CTA Case No. 4397 (Decision)

REPUBLIC OF THE PHI LIPPINES COURT OF TAX APPEALS QUEZON CI TY KAWASAKI HEAVY INDUSTRIES LTD. <Manila Of' fie�), Petit ic�Y�et', C. T.A. CASE NO. 4397 THE COMMISS I ONER OF INTERNAL REVENUE , Respc�ndeY�t. X- - - - ------ X D E C Xa ,I 0N This i s a c laim fc:c t' t'e ftmd c�f P2 26, 711.73 iY"1 value- added tax) fot' the third and fo twth qua t'tet'S o f 1987. Petitioner is the Manil a Representative Office of the ~{ a wa sa ki Heavy IY,du st t'ies Ltd. of JapaY�. I t was est.'a bli s hed iY"1 Marc h, 1. 978 tmdet' authority o �f Sectw it i es and ExchaY� ge Ceomm i �ss i CoY� Ltnder Investment Registration Certificate of Authority No. 974, wh i c h both empower petitioner to: " a. Ovet'see the i rnp lern eY.tatic:� n of the J c:oi nt VeY.ttwe Agt'eemeY�t betw e en the Philippine Govet'Y"�ment (through NIDC> and Kawasaki dat ed January 27, 1977; I

_, DECISION CTA CASE NO. 4 397 - 2- b. Conduct and make surveys and studies of market, economics, and f i rrar1ci a 1 conditions in the Philippines; ar�d c. Advise and render assistance to loca l distributors/irrderrtors " and customet~s ir� th e Phi 1 ippirtes . 11 < Se cut~ i t i es and Exchange Commission Reg i st t~at i or, N.:�. 8 0'+; CTA R e cot~ds , p. 5) � 20 , 1987, paid quartet~ endir�~l Septembet~ 30, 1987 <Exhs. E 11 11 11 E- , 11 1, 11 E - 2 11 7 F 11 11 11 F- 11 1, a rtd "G 11 >; and or� Jar.uary 7 20, 1988, it paid P109, 913.48 irt contt~actor' s tax covering the last quarter of 1987 <Exhs. H 11 11 11 H- , 1 ", H- 2 11 11 , I 11 11 11 I -1", and "J - 1 11 � ,. ) Ort July '+, 1989, t~esponderrt is s ued BIR Rulir,g No. 25-000-00-135-89 <dated July 4, 1989 ar.d addt~esse d to the Phi 1 i pp i r.e S hipyard and fo ll.:�ws: "xxx XXX XXX B;ased c�Y� the fo regoing representations, you now request in effect a ruling orr the following tax - t~ e 1 at ed issues: XXX XXX XXX '5. I s the KHI Martila Office s ubject to the value-added tax <VAT> ? If yes, wh a t , -gross t~ eceipt s' shall it report for VAT ptn~p ose s? ( I r tc i d emt a 1 1 y, ) 4 4(J

