CTA Case No. 5300 (Decision)

REPUBLIC OF THE PHI LIPPINES COURT OF TAX APPEALS Qi.JEZCn-.i C:;: TV LMG CnEIYt LHL::> LUt<PORATiON C.T.A. Ct-i~E Nu. 5300 formerly CMEMPH� L-LMG, INC., ~ro ulg aieo: , ner, - - ~~~tN_gg~ versus - fHE CGMMISS ONER OF INTERNAL REVENUE, Respondent. x--------- DECISIOi rh1 s lS an appe al fr�o m ~:;ne OT 1:;ne Lomm ... ssJ.unt'r u1 J.n"t;et'l"lclJ. nt'V t'i.ue u1 r11ea ~11e pl'O'I:;es~:; oy ~et1t1oner, aisputing tne as sessme nt dema nd1ng ue1 J.LJ.ency income t.ax, aer1CleT1cy Wlt.flnO ... Olng Cclx ana der1c 1ency sa1es t;ne year' .1. �:1t:l.::: 1 n t;ne I I It:' cl.SSi:.' '=>';;olllt:.'flt. clt'O�=>e Tt'OITI alsaJ.J.Owea aeouc~1ons of marKet1ng ana management support set�vices , under Wl~nholaing o t �ca.><e:; on t;ne management fees, ana sub.JeC-clng sales 0 r oy-pt'Oa UCt S r-'cl.lt;loner� 1s a pr va1:;e corpora'l:;lon ou.1.y w1tn the Securit1es and Exchange LOffiffilSSlOTl \::Jt::.Li c\lla lS engaged tne manufac1:, ..we ana or ret''(; 111 zer�s, '::> �.\ J. I 1.\r � J. L.: ..:.\L~ J..W' c\IIU u ~. 11 er 1..:1, t' 111 1 ca J. cll1U ... nuu::. l. t'ldl

DECISION C. T. A. CASE NO . 5300 It on the tnat Chemical the Philippines, Inc. \C.LP, TOt' brev1tyJ en~ered 1n~o .-;ne latter shall collect management fees In co nsideration tor l���enoer�1ny d.SSiscance In �cne p1ann1ny, etTICient; conouc �t. and general management of the business and affair's OT an 1nvescment ana managemen~ company. 1nere was also a separa~e "'''ctll ue erd:;I~:;leo re1moursement ror all actual costs incurreo by 1.-; .Lrl l;ne rendit;ion of management services to LMG oasec on reasonable allocat;ion factors (E xhs. H, H-1 to h-3, 1, I- 1 t. o I--3 > � On Apt'i l f iled Its 1ncome tax 1 u r� tne J.Jt:7Ct.71H uer' ..::, J. ' <Exns. D-1 to D-4) . as deouction from J.t;'=> ltH.:ume che s e r'V ices oy and paid "to managemen-c; ag1��eemen". i-'et.li.J.Uflt'r"' J.lkt:'WJ.'::>t:' L'UIIIJJUG!::'O lt.S wJ.�~.;nno!dlng "tax on "tne managemen~ fees of CIP at 3~ of is an independent contractor per Revenue Regula t; 1 on s i-.1 o. 1.::;-- r 8, as amended by Revenue Regula"tions b-l::;i; and Old �::>UU.)t.'Ci.. 01 uy- products -c;o 10~ sales -c;ax. 1-' e 1; I t; I o n e t' r'ece 1 veo an un uece mber' 2t:l, Assessment Notice No. FAS-18-82-87-00 cateo DecemGer lo,

