CTA Case No. 3779 (Decision)

REPUBLIC OF THE PHILIPPINE COURT OF TAX APPEALS QUEZON CITY SMITH-KLINE & FRENCH OVERSEAS CO., and SMITH-KLINE & FRENCH INTERNATIONAL CO., Petit i onet~s, versus - C.T.A. CASE NO. 3779 COMMISSIONER OF INTERNAL REVENUE, Hespondent. X- - - - ------X DEC I I0N The instant case presents a fairly similar que s tion as that presented in S11ith Kline & French Overseas Co., and S11ith Kline & French Int ern.at i onal Co. v. The Co11111 i ssi oner of Internal Revenue, CTA Case No. 37�:::0, June 30, 1989. The issue raised is whether or not petitioners are entitled to the refund of alleged erroneously paid withholding tax at source on t~oyalties due a non- t~esident fot~ eign cot~pot~ ation not engaged in trade or business in the Philippines. The material facts are undisputed. Petitionet~ Smit h Kline & French Ovet~seas Co. <SK&FO> is a fot~ eign cot~ pot~ation duly licensed to engage in business in the Philippines with 66

DECISION CTA CASE NO. 3779 - 2- established offices at Victor~ ia Valley Boulevar~d, Cainta, Rizal. While petitioner~ Smith Kline & Ft~ench Inter~ national Co. <s�~&FI> i s a non - t'e s i dent f Ot'e i gn cor~por-at ion not engaged in t r~ ade or~ business in the Philippines with pt'incipal office at 1500 Spt'ing Garden Street, Philadelphia, Pennsyl vania, U.S. A. For~ the yeat' 1982, SK&FO accr~ued in favot' of SK&FI r~oyalt ies amounting to P2, 691, 008. 00, computed at the rate of 5~ and 3~ on net sales of a n d phat~maceutical consumer~ pt~oducts r~espectively. On various dates, petitioner SK&FO withheld 35~ tax on said r~ oyalties equivalent to P941,853.00 ptwsuant to Section 2Lt(b) (1) [now Sec. 25(b) <l>J in r~ elation to Section 53(b) [now Sec. 50(a)J both of the National Internal Revenue Code. Revenue As certified and verified by the Accounting Division of the Bureau of I nt er~ na 1 Revenue, the following amounts with the it~ corresponding confirmation receipts have been paid by taxpayer-SK&FO, to wit: [Exh. NJ C. R. NO. DATE AMOUNT EXHIBIT 9910434 04-20-82 p 234,904.57 B-2 10047917 07-19-82 239,119.63 C-2 10742376 10-20-82 267,327.86 D-E 7489969 01-18-83 211,969.72 E- 2 Total p 953, 321. 78 ============== 6 '7

DECISION CTA CASE NO. 3779 - 3- On Apt~i 1 -L=..��L=--' 1983, SK&FO filed with the <TTB) a letter requesting approval and registration of the technological S~~&r--o, as Philippine licensee, and SK&FI <USA>, as 1 icen!; ot~ CExh. JJ. On August 2, 1983, the Technology Transfer Board qualified ly approved with a mendment s the Ag t~ e e men t e f f e c t i v e Dec e mbet~ 8, 1 9 7 8 [ L x h � KJ � T h e subject to amendment as a pre - condition fot~ the issuance of a Certificate of Registration. Th u s, the contt~act was amended "to t~eflect in At~t. III, Sees. 3.0 1 .::md 3.02 t~oyalty t~ates of 3~ of net sales on phat~maceutical pt~oducts ancl 2il. of net sales on consumet~ health pt~oducts" EExhs. ~~ - 1, M- 1 and M-2J . In view of this amendment, petit i onet~ SK&FO contends that was an ovet~ p ay ment of royalty tax totallin ~1 P376,678.00, computed as follows: EExh. GJ 68

DECISION CTA CASE NO. 3779 - 4- STATEMENT OF OVERPAYMENT OF ROYALTY DUE TO SMITHKLINE INTERNATIONAL AND CORRESPONDING WITHHOLDING TAX FOR THE YEAR ENDED DEC. 31, 1982 R0 YAl TY ____J!.RJ..Q.H~B!:- AS AMENDED NET SALES RATE AMOUNT RATE AMOltH OVERPAYMENT Phartace uti cal P531 766,312 5)( P2,688,316 . 3)( P1,6121990 P1,075,326 Products 89, 734 3)( 2,692 2% 1,795 897 Consuter Products ----------- ---------- ---------- ---------- Total P53, 856 I 0-46 P2,691,008 P1,614, 785 P1,076,223 Withholding Tax Rate ------------- 35)( 35% 35)( . Withholding Tax ---------- ---------- ---------- p 941,853 p 565, 175 p 376,678 ======== ---------- ======= In due time or on April 18, 1984, SK& F O ttn~ ough its auditing finn <SGV> filed with the But~eau of Intet~nal Revenue a claim fot~ t~ efund of overpa id withholding tax for 1982 amounting to P376,678.00. Simultaneous with the filing of the refund claim petitioners filed the instant petition Respondent in his answer invoked the principle that c laims for refund are strictly construed again s t the taxpayer. He added that the burden of proof lies on the taxpayer to show entitlement to the refund sought to be claimed. (.)san affit~ mative defense t~ espondent pointed out among that it is incumbent upon petitioner - SK&FO to show that it has complied with 69