DECISION CTA CASE NO. 4397 - 3- PSEC , which pays techni cal fees d i t~ect 1 y t t:) KH I ,.J a parr, i s EPZA-t~eg i ster~ ed , exempt ft~om corrtt~actc�r ' s tax, and thus exempt from VAT under Sec. 103(u) of the TAx Code, a s per BIR Ruling No. 0-00- 354-8 dated November 9, 1987). A ssum ing that KH I Manila Offic e i s subject to VAT, de� the techni cal services sold to PSEC <arr errt i t y exempt ft~eor,, VAT by virtue of its exemption from contractor ' s tax under the EPZA law, a special law) q ualify for zet~c. r~at i ng?' XXX XXX XXX J.~......t,_tt_!__ J:"J.9.n.J.-...L<:'\___p f f i ce_ ___L!?__~:�t_ S'=.!.Q.i~c ~---i.~=.!.....Y A l::___~.i_r!...c e--~ t ~-r' o�~---~X!.!ia ged_ i.r.:r___�.'.ri.Y__~___j rLc;~.!!n e - Y.~X!.�?t~ at i lJ!l_______b '-:!.2...tr:!!?:..".:?..?. �_c;j;__tv i t _y__:i,_n,_ t he �!1 i 1j._p_p i rres. 8__p et~?...9X! iE._..?..1! .9.JJ~.<::?.:.\:.___:\!..!;.!.... VA I__j....f.._ i t t~errd et:_~_...�..�.t~v i c~ :J.n ____t tlf:'.....___l~_p '-}..!:.? e c~f t r ad e �=�r~ bus i rre ~ s' ) .H?.�~~--9':?..,.. Tax Cod~..L~.~ <Exhs. ''K'' arrd "K- 1"; CTA Reccq�~ds, pp. 60 to 62) <Unders coring Our). On account of the aforequoted BIR Ruling, petit ionet~, on October~ 9, :1. 989, f i l e d with the Bureau of Internal Revenue, a claim for refund (dated Octobet~ 6, 1'389) of allegedly et~r~orreo u sly paid contractor's tax for the quarters ending Sept ember~ 30, 1987 and Decerrlber~ 31, 1987 in the total amount of P226,711 .73. On Oct obet~ 9, 1989, as t~espon den t had rrc�t yet acted on petitioner~'s claim, and irr t:�rder to t o l l the r~ r..mn i r�rg of the pt~ escr~ i pt i ve per~ i od, petit i o rre r 441

) DECISION CTA CASE NO. 4397 - 4- filed the instant petition for review with the The sole issue in this case is whether or not petitioner is entitled to the refund of the amo unt of P226, 7 11. 73. It is that the value-added tax> is refttr.dable ir� accordar.ce with B I R Ru 1 i r1g Nc�. 25-000-00 - 136-89 date d Ju 1 y Lt, 1989" <"Memc�randurn Fot~ Petitic�r�er", p.3; CT A Record, p. 75). Accordingly, it argues that: "It has been held that dec isic�r�s of lik.e admirlistt~ative c�fficet~ s , t~espor.der.t het~ ein, at~e Y"�C�t tc� be disturbed by the courts, exce pt when the former have acted bey�:�r�d theit~ statut01�~y authot~ ity ot~ cleat~ly acted ly at~bitt~at~i cot~ with grave abuse of di scretion <See Deluao vs. Casteel, 26 SC RA 4775, 496 [1968J>. So also , the afot~esaid BIR Ruling puts respondent in estoppel. By his decl a ration, respondent intentionally and deliberately led petitioner t o believe that h i s t~ ulir.g i s tt~ue ar.d petitic�r�et~ wa s led to act upor-1 such belief, hence t~ es pCoY"Id er1t CaY"11'"10t' i Y"l a Y"IY 1 it i gat i C�Y"I at~ ising out cof s uch dec 1 a rat i c�r�., be permitted to contradict the same (See De Castro vs. Ginete, 27 SCRA 623, 628 [1969]). Moreover, as petitioner does not earn any income, hence it is not subject teo ar.y tax. ., Finally, respondent did not present ar.y evider.ce ir. this case. That beir�g so, petitioner's c laim that it is not subject to the th en contractor's tax )

DECISION CTA CASE NO. 4397 - 5- should stand. 11 ( 11 Memot~a Y"rd urn F O:�t~ P e t i t i orret~ 11 , pp. 3 to:� 4; CTA Recot~ds, pp. 75 to 76). Respondent, the othet~ courrtet~s petitioner's contentions thus: 11 7. BIR Rulirrg No. 25--000--00-136- 89 is a response to the letter (sic> dated Noverrlbet~ 24 , 1988 aY"rd De ce mb e r 29, 1988 of t he Philippine Shipyard and Engineering Corporation CPHILSECO> seeking ad vice on the tax status of the KHI Japan aY"rd Marri la Offices. It is actually a BIR opinion wh ich is n ot conclusive in nature; 8. Furthermore, BIR Rulin g No. 25- _, 000 - 00 - 136- 89 is not a t~esolut iorr of a di s pute between the BIR arrd ~{HI l't1arrila Office. Accc:.t~dirrgly, the lattet~ carrnot rely on the aforesaid ruling to compel a ta>< t~efuY"rd fro:�rrl the BIR. Mo:�r eo:�ver, the Republic of the Philippines, which is the tt~ue t~esporrdent in t h i s case, i s rrot estopped by the acts or omissions of its e mplo yees o:�t~ r::�ffi cia ls <Republi c vs. Aquirro, 120 SCRA 186); 9. Petitioner is liable for the co:�rrtt~actot~ ' s tax. In his COI\ITRACTOR' S QUARTEHLY PERCENTAGE TAX RETURN for the Th i t~d Quat~t et~s <sic> o:�f 1987 , petitioner declared a gross rreceipt of xxx CP3, 893,275. 155) . Agairr, irr his (sic) CONTRACTOR'S QUARTERLY PERCENTAGE TAX RETURN for the last quart er of 1987, petit i orr e t~ dec 1 at~ed a grr::�ss t~ ece i pt of xxx <P3,6633,782.50>. There being no explanation as to how these amounts were t~ece i ved by petit i c�rret~, they are deemed rece ived by him in the ' course of busirress' as techrric al set~vice fees, in view of petitioner's function t o 'advice (sic) and render assistance to l ocal d i st r i but ors/ i nderrt c�t~s arrd cust o:�rners i rr the Phillippines' 10. B I R No. <sic> 25-000- 00-136-89 states that petitiorret~ t~errdet~s techrrical 442

.� DECISION CTA CASE NO. 4 3 97 - 6- assist arrce i r r the marragemerrt and operation of PHILSECO, f or which the latter pays technical serv ice fees. Technical service fees are subject to s contt~actot~ ' tax <CIR vs . Co Lwt c�f Tax Appeals, 134 SCRA 4'3). Irr the abserrce of a showing that KHI Japarr has actually receive d tech n ical service fees from PHILSECO and paid th� corresponding contractor's tax thereon, t h en it is presumed that these technical service fees were p~id to KHI, Manila, as t h e one rerrdet~irrg techrrical set~vices to PHILSECO" ("Arrswer", pp . 3 tc� 5; CT A Recc�rds, pp. 33-35>. The Court finds more merit in resp6ndent's Petitioner puts much importance on the finding c�f t~esporrderr t i_r r BI R Rulirrg N�:�. 25-000-00-136-8'3, t h at "KHI Manila Office is rrc�t subject to VAT" in estoppe l, arrd the State is, in effect, thereby bourrd to !;Want petitiorret~'s claim The Court does not consider BI R Ruling No . 25- 000-00- 136-8'3 as persuasive as petitioner seems to t h i rrl�!. it is. Firstly, it s h 6ul d be e mphasized that , as laid down by the S u preme Court in the case c�f Commissioner of< Internal Revenue v. Procter & Gamble Philippines Manuf<act uring Co rporation and the Court o f< Tax Appeals , 160 SC RA 560 (1'388): "xxx <I>t is axicrrnatic that the State can never be in estoppel , and this is pat~ticulat~ly tt~ue in matt'et~s irrvolvirrg 44~ (

DECISION CTA CASE NO. 4397 - 7- taxation. The errors of certain admir,istt~ative .:officers s hould never. be allowed to jeopardize the governme nt' s fir.ar.cia l positior�� " Secondly, as res pondent correctly notes, the ruling in question is not a resolution of a dispute bet weer, the B I R ar.d the petit i cor,er, for it wa s issued in response to the letters of inquiry of the Philippine Shipyard and Engineering Corporation <PHILSECO>. it is petitioner to say that res pondent, thro ugh said _, rulir,g, had "inter.tionally ar,d delibe t~a tely l e d petiti o r.et~ to believe" that it wa s indeed not subject to the 4'1- contt~actr.n~' s tax Lastly, th�~ notes that s t~es p or,der.t' f i r,d i r�g that peti tio net~ i s ncot subject to cor.tt"'ac tot~ 's taxi~; ar,chot~ed or, the fact that 11 it is r.ot er.gaged i r� ar1y income-generating busir.e ss activity i 1'"1 the Philippir.e s. 11 Ir, cothet~ wot"'ds, the bas is cof the t"'lll ir1g is fa c t�.1a l; and it is, therefore, not conclusive on the Court si r1 ce BIR Ruling Nco. 25-- 000- 00- 13 6 -8'3, bei r,g met~ ely i 1'"1 t~esponse to the query o:of PHIL SE CO, was based plwely on the t"'e pt~eser.t at i or's Cot"' stat eroer,t of fact s rna de i n PHILSECO' s let t et"'S (which represer.t at icons adopted ar.d laid dowr� by al beit su rnm at~ily, ir1 the fit~st p a t~a gt~a ph of i t s ru l i r,g) .

DECISION CTA CASE NO. 4397 - 8- Thus, t' espondent, iY"1 makiY"�Q such t"ulir.g, did Y"�ot consider any extraneous facts not laid down by PHILSECO in its query. Therefore, the Court must train its attention on the provisions of law applicable to the instant case in order that it can best decide the outcome of the instant case. Section 170 of the 1987 Tax Code, as amended reads as follows: "Sec. 10. Cont t"act ot~ s, pt"o pt' i et ors or operators of dockyards, and others . A contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of selling or t'endet'iY"�Q -the following set"vices fc�t' a fee or compensation: XXX XXX X><X <q> Other independent contractors. The tet'm 'ir.deper.der.t cc�Y"�tt"actc�t's' includes pet'SOY"�S (jut'idical C�t' r.atural> not enumet�ated above (but r.ot includir�g individuals subject to the occupation tax under the Local Tax Code) whose activity consists esser.t ially of the sale of all kind s of services for a fee regardless of whether or not th e performance of the service calls fbr the exercise or use of the physical or mental faculties of such cor.tt"acto::n~ s Ot' their employees. It does not include regional or area hea dquarters ) established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affi 1 iates, subsidiat�ies c�t~ bt"anches iY"� the Asia-Pacific Region. 445

� - - _ __.._._ _........,9 __ DECISION CTA CASE NO. 4397 - 9- The term 'gross receipts' means all amounts received by the prime or principal contractor as the total contract price, undiminished by any amount paid to the subcontractor u~der a subcor,tt'act at't'ar,gement. Any port ic�r� C�f the total contract price which is paid to the subcontractor, shall be excluded from the taxable gt'C�ss t'eceipts of the subcc�r,t t'act Ot'. " (As arner,ded by PO No. 1994). Under this provision, three conditions rnust be rnet in order for an independent contractor to be subject tc� the 4'1- cc�r�tt'actor' s tax <r�r.:�w the 10'1- VAT>. one, is essentially engaged in the selling or regardless of whether or not the performance o f the se~vic e calls for the exercise or use of the physical or ment a l faculties of such contractors or theit' employees"; twc�, is r1either a regior,al c�t~ area headquarter (which acts only as a supervisory, communications and coordinati ng center for its aff~ 1 iates, s�.lb sidiat'ies c�t' branches in the Asia- Pacific Region) established in the Philippines by a of such headquarter <unless such headquarter or alier, executive eat'Y"�S ot' derives ir,come ft'c�rn the Phi 1 i pp i r,es) ; and three, earns or derives income frorn the Philippines. 44~

DECISION CTA CASE NO. 4397 - 10 - In the case at bar, petitioner, which renders techrlical services <by ad v isir�g assistar.ce t 0:� lc�cal distributors/indenters customers in the Philippines>, meets the first two The decision of the hi r.ges wh et he r c�r Philippines. its mernot'and urn, stated factually that it "does r.ot CTA Reco:�rds, , ( " Mew�:�rand um for Pet it i or.et'", P� .�:.:.e. � p. 74>, which statement it based o:�n the T.S.N. (dated lvtay .c-..r:.:.:J- , 1990) of the testimony of Mrs. Milagros Sa mson Capanas, petitioner 's Executive Secretary and Administrative Assistant. The Court h as carefully read through said trans cript , and has fc�tmd or.ly the pot't ior. quoted below to deal even indirectly wi th the income - generating powet' of petit ior.er. This portion reads: "Q. (Atty. Baat' de> Do:�es petit i o r.er earr. any income? A. (Mr s . Capanas> <T.S.N., May 1990, p. 27 ). Obviously, such a bare and self-serving allegation rnade by petit ic�r�er' s executive-secretary-cum- administrative- assistant cannot be considered by the Co:�urt as sufficier.t by itself to wat't'ar.t a 4 ...

DECISION CTA CASE NO. 4397 11 - p os it ive f i r.d i rsg f.:.t~ petit i c�r.er, espec i a 11 y irs the light c�f the fact that petitieor.er; ir� its third and declared as its taxable gross receipt~ amount s 1='7,557,057.65. Fc�r, - as correctly observed: 11 Thet~e beir.g l'"IO exp lanat ieor. as teo how <this amour.t was> received by p e t i t ic�r�et~ , <such arnour.t is) deemed t~ecei ved by ( i t ) i l'"l the 'c eout~se C�f busir.ess' as techr.ical service fees xxx. x xx Ir� the abser.ce c�f a showi r �g that KHI Japan has actualy received technical service fees fro m PHILSECO and pa id the cc�t~resp orsdir�g cc�r.tractc�t~' s tax thet~ec�n, ther. it is presumed that these techr.ical service fees were paid t o KHI Manila, as the c�r�e rer.derirsg technical se t~ v ices to PH I LS ECO. 11 <11 Ar.swet~ 11 , pp. 4 - 5; CTA Records, pp. 34-35 ) That respor.dent did r.ot irstt~od uce any evidence t�:� show that petitior.er did, ir.deed, eat~ n ot~ derive ir.come ft~.:. m the Philippir�es is c�f r�er moment. It is, after all, on the peti ti oner that the burden of prervirsg its clai m ferr refund (whi ch is irs the nature of an exempt ion) rests. And, as the Court has discussed earlier, a most import ant ingredient irs a successful claim fc�t~ t~efund by petitior.er, is a clear showing that it did not derive any income from this country. Ir� view of the fot~egoing, the Cout~t sc� hold s that petitionet~ is subject tc� 4'1- c�:�r�tt~ a c tor's ta x 48 )

DECISION CTA CASE NO. 4397 - 12 - on its gross receipts for the third and fourth of 1987' that the payrneY�t by petit i OY1et~ o:�f the arno1.mt c�f P226, 711. 73 as such tax the said � period is 1 e-r~rc�ne c� us. WHEREFORE, finding the instant petition for review without merit, the same is hereby DISMISSED. amount of P226,711.73 in allegedly erroneou~ly paid contractor's tax is hereby DENIED. SO ORDERED. Que:zc�n City, Mett~c, MaY.ila, May 29, 19 92. .) Assc�ciat e Judge WE CONCUR: ~N~~~TA Pres idiY�g Judge ~A--------oe.....lR...s Act i Y�g 49

DECISION -� CTA CASE NO. 4397 - 13 - CE RT I F I CAT I 0 N I hereby certify that this deci si on was . reached after due consultat ion imong t h e ~emb e r s ot , the Court o f Tax Appeal ~ in accordance with Sect i on , ~--- ~} 3 .' ~ Article VIII o f t he Cc�nstit�.ttion . '\ cr_ G:LcA ~S"T~OQ. D,. ACOSTA Presiding Judge Court of Tax Appeals � .I 450