CTA Case No. 3786 (Decision)

/ REPUBLIC OF THE PHI LIPPHlES COURT OF TAX APPEALS QUEZON CITY DOWELL SCHLU~tBERGER C.T-A- CAi.:.J..E LN�.O_,_"_178b- (EASTERN), INC.- PHILIPPINE BRANCH; Petitioner, - versus - THE COMt'!HSSIONER OF INTERNAL REVENUE, Respon<1ent. X- - - - - - - - - - - - - - - X DOWELL SCHLUMBERGER~ INC.; Petitioner, .:. versus - C.I.A. CASE NO. 4042 THE COMMISSIONER OF INTERNAL REVENUE. Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X 127

DECISION- C.T.A. C.~ NCIS. JlfN & 40112 - Page 2 - DECISION (C.T.A. Cast" No..-~;7f.6);. a.nd tlle otl1er daimirv;�-:� f::::r tllt" refUJKi or calendar v' ear 1q-[--)4 or in the alt.erna.tiVB' a. lesser arnou.nt of P3�~::.9.32 ;..63. s11ou.1cl t.lle Court. find it liaNe for contractor's tax \�.-I,.-;�1�!-lo:=-� J-�n�=�1�1-1A�-..-. 1�1-1 tt~�-l;:�:-.� .nt'tll�J-iLr,.tn-� iI�t"�.lL;::.�~�� :�-:�. t) __._, '..1' . : ) . : . tools and. ::;ePlices as a :;u.1)-contractm� of service contractors engagecl in petroleum operations in t11e Philippine�::. Tllt" f;:J.cts are FACTS: LT_A_ CASE NO_ 3766 to equipn1ent. pro'iride tl1e latter V�t1t11 cernenting ancl cut-~:r!~---~.:� --~�-�..;... �:� ;i.'�-��-~ �-' (Exh. A) On :::ame da.te. both p2.rti>2s entered irl a.not11-&r Contract 128

DF.OSION- C.T.A. CASE NOS. .jf"Wl & 4042 - Page 3 - F�NOC-EDC ~,.,ritll directional drilling'--: tools a.nd services (.E:-:1.1. e.�,'. In bot11 instances, said (Ontra.cts Vlere entered. into by l?NOC-EDC in contractor of the ~~.-cvernment under Presidential '-' Decree No. Engaged In Petroleum OperatiGns In The Under For t11e yea.r l�J:~.2. petit.ion'?.r P 1,40?,,352.00. It VI:)Uld appear from t11e recorcls that. petit.i�:)ner incurred a net loss frorn it3 oper3tion:3, covering the non-P.D. t tr1�.: ~-1J'.;l-:.:�.1�.;..:.fn�-� t�;�:-.� J lt�1�1_~.'~'...�. l..l..l't-��;)r ,,,:r:~�=- tll;::.!-;::.!"t�.--,nl 11.-1 l.ll�.�_,'.�I.."_.,in1;�:-.� �"-�""' '1 �-��-� 1jp;:. . ..., --� ..... .a...t. � �-� �- -l. �-� EDC on services rendered by petitioner V�litll respect to J?:NOC- t�.,,,. fE'"' ��"'tll the. f'l""l.!"'l �'�!" 1 F''i ttlc. �-�-0. L .f..;-~.....!- .1-':~::f..1. 1�-�t� 1�!:._l t._. _..:~.a:�:c. "'�-�'l"':~:"�~-i-l't.... 1 �:~..r ~i\'i. .� .~.._. lY�~'-l~"r)'!".�_.'�\i�..1J�.:��'-~~�~"11+:-_. i..~..t....} -�.&. .... ..:\..1. .

