CTA Case No. 4334 (Decision)

REPUBLIC OF H PHI IPPINES OURT OF TAX APPEALS QUEZON cx � y WARNER BROS. <F. E. ) , INC6, PHILIPPINE BRANCH, P e t i t i o n e t' , -versus - C.T.A. CASE NO. 4334 THE COMMISSIONER OF INTERNAL REVENUE, Respond ent. X- - - - - - -� -� �~� - - - X DE C I S aN Th i case is an app l to tt e decision or the r pondent as sing th p titioner 'for al l eged de ici n cy inco~ae t X, withholding t X t source on royalty expenses, thre p rc:::e nt (3?(. ) contr � ctor's and fix d t ><, inclusive of su rcharge and int rest for fiscal ye r nded November 30, 1979. Petitio r is a or ign corporation duly li e n d to eng g in the local distribution of 'foreign ril s in �the Philippine �

DECISION - CTA CASE NO. 4334 - 2- In a letter, d ted Nove�ber 24, 1988, which was received by petitioner on January 29, 1989, respond nt assessed petitioner ror the rollowing alleged dericiency taxes, inclusiv or intere t and surcharge: "Deficiency Wittltiolding � ax at So urce on Royalty Exp ense ��� P113,987.42 Deficiency 3~ Contractor's t a> ��� 2,992.69 Deficiency Fixed 1�a>< ............... ...~.--.....������ ������� g-~.t~..!... ~'Z. Tot a 1 P 117, 22it�. 98" (See Ex~l. C) and t n odi i ed petitioner's alleged Det'iciency Inc om T X A s � Alent f'ro P572,7B5.51 to only P30~B24~B6, computed as 'follows .. " N1:1 t I n c:- o m p t' t' e t m' n P2, 128, 757.13 Add: lJ a � ll w � bl a Cost o - �� ........~t12.J .?..Q_<,l!...g;.~ P2 , 177, 4E.c .38 (idvet' ti1Sing accas so - t' i e s � o 1cJ <l'' en t d ) p 860' t::18E. . 00 1 5 0 3 . ......- .... lOtd.i.f... _. .!... .... .....- ...- ..(...>._(_)_ Income x plus CDT P 19, Lf83. 00 Leti& T~x a l re dy assess d D sfici~ncy In c ome Tax 801. 47 Add: 14Y. Int f.l l'O!D t (4/14/80 - 7/:31/80 ) 20Y. Int re ~ t (8/01/80- 4/ 15/83 >to1 ax . TOTAL AMOUNT DUE AND COLLECTIBLE (ibid) And, since th 1 tt r of' a ess ant was alr ady consider d by the respond nt as .. our 'fin a l decision on this c se" <ibid>, petitioner thus f'iled this petition ror review on February a, 1989.

DECISION - CTA CASE NO. 4~3 4 - 3- In oppo ing t e as es ed def'iciency income ta>< of P30,824.86 based on the disallowance of "Cost of' Advet't ising Accessori ' " titian r ubmitted that "ch t'ges to cost o'f advert ising accessot'ies - 11 ow bl � deduc tio from its g'f'OSS i nco t e s i �1c t se co i t - princi ally or T\... ight, axes, duti es a d brolH!rage eHpenses i curred upon ill Or'tat ion by p~tition r to tt a Pt :i. lippines 0 advert ising ac e5s s �to Sec. 30 a> <1 > and <c> he then ationa Intern 1 Revenue Code a d Sec. 80 of the Revenu R !iJUlat io s No. 2" <see Petitione\�"' 5 Memora duu, pp~ 1 - 2) .. The 'fir t issu - i whether" not cust ms dut i s, t iH:! 't t' e i g h t age , e s i ncu ...,... ed brol-<et'�age, sto age and other in the imp rtation advet't ising acce s SOl" i e s, ch t' ged to nd constituting "Cost or A vertising Acc~ssories" consid red allowable d e ductions. Petiti ne sub itted that these eHpens~s should be allowed as deductions since they "are charges neces at'i 1 y incurred by p titioner to secure the

