CTA Case No. 4507 (Decision)

REPU BL IC OF TilE PH ILI PPIN ES COURT OF TRH RP PERL S QUEZ ON CITY KAWA SAKI HEA VV INDUSTRIES C_T_A _ CASE NO. 4 5 07 LTD. (M onilo Office), Petitioner, - versus - 1 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - X DECISION This cese involves petitioner's clljim for refund of erroneou sllf paid 10% Va l ue Added Tax (VAT) in t he amount of P112, 167.34 for tile third quflrter ending September 30, 1988. Petitioner, Kewaseki Heavy Industri es Lt d. (1'"1enile Office), is t he representative off i ce in the Philippines of Kawasak i Heavy Industries Ltd. (KHI), FJ foreign corporation orgl3nize d 13nd exi st i ng � under the 1ews of Jop13n. v\'it.h the prior epprovl31 of the Boerd of Inves t ments [Exhs. I D end D-1, pp . 40 -41, CT A record] KH I W13S able t o acquire a l i cen se from the Securities end E~<cht.mge Commission [Exh . C, p. 40, CTA record] to establish a representative office, he~v ing the follo wing functions: 69~

.' DECISION C. T.A. Case Ho. 4507 - Page 2 - a. To oversee the 1rnplementat10n of the Joint Venture Agreement between the Philippine Go vernment (through NIDC) and Kawasaki Heavy Industries Ltd . ~ b. To conduct and make surveys end studies of m8rket, economic and finencial conditions in the Philippines; and c. To advi se and render as s istance to local ,jistributors/indentors and customers in the Philippines. On October 20, 1988, petitioner paid the 10% VAT for the third quarter ending September 30, 1988, amounting to P 11 2,167 .34, covered by BIR Payment Order No. C 4036610 [Exh. F, p. 44, CT A record] and CB Confirmation Receipt No. B 15565546 [Exit G, p. 44, CTa record] . On July 4, 1989, respondent issued BIR Revenue Ruling No. 25 - 00 0 -00-136-89, the pertinent portion of which reads as follows : [E xh. H, pp. 45-47, CT A record.] "In reply, please be informed as follows : I. Questions I, 2 and 3 being interrelated are hereby answered jointly. KHI Manila Representative is not a resident foreign corporation since it is not engaged in any income generattng business in the Philippines. A resident foreign corporation is a foreign corporation engaged in trade or business in the Philippines [Section 20(h), Tax .'t Code). Accordingly, KHI 1'-lanila is not subjec t to !' income tax; hence, it is exempt from filing of the corporate income tax return. (BIR Ruling No. 370-87) 7 00

DECI SIOB C.T.A. Case Ho . 4507 - Page 3 - KHI is a non-resident foreign corporation since it is a foreign corporati on not enga ged in trade or business in the Philippines [S ec. 20(i), Tax Code]. The technical service fees 'Nhich you rernit to KHI are considered royalties since they are in consideration for the "technical advice, assistance or services rendered in connect ion with technical management or edrninistretlon of any scientific, industrial or comrnercia l undertaking, venture , project or sc heme". [Se c. 36(a) (3)(F), Ibid.] Said technicel serv ice fees being Philippine source income of KHI ere subject to Phi l ipplne corporete income te x et th e rete of 35% [Sec. 25 (b)( 1), Ibid.] which shall be with held by you es th e pay or-corporation and paid in the se1me menner f.m d subject to the s8me conditions es provided in Sec. 5 1 of the Tax Code. [Sec. 50(e), Ibid.I 2. KHI does not maint ai n a branch i n the Philippines . Hence, by payfng direc tly the technical service fee s to KH I in Japan, it ca nnot be sa id that there is remittance of profits, directly or indirec tly, from the brench to its head offi ce. Your Que stion No . 4 is, therefore, answered in t.he negative si nce, th e 15% branch profit tax i mposed under Section 25{a)(5) of the Tax Code is a ts x on any profit remitted by a branch to it s head office. 3. KHI Manila Office is not subject to VAT since it is not engaged in any income- gener ting business activity jn the Philippines. A person is subject to VAT if it renders service �in the course of trade or business" _(Sec. 9 Tax Code) XXX XXX X X X.'' In 1ine with th1 s ruling, petft1oner fil ed on April 19, 1990 a cl aim for refund 1n the tot~t amount of P757, 160 .37, es i� erroneot~sly paid 4% contractor's tex for the first quarter of 701