l DEOSION- C.T.A. CASE NOS. J78q & 4042 I - Page 4 - IlOVEL SC:HtUYBERGER {E.!STERJf _t INC. - PHILIPPINE BRANCH SCHEDULE Of !AI VITHRILD BY CLIENTS DECE11BER 3 1, 1982 f,0.1nf~Pn'-P ��"D' 1-1~"-'">�x-") :RTF.: No. C.E. Ho. Amount L:c~ "'?Tithheld PHGC-EDC ~./ l O/B2 924E;722 * p 3}7. 6~!9.09 6/10/f.'Z 94992:,7 * �:.a]1 . 1J6.6~i 9/10/B2 9376704 9163699 �:;: 764:207 .tr3 1n iif�.o'R? - �-� I .:. ._f{ �-�o...~ 9999314 Y37..91B 00 1014078"3 103~~�33~,9 7. G9B. 200.;t1 204H37.15 11/10/82 10182549 161..2(6.29 12/10/82 103:13663 2'. 57:.:. 55t:.3t: 1~,t:, .037.21 1062B9B.3 2:015 .. 066.13 10629297 1.962.114 ::;-:; i i� i I Less: Taxes daime<i tm<ier P.D. No. 13~:.4 retu.t':t1S 290.141::;9 ! TOTAL CLAJl.,.IABLE TAX C:REDIT IN NON-F.D. 13~�4 RETTJRNS p 1. 407..3:�2 .00 290.14 1.-=:9 - C18Hoed under P.D 13~i4 returns ~:uch c:lain1. Hence, C.T .A. CASE NO. 4042 16� J the f.ure-au of En.:?.rgy Devdopm:S-nt.. enters--::!

// DEC5ION- C.TA. CAS.r. NOS. 3789 & 4042 - Pare 5 - 0 I Philippine Branch, petlt.ioner in t.lless- t.V�lO �:~ases. t:) do the drilling and cer:nenting . .PNOC-EDC (Ez1L .e). J>stit.i�)ner ::;.greed. to provkie the labor. second and t11ird qua.rt;:,.r:; of 19,:}4 (Ex1E C- 1. D- 1 ::.Ed. E- 1) and Receipts (Ezlls. C-2, C-.}. D-2., D-5. E-2 and E-5) Aside fr�:)m the contr3.ctx�s t3.X it :paid directly to tlle. BIR, PNOC-EDC V�iit.1l1leld (E:z:1E. C-7 t:) C-19.: F-1 and F-5� to F-13). claim for refund v'litll the fHR in the amount of F�S ~:, 1. 9.3� 1.76. 1(_,.'.�"�.�'�~"'� 1..'.-� 1�s pet...'1t.'..1oner �s opm� 1�on t..~11ar... a.s a :;u~t)-C�::'!th+-.rac._+.- c�r L�., 1�:3 nor.�. liable for contractor's tax under Sect.kn1 205 of ths T::.u: Cod.e. 131

DF.ciSION- C.T.A. C.AJ'""E NOS. Jl'ir1 & 404.2 - Page6- p 11,9f�4.654..3.3 Le~s: Eeceipt; p::tid out of proceeds of fon:+;,r,n lo.::1.rr.:: contra.ct.ed bv I ~ P.NOC-EDC pursu.ant tD P.D. # }~~4 as amended bv P.D. # ':�72 v.rl1id1 I - 7..o.:::.:..05�2 ..:::.3 a.rs- ezernpt iror.n c~:)ntr::1_(:tor\:: tax Eeceipts v..rhidl are merely 16<\042 .f-:.4 rechan;,res tc� or reirnbursements '.J from PNOC-EDC Gr(:.::s Receipts V.Jhich ;::;hc)uld have been subjecte.J to contractor�::: tax P 4.7~~.\~..-~.7.91 Contractor's Ta.x Due p -I.-_. 1') 1 ~} f,(i(-., Less: Contra.ct:)r':; Ta~r Paid �.r �-� �-�. ._) c:. 1 ;f, I �;>} Claim for Refund (l -~ l I .._, J L . i .,. f ���t�-, t�� y t .- 0 1�'- ~- l.]li P....��"=�-'i�}�t�)�t�lr-l...+:�:�-:�.�U��. t...1+1..r.-_l+ ,--t "-� .tL�,..,.J-..} ..� t..t-1l.-'::.::: �l�.:-:~:.r�nL-ut.-1(-.1. !,,.. -:'.i~.J-..l-..l 1f1�1�t�::�;'t..,-&l. ... ;�:-'-j'�:- ..r } fd���,-1 24.. HAt-'���� r���titi�.-,.-;::.1- i~lJ,�-l-:.jl~_i.~~i'--"-1�v�1�!�1�'�:�:�'-1. ~-.� 1'-.. t:;'�, ;...'' -�� � >._.tl._. i~':::'-. (�.�!11 J'.!Yl.Jf.O.~.t-1-�1~-~;1 L .' 132

