CTA Case No. 4448 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SIKE DARBY PILIPINAS INC., C~T~A~ CASE NO~ 4448 ( FORKERLY SiftE DARBY INTERNATIONAL TIRE CO., INC. ) F'et.i t .i oner, - versus - THE COftftiSSIONER OF INTERNAL REVENUE Respondent.. X- - - - - - - - - - - - X D.ECISIC7N The instant petition seeks ~or the cancellation o~ various tax assessments served by the respondent covering the ~iscal years ending June 30, 1986 and June 30, 1987. Peti t .ione:r is a domestic corporation pri ma :!'i 1 y engaged in the manufacture and recapping o~ tires. On April 14, 1989, the petitioner received from the respondent a pre- assessment notice assessing it liable for the following deficiency taxes for the ~iscal yea rs ending June ::10 , 1986 and June 30, 1987, inclusive o~ interests and surcharge: A. Income Ta~�t FY 6-30-86 p 4,032,937.66 FY 6-30 - 87 3,328,323.21 711

DECISION - -2- C.T.A. CASE NO. 4448 ~ B. Sales TaK FY E.-30-8& 9. 47!:�. 151. 03 FY E.<KI-87 14. (;23. 220. !:"t8 c. Penalty for late filing 185,437.72 & Payment of Royalty Tax Fourth Quarter Ending June ::ro, 1987 D. Co ntract.or' s Ta:-c 1.190.49 Total P31, 646, 260. 6'3 On May 2, 1 '38'3, the petitioner filed with the respondent 's office its protest assailing the propriety of the deficiency tax assessments made. However, on April 14, 1'38'3, the respondent issued a formal assessment reiterating its liability for the abovementioned deficiency taxes. Consequently, on June 1, 1'38'3, petitioner filed another protest seeking for a reinvestigation of the assessments and at the same time admitting its liability for the assessed deficiency contractor's tax amounting to ?1,1'30.4'3 which it paid on the same date, as evidenced by BIR Payment Order No. C- 558'3703 and CB Confirmation Re_ceipt No. B-16571211. On February 20, 1'3'30, the respondent finally issued her decision on the disputed assessments acknowledging the petitioner's payment of the deficiency contractor's tax and demanding for the payment of the balance of 712

DECISION - C.T.A. CASE NO. 4448 -3 - P31,645,070.00 representing the total sum of the assessed income, sales and withholding tax deficiencies. Thus, the instant petition. The issues to be resolved in this case are whether or not the petitioner is liable for the payment of deficiency income and sales tax for the FY 1986 and 1987 and penalty for late filing and payment of final withholding tax on royalty for the fourth quarter of FY 1987. One of the basis of the respondent in assessing the petitioner for deficiency income taxes for the FY's 1986 and 1987 is her disallowance of the costs of petitioner's long distance phone calls amounting to P48,436.79 <FY 1985-1986) and P107,306. 2 2 <FY 1986-1987) and as valid deductions from its gross revenues for the fiscal years ending June 30, 1986 and June 30, 1987, respectively. The respondent contends that such expenses should have been deducted in the corresponding fiscal years that the calls were made. Thus, calls which were billed in July' or during the initial months of fiscal years 1986 and 1987 were only allowed by the respondent as valid deductions in the previous fiscal year when the calls were actually made. 713

DECISION -- C.T.A. CASE NO. 4448 -4- The pet.i t .ioner, on the other hand, claims that. it. was not possible to accrue the costs of long distance calls made during the latter months of a fiscal year� since the bills corresponding thereto were only received during the start of the succeeding fiscal year. In ot.her words, the petitioner contends that the business expenses covering the costs of said long distance calls accrued from the time that it vas actually billed by the telephone company. We sustain the contention of the petitioner. The pet.i t .ioner � s wit.nes s t .estified t .hat it. generally adopts the accrual method in deter�mining its income and liabilities. And if the taxpayer is on the accrual basis, for the purposes of det.ermining deductions, it is necessary that there be a definite fixed liability <Law of Federal Income Taxation, Mertens, val. 4A, par. 25.10>. It has also been held that in order to be accruable in the taxable year, a valid obligation upon which the profit <or loss in the case of a deduction) is to be determined must have existed in the year in which the obligat i on became binding or enforceable. ( Ut.ah Idaho Sugar Co. vs. Staye Ta x Co mmission, 73 P 2d 974>. 714

