CTA Case No. 2818 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MOBIL PETROLEUM CO., INC., C.T.A. CASE NO. 2818 Petitioner-, - ver-sus - THE COMMISSIONER OF INTERNAL REVENUE, Respondent. ~<---- DEC I s I DN This is a petition for- review of the decision of r-espondent Commissioner- of Inter-nal Revenue denying a claim for- r-efund and/or- tax cr-edit of F'2~022~552.60 ~ wit hholctinq t a :-: e s er-r-oneous 1y col lee ted � . On Mar-c h. 1. ~ 1.974, a Deed of Assignment was e}(ecuted by and between the ESSO Easter-n Inc., a non -r-esi dent - cor-por-ation or-ganized and e}(isting under- the laws o �f the State of De lawpr-e, U.S.A., petitioner-, Mobil F'etr-oleLim Co.~ Inc., equally a non - r-esident cor-por-ation or-ganized under- the State of Delawar-e, U.S.A.~ and the Bataan Refining

' DECISION CTA CASE NO. 2818 2 Cor-por-ation (BRC for- shor-t), a cor-por-ation or-ganized under- the laws of the Philippines. Under- this Deed of Assignment, ESSO Easter-n Inc. , with consent of the Bataan Refining Cor�por-ation ( BRC) assigned to the Mobi 1 Petr-oleum Co., Inc., petitioner- her-ein, all its r-ights and obligations under- a Ser-vice and Technical Agr-eement originally executed by and between BRC and Standar-d Oil Company on Mar-ch 29, 1962, which agr-eement, on the date of assignment was in for-ce and effect betwee n ESSO Eas ter-n Inc. and BRC. By vir-tue of ass ignment, petitioner- Mobil Petr-ol e um Co. , Inc. (J supplied BRC with the manageme nt: ser-vices con temp 1a ted in the agr-eement all of which were r-endered in the Philippines. For the fir-st quarter- of 1974, r-espondent Commi s sioner� of In ter-n a 1 Revenue assessed BRC, as alleged withholding agent, the amount of P387,639.87 pur-por-ting to be withholding tax at source, plus inter-est of P4,900.93, or- a total of P387,540.80. This assessment which BRC paid "Under- Pr-otest" on June 28, 1976, in the amount of P387,540.80, was pr-emised ��, q the assumption of r-espondent

!� DECISION .. . CTA CASE NO. 2818 �-.:.:.-� Commissioner of Internal Revenue, that the payments by BRC to pet.i t.ioner Mob.i 1 Petroleum Co., Inc., were "royalty payments". Similar quarterly payments were made by BRC to respondent's Bureau "Under Protest" as follows : Second Quarter - 1974 P452,437.55 paid July 25, 1974 Third Qu a rt e r - 1974 P421,771.73 paid October 25, 1974 Fourth Quarter - 1974 P433 ,956. 3 6 paid Januar1 24, 1975 F.in;t Qu a rter 1975 P326,846 .16 paid April 25, 1975 which t.oge . 1er with the amount of P387,540.80, totals P2,022,552.60. On ,June 4, 1976 and June 9, 1.976, peti t.ioner Mob i l Pet.n:>leum Co., Inc., fi l ed with respo ndent Bure~u�s App e ll ate Divi sion a c l ai m for refund and a su pp l emen ta 1 1et ter to the c 1aim, res pec ti vel y, copies of which, together with their respective anne:.:es, wer-e made .integral parts as Anne:-:es "A" and "B". That the basis of the claim for refund is that the fees received by petitione r Mobil Petroleum Co., Inc., from the Bataan Refining Corporation (BRC), a~e not royalties as contemplated in the Tax

DECISION CTA CASE NG. 2818 - 4- Code but personal services rendered outside of the Philippines under Section 37(c) of the National Internal Revenue Code. Respondent Commissioner of Internal Revenue has not to date refunded or decided the claim for refund. Hence, petitioner � f i 1ed the instant petition for review. In r-esponse, however, to the petition for review filed by petitioner on June 24, 1976, respondent Commissioner- of Internal Revenue answered that the Service and Technical Agreement executed on March 29 , 1962, assigned to petitioner on March 1, 197 4, provided for a gr-ant or 1 icense in favor of the Ba taan Refining Corporation ( BRC) for its exclusive use in the Philippines of certain pater ts, sec ret processes, formulas and inventions belonging to petitioner without which BRC cannot operate its refinery units. The only issue in this case for our determination is whether the payments made by the Bataan Refining Corporation (BRC) to petitioner Mobil Petroleum Co., Inc., were for technical, management and administr~~ive services rendered :)91- D