DELJSION- C.T.li. CASE NOS. 3789 & 4042 -Page 7- ISSUES= CT.A. Case flo. 3766: ��rr1t t�.:=.f1 1�,-. ".l..ill"'tll~!- !I .::::- �� .... r",t� ,l.,. -.� ��� In�.�.:..:...t�l. .t.-l�,-..- -,..!. ��-r� ~...F -=- ~..�.. �L1t1-.� t1...-~.�--�-t�-� t�..J-'..). t,_1. �.i.��~-� �-� ~-1�.5.11-.r.+l ,.�.�..11� �.��.,. for its non-Presidentia.l Decree N�). 135.4 services for the year , C.I.A. Case No. 4042: o . H'.'T't.�H��e tJ"'l�e�t� <�_:.�t 1�1,_�:.t_. p~~.~..H_.-,(;:..!tl�!�:�"l� 1�:-:> e��l�l t...1t..le""cl t.. r�.}I�e� t��e1�Ut�!�t1 o�f 133

I DECISION- C.T.A. CASE NOS. Jl89 & 4042 - Page8 - C.T.A. Case No. 3786: The lavr:; applicable in this case are Sections� 1 and j(a) of Presidential Decree No. 1354 (~8.pri1 21, 197,3) and Section l(e) of Revenue Regulations No. 13-7�3 (SE>ptember 7, 197>3). Sedions 1 and .3(a) of Presidential Decree No. 135.4, �sECTION L EvE>ry subcontractor, ~,qhethE:>r domestic or foreign, entering,_, into a contra(:t y~vith a service o:mtrador whetht:.-r national or local: I'f~n-=:kl&fi. .J~'()H�PV&I; tl1at anv in\>)!11!:? reco&>ived from -3.11 c�ther sources vvithin a.nd �without tlle P�hilippine�:; in the cas& of dornest1C ��-==�__i,_l.h...(. -..(.l..!.�ltl-�-=\.~.;.(..�.,.tr,.),.r. ��:._�1 �\,=.,1.�.�1�1..-...-i \l�,i�!�tt.-..l,.1J.�!-1 ~l'J--.~.,.::._:.. P�1�1� il1:�;:n� :r;.1J � .t..�.�1,:.:..:. .-c� 1-fl t_t-J1. ,::..:.... ..-..-..-..-..:.1...-"='"-.,.:.:.:.. of foreign subcontradhrs sh:::tll be subject tc� tr1E:- rt:-�2'u1a.r incomE:- ta:K � url(ler t11e Natir_::,nal Interna.l Revenue Code. The tenn ",z_,ny;::; incorne" me::u1-:: a.11 i!Korne earned or received a.s a result of the contract entered into b~l the su1xontractm� .,,vtt11 a :::-s-rvi.ce B-nf�-!1;:J:f_>� '?.d contract in 1... :::.etroleu.m �:)T.>erations in the .L Philippines under f:Te::;idential D&cre& No ,:p ,=�ur�-r�11. l,�.�n....rl.--.l.,.:.:..:..!�,.=...,........-...-):-r1.�!�1~o: ~, t-. r-� ;.._:.:.�;~'1 ..'J "'::r' 0::1' "':::.'!' ~-"" ~-" ~...:..l.~.t. .:�~ .i~ ..:":c. ..:::. ...:~ EvE:-ry servi(e G(:.ntra.c:tor shall dedu(:t, V�lith1i.o1d_, and pay thE:- t:tx impose(i in Section 1 of this DB-cree from the amount.:=; Daid bv tlie ::;ervice- contractor t\::. tt.te- ':;ut:n:>:)ntra.ctor L t' 11e contract ent.er.:::-cl into t�y ;::md Uti'::ler t:;E:-t~.veen tllern in the ::;ame rn:::mner ;Jnd ::,ut�ie<:t t;) the ~A of tl1e 134