DEClSlON. �- �- 5 - C.T.A. CASE NO. 4~48 .�, it cannot be said that the petitioner accrued its long distance calls at the time that they were actually made. lt would be impractical for t .he petitioner to claim as deductible expense the mere Pst.i mat.E� of the costs of the 1 Ofl!;l dist a nee calls i t had made . Hence, lJJE' obli9ation on t .he part of the petitioner to pay or expend money which constitutes a deductible loss did not occur until it received from the telephon e company the demand to pay a definite fi xed amount representing t .he cost.s of long d istance phone calls made. Another basis of the respondent in asse~:::E:i ng t ..he petitioner for deficiency income tax is her allocation of a pr opor t .i onal amount. o :f business e}q:~euses incu:.rr eCI in the making of tires to the petitioner's earnings fr �om inte:rE'sts and money market p.l ac:E�ments by using t .he following foimula: Nontaxable revenues (income which iE: ta;.c �- e' :-~empt , tax- free, o1� ot.herwise not E:ubject. to the 35% corporate income tax) = Ratio Total revenues (taxable and non - t. a ~..r:tblE� revenues .l As testified to by petitioner's witness, the respondent claims t hat since the pE't.i tione :r alsc� earned income from intereBts and money mar~tet. pl acements , i t 715

DECISION - - 6- C.T.A. CASE NO. 4448 ~ should allocate a certain part o1 its operating cost to the generation of such passive income, thus in effect, disallowing a proportionate amount of deductible expenses from the petitioner's income in the manufacture and recapping of tires. However, the undisputed claim of the petitioner is that no expenses were incurred in the production of its passive income such a s income earned from the interests in bank deposits. Moreover, these income had already been subjected to a final withholding tax of 20%. By the very nature o1 a 1inal tax, the income is taxed based on its gross amount, without consideration of any deductions or c osts that may have a c tuall y been incurred in their produc t i on . We the r efore can n ot 1ind any valid reason for the r espondent's allocation of deductible expenses to the petitioner's income that has been subject to a final tax. Neither can we find any legal basis for adopting the abovementioned formula in view o1 the unrefuted testimony of the petitioner's witness that during the examination on its accounting records, all the pertinent journals~ led g e rs and documents covering both taxable and non- tax abl e revenues were duly presented to the respondent. 716

DECISION - C.T.A. CASE NO. 4448 -7- As to the second iss ue, the de~iciency sales tax assessed t .he pet.i t i oner resul tecl ~rom t .he respondent's disallowance of alleged overpayment cti advanced sales tax on imported nylon and ~abric which the petitioner has been paying at the rate o~ 30~ o~ their� gross value, and which were then credited against i t .s 207. sales tax liability on the sale o~ tires. The respondent. alleged that the petitioner is liable ~or advanced s ales tax on i t s importation at the rate o~ 20~ and no t 30~. She submits that since the petitioner should have only paid a tax rate of 20~ on its importation o~ nylon and fabric, the excess pay ment o~ 10~ cannot be applied as a tax credit on its sales o~ tires. However, a mere perusal o~ the pertinent provisions of law reveals otherwise. Section 163 of the 1986 Tax Code as amended by P.D. 2031 and E.O. 36 provides: "Sec. 163. Percentage tax on originaJ. saJ.es o.f articJ.es. There shall be levied, tt f assessed and collected, once only on every original sale, barter, exchange, or simi lar transaction for nominal or valuable consideration intended to transfer ownership of, or title to, the articles hereinbelow enumerated, a tax based on gross selling price or gross value in money of the articles so sold, bartered, exchanged, or trans~erred, such tax to be paid by the manufacturer, producer or import.er : ( 1) T h i r t.y per cent. ( ::10~ >, on the following non-essential articles: 71,

DEGISION - -8- C.T.A. CASE NO. 4448 ~ Cll Textiles wholly or in chie� value o1 silk, wool, or linen~ nylon or other synthetic and / or chemical fabrics not intended �or clo thing; wool and silk hats; and furs and manu�actures thereof. <Underscoring ours.) It is undisputed tha t the nylon and fabrics that are imported by the petitioner are not intended for clothing and are bein9 used ex~lusively for t .he manufacture of tires. It is therefore clear from the above- quoted provision that the subject importations are classi�ied as non - essential articles taxable at the rate of 30% and not 20% as alle9ed by the respondent. In �act., provisions specifically enumerated those arti cles , classif ied as essential, whose advanced sales tax shall be equal to the sales tax of the finished product. Section 163 of the same Tax Code, as amended, provides: " (2} Ten per cent C10%), on the following essential articles: (a} Processed meat, �ruits, vegetables, fish and other sea �oods and processed food products �or human consumption; (b) Processed milk, creamers, dairy products, l:tut.t .er and i t .s subst.i tut.es lilte margarine; Cc> Bread and bakery products; 718