DECISION -�� CTA CASE NO. 2818 - 5- outside of the Phi 1 i ppines by petitioner- or- for- r-oyalties subject to withholding tax at sour-ce. The law involved in this case is Section 37(c)(3) of the National Inter-nal Revenue Code which pr-ovides as follows: II ( C ) I?.I.:.Q�_� _.__ _:t..IJ.�.9.fJ.l..~----�-fr..PJ!'._____.�Qh!..r._~_g'_�. .t_.__ ~j,..t..t~.R.!,!. t..tl_�?___..f:. h.t_~...,t.P...P..to_~.?._~ . The fo 11 owing items of gr-oss income shall be tr-eated as income fr-om sour-ces without the Philippines. X~�~ X (3 ) i;;_: Q_fll_Q.~_fJ_?._~_t..;tQ.IJ..........-.....f.9.r:.___._!..~-Qp_.r__..__...9r.. P..~.C?...9Il~.L.__..�.gJ.:.Y..~..!;.�'EL._..P_f?.J:_f_q.r...m.ft�L_._w.tt.JlQ.!::!J;.__._t._b._E:?.. E:.!JJ.1JP.R.!J:LE:?..� .� II ( W.!J..It�'.r.Jj,_IJ.~.!J.Q...._Q.q r..� ..~. ) The petitioner- has shown that it is a non-r-esident for-eign cor-por-ation; that the income subject of the assessment na de in this case by the Commissioner- of Inter-nal Revenue was der-ived outside or- without the Phi 1 i.ppine s ; that under- the Ser-vice and Technical agr-eement a ssigned to petitioner- on Mar-ch 29, 1962, petitioner-'s s e r-v i c e s to Bat.aan Refining Cor-por-ation (BRC) consisted mer-ely of technical, management and administr-ative advice; and that no r-oyalty payment is involved. This was devolved in an affidavit of William C. Whitham, Jr-., Vice Pr-esident for- Technical Ser-vices of Bataan Refining Cor-por-ation ( BRC) , dated September- 13, 1979, who 51'!- E

DECISION ��� CTA CASE NO. 2818 - 6 �- was fami 1iar with the technic a 1 services rendered by l"lobi 1 . i. l. Corporation of New York or its subsidiary 1'1obil Petroleum to its affiliates all over the world~ having been employed in Mobi 1 Oi 1 Corporation Service in 1951 and have been assigned fF�om one affiliate to another, and who stated as follows: "5) When I assumed my present position in BRC in August, 1977, I reviewed the requests for and results of technical studies or services made by BRC to Mobilpet under the Service and Technical Agreement between BRC and Standard Oil Company (Esso) dated March 29, 1962 which Agreement was assigned by Esso to Mobilpet on March 1, 1974; the review was for the purpose of finding out whic:h studies were actually incorporated in BRC's facilities and/or operations; 6) In the course of my r�eview, I became familiar with the services performed by Mobil Oil Corporation, ,Mobilpet, Mob.il Resea rch and Development Corporation and under Mobil affiliates during 1974 and 1975 under the Services and Technical Agreement dated March 29, 1962, and assigned to Mobilpet on March 1, 1974; 7) All the technical studies or services made by Mobil Oil Corporation or Mobi 1 pet for� BRC for the period March 1, 1974 to the first quarter of 1975 were performed in New York or Princeton, U.S. or otherwise outside the Philippines by Mobil engineering, research, purchasing or other groups; ~11-- F

DECISION -- CTA CASE NO. 2818 - 7- 8) Such services consisted of, and include the following: a. General technical advice, ser- vice and information regarding operations of the Refinery; b. Specific detailed technical advire and operating and maintenance information regard- ing each Unit, including the res ults of researc h, develop- ment, technical service and engineering activities of Mobi 1 and its affili ates which are pertinent thereto; r.:. Immunity �from liability for infringement of any patents owned or controlled by Mobil and its affiliates (in the sense of having the right to grant licenses thereunder without accounting therefor to others) where such liability arises from operation of any Unit during the term of thi s Agreement; and d. General man age ment and adminis- trative advlce and service un op~?ra ting, corpo r� a te, account- ing, financial, legal, employee re J. at ion s , recr�ui tmen t, training safety and other gene ral matters as required to keep the Refinery operating in a safe and effi - cient manner. 9: The above services did not inc: 1ude the use by BRC in the Phi 1 i ppines of any patents, secret processes, formulas or inventions belonging to Mobil Oil Corporation or any of its affiliates; 10) Whatever patents or formulas Wf?re given or granted by Mobil Oil Corporation to BRC were given in 1962 when -:5:9 7- c

DECISION - CTA CASE NO. 2818 - 8- the refinery was constructed and started up with no obligation on the part of BRC to pay any royalty fees; no additional patents or- propriety formu1 a s were given or pr-ov ic:led BRC a 'f ter the a s signment of the Agreement to Mobilpet in 1974; 11) The technical services and engineering research rendered in 1974 and 1975 by Mobil Oil Corporation to BRC under the Agreement could have been rendered by another equally developed research and engineering company; 12) The management fee of US$0.03 rem.i. t ted to Mobi 1 pet for- each barre 1 of cr-ude pr-ocesses at BRC paid �for the cost of the above-mentioned tE?c hn ica 1 ser-vices and er ~~ .i.neer ing r-�esear-ch; any portion of the co!:�. t. of such services not covered by the management fee was absorbed by Mobi 1 Oi 1 Cor-por-ation." Also, in a certification issued by Antonio G. Mac kay, Vic E? F'r�� e s iden t. o �f the F'hi 1 i ppine Na tiona 1 Oil Company, dated September 2 9, 1983, he certified that �for- the per-iod January, 1974 to March 27, 1975, Mobi 1 Petro 1eum Company, Inc. , of New York, U.S.A. "performed technical services, researches and studies through its Technical Staff situated and working in New York, U.S.A. and Princeton, New Jersey, U.S.A. for Bataan Refining Corporation pursuant to a then e:-:isting Service and Technical Agreement dated March 29, 1962 between Standard Oil Company and Bataan Refining Corporation, and which