DECISION CTA CASE NO. 3779 - 5- the provisions of Section s 292 and 295 of the National Intet~ nal Revenue Code. He maintain s that the ame nded should be applied pt~ o s p e ct i v e l y. The withholdin~ taxes paid prior to the am enc:lment was t h et~ e fot~ e 1 e qa 1. claim fen~ wa s met~ ely an a f t et~ t hought following the grant by TTB of the reduce d rate. Respondent misses the point. The evidence p t~ e s e n t e d by p e t i t i o n e t~ 5 b o 1 5 t e t~ t h e i t~ c 1 a i m f o t' t~ e f�Jncl . Dn ~)p t~i 1 18, l984, p:et it i onet� fi l eel its claim fot~ t~ efun c:l si multane ous wit h the filinr.~ of t h e i n s t an t p e t i t i o n f o t �� t �' e v i e 1-'J � Hence, the s 1..1 i t W<:\5 filed within the two yeat� pt~ esct~ iptive per'ioc:l ft~ om date of fit~ st payment <Apt~ i 1. ;;:~o , 198;:~ >. During the tt~ ial, respondent waived his t~ ight to pres e nt any evidence. In stead he s ubmitted the ca se based on the pleadin~~s and the eviden ce offered by petitio ne r. Upon the t�eccn~ds pt~esentecl and the t~e J.evi'l.nt legal standard s obtaining petitioner has proved en t i t 1 e men t t o t h e t' e f un d c 1 a i m� Petit i onet~ has 5 a t i s f a c t o t~ i 1 y d i schat~g eel it 5 but~ d en administratively and judicially. In an earlier case involving the sa me parties Smith-Kli ne & French Overseas Co. and S�ith- Kline & French International Co. v. The Co��issioner of 70

DECISION CTA CASE NO. 3779 - 6- Internal Revenue, this had the occasion to rule: 11 x x x � A ft. e t~ p e t i t i o n e t�� s f o t'' m"' 1 l y offered their evidenc e the re s pondent expediently submitted the ca s e for dl'?cision on the basis of the pleadings 2. 9IL?.. the r e q u i s i t e IHH t~ ecor~ c:J~. pt~obably 11 l o s t i n t h e o b 1 i v i o n o f f o t~ g o t t e n 1 o t~ e � 11 f~nd, since one who pt~ ay~. fot~ judr:~ment on the pleadings without offet~ ing pt~ oof as to the tt~uth of his allegations, must be understood to have submitted the trut h of all the material and relevant allegation s f 01�' t h e o p p o s i n g pat' t y , and t o t~ e s t h i s motion fen� jud~1ment on these allegation s tal-<en togethet~ with such of hi s own C:\ S .:n�e admitted <Bauermann v. Cases , lO P h il. 386; Evangel i s t a v. De la Rosa, et. al. , 76 Phi. 11 5 >, t~ es p o n cl r>nt, as pointed out by pet i tioner may be considet�ed as not que s tioning set� iously petitioner's entitlement to its cla im for refund. More so when the evidence p r esented, which was not disputed by re s pondent sufficiently establishes p e t i t i o n e t~ ' s t' i g h t t o t he t'' e f u n d � 11 (CoM�onwealth Management and Service Corporation v. ComMissioner o'f Internal Revenue, CTA Case No. 3232, June 26, l985). XXX XXX X X X. A 11 told, the basi ~ of the c 1 aim i s not s h or t of ~ necific su ~ p o rt in terms of trac ta b le ~ a ta openly la id and fully di sc lo ge c! , f:IS suc h deset-�V"'!$ t he c t� edence th i::~t s t1o uld ilot~ mally be <'l c cm� ded i.n the absen ce c f oo ntrary evidenc e of relevance and ca mp e - en ce required to bash that p i:\ tina of validity o vrtr t he claim. And t h e t' e cor~ d s 11! a I< e i t c 1 eat' t hat t h e requisite statements or certification s of t h e t ax w i t h h e 1 d , p a i d and t' e mi t t e d upon which tacked the refundable amount cL=dmed co uld readity ftn-nish the leg al basis for a definite res olve but appt�opt�' iate action thet~ eon appeat� s dawdled in a limbo of lingering 71