DlCI SIOR C. T . A. Case Ho . 4507 - Page 4 - 1988 and the 10% va lue-added ta x for the second, third and f ourth quarters of 1988 and the first quarter of 1989. Up to the fi l ing of the instant petition on October 19, 1990, respondent has not acted on such clai m for refund. In answer, re spondent contends tha t the pet ition states no cause of ac tion sin ce the claim for refund i s still pending in vestigation in the Bureau of Inter nal Revenue. The petition f8il ed to mention petit.ioner� l eg I cap city to sue. In claims for refund tt1 e burden i s ot th e taxpayer to prove entitlement th ereto. During the trial, petitioner presented the following docurnentf:lry ev1den e to support it s clai m fo r re und: 1. Letter claim for refun d with the BIR dated Ap rll 19, 1990 [Exhs. A, A-1 to A-5-a, inclusive); 2. Letter of petitioner's General l"lanager au t hori zing Atty. Douglas G. Baarde to file a claim for refund on behalf of petitioner [E xhs. 6 and B-ll; 3. SEC Registratlon Certificat e and 80 1 Certif icate of Authoritw [Exhs. C, D and D-1 ]; 4. Contractor's Quarterly Percentage Tax Return for the third quarter ending September 30, 1988 [Exhs . E, E- 1 t o E-3 , inclusive]; o 5. BIR Payment Order No. C 40366 1 an d CB Confirmation � Receipt No. B 15565546 [Exhs. F, F-1, F- 1, G, G-1 and G-2l; and 6 . BIR Legislative end Research Di vision Rul ing No. 25- ,' , ;� 000-00-136-89 dated .Jul 4, 1989 [E xhs. H, H- 1 to H-2b, i nclus i ve]. 70 2

.. DECISION C. T .A. Ca~e Ho . 450 7 / - Page 5 - Respondent did not object to their admission. When it was time for respondent to present his evidence, after a series of postponements, he opted instead to submit the case based on the records and pleadings . The sole i ssue for determination is whether or not petitioner is subject to t he Value-Added Tax. This same question has been resolved in an earlier case involvinQ the same parties v�there this Court ruled : "The app1i cable pro vision of 1aw i s Section 99 or the National Internal Revenue Code , quoted rlereunder: �sec. 99. Persons l iob/e. - Any person who, in the course of trade or business, se11 s, berters or exchanges goods, renders services , or engages in simi 1ar transactions and any per son who imports goods shall be subJec t to the value-added t ax (VAT) imposed in Sections 100 to 102 of this Code.' In vievv of the findings of the BIR as embodied in its tJforementioned ruling that Petitioner i s not engaged in an~J income generating business act i vity in the Philippines, this Court likewise believes that it w1ll not. be subjected to va 1ue-adde d t ax pursuant to the 8f orequoted Section 99 of the Tax Code. Value-added tax is irnposable only against person, individual or juridical entity, in the course of their tn11je or business activities selling, barteri ng or exctumging of goods, or renderi ng ser vices for a .fee or other si mll ar transaction . Respondent failed to present any evidence that will show tha t Petitioner - - has t1een en QaQed in anq of t hese econom1c ~ activities, at l east to di spute its ovvn findinqs contained in tlie said BIR Ru l ing... [Kowo s ol<i Heovy In dust ries ltd. (M onilo Off ice ) v. Commr. of

DECI SION C. T. A. Case Ho . 4507 - Page 6 - Internal Revenue.. CTA Case No. 4473. June 11. 1993.1 In v 1ew of Our op1 m on that petitioner is not engag ed 1n any t ra de or business, cons1denng that it is only a representative office, and pursuant to BIR Ruling No. 25-000-00-136-89 in relation wtth Section 99 of the Tax Code, 'We find it unnecessary to pa ss upon the same issue rai sed . To reite ra te petitioner is not subje c t t the Value - Added Tax . WH REFORE# finding the petition meri oriou s, re spondent i s hereby or dered to refund to petitioner the am ount of Pl12,167 .34 which wa s erroneously paid by th e latter as va lue- added tax for the third quarter end1ng September 30, 1988. No costs. SO ORDERED. Quezon Ci ty, Metro Mani Ia, July 21, 199 -~ 0P_ O~E~~~A RAMON Associate Judge WE CONCUR: ~tJ. ~ ER N TO D. ACOSTA Presiding Judge ~u As soci ate Judge

DECISION C_T_A_ Case No _ 4507 - Page 7 - CERTIFICATION I heret1y certify that this decisi on vvas reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Arti cle VIII of the Constitution. ~0.. ~ ERNESTO 0 _ ACOSTA Presiding Judge Court of Tax Appeals 'l 705