CTA Case No. 3144 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY UNION GLASS AND CONTAINER CORPORATION, Petitioner , - versus - C.T.A. CASE NO. 3144 THE ACTING COMMISSIONER OF INTERNAL REVENUE, Respondent~ X- - - - - - - - - - - - - X DE C I s I 0 N This ca!.",;e is about an income ta:�: deficiency assessment issued on December� 6 ~ 19'76 against the peti t..ioner� in t h e amount of F' 2 0 ~ 965. 2'7, inc: 1 usi ve of interest~ as a result:. of disallowance of a claimed deduction of P4'7,301.90 representing an excess management fee payment for t he taxable year ended September 30~ 1974. F'eti.t..ionel'� pr.. otested the assessment on Apr�i.l 18, 19'77, but which respondent denied under letter dated July 2, 1981, s tating that - Under� t.he ManagernEm t Con tr-c:~. c t en tr�ecl .in to by you ~-Ji. th the CF'J Corporation on November 5, 1970, you 3 6~)

DECISION -��� CTA CASE NO. 3144 2 ~�" shall pay a management fee of PB~OOO.OO a month plus 12% of your net income after ta:-:es~ bonuses and management fees. It appears~ however~ that you computed the 12% management fee on your net income in the audited �financial statement without consider� ing your BO I I nc:en t i ves on pr-�e -- oper�a tinq e:-: penses and ac:c:e 1era ted depreciation and other non - deduc ti b 1e items as shown in the auditor's reconciliation statement. The net income you used as the bas;.is of the 12% managem~mt fee e:-:ceeded the net income after deducting the BOI Incentives on pre- operating expenses and accelerated depreciation and other-� non-�deduc t i b 1 e items. Accordingly~ the 12% management fee you paid to CPJ Corporation cannot be claimed as a deduction in your income tax return~ the same not being in accordance with the aforesaid management contract. Hence~ this appeal. The case be �fore Us presents no dispute as to the r �elat.ively simple material �f ac t.s but the parties seem trying to get the better of each other over� by a quibble as to the pr-�oper import of "net income" under� the ter�ms of the Agr- eement~ to wit: CPJ shall be entitled~ by way of remuneration from UGC for services under thi s M.::magement. Ccmtl�� act.~ to the �fo 11 owing fees: A f .i.:-:ed fee of PB~OOO.OO a month; plus 12% of UGC's net income after taxes~ bonuses and management fees. Petitioner maintains that the phrase "net income after ta:-:es ~ bonuses and management fees" upon which ba~.;; ed the .12% con t.ingen t fee has since .~ 70

DECISION ... CTA CASE NO. 3144 .1972 been consistently interpreted by the contracting pal~ ties to mean the net income figure appearing in the audited financial statements prepared by their external auditors. (E:�:hs. E~ F~ G~ H~ J~ K~ L; Testimonies of Mr. Nemesio A. Sugue~ Mr s . Warrie Zenoval Totto and Mr. Luisito N. Reyes; tsn August 3~ 1982~ pp. 608; tsn Oct. 30~ 1983~ pp. 6 - 8~ 9 - 10~ 12-18~ CTA recs.) The net income utilized the purpose of the per�cen tage contingent fee comports with their contractual intendment. As b e f o r� e noted~ however, respondent's unva1r� y ing a sse r.. t i. on is that for purposes of asse ssment the net income appearing in the petitioner 's income tax return for the taxable period involv!:?d~ i.e., net income after deduct.ing the BOI Incentives granted, should have been utilized for computing the 12% management fee vis a vis the net income in petitioner's audited financial statement. We do not reach the same conclusion of res pondent Commi s sioner. It is perhaps hardly necessary to stress that

DECISION --� CTA CASE NO. 3144 -- 4 - the contract of management is the law between the parties and un 1ess it fa 11 s sharp 1y at odds with any legal constraint the same deserves valid cognizance. We sha 11 be 1 ess than respecting the compe 11 ing import of the wi 11 of the contrac t.ing parties should a narrow and unvarying app 1 ica tion of the contractually stipulated "net income" be posed. Thus stated "the computation of net income in the income ta:-: return is simply not the "net .income" con temp 1a ted by the par� ties. And there is no inconsistency in this at all~ net income may be computed differently for different purposes~ as i t was compu tF.:d differently for� purposes of the management and for purposes of arriving at taxable income. Since the net income for purposes of the Con tr� ac t is the net income appearing in petitioner's audited financial statements~ respondent simp 1 y has no au thor.i ty or� 1 ega 1 basis to substitute his own computation for that of the pat~ ties to the Contract." We share pet.i tioner' s view. We cannot help but think that the respondent has mistakenly applied the net .income figure used ~ ,_ , - �.J .

DECISION -��� CTA CASE NO. 3144 ~-� 5 - � in petitioner's ta:-: retur�n to a situation where what the petitioner did was merely to use permissible business judgment that better e �ffectuate a reasonable basis for compensation in its contractual obligation. Respondent has grafted a meaning other than that conveyed by the plain and c 1ear� tenor� of the terms of the Agreement. This s hould not however foreclose the possibility of having the legal moorings for the percentage contingent fee voided should the arrangement prove a sort of malarkey devised to evade the payment of the rightful dues~ but only then may the bridge be cross ed for any such deficiency tax liability. It is too much of a stretch to hold petitioner straight- jacketed to the respondent's own interpretation of net income by reason thereof deny altogether any opportunity for petitioner to a serendipitous availment of allowable deduction from qr�o ss income neces s ar-y business expenses incurred and paid during the taxable year. Upon the records~ both circumstances obtaining and relevant legal standards compel the conclusion that petitioner has proved entitlement to a favorable determination of the desired relief. 37 3

DECISION --� CTA CASE NO. 3144 -- 6 -- WHEREFORE, respondent's decision appealed from is hereby set aside and cancelled. No pronouncement as to costs. SO ORDERED. Quezon City ~ Metro M a n i l a~ Ju l y 31~ 1989. Associate Judge WE CONCUR: AMANTE ILLER F'no> s .id ing ,Judge (on leave) CONS TANTE C. ROAQUIN Associate ,Judge CERTIFICATION I hereby certi f y that t h is decision was reached after d u e consu l tation with t he me mbers of t he Court o 'f Tax Appeals in accorda n ce with Section 1 3~ Artic l e VII I o'f t he Constitu t ion. F'r�esid i n J udge Court of Tax Appea l s 374