DECISION CTA CASE NO. 3779 - 7- v f~ t � j_ f j ( '" t i () 11. vlh i r. h c () mP. 5 c"'\ 5 a Tl a gq Y8 Y0 t ed c h utzp c h, s o t o s p ea k. Pett ti o n ~ r o Y a n y im il ar l y c i rcumsta nced t~~ p ~ y e~ fo r t h at matter d es e r ve s a mf.! e ~') 1.\ t ' ~~ 0 f' fa i t d '" '"" 1 :i n q in i::\ Ill 0 t "' e ex pedi � icu s an d c omp t ent l y res p on s ive (':\Ct i (~!1 .. II In t;h ~ ca s e at ba t~, the S i"\me c h �' c um sta n ce is o btai n in q as in the cas e abo v e - me nt i oned. I t mu st be st t ' e s s e d that petition er - S K&FO wa s a ble to 0 V P. t ' CO m!? i t 5 but' den. Re <:=, ponrlent no eviden ce to t'ebut the eviden c e a ddu c �~ d by petitionet'S . fat ' <"\ S t~ espondent ' s t he t'oyalt y t�� ates s hould be ap pli e d pt�'o s p e c tiv e ly, 1.-Je see no merit to such conten t ion. I t a pp ea t' ~ c 1 e at' 1 y ft- o m t h e t~ e cot' d t h a t t h e Ag t..�e e me n t s h o u 1 c:l be a mended as a pre - r equi s ite for regi s tration. The a mendment a c onditio n fot" Since royalty rates we r e redu c ed by TTB ft' om 5 '1- to 3 '1- fot' ph a l ~ m ac eu t i c al p t' o ,juc t s a nd frg m 3'1- to 2 '1- for consum e r p ro du c ts, the s ame s hou ld b e made t o apply on th ~ af f ectiv i ty date of t h e c o n t r~ ~\ G t , t 1"1!1 t i s , o n De c e Ill b e t ' 8 , 1 9 7 8 LE x h s � M and OJ. Hi11 v :i ng complied with t h i s c o ndit i on, the , TTB is s u ecJ Cet' tificate of He q i s b -at i on t o pet i t i on e t' s on Apt' i 1 9 , 1 9 8 4. As specified in the Certificate the Royalty Agreement dated Dece rn bet' 8, 1978 was appt' oved f Ot' 72

DECISION CTA CASE NO. 3779 - 8- registration purs u a nt to the provi s ion s of S e c tion 5 of P t~ e s idential Dec:T ee No. 1~520 [ E xh. 0::1 . Fot~ :. too~< a l l intent and pm~ po s es the Roy a lty A~v~ eement effect 011 Decembet~ 8, 1 97 8. The Aqreeme11t having been aprwoved with amendment s pat~ ticul .::n�� J.y on th e royalty r ates then the s ame s hould be a pplied from its eff ec tivity date. I t mu s t be t�� e me mbet�� e d t t"1 ~ t the A~weement d a ted Decembet~ 8, 1978 is th e vet~ y contt' act th a t was appt~.oved s ubject howevet' to the ~' e d u c e d t ' o y a 1 t y t' a t e s o f 3 ;1. a 11 d C:~ 1- � We seE.' n o plausible t' eason why th�> am e nded t' ates should b e applied only pro s pectively when the effectivity date of the (-"!gt' eernent which wa s appt��oved wa s not chanqed at all but was in fact adopted. WHEREFORE, finding petit i onet' S' claim t~ efund to be in ot' der, t' e s ponclent i s h c- �,��etJy cn~ det' ed t o t' e f und i n fa v o t' o f p e t i t i o ne t' s S m i t h - K 1 i n e & a nd & Ft' ench Inte r national Co. the amoun t of P376,6 7 8.00 as o v e t ' p a i d t.-1 i t h h o 1 d i n g t ax �~ s f o t ' t h e y e e:w 1 9 8 f :. No costs. SO ORDERED. Quezon City, l't1ett' O l't1ani la, Febt' uary 1'+, 1992. C("" ..;;;; 12 . ~~ ERNESTO D. ACOSTA (-"!ssociate Judqe 73

.. . DECISION - 9- CTA CASE NO. 3779 I CONCUR: CE RT I F I C AT I 0 N I hereby certify that this decision was reached after due consultation between the member s of the Court of Tax Appea ls in accot~ dance with :::S4~::~UIN Section 13, Adicle VIII of �s oc1ate Judge Court of Tax Appeals 74