DECISION C.T.A. CASE NO. 5300 - 3- 1987 (Exh. A>' assessin g Petit i one~' for' all e ged tax , e xpa nd e d wi thholdin g a n d sal e s deficien cy i n come taxes , as ~-v e ll as inc~'em e nts amountin g t o P2, 1.1. 4, 911.87, computed as fol l ow s : 1982-Deficiency Inco1e Tax Net inco1e per return Pl31 0b41803. 00 Add: Unall owabl e deduct ion/addit ional inco1e: Market ing &1anage1ent support services chan~ ed by Cheephi l p 637, 900. 00 Managesent fees-not subjected t o EWT (5~ ) 1,985, 712.47 p 2,623,612.47 Net taxable per investigation P15,b88,415. 47 Inco1e tax due thereon p 7,049, 787.00 Less: A1ount due per return 5, 869, 161.00 Deficiency inco1e tax Add: 20j int. fr. 4-16-83 to 4-16-86 (1axi1u1l p 1,180,626.00 TOTAL AMOUNT DUE AND COLLECTIBLE 708,375.60 p 1,889, 001. bO 1982-Deficiency Expanded Withholding Tax Managesent fees p 2,182,101.67 5~ Withholding tax due thereon 109,105.08 Less: A1ount paid per return 9,819.46 Deficiency tax: Add: 25% surcharge p 99,285.62 24,821.40 14~ int. fr. 2-1-83 to 12-31-85 40,541.62 20~ int. fr. 1-1-86 to 12-18-87 38,983.50 TOTAL AMOUNT DUE AND COLLECTIBLE p 203,632.14 1982-Deficiency Sales Tax p 89,080.82 8,908.08 Sales-by product 1~ sales tax due thereon 8,908.08 Less : A1ount paid 2,227.02 Deficiency tax p 11,135.10 Add: 25~ surcharge 10,743.03 Sub-total p 22,278.13 Add: ~ int. fr. 2-21-83 to 12-18-87 TOTAL AMOUNT DUE AND COLLECTIBLE

DEC IS ION C. T.A. CASE NO. 5300 - 4- On January 7, 1988, Petitioner filed a position paper protesting the aforesaid assessment. <Annex D of the Petition for Review, CTA records pp. 28, 29) Notwithstanding Petitioner's letter of protest and its subsequent letters reiterating such protest, Respondent denied Petitioner's pleas. The last and final denial was received by Petitioner on November 2, 1995 dated May 26, 1995. <Exh. 4, CTA records p. 7) Respondent disallowed the deductions made by the Petitionet~ ft~om i t s income the m a t~ket ing and management suppot~t set~vices charged by and paid to CIP because of alleged absence of evidence to show that the amount ~'ias actually i ncut~t~ed by CIP. Respondent also disallowed a withholding tax rate of 3~ of 15~ of the gross payment of management fees in the a mount of P2, 182,101.67 charged by and paid to CIP, or in the equivalent amount of P9,81 9 .46 <Exh. E) � Instead, Respondent assessed the Petitioner five perc e nt ( 5~ ) o f t he management fees, ot~ in the eq u ivalent amount of P109, 105.08. Hence, as assessed, there was a deficiency withheld tax in the amount of P99,285.62. Correspondingly, a surcharge of 25~ on the deficiency withheld tax and penalties on the aggregate amount in varying percentages was imposed. The basis of Respondent in disallowing the withholding tax rate of 3~ of 1 5~ of the gross payment was that the said t ax rate was applicable only to

DECISION C.T.A. CASE NO. 5300 - 5- lndepet luent con"i.r�actot' S tJer � kevc>nu ~=' Reg u .i. cit. 1 on s 1\1 o. f' Ci, as amended oy Revenue Reguia"t 1ons i''lo. t:.-7'3. 1.c:n; c acn me rn; of Annex F, Petition for Review, CTA records pp. 3'3, 4(1} ' nesponden"t tooK tne po:.it1on �that Cii=� allegedly r�end e t' t:!tl tllanag em en c "tO l"tS s 1 s<; et~ com pan 1 es wn1cll '{;0 o"tner companies; and as sucn, L, 1 i-' can only be as a '- management and techn1cal consuLtant " under~ Sect ian 1 \b) of Rev. Regs. f._ja. 13-78, as amended, .Lnstt?dtl o �i untJer � same: r' egula'L ian. ~i'Lh regard 'LO de1 1.c1ency sa1.es �(;aX an oy- pr-oducts , Responden �~; L:ialm::. basis to al t et' why tnese me:nn s pt~oauc-c oy-pr�uducts <lq;tht d.i.kyiate ana heavy dikylate) shou1ci not oe sub.Jec<;eu to sales tax, cons1oer � 1ng ... ncti', the oy - pr�oduct.:. Wt:!t�e <::11:.0 ue1ny soJ.u separate products to s1s~;er compctntes co wn1cn 1ncome was earned ana f o r wh1ch no sales tax was paid. Respondent t��e main ed in pOSl(;l.On so r- eG J. t .toner� wcts constt' <:nned ~;o r11e a pet.1t.1o n rot � tills Cout� c on De..:emoer l' ~-�et 1 c 1 oner�� its posii:.1. on anJ !Jray:, I Ot ' Ul Respondent's decision denying ]. \; s r�r�om ttlt: pciyulen.., o 1 t. il e a for � t~., clJ. J Ol.Spu �ced d'::>sessment. ~ecitioner further '::>Uomits tha<; ~esponden~;'s