DEC IS I 01\1 CTA CASE NO. 2818 - 9- was assigned in favor of Mobil Petroleum Company, Inc., by the Agreement of Assignment dated March 1, 1974, and which took effect on March 1, 1974, that the service fees paid by Bataan Refining Corporation under the said Service and Technical Agreement were fees for the per��for�mance of said services and did not inc 1ude any roya 1 ty for any patent or other propriety technology of Mobil Petroleum Co., Inc., or� its affiliates." (E:<h. s, p . 1 , Vo 1 � I I , B I R rec . ) And in a certified copy of the agreement dated Mar� c h 5, 1. 962 between Socrmy Mobi 1 Oi 1 Company, Inc., and Batann Refining Corporation, it will appear in par. 2.0.1, the fact that the latter is granted an i rr�evocab 1 e, royalty-free, the unrestr i.e ted f r. eedom to use, operate and maintain Socony Process Units. "2.0.1. SOCONY hereby grants to LICENSEE for the SOCONY Process Units an irrevocable, royalty-free, non-exclusive license and immunity under SOCONY's Patent Rights to the extent that such license and immunity is required to afford LICENSEE the unrestr�ict.ed freedom to use, operate and maintain the SOCONY Process Units 591- _!_

DECISION -. CTA CASE NO. 2818 - 10 - (including rep lacements thereof at the same ~ ocation ) and to dispose of the produc . ; ther-efrom thr-oughout the wor-ld." The evidence of respondent, Exhs. 1 to 3 , does not point out categorically that. the fees paid wer-e derived from sources within the Philippines, or that said fees ar�e in reality royalties . Royalty fee is payment by the grantor or licensor for- the use of a property or- property r-ights, such as patents, secr-et pr-ocesses, copyrights and the like. Nowhere in the Service and Technical Agreement does it show the character-istics and features of a royalty agr-eement. As far as we see, in Sec. 1.01, MOBIL agrees to supp ly BRC the ff: "SECTION 1..01.. Jersey agrees to supply Bataan: (a) Gener-a l technical advice, regarding .service and infor-mation operations of the Refinery; (b) Specific detailed technical advice and operating and maintenance information regarding each Unit, including the results of research, development, technical service and engineering activities of Jersey and its affiliates which are pertinent thereto; (c:) Immunity from liability for infr-ingement of any patents owned or contro lled by Jer-sey and its affiliates (in the sense of having the right to grant 1 icenses thereunder without ac:c:oun ting therefor� to others) wher-e suc h 1 iabi 1i ty

DECISION -�- CTA CASE NO. 2818 11 ar-ises fr-om oper-ation of any Unit dur-ing the ter-m of this Agr-eement; and (d) Gener-al management and administr-ative advice and ser-vice on oper�at.i.ng, cor-por-ate, accounting, financ ..a l, legal, employee r-elations, r-ecr-ui �_. 1ent, tr-aining and other- gener-al rna t ter-s as r-equir-ed to keep the Refiner-y oper-ating in a safe and efficient manner-. It is Ser-vice and Technical Agr-eement , by Mobil Petr-o 1 eum Co . , Inc. , the ser-vices of which wer-e per-for-med in New Yor-k or- Pr-inceton, U.S.A., or- other-wise outside of the Philippines. WHEREFORE, judgment. is her�� eby r-ender-ed or-der-ing r-espondent Commissioner- of Inter-nal Revenue to gr-ant a r-efund or- tax cr-edit in favor- of petitioner- Mobi 1 Petr-o 1eum Co. , Inc. , the sum of P2,022,552.60, as income ta:�: and inter-est er-r-oneously withheld at sour-ce and paid by the Bataan Refining Cor-por-ation. Without pr-onol1ncemen t as to costs. SO ORDERED. Quezon City, Metr-o Manila, 1988.

DECISION -- CTA CASE NO. 2818 -- 1.2 -- WE CONCUR: F'r-esid .i.ng ,Judge Associate ,Judge CERT I F ! CAT I 0 N I her-eby cer-tify that this decision was r-eached after- due consultation among the members of the Cour-t of Tax Appeals in accor-dance with Section 13, Ar-ticle VIII of the Constitution . AMANTE LLER Pr-esiding Judge Cour-t of Tax Appeals :J1 '7- L