CTA Case No. 3185 (Decision)

~!ZP\JDUC 0 Jll' 01� F'tHLIPf'INf'O .;ou..,T OF TAX APPU. ~ QUE~ON c.t'TV PHILIPPINE EXPLOSIVES CORPORATION, Petitioner, - versus - C.T .A. CASE NO. 3185 THE ACTING COMMISSIONER OF INTERNA L REVENUE, Respondent. X- - - - - - - - - ----- X DECI S I 0 N In its letter dated December 18, 1980 to respondent Commissioner of Internal Revenue, petitioner Philippine Explosives Co r por ati on, as withholding agent, requested for the re f und of the amount of e264,514. 12 representing alleged exce ss payments of w~lding tax on royalties pai~ to the Imperial Chemical, I nc., for the period from the fourth quarter of 1978 to the third quarter of 1980. No a c t i o n h a vi n g -b e e n t a k e n s e as on a b 1 y b y r e s po n de n t o n the claim for refund~ petitioner brough t this action to this Court pursuant to Section 292 of the then in force National Int er nal Reve nu e Code. The factual background of this suit is not in controversy, the parties having s ubmi tte d the ca se for decision on the basis of th e pleadings and t he records of the cas e . Petitioner is a corporation orga niz ed and existing under the laws of the Philippines, with office at Fairlane

DECISION - CTA CASE NO. 3185 - 2- Street torner Brixton, Pasig, Metro Manila. It is reg istered wi th the Philippine Securities and Exchan9e Commission unde r Registration Certificate No. 38634 dated June 19, 1969 . Petitioner is also duly regis- tered with the Board of Investments unde r the provisions of Republic Act No. 5186 as a preferred pioneer enter- prise for the production/manufacture of industrial e)(plosives. The records show that on June 21, 1969 , petitioner entered into a technical assistance agre e ment with the Imperial Chemical, Inc., a non-resid ent foreign corpo- ration created and domiciled in the United Kingdom (U.K.), under which agreement peti ti oner would pay the Imperial Chemical, Inc., royalties in consideration of the latter's work . carried out under said agreement and also for having provided technical assistance and information to petitioner. An d pursuant to the afore-mention ed agreement, petitioner withheld from the Imperial Chemical, Inc.rs remittable royalties of 81,322,570.80, for the period fr om the fourth quarter of 1978 to the third quart er of 1980, the total amount of 8462,899.75, which is equivalent to 35% of the royalti es. It appears that the amounts withheld were duly reported and remitted to the Bureau of Internal Revenu e. 0 n De c e m.b e r 19 , 19 80 , pe t i t i o ne r f i 1e d v-1 i t h r e s - pondent a claim for the refund of the amount of e264,514.12 1 ,...., r .l . . )

DECISION - CTA CASE NO. 3185 - 3- representing erroneously paid withholding tax on the royalties remitted to the Imperial Chemical, Inc., for the period from the . fo urth quarter of 1978 to the third quarter of 1980, invoking Article 11(2) of the Tax Treaty ente red into by the Governments of the Republic of the Philippines and the United Kingdom of Great Britain and Northern Ireland which was already in force, having become effective on J anuary 29, 1978. Article 11(2) states: � "2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of t~e State. How- ever, the tax so charged shall not exceed: "(a) 15 per cent of the gross amount of the royalties, where the royalties are paid: "i) by an enterpr i se regis- tered with the Philippine Board of Investments and engaged in preferred areas of activity or "ii) in respect of cinematograph films or tapes for television or radio broadcasting. "(b) in all other cases , 25 per cent of the gross amount of the royal- ties �." The amount of e264,514.12 was arrived at by sub- tracting el98,385.63, the amount equivalent to 15% of el,322,570.BO, from e462,899.75 which, as stated above, is equivalent to 35% of the royalties. L� 19 7

DECISIO N - CTA CASE NO. 3185 - 4- Is petitioner entitled to the refund of the amount of E264,514.12 as ex cess payments of withholding tax on royalties pai d to the Imperial Chemical, Inc., for the period from the fourth quarter of 1978 to the third qua r ter of 1980? The parties are not in controversy on the compu- tation of the withholding tax on roy a lties paid by, or amount refundable t o, petitioner as the case may be. As one of his special and affirmative defenses, respondent alleges that petitioner has no legal person- ality to institute the instant petition for review inasmuch as the Imperial Chemical, Inc., a non-resident foreign corporation, which paid the alleged withholding tax on royalties, is he real party in interest. We do not agree. The taxability of a foreign corporation's income depends upon the locus of the activity, property or service giving rise thereto. Stated otherwise , the flow of wealth proceeded from, and occurred within, Philippine territory, enjoying therein the protection accorded by our Government. Such flow of wealth should, in consideration for the protection, share the burden of supporting the Government. Precisely, our law adopted the a dministrative device in Sections 53 and 54 of the Nationa l Internal Revenue Code then applicable - with- f 19 R

DECISION - CTA CASE NO. 3185 - 5- holding of the corresponding income tax at source of the income - to i nsure collection of whatever tax may be due on income earned in the Philippines by those who are not doing business in the Phil ippi nes and have no office or agent here. The fact that a foreign corpo- ration does not engage in business here and had no office or agent is the very reason why its income is subject to withholding tax. (See British Traders' Insurance Co., Ltde vs. Commissioner of Internal Revenue, L-20501, April 30, 1965, 13 SCRA 719.) And the law sets no condition� for the personal liability of the withholding agent to attach. Th e reason is to compel the withholding agent to wi thhold the tax under all circumstances. In effect, the res- ponsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the with- holding agent is constituted the agent of both the Government and the taxpayer. With resp ect to the col- lection and/or withholding of the tax, he is the Govern- ment's agent . In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The with- holding agent, therefore, is no ordinary government agent especially b~cause under Section 53(c) he is held person- ally liable for the tax he is duty bound to withhold,

DECISION - CTA CASE NO. 3185 - 6- where a s, the Commissioner of Internal Re venue a nd hi s deputies are not made liable by law. (Philippine Guaranty Co. vs. Com mi ssioner of Internal Re venue and the Co urt of Tax Appeals , L-22074, September 6, 1965, 15 SCRA 1.) If tte law requires the withholding agent to deduct and withh old from the income of a foreign corporation subject to inc ome tax not engaged in trade or busines s within the Philippi nes , file the requi s ite withh old ing returns, and pay the tax withheld to the Bureau of In- ternal Revenue (Sees. 53 & 54, N&tional Internal Revenu e Code t h en in force; Sec. 205, Rev. Reg s . No. 2); and makes the withholding age nt personally liable for the income tax withhe l d (Sec. 5L~, ibid), incurring all penalties incident to delinquency, deficiency and fr om i ncor r ect returns (Sec. 54, ibid), in the determination of the degree of interest essential to give the requisite standing to a recove r y of tax erroneous ly or illegally paid, public policy would seem to require that th e with- holding agent should have sufficient interest or right to cla i m for ref un d and sue for re c overy of any exces s amount wit hheld and remitted by him. We see no s igni- ficance therefore in t he contention of respondent th a t petitioner has no legal personality to in s titute the i ns tan t petit.ion for review inasmuch as the Imperial Chemical, Inc., a non-resident foreign corporation, which 9nn " ��' \..; �..!

DECISION - CTA CASE NO. 3185 - 7- paid the withholding tax on royalties, is the real party interest. Respondent assails however petitioner's ri~ht to the refun d of e264,514.12 as withholding tax on royal- ties on the ground that the claim is not supported by adequate evidence, the original of the alleged technical assistance agreement not having presented in court. Thus : "The claim for refund is anchored on a technical assistance agreement alle~edly entered into between peti tioner and ICI pursuant to which petitioner paid ICI royalties. This agreement is � vital to the claim because the natur e of the royal- ties paid to ICI can be determined only from the agreement itself, i.e., whether the royalties are indeed royalties within the meaning defined in the RP-UK Tax Treaty as follows: 'The term royalties used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (in- cluding ci nematograph films, and films casting), any patent, trade mark, design or model, plan, secret form ula or proce ss , or for the use of, or the riq ht to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.' Are the royalties paid to ICI in the nature of royalties defined under the RP-UK Tax Treaty and therefore s ub ject to t8x at 15% only? This question can be answered only frqm the provi si on s of the alleged technical service agreement." �.... .. ��'""'

DECISION - CTA CASE NO. 3185 - 8- The controlling legal provision is Section 2 of Rule 130, Rules of Court, which textually reads: 11 SEC � 2 � 0 rig in a 1 writing must_ be produced; exceptions.M There can be no evidence of a writing the contents of which is the subject of inqu iry , other than the original writing itself, except in the following cases: (a) When the original has been lost, destroyed, or cannot be produced i n court; (b) When the original is in the possession of the party against whom the evide nce is off ered, and the latter fails to produce it after reasonable notice; (c) When the origin al is a record or other document in the custody-of a public officer; (d) When the original has been re- corded in an existing record a certified copy of which is made evidence by law; (e) When the original con sists of numerous. accounts or other documents which cannot be examined in court without great loss of time and the fact sought to be established from them is only the general result of the whole." The language quoted leav es no doubt in our mind that the original of a writing is the writing itself, the contents of which is the s ubject of inqu ir y. And such original must be produced, according to the best evidence rule, if the purpose is to prove its contents. As aptly stated by respondent, the contents of the alleged technical assistance agreement is the "subject of inquiry" ~n this case since the nature of the pay- ments designated as royalties remitted by petitioner to 20~

DECISI ON - CTA CASE NO. 3185 ... 9 - the Imperial Chemical, Inc., pursuant to the alleged agreement can be determined only from the provisions thereof. It seems to us not understand able why petitioner, despite its reservation during the hearing of this case to produce the original of th e alleged technical assist- ance agreement (t.s.n., pp. 4-7, Nov . 19, 1981), never did so. Then, when petitioner offered in evidence the xerox copy of the alleged technical assistance agreement, and respondent objected to its admission on the ground that the same is a mere xerox copy the original of which was never presented in court, this Court admitted the same only for whatever value and worth it may serve. Much stress is placed by petition er on the letter of the then Chairman of the Board of Investments Vicente T. Paterno (Exhibit "B"), approving the alleged technical assistance agreement, contending that since the approval and the letter confirming the same (whic h ar e also mere xerox copies the originals of which were never presented) are official acts ' of the executive department of the Government, j~dic ial notice may be taken by this Court in accordance with Section 1, Rule 129, Rules of Court, and respondent could have secured a copy of the ag reement from th e Board of Investments. To begin with, as correctly stated by respondent, in an action for refund, the burden of proof is upon the 20 ~

DECISION - CTA CASE NO. 3185 .... 10 - taxpaye~ to show that the taxes paid were erroneously or i lleg8lly collected and failure to sustain said burden is fatal to the action for refund . Petitioner hav i ng failed to sustain th e burden placed upon it by presenting adequate and competent evide nce that it is entitled to the refund of the amount involved herein, this Co ur t could not look with approval to the grant of the refund. (Caltex /Phi lipp ines! Inc. vs . Commis sioner of Internal Revenue, CTA Case No. 287 1, January 29, 1986.) The fallacy of petitioner's position is its assumption that it is incum b e nt upon re sponde~t to secure the necessa r y docume nts or proofs to support its claim for refund. Then, it is to be considered that a ref und of taxes undoubtedly partakes of t he nature of an exemption , and the same can not be allowed unless gra nted in the most explicit and categorical language. (Resins, Inc . vs . Auditor General , L-17888) Oct. 29, 1968, 25 SCRA 754. ) Claims for refund are construed strictly against claim- ants since a claim for refund is in the nature of an exe mption from taxation . (Commissioner of Internal Reven ue vs. Ledesma , L-17509 , Jan. 30, 1970, 31 SCRA 95 . ) As set forth in Commissioner of Inter nal Revenue vs. Guerrero, L-20812, Se pt. 12, 1967, 21 SCRA 180: "From 1906, in Catholic Church vs. Hastings to 1966, in Ess o Standard Eastern , Inc. vs . Acting Commissioner of Customs,

DECISION - CTA CASE NO. 3185 - 11 - it has been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if granted it must be s trictly cons- trued against the taxpayer . Affirmatively put, the law frowns on exemption from taxation, hence, an ex- empting provision, or a claim for refund, should be construed std. ctissimi juris . " (Se? Catholic Church vs. Hastings, 5 Phil. 701; Esso Standard Eastern, Inc. vs. Acting Commissio ner of Custom s , L-21841, Oct. 28, 1966, 10 SCRA 488; Phil. Acetylene vs. Commissioner of Internal Revenue, L-19707, Aug. 17, 1967, 20 SCRA 1056; Commissioner of Internal Revenue vs. Guerrero, L-20942, Sept. 22, 1967, 21 SCRA 180 ; Manila Electric Co. vs. Vera, L- 29987, Oct . 22, 1975, 67 SCRA 351 . ) Petitioner relies on Section 8 of Republic Act No. 1125 which pr ovides that the proceedings in the Court of Tax Appeals shall not be governed strictly by tech- nical rules of evidence, but this Court cannot just gra nt a cloim for refund on the basis of a xerox copy of an alleged technical agreement the original of which has not been shown t o have been lost, d~stroyed or cannot be produced in court. It has already been ruled that the findings of facts of the Court of Tax Appeals are not reviewable when supported by substantial evidence (Com- missioner of. Internal Revenue vs. Phil. Planters Invest- ment, L-24293, March 28, 1974, 56 SCRA 194; Aznor vs. ~ ..

DECISION - CTA CASE NO. 3185 - 12 ... Court of Tax Appeals, L-20569 , Aug. 23, 1974, 58 SCRA 579; Vi Ve Chemical Products vs. Commis s ioner of Customs, L-28693, Sept. 30, 1974, 60 SCRA 52; Nasiad vs. Court of Tax Appeals, L-29318, Nov. 29, 1974, 61 SCRA 230; Indus- trial Textiles Manufacturing Company of the Philippines vs. Commissioner of Internal Revenue a nd Court of Ta x Appeals, L-27718 & L- 27768, May 27, 1985), and it is th us to be fairly and justly considered that such sub- stantial evidence implies c o mpetent and adequate evidence. For this Court therefore to disregard th e basic rules of admissibility of evidence, that would be tantamount to trifling with its pr oc eedi ngs which are strictly judicial in nature (Ursa! vs. Court of Tax Appeals , 101 Phil. 209; Auyo n g Hian vs. Cou r t of Tax Appeals , L-25181, Jan. 11 , 1967, 19 SCI\A 10 ; C . E. Sharp & Co . vs. Commissioner of Cust om s, L-23803, Feb. 26, 1968, 22 SCRA 780), and expose its findings of facts open to question and review . If the technical assistance agreement in question was indeed submitted and approved by the Board of Investments, then such ag r eement co uld easily be capable of unquestionable demonstration by means of certified true copy thereof which may be issued by the said Board. In view of petitioner 1 s fail ure to produce the original or certified true copy of the alleged technical assistance agreement for ascertainment of the exact nature of the payments of r oyalties to the Imperi a l Chemical, 0 .r" ...... ....; �. /

DECISION - CTA CASE NO. 3185 - 13 - Inc. as defined under the Tax Treaty entered into by the Philippines and the United Kingdom of Great Britain and Northern Ireland,which to our mind is necessary to establish its claim for refund of the amount of E264,514.12 representing alleged overpaid withholding tax on royalties, petitioner failed to sustain the burden placed upon it of presenting adequate and competent evi- dence that it is entitled to the refund. WHEREFORE, finding the petition for review without merit, the same is dismissed and the refund sought is hereby denied. SO ORDERED. Quezon City, Metro Manila, September 26, 1986. rOw~~~Q_) M�1 ANT E F I LLER Presid. ng Judge WE CONCUR: