by petitioner Haintaining that the above assessed deficiency tax of P61,614.82 has already been withheld and remitted to the Bureau of Internal Revenue, in explaining its allegation, the petitioner said, thus:

"xy * »%® The Game amount corresponds to royalty expense of FPE4E, 459. 28 (P@1,614,.62/25% = 246,459.28) for the period November #5, 1979 to November 30, 1979 §=<(Exhibit D). Said amount of P246,459.28 wae Likewise included in the total royalty expenses of P03, 316. 85 corresponding to the period November Z5, 1979 to December 29, 197959 (Exhibit &). Of the royalty payments of PSO3, 316. 85, petitioner withheld PLes, 629.a1, representing &#5% withholding tax at source on royalty expenses. The amount of tax withheld of F125,829.21 was then remitted by petitioner to the Bureau of Internal Revenue aw evidenced by Confirmation Receipt No. 3504802 and Central Bank (CB) Revenue Tax Receipt No. 2871786, both dated January 10, 1980, (Exhibit G), and BIR Form 1743-C

(QUARTERLY RETURN OF FINAL INCOME TAX

WITHHELD AT SOURCE) dated January 10, 1980 reflecting therein the amount of royalty expenses of P5O3, 316.85 (Exhibit F.)."

(See Fetitioner’s Memorandum, pp. 14-15.)

v4 o ~ cr s u t~ -- CT~1 CA;J - l,hJ .

4 ..... 2;<1 ·- 8 -- Court cords t at pet i t i on e \·' indeed has al\"' ady paid the aruount of P61, 614.82 which was equival nt to twenty- t'ive p rc:ent <25~) of the \' oyalty expense of P246,459.28 for th pen"' iod NoveUJbe ~ 25, 1979 to Nove~~tber 30, 1979 D>' wh i c alllOU WcH• i eluded i the total roya lty expenses of P503,316.85 c:ort"' e spond i ng to th pe iod November 25, 1979 to December 29, 1979 (see E><h.

. ) .

The alfiount of P125, 829.21 representin g 25~ withholcJiny ta>< at SOU ' Ce on the P503,316.05 royalty exp nses, has ah"'eady been &.-Ji thha ld and t "' itted by the p~tition~;:

to the Bu '"'eau H(::VtH1u e <see E Hh.

{3).

uch \"e wittance, h Wl:i!Veo ~ , w a s only 111 a d~ on a n .ta\·· y 10~ 1980 (ibid> .

No xpl ation was advanced by the put it i on~ l ~ to " hy" the p a y IHH\ ·l;

Wd.S d& layed wh it was already clai111ed as an e><p ns a a ~ of Nove ber 30, 19"79.

his Cow"'t has co sistent l y held that the date o"f · t:-11 ittance of the withholding tax at source to the Bureau of I te rnal R v~ ue s o' 1 d be at t he t i me of ace t' u a 1 in the boo•< s of t h taHpayt: • In tl is case, the

DECISION ~

-~ Gow date should be reckoned on November 30, 1979, and the date of payment should have been on December 10, 1979 (which is the 10th day after the end of the period provided by law as the last day of payment). Hence, petitioner shauld be assessed in the foru of interest and surcharge for late rewittance from Deceaber 11, 1979 to January 10, 1980, computed as Followss Withholding tax remitted on Jan. 10, 1980 but which should have been remitted an Dea. 14, 1979 PG1,614. 82 Surcharges 252 PIS, 403. 71 Interests 14% per annum 7d. 84

AMOUNT FAYABLE

This Court, econnizant af the possibility that petitioner wight have claiuwed again the same amount oF P246,459.28 in the next succeeding year, wishes ta warn herein petitioner to discontinue any act of cGlaiming an expense in the preceding year and yet rewit only oan the succeeding year to avoid suspicion. This action is a deterrent to the programs of the Governwent and will ultimately work to the disadvantage of the taxpayer.

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DECISIUN —

CTA CASE HO. 43344 The third issue is whether or not petitioner is liable for a three percent (34%) contractor's tax and fixed tax on its activity of lending advertising accessories ta theater owners.

Respondent assessed petitioner for a three percent (34) contractor's tax and fixed tax on the yround that the latter engayed itself in the activity of leasing personal properties, is@., advertising accessories in accordancad to Sec. 2o3s, which pravides, thus:

"Sea. eos. Cantractors, prop- rigtors, or operaters of doekyards, and others. A contractor’s tan of three per centum of yross peceipte ig hereby dmpused on the following:

xX KX KX

(17) Lessors of personal property, except nonresident owiers of property subjeat bo Fitval tax under Gection e4(b) (vii) of this Code."

Petitioner, however, maintained that it should not be subjected to the above taxes since it did not conduct an independent business of leasing personal properties. The Lending of advertising accessories ta theater owners was only liwited to the purpose of prowaoting a particular filw O4u

DECISIGN —

- 11 - being released in the Philippines. Hence, it is merely incidental to and an integral part of its ain activity af filam distribution. "Without the latter, petitioner cannot and does not lease advertising accessories. x x Being incidental to petitioner’s business of film distribution, it Follows that no contractor’s tax or fixed tax should be levied on its income derived from such activity.” (Petitioner’s Memorandum, p- 23.)

Rightly so.

Jurisprudence guides Us to believe that / an activity that is a were incident to, or as a necessary consequence of, the principal business, should not be taxed as an independent business in itself.

"When a person or company is already taxed un its main business, it may not be Further taxed for doing something or euygaying in an activity or work which is werely a part of, incidental to and is Necessary ta its Wain ludiness. " (Standard Vacuum O11 Co. vs. Antigua, 96 Phil. 909) “This is the consensus of authority" (Manila Press, Ine. vs. GSGarmiento, 99 Phil.

41).

DECISION -

CTA CASE NO. 43434 Thus, petitioner should only be liable for the two percent (24) percentage tax on its gross receipts levied upon cinematographic Film owners, lessors or distributors in accordance with Sec. 208 of the then National Internal Revenue Code which provides, thus:

"Sec. €08. Percentage tax on stock, real estate, conmercial, ecustons, and immigration brokers and cinematographic film owners, lessors, or distributors. - Glock, real estate, Comwercial, custons, and ifttigvation brokers shall pay a percentaye lax equivalent to six per centum of the gross compensation received by them. Cinematographic. Film. ownerss.

lessors...or..distributors shall. pay.a percentage tax of two per centum of their yuregs receipts." (Underscoring supplied) which was already duly paid by the petitioner (see Exhs. I to P and sub— warkings). The law being clear and supported by jurisprudence, the petitioner should no lonyger be assessed the alleyed deficiency fixed and contractor’s taxes.

WHEREFORE, in all the foregoing, the respondent’s assessment against petitioner for deficiency income tax, withholding tax at source on royalty expenses, cantractor’s tax and fixed tax for fiscal year ended Novenber 340, i979, is HEREBY ORDERED

DECISION —

CTA CASE WO. 4334 CANCELLED for being erroneous and for lack of werit. HOWEVER, petitioner is HEREBY GRDERED TO PAY respondent the awount of P16,122.55 as surcharge and interest far late remittance of withholding tax.

$0 ORDERED.

Quezon City, Metro Manila, June 2, 1993.

TRE: “hey Ansuciate Judg

WE CONCUR:

Quze @.GraQ / ERNESTO vb. ACOSTA Presiding Judye oe é Fae LK. GRUBA Assad’ ate Judge DUK DELCLSOIU

CTA CASE NUL 4354

CERTIFICATION I hereby certify that this decision Was reached after due consultation among the wembers of the Court oF Tax Appeals in accurdance with Section 13, Article VIIT oF the Constitution.

Or. 8> Q Gon Pe ERNESTO DO. ACUSTA Presiding Judge Court of Tax Appeals Cr cr om