DEC6ION- C.T.A. Ck:;lr: NlJS. 3W & 4042 - Page 9 - 7 197(:,), [Supplemented by Rev. Rs-gs. N�.::. 6-79 d.a.te.d Ju.ne 4. ftsection 1_ Income payments subject to withholding tax and rates prescribed the:reiiL - E.7...(..�.;..::�:��..f,�.�.�,t� �"=--'-���-~� 1-1-~;:�::.!-.-._:.:.1�!-.,. n..t.1.��1;:.:_:. .!-,I.,rk�-�-;:::,:_.. rr-�"t'�r�v.~;l�.rl;._:::......-..-.1-' "-.1Jh.J;.::.:_.�t.�1.;::-:..�. �._:.:1\�1~�..~..~..1. 1 h"'-.�::�.:_.. 3f-:;B(ifiB(l f(:=r e;::i_ct'.t cL:t3E; (::.f ~);~.;lee fr�)tll t.11e f.-_:;11~)~.:\~itlg: items C�f income payment:: to pe.r:3ons resid.ing in tlle Philippine::;: ":7 -=::r "'::"" ..:":t. .:C.~..:~ (e) Amounts paid to certain contractors_ n�-1 ,-. t.--, ttl;::. f(��ll(�,"'rl�t�lc; r�..-.. �-� i 0 ~i(��,-��:�:-:��~=-�: r1;-'�:0-..n?�l��l�i;:.:..:. ...t.�lt.�J'"-":�J. -''-~' '.....L. v �-� 'J I� i::) �., '<I' r;.L+t1�.-�L::,_.,,_�._�,��t-�r��-�.t��-~~�� 1"1-lfll" (�,t� T\ 1'-Tl.ti-.,L;�.:.�::..,t.1~-1{-:~:.[ {.,_'�{�.,�. ,r�,rt)'..._,-...�!r'�-:'-:..t..iJ.(�~J..1-1 - t.t.-�J.l�r� ;.:,_::.,;�::.r:, ,���.:;,~; �:-.1 ni,"l11 .,_ ~l i. �� -�- 1~� .i.. .... ~.r,_��,�:�:.;._. J.-�� !l.>�L.;fr-:l-."i.>l ":..� ...:.!.J ~" -~1"a::�,. \.j.-t�}. ( 1) (.TenBE11 engineerinK general 1)U.i1ding and specialty contractors - Sed.ion 1 of PrE>:;ldentia.l Decree No. l.YS4 n1ah~es it plain tlla t. t.11 e incorne tax refers to v�.:."-. 1�rr-�; ,;'1. ~1-h,--..�--�.'1-I-l �-- derived 1-t.:-:>. ;�.-~.=~� �--:;�.� frorn :;erviee >.:::' All other income. re.ce.ived frorn sources c�tller than pe.trole.urn t�� ....,._, _ _ -r���� r�.,.TT \�.�)�r)-\�:�;:�"�!"�~.�---�-.�t�;'-~-'.1�1-::.:--. .L-.--:1+V-.:-t.:.=-�. .�-:U-- ,. ,�=-�.�,-1-f-;J._-I.\:,;.:"-1._.-..1._.. A.' 1.-!LI:::' 1���t-::>��0:rl-1��1-�:.-1.�.1-1�11,<._-...\) Ilt::> .�:<..';. "L1i.~-l-<l.-�<-7-r t.-ti 1f~:3 '<:;:" Nat.ion;:1.l Internal Re.venue Cede. In relatlon to this. Sec:tic�n 1(e) 135