DECISION C. T.A. CASE NO. 5300 collect such taxes have already been barred by Th e issues -co oe in tnis case ar~e ruilow1ng: l. wnetner~ or' no1; ~:;ne r1yn1; of r<esponoen~:; "GO collect has a l r' e ad y pr'e sc1�' i beo, ana 1f the an~~wer~ 1 s J.Yl the negative; Whe-cner' or�' not the and management '=>Uppor'T, st=r'Vlces cnc.n�'yeu i..Jy <::IIIU !J<::IlU �~u Cli=� by tne Petit1oner 1s oeouctible as al1owab1e expense; 1 �. vntnho1o1ng un ::> management fees? 4. Whether or not the sales of by-products derived fr�'oru tilt: pr~lllt..:l!J<::Il 1-!r uU�-IC\. !Jr�uduct=d or' lll<::~l'liXI actur��ed by tne Pet1tioner 1s also suoject to 1V~ sales tax. i 110::: que-:.1.lUli ur pr��e scr' 1 pt. 1 on 1 ~. ueemeo 1ssue anu mus1; f1rst oe resolved so that -chis Court can wnet her' T10'(; -cne other' lSSUeS pr�esented deserve cons1dera~:;ion. ,::.. e t 1 t i o n e r�' contenos '!;l!a"t; Responoent can no 1,118 01spu~.eu L:UfiS1uer�11 1Q tha-c the action In y�eview, Pet1tione1�' e l abo r�at ed on the issue of pr�escr'iption by stating that the assessment 1n question was we1l w1-cnin 1,1'le pel�' i od. Pet 1t 1 oner� then pr�opu:,eu a r �y u. me 11 1. Respondent had five (5) year's fY'Oill tile Issuance of tne cl'=>-:. t==> :oment, �l.i 1d (, was culJ.ect tne

J DECISION C. T. A. CASE Nu . 5300 - 7- oef1c1ency taxes, hence the period ~u LU a, December~ 1 1-33.:::. however, f.-�e-c 1 -c 1 onet' tnat Respuncent. rc~.:.J.eo co rnc~Ke c~ny mov~ r�eyc~.- LJ.L!ly cne oJ.spuc,eu assessmen-c cesp1-ce tne race -cna-c -cney nave noc c~a1y 111 (,0 ~xt.eno �t. 1111 t.� I WI' COlJ.eCC10n, tnus, t'esulting 1n tile p t' e s c r~ 1 p -c 1 o n o 1 the l"(esponoen-c , on tne o-cner~ nc~nu, r�erutes -cne c:\J. iegdt.J.un uy :,(,dt.J.ny per 1 oo COJ.leC\.10T1 was 1 n-c er�r-up~; eo wnen -che t i-'e"C 1 1 utaer� r2ques -ced for a reinvestigation or r�econs1oer'at1ort ur d1e assessment., the pt' or. e s �t. eo assessment nas not. ye-c pr�escr'li.Jed . we t-'ct 1,; 1 oner'' s conc.en�c1ons W 1 Lll r�egar~o "CO pt't.'"::>Ct 'J. IJ\;10T1 OeVUJ.U Ol lilt.'t'J.L. Recoros show -cnat ~etlt_oner rece1veo -che assessmen,; 11 u t. 1 c e 1-l e r' " c1 1 n 1 n y t o c.6' l :;ICit � ci IJLlS J.1.1 Ull ,_Jciper� l Tl cill eitOt'L LU L:UliV.LIICt: lit:.'SJ-IUIIUt:IIL L U r"'e -�eV c\1 UdL e II .L '::> r'egat'O ""CO 1""CS tax oer1c1enc1es suoJeLt o, tne a�;;;sessment. Respondent, llowe1. et' �co r'e- evaluate and pr��oce eo eo to 1SSUe a demand letter� asK1ny c for� c.he pciymeTtt. u r t. 11e 1-; t:: 1 t. 1 o n e r� � s t. d. x u e 1 .:. L' J. e n c 1 e s � H s o o n 1 1 1 e o b y t-� e 1. .L t. 1 u n e r � u n l�::;la:J UJ.SjJUi.J.tl!::j �t.ne CUt"'t't'L:l.llt:'.:>S WI l.llt! l:;ne same t..Lme for�� a r'e 1nvest 1 gcn 1 on or

