Kanematsu Corporation, et al. vs. ~ GC.1.A. Gase NO.4875 the Commissioner of

DECISION

C.t.A. CASE NO. 4875

-~ DP

office, Kanematsu Corporation of Japan (formerly Kanematsu-Gosho Ltd.), and its customers in the Philippines.

In a letter, dated July 23, lyg1, respondent informed petitioner that it had detictency VAT liability tor taxable years 1988 and 198Y mn the amounts of P8.151.130.685 and P15.8641.244.d/, respectively, computed as follows:

DEF IG TENCY VALUE ADDED AX

1986-1989- Total sales subjyect to VAT ($1,849,897.14) PSY, 399, 422, 225 VAI due thereon at 10% Fb 3,939,942.23 Add: 25% surcharge __ 984,985.56 Sub-total! p 4, 924.4 .1Y9 Add: 20% itterest up to B8-2U-Y1 3,.201,203.Ub6 Comprom!se 25,000.00 FOYAL AMOUNT DUE & COLLECTIBLE P 8,151,130. 85 1989-1990 fotal Sales subject to VAI (%$3,953,/59.05) BS VAT due thereon at 10% P ./26,2384.19 Add: 25% surcharge " 2) let see 558.55 sub-tota | P10, 907. TT Add: 20% Interest up ta &€-20-91 4,908,506. Compromise oO “000. v0 IOtTAL AMOUN! DUE & COLLECTIBLE P15 , 841, 299. ae the above~ment toned assessments were based on Revenue Audit Memorandum Order (HAMO) 1-85, whien the constructive trading theory that the sates of the Home

DECISION

C.1T.A. CASE NO. 4875 Office based on the solicitation of the Branch, are in substance sales of the branch, because the sales. are constructively consummated in the Philippines. As the seiftfer, the Branch ts therefore tiable for 1@% VAT on the total value of goods bought by the Philitppine importers directiy from Japan and other countries for the subject taxable years.

In its letter, dated August 26, {y9l, petitioner through its external auditors protested the aforementioned propesed assessments. it argued that RAMO 1-6 appiied anly to income tax. not to VAT, which is business tax. Moreover, the constructive trading theory haS tis bearing for purposes of the vAIl. as the ftabiltity ror the said tax «8S tmposed on the Fhiltppine Importers or focal purchasers of the goods and not upon subject taxpayer.

On January / 1992, respondent Issued deficiency VAT assessments against petitioner mn the total amount of Piego 937,874.10, inelusive of interests, surcharges, and compromise penalties, covering taxable years 1988 and iv89, which were received by petitioner on January 14, iv¥e. and detaitis of which are as follows:

DECISION

C.T.A. CASE NO.4875 -~- 4 -

Deficiency VAT-1989 (FAS-4-89-91-3649)

Deficiency VAI

25% Surcharge

Interest due Compromise penaity Total amount due

Deficiency VAI-1989 (FAS~4~-89-91-3650)

Deftcrenoy val 250% surcharge Interest due Compromise penalty lotal amount due befictency VAI-1y8B (FAS-4-88-Y91-O00G651) Deficiency vA 29% surcharge fnterest due Compromise penalty fotal amount due

Deficiency VAI~198B (FAS-~4-88-91-008652 )

Deftcrency VAI

25% surcharge Interest due Compromise penaity fotal amount due t9Ye2, On february 134, petitioner the above-ment toned assessments on protested P 8,726,234.19 2,181,558.55 5,661,.144.37 __25,000.00 P27.175.559.15 20,381,669.37 22,829,148. 57 100,000.00 Pio, 387,317. 89 bF 3,939,942. 23 984,985.56 3.941.023.07 25,000.00 P 8, 490, 950. 86 P14,420,442.31 7,210,221.16 fo.,251.334.94 100,000.00 ba | ie i i} | i | | against sane grounds stated in tts eai lier protest to the proposed assessment.

Ihts tttme. however, tt lamented the its deficiency assessments by more than that the itnorease was devoid ot Furthermore, the sales considered as constructively Phitippines tor the 500%, supporting made by the Head Office ownership or title to the arbitrary increase of It alleged uocuments.

cannot be consummated rn the goods sold

DECISION

C.T.A. CASE NO.4875 passed to the Philippine buyers upon delivery thereof in Japan.

In a letter, dated September 29, 1992, which was recetved by petitioner on October 15, 1992, respondent denied with Tinality petitioner s protest. Hence, the instant petition tor review filed with this Court on November f5, !99e.

fhe sole lteygal tssue to be resolved in this case, 18 whether or not petitioner is ftable tor 10% VAI on the sale of guods by its Japan Head Office to Philippine customers In her denial letter, page 1, fast paragraph thereot (Exh. "GC", Pet. ; p.16. CIA ree.). respondent alleged that:

“x OX x fhe sales consummated abroad by the Home Oftiree shall be treated as sales eanstructivelty consummated tn the Pheltippines and made hy the branch office. hence, rneane therefrom shail be considered as Income from sources within the Phibtppines. Ihe solicitations made by the branch are actually trading acts and the home otfice, in pursutng its trading business here im the Philippines 1S obltgated to supply its branch with merchandtse ordered by tocal buyers. the sales then, that were made by the home office shall be cansidered tho more than merely a constructive supplytny of the merchandise to its branch which eventually constructively sells the sanie to the Philippine buyers (par. G.1 RAMO No. 1-86)"

DECISION

C.T.A. CASE NO. 4875 On page 2 ot the same letter/Exh. "Cc", Pet. (p.17, CTA rec.)