DEOSION- C.TA. CA....CJ! NOS. 3189 & 4042 - Page10- general l:uilding and specD.lty r:o!lt.ractors. Thus, for w:m-F'.D. U5A :3ervices rendered ty petitioner t;:) PNOC-EDC, the latter should ha':.re vlith11e1d only� 3.$ instecv1 of (~;~: final i1E0n1e tax non-F�.D. C.T .A. Case No. 4042: The word ~Nhen or not restrained by the <:ontext or particular T,qc,rds. may mean a sub- contractor, or anv nerson,remotelv eng"aged under contract and , I I; I W- T�T()!"l�� <'� jr�-,~i-+-J-..l;l-E,:�, t�h._,,.:..:_.. 'f'l-..��,_._, _.,.,~ ~f�j'l.'f:,:J-11 ,.,.,~ t:e..i.1�1,:-:.... (v"\1"1.!;"~!'1ll.+'"-�\;:.11 1-..".,.'�.") !lt+-�.�1.C-.I..�r..��.�.J.t.:,". lf . .'..~)1.1.r..�_i.�l1... C".-l. p~,"":':' .r;.:--\J.~n Q.j s:l,.:) >;�r,::.ll tl�,.,.. {Ept"fant�o G 1��::: ,.~,.-,tltr�a.-~t.-�,�� -::~.::: -:j ,_l :_._ '..1' �..; � ' - �.;> J ....,. ,L l(.t,._, If\: �-� Ia�,~j 1... '�' '''�!'�1�.-;,::..;J!.1-.�.::.>l. l ��..�..-.,_r, 'tlt..r_.�-(~},,r�.�.�t,..���..,- r� , - GonzalesR .National Internal Revenue Code, 1984 Revised Edition~ p. 527.) It v.ras formerly held that a contract.')r and t�a�:-r,-.y,::.r�,-. _., r,�ar�,., . . '".�_�,J.�'l. 't-.1. -r.�_. ,_~_\.Lt}f�'.f~.��.1.r"._.�tt'�.)!�� ,�::<'_._�!�,::.,_. 1'fl,-�"� lP�.� n!'.".::.' -.!��}("lJ''f}t~ /. L>.I:' �:\ ' ��� �J <:..�t..lf��-l~ u~.~t�.:�;.:,, ~.:.�<,::>, r���C. 0. tP...l.T'T/ tax::1.ble. The pa.yment of the c:Nltn:v~tor�s tax by tlH prime 136

-DEC'JSION- C.T.A.. C~"'"E NOS. 3789 & 4042 - Page 11 - ,' � ,,,, t:~.x. (P_ J. Kiener Co.� Ltd. v. Commissioner of Internal ~ ,f , Revenue, G.R. tlo_ L-16417, January 31, 1963. 7 SCRA "T11e term 'gross receipts�� tne:3.ns all :3.rnounts r�,r.. .-��,-�;!Jlff"::";,��-tr�,t� r-�,t�1� tt1;:, it"I(�t'n�::-11 t�;:,.���.::::.i;~,::.f�i 1 -.� -...,.�.�. .1. ......._ ~1--.J-l~7 t.t.�1l.:.:.... ..�.!. 1��r�l;..:..,. !�"-�;.t1-� .t-� I-" .!. �-� J--~ �-- .... �-� �-�- �-� .t�..� l . �3,0:: �.1 .., �- �-� total C(mtract. r.ri<::>?. undirninislled bv ::J.rw::.unt !Y::dd to !. . " - the �:::;ubcontr::1d.or undt?.r a. subcontra.ct ;:UT:.'lngement.. Any� portion of the t..Aa1 contract prke ;Nhich is paid tD t11e �::::ut<(:C�nt.r.::v::tcT. 3lla.11 be exclude(! fro:::,rn t1w taxable gr(:::::�:::: rs<:eipts cf tlh:: sut-<.�:)ntt:=Jct(:.r:;. (1\s ::n::.1s-nded by P.D. Nc. 145� 7.). case of Dravo Philippines. Inc. v _ c~)mmissioner of Internal Revenue.. C.T.A. Case No. 3487. September 15.. 1989 -:"1�=: 1-<-)ll,'l~:.!C:� ;J 1--.�-� �~ ~ '�' I I �-� � "�.v.::�.. ..a.::.~... ."s:":"~�.. Tl�-1.::��:�:.. ��-=' �t~-..=__-tt��1'-J�t.�:-:��:~:�. �c..}-rr-.�.�co:;::,:�-::_-1�_11�!1'C..�-�' c-�~�!� t}..�...~_,:,:_.. r�.r;r-tt�r,t�r ,-.,1- t}�1.::::. J._.-�.... �-� �-� ..... �-� -�.L �-� contract price paid to tlw subcontrad�::;.r under a sgurobscsonretrcaecipt t;s:t-l�2oTf &sueem:lelnst uabsceoxnctrluacdteodr. irom the taxable Accordingly. for t11e B-xclusion t;:) a.p_p~y, it is enougll tllat. the gross .. ')f r� 1.J�:"::�"(._".t.:,;':1�lr)�Jt,.-j. �~ :"<r�-v._ t~�.i�.l1._i'.-.�:.,.:.:... 1... u:=\. ,�=-�.�-,t.,h._.!�.,....�l.JJt."J�.lf_t.".:.:.:t.j!�.�...�t,..�.)�.i�.. �-:J:'<.l"l�!.�_J t-ll�~,_~.TlT t�)��r�rl�. l part of the portion c.f the total contract price of the prime or principal contractor paid to ~31J.dl subcontractor. That tile ~:ub.:::�:::rntra.ctor may be an independB-nt. contrador, to our tnind. is th>::orB-fore of no rrwment. It seem:; c:lea.r tlE1.t the philosop11y behind the 'B-~�~(:lusion is t() minirnize thB- effects of doublB- tazati::)n (:;f the sarne gr<Y:s re.:::eipt;;_ .. 137