DECISION C. T.A. CASE NO. 5300 - a- t. 11 e 1 r' L"d.:ten 1~~4 , nespunaen~ aen1ea to wn1cn Petitioner~ aga1n reconsiderat ion 1n a le~ter f1led on Apr1l tne 1ssue of prescription ~ i me . F i n a l l y, Rf? s pond en t 1 s s u e d i�l 1 s f i n a l c.ieClSiOn CH,�ll)/J.lig c<.t.J. t h e r' e q u e s t s c.iemanu1ng ~ne payment of lllCUillt: I lllcti uecis1on was r��ece i ved by Petitioner~ on November~ .:::, 1335 which lea a Pet1tion fur' Rev1ew w1~h t; n J. :, L u u r� t; on December~ 1, i �3 .35 . i'he above show t~esponaent r or~ r�t=J.IIVt.�St;lyatlOTlS/r�t;- the revenue examiner with eva1 uat 1 on o�r ~he f1ndings o f ;-��espect to 1ts 1982 ~ax deficienc1es. the pr~otest was never f1n ally c.ieniec.i until November .:::, cat ego 1�' 1c a .l. ... y u e L J. <::< l"' e a the oecis1on. Unaer tne :aw , particularly Sec~1on 320 o f the 1982 Tax Cooe, the 1 u r� reinvest1gation have the effect of suspending the running Ul U I J. .l.llll. tJd i. lUll cliiU CU.iJ.eCt. :,een from the fol1awiny s~a~emen~s: SEC. ~20 . Suspension of t�unning o f statute. The runn1ng of the statute of limitations pr0v1aed in Sec~1on 318 and 313 on the making of assessment ano the beg1nning or d1st1��'alnt or ' levy Or' c\ j.Jr'UL:�.::eLiJ.II!:J 111 L:uur" 1 ur� collect1an , 1n n~spec1, o f any defic1ency , Sllc<iJ. be :,USj-it:llLieu ! ur� �t.ne per'ioo uur�ing wi�1lCI1 t.IIt: Comm i ssJ.uner~ of lnter~nal Revenue 1s pr~ohlb ited ft~om mak1ng the as�::.essme nt

DECISION C. T. CASE 0 . 5300 9- c1 i �:; t Y"' \::1 i -n �'.: D r � 1. E? \} y G �~"~ i:.~. p ,"' (J c:� c;. ~�:? d i n 1::. 1 7-1 c:- ::J u �r-� t: , C\ n d for sixty days thereafter; when the taxpaver requests for a re-investigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in thE� Y'etui-~n fi1E!d upoii ''Jhich <~ t.:,\:r: is bE~ing a~;~,e-:;sed o1��� collE�cted : Pr� ovided:1 T"��,at if th(:; taxpayer infor~s the Commissioner of Internal RevenuE of any change in address~ the statute tAl :i. 1 1 n o t .. b c~ ~; ,_;_ f; p t~ n d E~ d ; wh E! n t h e 1--'J a 1�' r~ <":\ n t D f distraint and levy is duly served upon the t a.>< pay E~ 1-~, h :i. f; a,_, t t�, o �r�� :i. z E~ d Y' e pr~ e sent at i v e, o -.-- a member of his household with sufficient discretion, and no property could be located; and when the taxpayer ~~ out of the Philippines. <Underscoring supplied) to collect not yet prescribed due to the latter's repeated requests for reinvestigation which haVE! the E!ffect of suspending pr�� E~ ~> c�r� j pt i 'v' c~ It is for this reason th<::�.t V.Jt} lrJilJ. riOH p;--�ocE Eel to discuss the merits of the assessment. I""Dl"' pUl�'pOSf?~:; of cla�r��-~t'y' 7 lNP S!lE,ll cJ.i.scu.~;-:; tht:� kinds of taxes involved in the assessment individually. SALES TAX DEFICIENCY The C:\�r-.0 s e fr��om r.XespondE~nt ' ~; the sales of the by product of alky!benzene (1rJh i ch i s t he.' main p1�~od uct being manu fact ur��ecJ by Petitioner) should have been ~:; u.bj !?c::-t to Dul�-� :i. n g the� the e H <:1m i. n E! �r� ~; discoV<'2-,'ed that P!:tition*~i- c:l:i.d not pE:..y �;.;;;,ll::; ta:-:e~:; on th(0 of thc~�::;e by��-�pr��ocl uct s t h u�:o D com put at :ion of tht:!

DECISION C. T. A. CASE NO. 5300 iO der"1c1ency J.n the amount of per'tain1ng to sales -cax 1 iduJ.lu.1es tor� "=>dlU year��. P e t i t i o n e r' gave a vague explanat1on an e f{oy�t to I lllUlii!:JS u{ -cne J�'evenue exam1ner's to tne sales tax defic1encies. C\n:.> uy--J..H ' ud uci:; s u r -cne ma1n pr' oduc�c alkylbenzene and these are used by tnem ror -che heating system 1n -che1r manufac-curing plant . fJue to the if�� utiliza-c1on of these CU\:,t.S 'r''8'::>Ull:.eo , 1ncome and cunsequentiaily , 1ncreasing tne taxes paid t;O the gover��nment. An analysis of the records of this case pr�ov iaed us Wl t.li a a 1 ffer�ern; the issue of '::>ales tax def1c1ency of Pet;it1oner. !.Ill::' bOdt''U u�[�� J.IIUU'::>t.f'lt''=> Petitioner' ex e nq:Jt 1 on privilege pursuant to the prov1sions of Section a,aJ of Republic Act No. 51Bb. The effectivity of this tax exempt privilege was ex-cenaed up acKnowleoged ~y tne revenue examiner 1n n1s worKing paper (found on page 87, BIR records). we T'1TIU exemption significant because we believe that 1 r ,..:�l:-: t. J. t. J. u r1c:� r wa:. exenq.Jt; 1 r�um l.c~ x e:. ur1 main pr-oduct \alkyloenzene) �ch en We see rto r�eetson wny it snould no-c a.1.so be t!i\t=lllj..!t. i r u111 i..;re j..!a'/til etti..

DECISION C.T.A. CASE NO. 5300 - 11 - on its by-products. Furthermore, the records do not show that Petitioner engaged in any other activity that will warrant the withdrawal of its tax exemption privilege. In this light, the sales tax deficiency for 1982 should be cancelled due to a lack of legal basis. INCOME TAX DEFICIENCY There are two items of deductions disallowed giving rise to the income tax deficiency assessment in the amount of P 1,889,001.60. One is the amount of P637,900.00 representing disallowed deductions pertaining to marketing and manag ement support services charged by and paid to Chemical Industries of the Philippines CCIP>. The other item involves the amount of P1,985,712.47 disallowed as a deduction allegedly representing management fees paid to CIP which was not subjected to the expanded withholding tax. a) The amount of P637,900.00 Respondent maintains that the amount of P637,900.00 representing the portion of shared expenses of petitioner and CIP corresponding to marketing and managem en t support serv ices was never proven to have been actually incurred due to lack of receipts and invoi ces to substantiate the same. We have reviewed th e records of this case and We find that Petitioner has satisfactorily proven that the managing company CCIP) actually incurred expenses and

DECISION C.T.A. CASE NO. 5300 - 12 - COtTect 1y billed the Petitionet~ the amount of P637,900.00. Although Petitioner failed to present the receipts corresponding to said amount, it was able to secondary evidence such as Journal Voucher No. 5112, dated Decembet~ 31, 1982, which contained a summ at��y of all expenses incurred by CIP i n the management of the affiliates and other managed companies <Exhibit II M!I) � Said voucher revealed the breakdown of expenses by CIP and allocated among the managed companies. The a mount of P637,898.33 was mentioned in s aid Exhibit "M" corresponding to the shares of LMG Chemicals Inc �� Furthermore, the amount of P637,900.00 was stipulated in the reimbursement agreement between LMG Chemicals and CIP <see Exhibit "H-3"). Having found the evidence pertaining to the expense of P637,900.00 to be sufficient, the deduction for said amount should be allowed. b) The amount of P1,985,712.47 Respondent disallowed the above amount as a deduction ft�om !;WOSS income because it allegedly represents management fees paid to CIP which were never subjected to the expanded withholding tax. Respondent based his conclusion on Section 30(e) of the 1982 Tax Code which provides that any expense subject to expanded withholding tax should only be allowed as a deduction

