CTA Case No. 3938 (Decision)

t>� REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PBM CONSTRUCTION SERVICE, INC., Petitioner, - versus �-- C.T.A. CASE MO. 3938 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - X DEC s 0N This is an appeal from the decision of respondent assessing and demanding against petitioner the sum of P76,664.37, inclusive of interest and 10/. surcharge, for- 1980 income ta>: deficiency, computed as follows: Net income per return Pl, 11."">6. 61 Add: Items disallOf..led: M?.! . s.~"ID-!J~ ( 1 ) Misee11 anea..ts P 275. CX) (2) E>:penses not st.tb- jected to Expanded Wi thtnlding ta:-: (a) Lease of jeep 12, O<...Xl. (l(l (b) Professicnal fees !!f�..s.\=:3..!1:.!\.;!,.~ Net inccme per investigaticn P162,195.73 Less: E:-:empticns Net incare st.tbj ect to ta:-: E.+~-.!..!~~~..73 Ta:�: due therecn Less: Ta:{ paid JJE!r return F' 54,879.00 Deficiency inccme tax Plus: !Cf/. st.trcharge (Sec. 51 F'D1705) -�-----�-���UJ;l_!\11 20"/. interest F'/A fron 4-!b-81 F' 54, 7(:1).26 5,476.03 to 10-16-82 ( .:::!'.()) TOTAL PMl..NT IX..E ~ CCLLECTIEt..E 53 i

DECISION CTA CASE NO. 3938 2- In a letter dated January 7, 1983, it filed a protest of the deficiency assessment with the Regional Director of Region 10-A of the Bureau of Internal Revenue. This was followed by a protest to respondent Commissioner of Internal Revenue dated April 22, 1985. Instead of acting on the merits of the protest, respondent served upon petitioner on April 18, 1985, warrant of distraint on personal property and levy on real property. This warrant of distraint is considered a denial by respondent of the protest. Henc e, petitioner appealed. The deductions in the income tax return of 1980, namely; (a) P275 for representation and goodwi 11 in connection with the MCC I LAB Project; (b) the lease of the jeep in the sum of P12,000 and ( c ) the professional fees in the amoLtnt of P148, 814.12 as advances drawn by Engrs. Mejia and Tolosa, officers of petitioner, were disallowed for the sole reason that petitioner did not withhold the amount required under the expanded withholding ta x (EWT). However, in Revenue Memorandum Order No. 38- 83, respondent had expressly instructed his revenue e >: aminers against indiscriminately disallowing 532

DECISION CTA CASE NO. 3938 - 3- e>:penses and fees and that instead to allow their deduction if it is shown that the recipient of the fee had dec 1a red them in their respective income ta>t returns and that the corresponding income t.:nt therein properly paid. Petitioner had finally satisfied these conditions because the recipients of the fees had previously declared them in their income tax returns and actually paid the income tax. True it is that the amount of P275 consisted of P15 as payment for assistance of non-employees of the Land Registration Commission in stencilling the engine and chassis number of the motor vehicle� P160 for lechon, and an additional paltry amount of P100. These e>:penses partakes of the nature of ordinary and necessary business e>:penses. (T.S.N., Jan. 22, 1986, pp. 19-20, E>:hs. E, E-1 and E-2.) Regarding the P12,000 jeep rental, there is no indication that there was actually a jeep rental. This is indeed careless and arbitrary on the part of respondent. ( E>: h. A, 1980 I nco me Ta>: Return, inclusive of schedule and financial statement.) Anent the professional fees in the sum of P14B,OOO.OO, this amount was disallowed by respondent because petitioner did not withhold the income ta>: Linder the provisions of the E:�tpanded Withholding Ta>:. 5 33

DECISION CTA CASE NO. 3938 - 4- The E:<panded Withholding Tax (EWT) Regulations, as amended by Rev. Regs. No. 6-79, dated June 4, 1979, provides for the wi thho 1ding for the amount paid to the enumerated contractors of 37. of the fifteen percent of suc:h gross payments, whic:h provides in part as follows: "Sec: tion 7. Paragraph (e) of Section 1 of Revenue Regulations No. 13- 78 is hereby amended to read as follows: � ( e ) Amqun _!;E___ _ _g_~;!._g _ _t_q______�;.~.r.:..t~.i.n c:q_nt.ra_!;_t;_g_r~. � - On fifteen perc:entum (157.) of gross payments to the following contractors, whether individual or corporate--three per centum (37.). � (1) General engineering, general building and specially contractors - (a) General Engineering Contractors XXH (b) General Building Contractors. Those whose principal contracting business is in c:onnec:tion with any struc: ture bui 1 t, being bui 1t or to be built, for the support, shelter and enclosure of persons . . ��������. Suc:h structure includes ������ refineries, c:hemic:al plants and similar industrial plants requiring specialized engineering knowledge and sl-::ill .. . . . . . . � � . . . . . . . . . . . . . . . . . . . . . . . . . . The payments to Engrs. Mejia and Tolosa in the sum of P148,000 (should be P107 ,000) (E>:hs. F, F-1 to F- 5, G, G-1 to G-7) were not considered as 53 ~

DECISION CTA CASE NO. 3938 - 5 -- payments of income to contr-actor-s. The payment made to them wer-e made as officer-s and employees and not as contr-actor-s. (E>:hs. I, 1- 1, 1- 2 and �:::.) Since these total amount of P107,000 wer-e not payments to officer-s and employees within the meaning of the EWT, petitioner- had no duty under- the law to withhold the income tax. Resor-t to the EWT r-egulations as basis for- deficiency income tax assessment becomes illegal. As a consequence, the 1980 deficiency income ta>t 1oses its 1egal s 'uppor-t and is a nullity. WHEREFORE, we so hold that petitioner PBM Construction Service, Inc. is not 1iable for the 1980 deficiency in the sum of P76,664.37, inclusive of interest and surcharges. Without pronouncement as to costs. SO ORDERED. Quezon City, Philippines, 1989. WE CONCUR: 5 30 AMANTE Pr-esiding Judge ~~ Associate Judge

DECISION CTA CASE NO. 3938 �- 6 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. Presid1ng Judge Court of Tax Appeals