CTA Case No. 4869 (Decision)

REPUBLIC OF THE PHILIPPINES .. COURT OF TAX APPEALS QUEZON CITY RHONE-POULENC RORER PHILIPPINES. INC .� Petitioner, - versus - C.T.A. CASE NO. 4a69 COMMISSIONER OF Promulgated: ~ INTERNAL REVENUE. APR 031996 . Respondent. X - - - - - - - - - - - - - - - - - - - - - - - - �- - - - - - - - - - - - - - - X DECISION Tllis case involves a claim for refund or tax credit filed by petitioner.. Rllone-Poulenc Rorer Pllilippines, Inc., against respondent, Commissioner of Internal Revenue, for alleged overpaid income tax for tl1e !Tear 1990 in tile amount of u.. c P�) 2�j . )1 . . ~ 06~~<-. �.u~ J. As borne ()ut by tlle pleadings, petitioner is a corporation dul;1 organized and ei<jsting under tl1e laws of the Philippines. It is primaril;T engaged in tl1e business of "irnporting, manu.facturinK processing, compounding, repacking/ preparing for market, buying/ selling at wllole/ distributing, transporting

DECISIOB- C.I.A. CASE HO. 4869 -2- and promoting general merchandise, goods and �~~'ares of all kinds and descriptions, such as but not limited to pharmaceutical preparations, drugs, medicines, chemicals, compounds, druggist sundries and supplies, perfumeries, toilet articles, scientific apparatus and physicians' and hospitals' supplies". Sometime dunng the third quarter of 1990 or exactly on the 27th of September 1990, petitioner bought all tl1e assets of Rhone Poulenc Nattermann Pharma, Inc. in e}~change for all the unissued no par value shares of petitioner. By virtue of this merger, petitioner also assumed all the obligations and liabilities of Rhone Poulenc Nattermann Pharma, Inc.. Prior to the merger, Rhone Poulenc Nattermann Pharma, Inc. has filed with the Bureau of Internal Revenue its first and second quarters Quarterly Income Tax Returns for the year 1990. It paid the amounts of P 1,400530.00 on May 30, 1990 and P 1.81 9,53}00 on ..A..ugust 29, 1990, representing its quarterly income tax payments for the first and second quarters ending .March 1990 and June 1990, respectively. As a result of tile merger, Rhone Poulenc Nattermann Pharma, Inc. was dissolved on October 30, 1990. Thus, on November 29, 1990, Rhone Poulenc Nattermann Pharma, Inc. filed its final Income Tax Return for the period starting January 1, 1990 to October 30, 1990, showing a net loss of P 14,065,749.00, a NIL income tax liability and a refundable amount of P3,220,063.00, representing the total payments made for the first and second quarters of 1990.

DECISIOH- C.T.A. CASE HO. 4869 -3- The refund of the excess t:m paid by Rhone Poulenc Nattermann Pharma, Inc. forms part of the assets (rights receivable) acquired by petitioner, as tile surviving corporation l)y virtue of tile merger. Thus, on September 1, 1992, petitioner filed ~Nith the Bureau of Internal Revenue a letter claim for refund or tax credit, dated August 27, 1992, seeking tile refund of the sum of P3,220,063.00, equivalent to the overpaid income ta}~ for 1990 b}T Rhone Poulenc Nattermann Pharma, Inc.. A little about two monti1s thereafter or on October 29, 1992, petitioner instituted this petition for review, seeking the refund of P3,220,063.00, "Without necessarily waiting for the decision of respondent on its claim for refund or tax credit for the purpose of tolling the running of the two-year prescriptive period for filing a judicial claim for refund or tax credit. In response to the petition filed, respondent alleged that the petitioner is not tile real party in interest to claim for the refund or tax credit of P3,2 2d,063.00 because there was no valid merger or consolidation between petitioner and Rhone Poulenc Nattennann Pharma, Inc. as envisioned in Section 76 of the Corporation Code. Secondly, the petition is still premature because ti1e claim for refund or tax credit is still pending investigation by the Bureau. of Internal Revenue. respondent averred that the quarterly income tax payments were made in accordance with law. Since claim for refund or tax credit partar:es the nature of a tax exemption, therefore the same should be construed strictl}T against the claimants.