DECIS ION C.T. A. CASE NO. 5300 - 13 - from gross income if the corresponding income tax is withheld by the payor. Petitioner apparently did not understand how Respondent came up with the disallowed amount P1,985,712.47 so that its first reaction was to deny having deducted said amount from its gross income by way of management fees. A closer scrutiny of the records show that the amount of P1,985,712.47 was due to Respondent's theory that the management fees paid by Petitioner to CIP should have been subjected to 5~ income tax instead of only the amount of 3~ of 15% as what Petitioner had done. Shown hereunder is how Respondent computed the amount of P1,985,712.47. Total management fees paid P2, 182,101.67 EWT paid by Petitioner 9,819.46 (P2,182, 101.67 X 15~ X 3~) 5~ Divided by 5~, the correct EWT rate per Respondent p 196,389.20 2, 182,101.67 Corresponding allowable management fees P1,985,712.47 Less management fees paid Disallowed management fees Again, We find for and in favor of the Petitioner and consider the deduction of the amount of P1,985,712.47 to be pr oper under the circumstances. While We agree with Respondent that Petitioner should have subjected the management fees paid to CIP to the tax rate of 5~ income tax for reasons that will be ~)

DECI S ION C. T.A. CASE NO. 530 0 - 14 - discussed in the latter part of this decision, We also believe that Petitioner should be allowed to deduct the amount of P1,985,712.47 from its gross income primarily because Respondent has already assessed Petitioner of deficiency expanded withholding tax <EWT) on management fees based on his theory tha t it sh o uld have paid 5~ instead of 3~ of 151a EWT as will be explained on the issue of deficiency expanded withholding tax. Furthermore, Petitioner already complied with the requirement of deducting expanded withholding tax on these management fees, thus allowing said fees to be deducted as an expense. As mentioned earlier, the tax code allows an expense to be deducted from gross income o nly if the corresponding EWT is paid on said expense. It was clearly shown that Petitioner was in good faith when it deducted the rate of 3~ of 15~ EWT from the mana g emen t f ees instead of 5~, hence there is no reason why said management fees should not be allowed as a deducti on. DEFICIENCY EXPANDED WITHHOLDING TAX <EWT) This issue is intertwined with the above discussion pertaining to the rate of EWT to be imposed on the management fees paid by Petitioner to CIP. Whether or not it should be subjected to 5~ or to 3~ of 15~ EWT is a question that should still be answered.

DECISION C.T.A. CASE NO. 5300 - 15 - Respondent maintains that the management fees paid by Petitioner to CIP should be subject to the 51- EWT because CIP can be categorized only as a management and technical consultant and as such falls under the provision of Section 1(b) of Revenue Regulations No. 13�- 78 in relation to Section 1 (a) (5) of the same Revenue Regulations. The conclusion of Respondent was based on his observation that CIP rendered management only to its sister companies and does not offer the same services to other companies. On the other hand, Petitioner asserts that CIP is not merely a management and technical consultant but is an independent con tractor performing management services, thus the applicab l e pt~ovision is Section 1 (e) (2) (].) of the same Revenue Regulation No. 13-78, as amended by Revenue Reg ulations No. 6-79, where the proper EWT rate is 31- of 151- and not 5'1-, as cla i med by Respondent. To better understand the arguments of both parties, We quote certain portions of Section 1(e) of Revenu e Regulati!ms No. 13-78 as amended by Revenue Regulations No. 6-79, (for Petitioner) and Section 1 (b) Respondent) of the same Revenue Regulations. "Sect i on 1. Income payments subJect to withholding tax and t'ates prescr ibed therein. X X X t " (e) RIYounts paid D Ci~ t�f;� a i T7 CD n t:J��,::~ci= D J�' !f_;. On fifteen per cent (151-) of gross payment to the following contractors, whether

DECISION - 16 C.T.A. CASE NO. 5300 three per centum individual ( 3'1-) D X X X "(i~) Ot�her' Conf:;�a.ctor�s. X X X " (i) f'r1an."!:lgf;:'lflent and consult:anc.v agencies." X X X "Section 1. Inco�e payments s ubject to withholding tax and t�ates pt�escribed thet�ein. X X X "(b) Pr�oF12ssional F~:�es, talent Fees, t'::'t�c., paid t~o taxable j'-widica.l pEn���sons. On the gt�oss pt�ofessional , pt�omotional, talent fees Ot' other remunerations enumerated in the preceding subparagraph paid to t axable juridical persons -five pe l'' centum (5'1-)." It could be seen from the arguments propounded by the Petitioner that the assumption of CIP of the role of an independent contractor rendering management services is anchol''ed on its allegation that it does not met�e 1y offer management services to its sister companies but to various ot her companies as wel l. The theory is that if CI P renders management services to the public in general and not onl y to related companies , it falls outside the category of management and technical consultant but is in the categot'Y of a contractor management services where the management fees paid to it are subject to an EWT rate of 3'1- of 15'1- ptwsuant to