DECI i.ON CTA CASE NO . 4334 release or tt above i mpo 1" t ed advertisin g ac::cessori s frona cu to s custody <E>hibit e><penses B., � p. 9>", (ibid, p. B> ; "these are 'ordinary a nd necess ry' for these are norw lly incurred in th bu iness or the petitional, ~ nd e app~c riate a1d helpful in tl e dt=velopl ent o �f it � us (.ibid, p. 9 ) . h deduct1ona ttl b v - In nt i oned eHp se s at��� a appa ly justi i d Sec. 30 <a > ( 1 ) o t' the pp lic: Ll Natio n 1 Int er n � l Hevb lUil Co e ., wl i h 11 S e <.,;. 30 . De d 1.u: t i on s f I ' o 111 yl' os s t 11 \.?1'' t1 i rH..: CJIII .: � �� I n c o mp u t i n 1 n u i n c o m~ , ~ l1 .;.d l tJ 1:1 " 11 ow E:! d as de d l..tC't i o 1 u �� (~) E >.; p ~n~.::~. ~� (1) Bul<iirtes::; t1 >q:J t: n ~ .: !.> � � � <A) A1 l <J 1� J i n .:.~ 1' ~~ ..m d I 1 i.: C ~.;: l:.i \.i -"' \ ' y 1:.1 II p I \ \;, U ~ p 1.\ i tJ 0 I' i ll C 1.1 \ ' \'' 0:.: d Jl.l\' ll!.] l:IH.: t �~Hciblu y .:\\ ' .'11 Ci; l ' l�' yiny on u .i.l n y la' � d o 1�' b 1.1fO i n 13 10 1 I< x ){ � 11 The d~du t i o 1 o t H s and duties p a id in conn cti with th i 1 o \"t a t i on of ac e s & 01�~ i e s by St:c. 30 < )(1) o � the tli n Na tion a l Intet�nal Rev nu e Code, thu 11 S ~ ~.: � 3 ( l � D ~ d u c.:: t i o n s t'l�' o 111 y 1 s ~ i n - ml'.t � � � I n c~ o 10 p u t i n 9 1 u t i l <.,; o 111~ t t. t: I' & !:i lu d l bli! c:~llowi:d as cJ i.i ducti ons >< >< )( I<>< X )()()(

DECISlOfJ - CTA CAS 0. 43 34 - 5- (c) T ~ xea. - <1> In g enbra l . - Taxes paid or accrued within th e t axa bl e y ec.H' in ~ o ct ion with the t~xp a y er ' s pl�' of s s ion, t t ad e o~� tnts i n e s s x x x � " It is ev n further buttre ed by � sec. 80 o'f R venu ul tio 7i No. &:: , t u ;: "Sec. 80. Ta><>s in ge 1e �a l. - As a g ene ~ 1 rul , ta x ~& ar d ductibl~ wi th th~ a><c ption of tho e with t'espect t o which th l aw do es not permit dadu � tion. H }( )(II " 1 mp o t' t d '�' t i e s p a i d t o t h e p 1� o p e l ' custom~ officers, ~nJ bu iness, oc . updt i on , l i e nse, pri vi l a ge, exc ise ~:nd s tamp t x u .;; n i c::ny o't t ill' t ax~:~s of e v ~n� y n a me o1�� n � t u\�e p .:.d d cJ b � e c t l y b:> t h e G v t� nment of th PI i l i pin ei:i O\' tc1 c:my politica l ~ubdivisi o n t tun�e of, .:we d >ductible. x x ><'' Re spo dent's content i 01 t t the "Cost of Ad ver t i in Ac e e s � o r i e '1 are considered s c ital )(p nditure , n -e, c�nnot be ded ucted om g ross i nc cuae but should be instead capitali z d and subj cted to ann ual dept"eci at ion , i s wi hout b a is in fact and in law. Th e 11 Cost of Adven"'t ising Accessories" cannot be consi dered as c pi'tal fH<p nditures s ine t h ey neitt et"' materi a lly add to th e valu of the a d ve t"' t i sin g accessories n or apprecia bly ptolong their li'fe . They are not even considered as re pl ac e� ents. Hence , such