DECISIOll- C.T.A. CASE llO. 4869 -4 - The issues presented are as follow: 1. 'iNhether or not petitioner is the real party in interest to judicially claim for the refund or tax credit of overpaid income tax for 1990 paid by Rhone Poulenc Nattermann Pharma, Inc.. To answer this, we must first determine whether or not there was a valid merger or consolidation between petitioner and Rhone Poulenc Nattermann Pharma, Inc. in order to constitute petitioner to be the real party in interest vllho can institute and file the instant petition for refund; and 2. Whether or not petitioner is entitled to claim for the refund of overpaid income tax for the year 1990 by Rhone Poulenc Nattermann Pharma, Inc.. Tackling on the first issue, that is, V~lhether or not petitioner is the real party in interest to file the suit for the judicial refund of P3,220,063.00, the Court believes that the document presented by petitioner more particularly described as a "Deed Of Assignment With ..8..ssumption Of Liabilities", dated September 27, 1990, constitutes a valid merger between petitioner and Rhone Poulenc Nattermann Pharma, Inc. as contemplated in Section 34(c)(2) and (4) in relation to Section 34(c)(6)(b) of the National Internal Revenue Code. For taxation purposes the term "merger" or "consolidation" lias been defined in Section 34(c)(6)(b) of the Tax Code as follows: "(b) The term 'merger� or 'consolidation', -.;,.,hen used in this section shall be understood to mean: ( 1) the ordinary merger or C<)nsolidation or (2) the a<)JUisition tv <)ne corporation of all or

DECISIOB- C.T.A. CASE 110. 4869 -5- substantially all the properties of another corporation sc�lely for stock: PiovJ..:t&-.~ That for a transaction to be regarded as merger or consolidation wtthm the purv1ew of this section, it must be undertaken for a /Jf)JJL'1 fiat;:. business purpos~ and not solely for the purpose of escaping tlN burden of taxation: Pft?Vide-.1.. luft:J~�er; That in determining Vv"hether a b.?.mr f}�.ie business purpose exists each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Ptl?VidA'i;. JinLqJJy. That in determining whether the property transferred constitutes a substantial portion of the property of the transferor the term 'property' shall be taken to include the cash assets of the transferor." (Emphasis Ours.) The first kind of merger or consolidation above-cited refers to the "ordinary merger or consolidation" as contemplated and referred to by respondent in her answer which is covered under Section 76 of the Corporation Code, Vv"hich provides as follo�ws: �sEc_ 76. Plan of merger or consolidation. - Two or more corporations may merge mto a single corporation which shall be one oi the constituent corporations or may consolidate into a new single corporation which s11all b' the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of mt?rger or consolidation setting forth the following: 1. Tlle names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations;

DECISIOII- C.T.A. CASE HO. 4869 -6- 2. The terms of the merger or consolidation and the mode of carrying the same- into e-ffe-ct; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in tlle articles of incorporation for corporations organized unde-r this Code; and 4. Such other provisiOns with respect to the proposed merger or consolidation as are deemed necessarv� or desirable... However, this is not the one referred to by petitioner in this case. It is the second kind of merger, tllat is, the acquisition by ~)n~ �:orporation of all or substantially all the properties of another corporation sol~ly ftJf stocl:.. We agree vv'ith petitioner. As a general rule, there shall be recognized a gain or loss for every sale or exchange of property except in pursuance of a plan of merger or consolidation where in the folloVv'ing instances: (a) a corporati(m which is a party to a merger or consolidation exchanges property solely for stock in a corporation Tv'-111icll is a party to the said merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to tlle merger or consolidation solely for the stock of anotlNr corporation also a party to t11e merger or consolidation, or