DECISION C.T.A. CASE NO . 5300 - 17 - Section l(e) of Revenue Regulations No. 13-78, as amended by Revenue Regulations 1\lo. 6-79, !?l..lf..W'cl. Respondent, on the other hand refutes the claim of Petitioner and offers two observations on the ownership structure of CIP and Petitioner, to wit: a) Chemical Industries of the Philippines (CIP) renders management services only to its sister companies and does not offer the same service to other parties, and b) CIP, LMG Chemicals <Petitionet~ herein) and Chemphil Manufacturing, Inc., at~e owned by the same stockholders. The afon':!ci ted observations lead Respondent to conclude that CIP is not an independent contractor but falls under the category of management and technical consultant, where management fees paid to it should be taxed at the rate of 5~ EWT. In this aspect of the assessment of EWT, We find fot"' the Respondent. CIP which management set��v ices to Petitionet~, cannot be classified as an independent contractor as claimed by the latter primarily because it failed to dispute the claim of Respondent that management services only to its sister companies. This, plus the fact that the ownership structure of Petitioner and CIP is the same, thus belying the claim of Petitioner that CIP is an 11 independent 11 con�tJ�~act Ot''. Even granting that CIP is an independent contractor, the management fees paid to it are still subject to 5~

DECISION C.T.A. CASE NO. 5 3 0 0 - 18 - EV.JT, because a per~usal of Section 1 (e) (2) (1) of Rev~:m ue Regulations No. 13-78 as amended by Revenue Regulations No. 6-7'3 uses the ter~m "contr��actor�� " as per��taining to a management and Consultancy agency. The legal definition of a g ency is far different from that of an independent contl"'act Ol""' claimed by Petiti oner�, thus the management fees really fall outside the tax rate of 3% of 15% because Revenue Memorandum Circular No. 51-79 also uses consultancy a gency". If petitioner claims that he is an independent contractor, it cannot now fall under' the category of a management and consultancy a g ency because these two terms have different le gal definitions. One cannot claim to be an independent contractor and at the same time fall under the category of a management and consultancy ag ency. We therefore conclude that Respondent is correct in classifying CIP as a management and technical consultant as defined under Section l (b) of Revenue Regulations No. 5-78, therefore subjecting management fees paid to it to a tax rate of 5%. BIR Rul i ng No. 182, which dealt on the very same issue , dated October 17, 1983, also declares that payment of plxofessional fees to juridical persons is subject to 5 % withholding tax.

DECISION C.T.A. CASE NO. 5300 - 19 - However, due to the failure of Revenue Regulations No. 13-78 or Revenue Regulations No. 6-79 to provide for a cleat~ definition of a "management and consultancy agency", then the penalty, sm~chat~ge and intet~est should not be imposed on the assessed deficiency as Petitioner made an honest mistake in classifying CIP as a management and consultancy agency. In sum, Petitioner is liable to pay the basic deficiency expanded withholding tax of P99,285.62 computed as follows: Management fees P2, 182,101.67 Multiply b y correct rate Correct withholding tax p 109,105.08 Less: amount paid per return 9,819.46 Basic deficiency EWT p 99,, 285. 62 WHEREFORE, in view o f the foregoing, the assessments issued by Respondent for the taxable year 1982 pertaining to deficiency sales tax in the amount of P22,278. 13 and deficiency income tax in the total amount of P1,889,001.60 are hereby CANCELLED and WITHDRAWN for ack of legal bases. Howe vet~ , the assessment for expanded withholding tax in the amount of P99,285.62 is upheld, without imposing the corresponding penalties. ACCORDINGLY, Petitioner is ORDERED to PAY the amount of P99,285.62 to Respondent. SO ORDERED. l {:i;

DECISION C.T.A. CASE NO. 5300 - 20 - WE CONCUR: G ta--O~ ERNESTO D. ACOSTA Pt~esiding Judge CERTl:Fl:CATl:ON I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. G ~-~ ERNESTO D. ACOSTA Pt~esiding Judge