, respondent further stated that:

“Under Section 100 of the Tax Cade, a value-added tax equivalent to 10% of the gross selling price or gross value tn money of the goods sold, bartered or exchanged shall be tmposed on the seller at transferor. AS clearly portrayed, kKanematsu Corporation-Matila Branch I's the actua! seller or transferor of the goods supplied by its head ottice, such being the case, it 1s tiable te the assessed 10% Value-added tax."

2 COL ome yt Subse 2 eS F ‘¢ the Court annot subsertbe to respondent’ s idea petitionel thar 1S subyeet to 10% VAT. AS correctly argued by petitioner, RAMO 1-86 appltes only to tnoome tax and to vA.

Clear

) lhus Section 8.1 thereof provides:

"3.17 The Phrlippine branch solicits purchase orders from tocal buyers, relays the information to ts home otfice, purportedly directly makes the sale.

tn thes type of operattonm: (1) sales purportedly consummated abroad by the home office shai be treated as sales constructively consummated in the Phtlipptnes and inade by the branch office, henae, income therefrom shall be sonsidered thneawe trom sources within the Philtpptnes: Cit? the branch shalt record and report the yross selling price of commodrtrtres sotd thru the home office; and (tit) Peport for ihcome tax purposes rks net Income therefrom, (tv) Sstnce under this situation, the Import taxes, duties and chardes have aitready been paid by the local buyers, the same shall net anymore be chargeable against the branch. “ (Underscoring supplied) riy, as can be seen from sub-Seettian Ctr), 1-86 covers only income tax and not VAL. RAMU 1-86 not

RAMO

Was

DECISION

G.T.A. CASE NO. 4875 passed in January 1986 while VAT was passed onty in January 1988, or two years later.

the years covered in the instant case are 1988 and 1989. The ktnd of tax tnvolved (S VAT. Therefore, the proper law that should govern ts Executive Order No.273, better known as the VAT law, whtch was incorporated mn the lax Code of 1988, starting trom section 99 up to Section Jil thereot.

Pursuant to Section 9Y, the persons lItable for VAT are the seller of goods or services atid the Importer. In the instant case, although the actual seller of goods «Ss the Head Office in Japan, it cannot be made liable tor VAT aS the sale was consunmated th Japan.

Neither tS the Branch (the herein petitioner) liable ter VAI as tt is not the actual setter, thts was the Court’ s finding in an earlier case of petitioner decided on March 2f, 1995. fhe decision in part states:

"x & XK Petitioner as a branch merely acted as an agent of the Head Office in promoting its sales, delivering the samples and the quotation to the possible buyers. ihe Head Office is the actual seller (shipper) of the goods as indicated in the commercial involtces presented in evidence by petitioner. the Head Office as a trading office buys the goods from manufacturers in Japan and then sells the same to local buyers tn the Philippines. x xX x." (p.7, Decision in CTA Case No.4531, “Kanematsu-Gosho, Ltd.-Manita Branch vs. CR,” prom, March 2f, 1995; Underscoring supplied) DECIS!I@N C.1.A. CASE NO. 4875 In the case at bar, VAT is properly and legally due on the ltocal buyers who are considered the importers. As earlier said, under Section 99 of the Tax Code, VAT is a liability of the setter of goods or services and the importer. Although it has been estabiished that there was no sale subject to VAI as the satd sale was consummated th Japan there was definitely importation of goods by local purchasers who are liable for VAT. However, considering that such vVAl on tmportation was already patd by the local huyers, tt should no longer be imposed on the herein petitioner.

Finding the petitton for review meritorious ana if accordance with law, the Court GRANIS the same, WHEHEFORE. respondent ts hereby ORDERED to CANCEL and WITHDRAW the sublect detictency VA!t assessments in the total amount of P136,937,874.10, tnelusive of interests, surcharges and compromise penalittes covering taxable yeais 1988 and 1y98y tor lack oft any legal and , RAMON O. DE

Associate Ju

tactual bases.

SO OHDEHED.

| CONCUR:

ERNESTO ). ACOSTA

Frestding Judge

i oniaand > —

DECISION

C.1.A. CASE NO. 4875

CERTIFICATION

| hereby certify that this decision was reached after due consultation with the member of the Court of Tax Appeals in accordance with Section 138, Article Vidl ot the Constitution.

Om R. Qaok tRNESIO D. ACUSIA

Presiding Judge

Court of Tax Appeals