DECISIOB- C.I.A. CASE HO_ 4869 -7 - (c) a security holder of a corporation which is a party to the merger or consolidation (mchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. [Section 34(c)( 1) and (2) NIP.C (Underling ours.)]. The Deed of .,A..ssignment ~Nith Assumption of Liabilities clearly embodies the agreement bet~Neen Rhone Poulenc Nattermann Pharma, Inc., as the Assignor, and Rhone Poulenc Rorer Philippines, Inc., as the l�..ssignee, whereby the former shall transfer and deliver all its existing assets, rights and business including the goodV'lill, the right to use its name, all its rights and interests in all patents, trademarks and licenses for and in consideration of the issuance of 15,2 64 no par value shares equivalent to a total issue value of P21,824,90().00. In addition, the Assignee shall assume all debts, obligations and liabilities of the .8. ..ssignor whether accrued, absolute, contingent. or otherwise, as of September 27, 1ggo (Exb.. J). It is therefore evident, that by virtue of this l�..greement or the assignment of all of the assets, rights and obligations of Rhone Poulenc Nattermann Pharma, Inc. to petitioner, the second kind of merger exists that which is equivalent to the "merger" by virtue of the- "acquisition by one corporation of all or subst1ntially all the properties of another corporation solely for stocl('. The execution of the Deed of l�..ssignment with Assumption �Jf Liabilities in effect constituted a valid merger. ..A..s a result thereof, there ~,\fas dissolution and liquidation of th' absorbed

DECISIOH- C.T.A. CASE HO. 4869 -8- corporation (Rhone Poulenc Nattermann Pharma, Inc.) 'Which \"laS effected on October 30, 1990. Necessarily, the net assets of the dissolved corporation which included among others its receivables were transferred in favor of petitioner. This includes tl1e right to claim for the refund or tax credit of overpaid taxes. ~A..fortiori, petitioner after having acquired the right to collect tlw receivables of Rhone Poulenc Nattermann Pharma, Inc. has also acquired a valid right to institute this claim for refund or tax credit in its favor. This finds support in Section &0(4) of the Corporation Code, \hlhich states tl1at "(t)he surviving or the consolidated corporation shall thereupon and tl1ereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on '.Alhatever account. including subscriptions to shares and other choses in action. and all and every other interest of. or belonging to. or due to each constituent corporation. shall be deemed transferred to and vested in such surviving or consolidated corporation �without further act or deed". (Emphasis ours.) It is also notewortl1y to point that the purpose of the merger was to effect a reorganization as embodied in the ~."lhereas Clause of the Deed of Assignment - "11ilHEREAS, ASSIGNOR desires that all of its assets be conveyed and e:-!changed solely for shares of ASSIGNEE'S unissued no par shares, with tl1e assumption by l�..SSIGNEE of such liabilities and obligations of ASSIGNOR as hereinafter set forth, for tl1e purpose

DECISIOH- C.T _A_ CASE HO. 4869 -9- of carrying out in the Philippines, the world-wide reorganization of Rhone Poulenc and Rorer Companies" (E~m. J). It cannot be denied therefore that the merger was effected for a b.?.lJL'f .lid~ business purpose and not for the purpose of escaping the burden of taxation. As elucidated by the Supreme Court in the case of Commissioner of Internal Revenue v _ Rufina~ et_ aL~ G:R. Nos. L-33665-68, February 27, 1987, 148 SCR..A.. 42, 49, to wit: "The basic consideration, oi course, is the purpose of t.lle merger, as tl1is would determine >+llletller tl1e ~xcllange of properties involved t11erein shall be subject or not to the capital gains tax. The criterion laid dov.;n by the lavvT is that the merger 'must be undertaken for a l>t>.llL'f f.id.f! business purpose and not solely for the purpose of escaping the burden oi taxation.� We must therefore seek and ascertain the intention oi the parties in the light of their conduct contemporaneously with, and ~specially after, t11e questioned merger pursuant to the Deed of Assignment of January 9, 1959... In the case at bar, the transfer of assets by Rhone Poulenc Nattermann Pharma, Inc. to Rorer Philippines, Inc. T...vas made in pursuance to a plan of reorganization. It cannot be said tl1at there is a device to avoid the tax by means of tl1is merger since botll corporations are engaged in similar business. Rhone Poulenc Nattermann Pharma, Inc. is primarily engaged in the business of importing, buying, repacking, manufacturing, selling at >:~Yilolesale, distributing, transporting, and promoting pharmaceutical preparations, drugs, and medicines of all kinds and description, similar to the business petitioner is engaged in.