�I DE.as.ION- I C.T.l\. CAJI! NOS. JlS!1 & 4042 - Page 12 - PNOC-EDC (principal C�:)nt.ra.dor) G�r a total of F�5:31 . 931.76 ...,N::J.s bet.-.:,~.,re.en PNOC-EDC and petit.i:�)ner as sub-cont.ra.ctor. Section 205 petitioner as sub-cont.ra.ct.or a.re excluded from it:: ta:mble gross I n ��1 r� 1�� t11 tl1 BI t- .... , t11..., �"11 :i �� Il 1.+'..--.:":t ..�...+...~'=1:.\��.�111 1-'..-J. tJ.- 1�--'=-::'1-1-1� '... .i.. ':::."'�. 'rt�1� ~ --:i t l~i:j _. .".D~ _, J�. .......:~.:~.a:~. t,_.�':;''�._ _ �:t ... �:J. tlleir cc�ntrad V�litll FtTC'C:-EDC. Since the gn)ss receipts paid to petitioner ::J.s sub-contractor ;3.re excluded under Section 205 of t.l1e. Ta.z Code, then tlle same ~.llould not be subje.:ts-d to the contra.dor�s tax_ Only the otlwr receipt..:; earned by the sub- ccmtrad.or~ as prime .c,:.nt.ractor i�; :;ubject to the contract.�:T':; tax_ . .�-,r- �=l'�=-1'l c. 1-t��-��n1 t-f�ic. t�:>v'=-hlc. 1-c..-'c.l�p,t�= ,-,f the. -,~,11t-ra�~~~ .......... .a. '�" i.. '�.� �.r��� 4 �.j l�:J, .&. it,-..� '�-� c'�.'~,.i:,.&..,'�-.-�l-1-,�]��,.-+i'c�.' ,'���j �._,� J..a..� �-� .0. ��w� ....:.\.d;;;.�:r. r.,�' -,.I' Cl'Jt.t..... ,_ ..,� ���-' ._,.... '�' .,_., ..,_, J..:. 'w'.A..a. '�.� �-1 contractor_ i:1...11 the proceeds ea.rned from its S1..!.1J-contrad. agreement ~Nitll PNClC-EDC does not form pa.rt of the gny:;s re(:ei.pts netitioner .::J.s ' sub.ject to the ,-::on tractor's ~3ub-cont.ractor ('f ~ tax. Pe.t.it.h::.ner is entitled to t11e refund claimed in the ::J.mount of J:�� l_:"}..-), 1"'.1.'-.-:.~-), i" i~ ... � 1. i' �.). WHEREFORE. in 'lie~.v of tlle foregoing_, the petitions hr GRAf{TED. Respcndent. i:3 hereby ordere.d t-:~. refu.ndin f::l7or ')f

DECISION- C.T.A. CASE NOS. 37'89 & 4.042 - Page 13 - ser7ic'3':: lJ.nd.er C.I.A. C;3.se t�i(� ..~:.7e6 In addition, respondent is also orciered to refu.nd in favor �:)f petitioner tlw a.nl(:>tmt of No o,:.sts c�f suits. -.p-<# RA~.Nr 0. DEVEY -.A SO ORDERED. As~;ocf;::~_te Ju.d!d�--�& WE C011CUR: I' / CERTIFICATION ~Q_.~ ERNESTO D. ACOSTA 139