DECISION -- CTA CASE NO. 4334 - 6- contention is simply p rceived by this Court as erroneous. Petit i onel'"', likewi .. e, opposed the assessm nt on th all g d deficiency withholding tax at ourcEt on royalty xpensEts 1n th � aunt 0 P1 1 3, 987 . 42,,� allegedly because o'f its failur to withho ld and l"'e mit the s 11 to the Bu t~eau of In tern al Reven ue. Petition r , however, submitt d that "t prop r withholding tax at source on royalty s s had already be n w thheld nd to the ..... espondent. �� <ibid.) Ttl s cond issu i whether or not the assessm nt f deficiency with ldi1 g tax at so u rce 0 t oyalty ex pens inclusive of i terest and su charge is proper. In a lettet"', d ted ~lat"'c h 1, 1985, respondent ass ss d petitio er o'f defici ency withholding ta>< at source comput ed s f oll ows:

DECISION - CTA CASE NO. 4334 - 7- P..~. f .~ ~ .~ .~ !H; .Y. ....W.t:~ 1.1t19.. t .Q.J ng ...T... K . S\..t. .. f.2 Q q C9..f!. Royalty Expense .. e~! ~.e.'2,!J..~.~9.!!. .~Q 1,122,391.63 Tax d�..1~ 'th t'f~on L ess: Withholding T~x paid ...J . $ .~~.~.Q.$...7. 19..!-. gl Defi~i n cy witht olcJing t x E.1 ' 61 Lj.� 82 Add: 2~1. H l Y" C::tltS\1" 9 ' . 15,403.71 IntereGt (M aximuM) �-�� ..~.~' .~~9..e ~..~.2 AMOUNT STILL DUE ND C LLEC I L.E ( 6 Pet i 't ion I�' ' a Ex t1 . whic was p ot t d by petitioner wai t ining th t th bove assessed defici ' y t x o �f b1;614 .. 82 as b en withh ld and it t e BuY'eau of' Int n 1 "" . Entpl i in its all . tion, th p tition r said, t us: "x x >< The sam~ amount co 't'e sponds to royalty expense of P246,459.2B CPC1 , 614.6 ii; /i:':.:;;iY. :::: F' i::"~t:. , Lit/ 9.88 ) fot' ttHi p~:~ �� iod Nclvt:mb l ' i$: 5, 1979 to l'iov mber 30, 1979 ( E>d ibit 0> . :aid ~11101.11t of P 24 6 1 4~~. 28 w - 11k~w1 ne in~lud � d in the total l' oy � lty e>< � r s of P50 3 , :::at:. .85 ccnTfHlpondir g �to t ti p riod Novambel' 25, 1979 to D c mber� ~':3 , 1'iiJ7SJ <E x hibit E::> . O'F tht? l' Oya lty p yment f P..~03~ 316.85, petition ' wit held P1 25,829.21, ~- upr' usant ing 251- withholdi 1g ta>< at socwce on J��oyc.dty eJ<pen e � � The <i.\mount of t a >< withh ld of P125,829.21 was then remitted by petitioner to the Bureau of I t e ~-n a 1 Re v e1 u � a s e v i. d e n c e d by Confil'' mat on Re c::ei t No. 3504802 a ,d C~::nt r�a l Sa nk (CB) Hev e1H.1e T � >< Rece ipt No. 21371786, botti d a t~d J a T'll.l c\l''Y 10, 1980, <E xh ibit G>, ~ d BIR Form 1743- C CQUAR ERLY RE URN OF FINAL NCOME TAX WITHHELD AT SOURCE> dat t: d J a nu.;H' Y 10, 1980 l'e fle ctin g th EH'e in tt1' amount o royalty e xpens s of P503,316.85 <Exhibit F. >." <8 e e P e t i t i o n e t' 1 s tvl e mo 1�' an d 1.1 m, p p � 1 '~ - 15 � ) b4u