DECISIOH- C.T.A. CASE 110. 4869 - 10 - Thus, in view of the foregoing we have arrived at the conclusion that there is a valid merger. Hence, the question of whether or not petitioner is the real party in interest entitled to institute tl1is action should be answered in tl1e affirmative. The second issue to be resolved is whetl1er or not petitioner is entitled to tl1e refund or tax credit of P3,220,06}00. After examining the evidence presented by petitioner, the Court found petitioner to be entitled to the amount claimed for. Petitioner has presented as evidence the follo\o'ling documents to prove entitlement to tl".te amount sought for refund or tax credit, to "Wit: 1. First Quarter Income Tax Return, ending March, 1990, of Rhone Poulenc Nattermann Pharma, Inc., showing the tax due of P 1/100530.00 (E}{l1. A); 2. Central Bank Confirmation Receipt No. B1963&241 (EYJl. F) and BIR Payment Order No. C7&74934 (Exh. G) evidencing payment of the first quarter income tax due of P 1,400,530.00; 3. Second Quarter Income Tax Return, ending June 1990, of Rl1one Poulenc Nattermann Pharma, Inc., showing the tax due of P 1,& 19.533.00 (Exh. B); 4. Central Bank Confirmation Receipt No. B1963&261 (Exh. I) and BIR Payment Order No. C34&74&& (E~m. H) evidencing payment of the second quarter income tax due of P U319.533.00; 5. Final Income Tax Return, as of October 30, 1990. of Rhone Poulenc Nattermann Pharma.. Inc., showing a refundable amount of P3)20,06}00, equivalent to the total quarterly income tax

DECISIOH- C.I.A. CASI HO. 4369 - 11 - payments for the first and second quarters of .1 990 (Exll. D); 6. Letter claim for refund/tax credit filed by petitioner on September 1, 1992 (Exh. E): 7. The Income Tax Returns and CB Confirmation Receipts and BIR Payment Orders of petitioner for: a. the Third Quarter, ending September 30, 1990 (Exh. L) showing a tax due of f-'3533, 127.00.: b. CB Confirmation Receipt No. B21236327 (E}ll. L-3) and BIR Payment Order No. C9040915 (Exh. L-4) evidencing payment of the tax for the third quarter in the amount of P3583.127.00; c. the 1990 Annual Income Tax Return, ending December 31. 1990 (Exh. Kt shov..ring a tax due of P 13,490,590.00, Vv?itll no indication of any tax credit being claimed in the return filed with the BIR (Exh. K-2) and with the attached audited financial statements for said year; d. CB Confirmation Receipt No. B20211333 (Exh. K-3) and BIR Payment Order No. C10574883 (Exll. K-4) evidencing payment of the tax due of p 18,490590.00; e. First Quarter Income Tax Return, ending Iv1arch 31.. 1991 (Exh. M}. showing t11at petitic�ner did not avail of any tax credit in the amount of P3,220,06.3.00 (refund for 1990) as a carry-over to the succeeding t:nmb1e quarter.

DECISIOH- C.I.A. CASE BO. 4869 - 12 - Pursuant to Section 69 of the National Internal Revenue Code, any excess of the quarterly income taxes paid from the total ta~~ due on the entire taxable net income of that year the same shall be refunded or credited against the estimated quarterly income tax liabilities for tl1e taxable quarters of the succeeding t:mable year. Since petitioner did not apply the same as a tax credit for the succeeding taxable quarter necessarily it opted to file for a refund of the e~~cess income tax paid. ..:!..11 the documents submitted in evidence by petitioner showed tl1at petitioner is indeed entitled to the refund or tax credit being claimed for. Respondent -was considered by this Court, upon the motion of petitioner, to have -waived her right to present any evidence. She instead manifested to submit this case based on the pleadings and the evidence presented by petitioner. She also vnived the � presentation of memorandum for the guidance of tl1is Court in tl1e resolution of this case. There being no serious ground raised by respondent to discourage this Court from granting the claim for refund or tax credit the same should be allowed. Petitioner has overcome tl1e burden of proof required under the law. Petitioner has satisfactorily proven its case. WHEREFORE~ finding tl1e petition to be meritorious the same is hereby GRANTED. Respondent is hereby ordered to refund or issue a tax credit in favor of petitioner in the amount of

DECISIOH- C.T.A. CASE HO. 4869 - 13 - P3,220,063.00, representing overpaid income tax for the year 1990. No pronouncement as to cost. SO ORDERED. Q~--u,...~ ERNESTO D. ACOSTA Presiding Judge WE CONCUR: / CERTIFICATION I he-reby certify that this decision Vo~as reached after due consultation among the members of the Court of Tax Appeals in accordance -.:,...lith Section 13, Article VI II of the Constitution. ~~(h Q~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals