CTA Case No. 725 (Decision)

HOME PRODUCTS INTERNATIONAL, C. T.A. LTD . , CASE NO . 725 Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent . X- - - - - - - - - - - - - ~ X DE C I S I 0 N This is an appeal from the decision of respondent Commissioner of Internal Revenue assessing against and demanding from petitioner Home Products International, Ltd . deficiency income taxes for the years 1955 and �. 1956 in the amounts of ?1,940 . 00 and P2 ,164. oo, respec- tively. (Par . 9, Partial Stipulation of Facts, herein- after referred to as Stifacts, pp . 22~ 26 , CTA rec . ; Exh . 1 , pp . 31-33, Folder No . 1, BIR rec . ; Exh . 2, pp . 55-56, Folder No . 2, BIR rec.) These deficiency income tax assessments arose from the disallov1ance by the respon- dent of all the claims for deductions for business ex- penses and depreciation in petitioner's income tax re- turns for the years in question. The petitioner, Home Products International, Ltd . , is a nonresident foreign corporation not engaged in trade or business in the Philippines and duly organi zed and existing under the laws of the State of New York , U. S. A. (Par . 1, Stifacts . )

DECISION - C. T.A. CASE NO . 725 - 2- During the years 1955 and 1956, the petitioner realized income from sources within the Philippines which consisted of royalties and rental payments re- ceived from Muller & Phipps (Manila) Ltd. The royal- ties were received by virtue of a manufacture and dis- tribution agreement dated January 1, 1950, and entered into between Whitehall Pharmacal Company, with the petitioner administering the rights of the afore-named company under the contract, on the one hand, and Muller & Phipps (Manila) Ltd . , on the other hand . (Exh . A-2, pp . 29-35, Folder No . 2, BIR rec . ) The rental payments were received by virtue of a lease agreement dated January 1, 1950, and entered into between the peti- tioner and Huller & Phipps (Manila) Ltd . (Exhs . A & A-1, pp. 36-42, Folder No . 2, BIR rec . ; Par . 2, Stifacts . ) The terms of the above mentioned contracts gave Muller & Phipps (Manila) Ltd. , the exclusive right to manufacture and sell in the Philippines "Kolynos" dental cream, the same to be manufactured with the machineries and equipments brought into the country by the petitioner and in accordance with the formula belonging to Whitehall Pharmacal Company . For taxable yaars 1955 and 1956, the petitioner duly filed its income tax returns, reporting therein only its Philippine income and expenses . (Par. 3, Sti- facts . ) In separate assessments, (See Exh . 1 , pp . 31- 33 , Folder No . 1, BIR rec . and Exh. 2, pp. 55-56, Folder No . 2, BIR rec . ) the respondent disallowed all the de-

DECmSION - C. T. A. CASE NO . 725 -3- ductions claimed by the petitioner for alleged business expanses and depreciati on , except the claim for losses for the year 1956 in the amount of P3 , 80o . oo whi ch was allowed pursuant to Section 30 (d)(3) of the National Internal Revenue Code . (Par . 5, Stifacts . ) The petitioner protested against the assessments . (Par . 6, Stifacts . ) After due hearing held on May 19 , 1959, before the Appellate Division of the Bureau of Internal Revenue, (Par . 7, Stifacts) the petitioner , on November 25, 1959 , received the decision of the respon- dent finally demanding the. payment of the amounts of Pl,94-0 . 00 and ?2,164- . oo, representing petitioner's alleged deficiency income tax liabilities for the years 1955 and 1956, respectively . (Par . 9, Stifacts . ) Hence , the present appeal. From the view that we take of the present case , and considering the pleadings of the parties, particu- larly the "Partial Stipulation of Facts", (pp. 22-26 , CTA rec . ) the only issue to be resolved in this case is whether or not the petitioner, a nonresident foreign corporation, not engaged in trade or business within the Philippines and not having any office or place of business therein, is entitled to deduct the expenses it incurred in the Phili ppines, and an allowance for depre- ciation, during the taxable years in question. The petitioner claims that it is entitled to deduct the expenses incurred in the Phili ppines, related to its trade or business, and to an allow~~ce for depreciation, )

DECISION - C. T.A. CASE NO. 725 - 4- and is subject to income tax based only on its net in- come. On the other hand, the respondent contends that the petitioner herein is not allowed deductions for business expenses under Section 30 (a)(2) of the Tax Code, nor to an allowance for depreciation, and is therefore subject to income t ax based on i t s gross in- come. (Par. 10, Stifacts.) At the outset, we would like to state that "the most important rule re garding the allowance of deduc- tions in general is that they are a matter of legisla- tive grace. Therefore, a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms." (Prentice-Hall, Fe- deral Taxes, Vol. 2, par. 11,042, p. 11,027, 1962 Edi- tion.) In the case at bar, the pertinent and applicable provisions of the National Internal Revenue Code read as follows: "Sec. 30. Deductions from ~ross income. In computing net income there s all be allowed as deductions - "(a) Exaenses: X X X X tt(2) Expenses allowable to nonresident !lien individuals and foreign corporat!ons.- n the case of a nonresident alien individual or a foreign corporation, the expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclu- sively. X X X X "(t) Depreciation: X X X X

DECISION - C.T.A. CASE NO. 725 - 5- tt(2) Depreciation deductible by non- rIne s itdh ee nct a sael i ens or foreign corpora tions.- of a nonresident alien indi- vidual or a foreign corporation a rea- orsonable allowance for the deter!Qration property arisin~ out of its use or em- plo:vment �or its nonuse in the busipe�S ox: tra4e shall be permitted only when such property is located within the Philippines." (Underscoring supplied.) It is clear from the above quoted provisions of the Tax Code that one of the requirements before busi- ness expenses can be allowed as a deduction from the gross income in computing the net income of a foreign corporation is that the expenses be paid or incurred in "carrying on any business or trade" within the Phil- ippines. Likewise, before depreciation can be consi- dered deductible by a foreign corporation, the deteriora- tion of the property must arise out of "its use or em- ployment or its nonuse in the business or trade," which means that the property must be "devoted to the trade or business" in which the taxpayer concerned is engaged in. (P. Dougherty Co., vs. Commissioner of Internal Revenue, 159 F. 2d. 269; 35 AFTR 669.) In the instant case, the petitioner admits that it is "a nonresident foreign corporation not engaged in trade or business in the Philippines". (Par. 1, Sti- facts.) Accordingly, inasmuch as it was "not engaged in trade or business" in the Philippines during the years under review, the business expenses in question could not have been paid or incurred in "carrying on any business or trade" conducted within the Philippires,

DECISION - C.T.A. CASE NO. 725 - 6- nor the property on which depreciation is being claimed as a deduction be considered as having been "devoted to the trade or business". We are therefore of the opinion and so hold that the respondent Commissioner of Internal Revenue properly disallowed the items for business ex- penses and depreciation as deduction from the gross in- come of the petitioner in computing its net income for the years 1955 and 1956, and his decision must be affirmed. It is true as argued by the petitioner that prior to the enactment of Republic Act No. 23~3 which took ef- f ect on June 20, 1959, Section 24 did "not make any dis- tinction between domestic, resident foreign and nonresi- dent foreign corporations in that they all are subject to the same rate of income tax and this tax is to be levied only upon their taxable ~ incomen. (pp. 5-6, Memoran- dum for Petitioner, pp . 33-43, CTA rec.; Underscoring supplied.) In other words, foreign corporations were also entitled to deductions from their gross income pur- suant to the provisions of Section 30 of the National In- ternal Revenue Code . As a matter of fact, in the present case, the respondent authorized the deduction of pg,Boo.oo for losses sustained by the petitioner in the year 1956, and also expressed his willingness to allow another claim for deduction for interest if the petitioner did not only fail to "include in its income tax return all the informa- tion necessary for its calculation". (Exh. 2, pp . 55-56, Folder No. 2, BIR rec.)

DECISION - C. T. A. CASE NO . 725 - 7- But with regard to nonresident foreign corpora- tions not engaged in trade or business in the Philip- pines, like the petitioner herein, they were likewise entitled to certain deductions authorized by the Tax Code, hmoTever, business expenses and depreciation are not among them as said deductions can be claimed by and granted only to those who are actually engaged in trade or busines"s ,.,i thin tbe Phil ippines . ~FORE , in view of the foregoing considera- tions, the de cision appealed from is hereby affirmed , with costs against t~�etitioner . SO ORDERED . / Manila, February 26, 1962 . We concur: ~~ f Presiding Judge ROMAN M. UMALI Associate Judge /