o ~ cr s u t~ -- CT~1 CA ;J - l ,hJ . 4 ..... 2;<1 �- 8 -- Court cords t at pet i t i on e \�' indeed has al\ "' ady paid the aruount of P61, 614.82 which was equival nt to twenty- t'ive p rc:ent <25~) of the \' oyalty expense of P246,459.28 for th pen"' iod NoveUJbe ~ 25, 1979 to Nove~~tber 30, 1979 D>' wh i c alllOU WcH� i eluded i the total roya lty expenses of P503,316.85 c:ort"' e spond i ng to th pe iod November 25, 1979 to December 29, 1979 (see E><h. .. ) The alfiount of P125, 829.21 representin g 25~ withholcJiny ta>< at SOU ' Ce on the P503,316.05 royalty exp nses, has ah"' eady been &.-Ji thha ld and t "' i t t e d by the p~tition~;: to the Bu '"'eau H(::VtH1u e <see E Hh. {3). uch \"e wittance, h Wl:i!Veo ~ , w a s only 111 a d~ on a n .ta\ �� y 10~ 1980 (ibid> . No xpl ation was advanced by the put i t i on~ l ~ t o " hy" the p a y IHH\ �l; Wd.S d& layed wh it was already clai111ed as an e><p ns a a ~ of Nove ber 30, 19"79. his Cow"' t has co sistent l y held that the date o"f � t:-11 ittance of the withholding tax at source to the Bureau of I te rnal R v~ ue s o' 1 d be at t he t i me of ace t' u a 1 in the boo�< s of t h taHpayt: � In tl is case, the

DE.CiblON - Clt C E � 4~ �-� 9 - data h uld be Novemb r 30, 1979., a 1d the d t or pay ent should have been o D e b )" 10, 1979 <wt ich is the 10th t er t tH~ nd Q the pet"iod by l aw as h Pl""O Vi d �~cj day or pay IE t) � H nc � p ition r hould b e C..!DS ' SS d in the TO ID o � inte est and or late rem t � ce f on December 11' 197 t January 10, 1980, co put ad as 'follows: Wi �thh lcJing taH r'emittEJ o � .J'~T � 1(1, 1';j(:l(l but V.Jt l i ' h S il I) I.J 1tJ h v b � i r' mittecJ c1n D c. 1 �~, 1"379 81.11' C:: h Ql t' b1 ~ : 2 5 'X. p 1 Ei t Lf (!3 � ( 1 Intel' est c 141- p a: t' "' n n urn -�-- ............7l f!, .�!:':!: f4l tiOUI\lT PAYABLE TO BIR P l i 01::�.: .:o:. ~ 1 . !:~f:'.~t:': . ~.. ~.J.:.: ~. . .: Thi 0 the possibil ty h t p t.i.ti ne I i gt t have c:lain d e.g ~ i n a aunt of P246,459.2S in the n xt u e i 1 y ar, wishes to w rn h in petiti net" to disconti u any act of c l aiming an exp nse in the Pl" ce i \ y ar nd yet t' it only on th succ eding ye r to void usp i c ion. This action is a det rrent to th of' the Governlilent and will ultimately wot"k to th disadvantage of the taxpayer. b4u

Dl::C I S I Ul u. en~ CfibL r , .::;3 4 Til e issu is wl i:!t h e ~ ~ ot~ not petition i s lia b l e f o r a t lw�ee pe.-'cent < 3~ > co ntracto �' ta>< a nd iHe d tax on i t s activity o 1 e ding ad v tH" t i s in g ac~ e s so\�' i e s to th ~ tiH" ow &. R spa den t as e p..atitioner fat~ p~::rcen t ::1)( a nd the lat te .. f i HtHJ t. CH \u th � ~p-�� oo th - t e l !JcA e d lts e l i th tivity o �f leasing pEH' S on~l ro p e t i es, i to s~c .. 205, wh i e l l l ~ ~ o v i d ~ s ., t h u " Wwc. 2 05. C ,J �Iii ' -.\C l. Wl ' St pr- o p �-� r I . i I# t (j) ' s , u ~� u IJ" j '�'"1 t 0 )"� s () d iH~ I( 'I ;. 1' ch; ' <.\li U "'c: u ~ t 1~.: � �. ., � ����� H L: (; 11 ~ �r' t u1-. ' !.. t a )\ u f l; I� r � 1.: ~ p t.� 1� c .: n ~ �.1111 of y 1� o J:> s 1� : e 1 ~) i "' i ~- I-, ,n- e lJ y i~o1pt1 ' ... d wn t t1e fo ll oiJl llbJ: X >< X XXX )(){){ <1 -/) L sso 1�s of l � ~t l �so n o.:~ l pI ' 0 p l'.ll'' '(; ~~ 1 t: Hc e 1-i l. 11 u 11 1' .., !a 1 d t.: n L u �l11 l.i 1�. s o 't' j..l\ ' 0 fH!\' t y s~tuj e~: t l.o 1� 1 , .::~1 t ... >< unJ.:I ' Su c tion 2 /j ( b) ( V i i ) f t h i U C Q d C' o II Pe t i t io En ~ , owever, ai t ai n e ha �t i t sh uuld not b subJected to t l e atJov �taHes s in ce it. did not c duc-t a I i1depend~nt bus in ess o �f lt:a!:ii IQ pc:t-� 0 1 pr"o pert ies. th at e i~ was only lii.llited to t he plH'pose of p ,~ o w o t i. n g a a ~ t i c u 1 .:u ~ f i l

DECISIOI-1 - C A CASE NO. 4334 - 11 -� being released in the Philippines. Hence, it incident a l to and an integral part of its &lain activity of film d i s b~ i but i on � "Without the petitio el~ ca not and does not lease adve~ ~ tising accessories. >< B ing incid ent"'-1 to p~titioner's business of film distl"~ ibution, it follows that no ta>< or fixed tax should be 1 vied on its incou1e uch act ivity." <Petition er ' s f't'lemoy�a ndun, P� 23.) f ightly so. i Jur~ sp1~u dence guides Us to believe t at an ac t i v i t y that is a IIIE:n ~ e incident to, at~ as a necessary cons quence of, the p -,~ i n c i p a 1 busi ess, s l auld not be taxed as i:.l.n independent bu siness in itself. "WI 1~ n a p e 1' 5o n o 1�' c:.� o Ill p a n y i s "' l l' e d y t "'' :< t: d u 11 i t s 111.:d n Llu s i lH.l i.i 5) i t m-"~ y not be f I.U' lll <.! I ' t <;I){ liHJ f 0 \ ' d 0 i 1'\ y t S 0 Ill (:! h i 11 g 0 r' "' '' y.:..,uiny in ... n ,:~c tivity 01�' WOl ' l�< which is 111 <:I ' t:- l 'I .3 p a 1�' l of , i �1c i cJ Iii n t a l l; o a n c.J i s 1"'11:..:: \.:!;, ~ i..'\ i ., y 'l () it S 1\1.::\ i \\ b IJ.,; i ll l.:: \.> S � II CS l a d a rd Vacuuw Oil Co. Vb. Antigua, 96 PII i l . 'XI'] ) " his is tile consensus o �f authority" < lila Pr~ ess, Inc. vs. Sal�' ie to, 99 Phil. 3 1).

DECISION - CTA C() S E 1~0. <, 334 - 12 - Thus, petitioner s hould only be liable 'for the two pet" cent <2~) pet~centa ge ta>< on its gross receipts levied upon cinematographic "film owners, lessors dist ibutors in accordance with Sec. 208 of" the the National Inte rnal Revenue Code which p rov ides, thus: "Sc:c . 208. Pen~ cent .::~. ye t .. x on st;ocl<, '(' e"-1 t:sta t e, commet~ c ia1 , custom s , and iluhligl '.;... t i on b 1���ol-< t:l ' S ~ nd c i nelna togi ' a phi c I' i 1 111 o ~�m e i ' s 1 1 12 s s o J�' s , o 1~ d i s t ;' i b u t o 1�' s � ��� ULoc l <, ���t:a l ~s t a te , co ulil t: l ' Ci <.~ l, cu s tom s , ""'It Ll t i fil Ill i !d I '.::, i u I b I ' \} I( 8 .� :,; !,; h .:d 1 p <..\ )I .::.� u IJ 0 1�. c c: n t "'" El l "'' H .: q 1.1 i v ~ 1 t: n t t o .,; i h p iH' c t: r1t u 111 o F t h e g r��o s ~ co 111 p e n s at j_u n t' t! c: ii! i v e d i.J ~~ tli t:H11 . t !,':;!,!Hi HI �.~ Qm~~ P.h .! !,; .. :U ~ !l! . 9~�!Lt~. i~� �. , Ji: .�:iaW.~ la ..... Qt~.. r.JL�tc!P.utm.~� ... at.!s\J.! .nii.\ Y..... ~ P ~ l'~~ s n :\t .s Y.1 ... :1! �..\!! .. .!?. :f. ...t .ki9. P g c .Qs nt. .1=!m ... Q f ... �~ h ~j, L' l.H2Q� � !~ .Q f? ~!IX~ � .� " <Und e i ' SCOI'ing supplied) which was a l ready duly paid by the p ~ t i t i on en' <see E><h s. I to p and sub- u1 a\ ~ l< i n g s > � The l aw being clea ' and s upported by ju risp�~ ud e 1ce, 'the petitionet~ s hould no longer� be assessed the alleged de ' i c i &ncy fixed a nd cant actor's taxes. L.JHER FORE~ in a l l the t'ot'e going, the ~ espond e �t' s assesswent a gainst p e t i t i o et' f o t ' de f i c i en c y i 1 come t ax, w i t h h o 1 d i n g t a>< at source on roya lty e><penses, contt'acto ' ' s t aH a .d fixed tax fo ~ fisca l ye~r ende d 30 , 1 '379, i s HEHEBY ORDERED

OECIS iON - CTA COSE 0. 43~4 - 13 - CANCELLE or" b ing et" on ous and fa�... lack of' .we:ri � HOW EVER, pet; i t i 01 er is HEREBY ORDEHED TO AY r s po � dent the amount of' P16,1 22-5ti .a s urch '"' ~ � nd intEn'est fo, .. l ...;. t e ~ ~ itta1 c~ f wit holding taH~ SO t<DE ...< . � Qw :to11 City, M@ ra Manil � Ju e 2 1 19~3. WE C NCU = / t

DL:. L: J. S 1 Ul j L l t i iJ1 ~~E I H.J . .,.-..:,_,)4 14 - E ~Tl -- ICATIUN I h ~;; l ' t:t by c e t i f y that t h i s d a c i !:i i o n ~,J as consul at .ion tht: IIIL:Idb~l ' ::. uf t 1c: 0 T'-ti< -11 I d~ctiu 13., of tl1 e co. 1::. .i.t.ution . u. A ��us�rA p, ~ ~ ~ i J i t"l g th..l!) 1: Co~o - l; u f "fa) Appe;:als