DECISION - C.T.A. CASE NO. 4448 -9 - <dJ Lard, shortening and cooking oil; (e) Beverages and concentrates thereof, whether� in liquid, powder or granulated form~ intended for consumption as a drink, including but not limited to, processed coffee, cocoa, tea or ginger; CfJ Wheat flour; (gl Clothes and textiles intended for clothing; (h) Medicines and articles primarily intended for the administration thereof. (iJ Soa ps, detergents, toothbrushes and toothpastes. (j) Writing pads, notebook, or�dinary lead pencil s and disposable ballpens. <k> Cemen t, hollow blocks, logs, lumber~ plywood, plyboard, fiber-board glass, roofing materials, steel bars, nails, sand and gravel, woven bamboo splits <sawaliJ, nipa shingles~ bamboo, basic sanitary and plumbing fixtures and fittings. ( 1 ) Fish, poultry, swine and cattle feeds. (m) Fertilizers, pesticides and technical materials for use in the formulation of pesticides. <n> Spare part s and accessories of motor vehicles, except tires.~ <Underscoring ou rs > It is worthy to stress that the above-quoted pro vision clearly excludes tires from those enumerated e s sen t ial a r ticles whose raw materials shal l be fixed at t h~ s a me r a te as th e finis hed product. Theref or �e, there i s n o l eg a l b a s i s for the r �espondent i n im po s ing an 71 9

DEGISlUf{ �- G.T.A. CASE NO. 4448 - 10 - advariced sales tax on nylon and fabric which is equal t .o t .he rate imposed on tires. Consequently , the entire 3 0 % advanced sales tax paid by the petitioner on the imported raw material should be all owed to be credited against the 20% sales tax imposed on tires under Section 163<4 > of the same Ta x Code. Finally, wit.h regard t .o the la st issue, the respondent contends that the petitioner was late in the filing and payment of t .he final withholding ta x on royalty under Secti on 25<bJ of the 1987 Tax Code due to Uniroyal Goodrich of U. S.A . for the fourth quarter of the fis cal year ended June 30, 1987. The respondent alleged that the filing and payment of the said withholding tax should have been made within a period of t .went.y five ( 25) days from the close of the fourth quarter, specifical ly on or before July 25, 1987 in accordance with Secti on 52 CaJ in conjunction with Section 5 1 of the Tax Code. Section 52CaJ provides: �sEC. 52. Ji'et.urrnt ;u1d p.aynrent. of t.axes ~t�it.hheld at. source. - <a> Quarter.ly returns and 1� payment of taxes vithhe.ld. Taxes deducted and withheld under Section 51 shall be covered by a return and pai d to the Revenue District Officer, Collec t io n Agent, ~r duly aut ho ri zed Tr ea s urer of the ci ty, or municipal i� y wh ere t h e withh old i n g a gent has his legal r es i dence . o r p rinc ipa l pl ace of business, or WJ E're the wi th h oldi ng age nt i s a corporation, wh e r the pr inc ipal offic e i s located. The taxes d e du c tPd and wit1 h~l d by the wi thhol d in g ag ent 72 0

- DECISION -- - 11 - C.T.A. CASE NO. 4448 ..... shall be held as a special fund in trust for � . ''....... the Go~ernment until paid to the collecting �I officers. The Commissioner of Internal Revenue may, with th~ approval of the Minister of Finance, require these withholding agents to :; pay or deposit the taxes deducted or wi~hheld at more frequent intervals when necessary to prot.ect t .he int.erest. of the Government. The n? t _\l!~..!_\ _.f.9_!:__ f i _!}_a ~.it..b.!E~l,!",t!.ng_ t a>~ s ha 11 be f i 1 ed and the payment made within 25 days from the c1osP of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made." <Underscoring supplied.) The respondent alleged that since the filing and payment. of the withholding tax on royalty was belatedly made on August 10, 1987, the petitioner is liable for penal t .y. In r efut at.i on of respondent's claim, the petitioner contends that the respondent failed to consider its Technical Service Agreement with Uniroyal Goodrich U.S.A~ under Article V, paragr�aph 5.3 of which states: "Fee Accrual and Payment - The Technical Fee provided in paragraph 5.�1 shall accrue as company sales subject to s uch fee are made, and the accrued fee shall be paid to B.F. Goodrich within thirty C30J days next following the end of each calendar quarter year in which such sales are made. " .} I t is further alleged " that since the quarter!~ hi royalty fee becomes demandable as a matter of r �ight Unir oy al Goodrich o .:f U.S.A. only on t .he :::10th .J day following the end cd eaclJ cale-ndar quarter, t .he last. clay 721

DECISION - C.T.A. CASE NO. 4448 - 12 - 1or the 1iling and payment of the final withholding tax is on October 25. 1987. From this conclusion, it would there1ore seem that the petitioner is of the impression that the income 1rom royalties on sales accrued only on the quarter when the royalties became demandable by Uniroyal Goodrich U.S.A .. However, as earlier discussed, 1or purposes o1 determining income and liabilities under the accrual method, it is necessary that the taxpayer incur a definite 1ixed liability. Section 5.1 o1 the Technical Service Agreement provides that the technical 1ee or royalty payment shall be computed at 3% o1 the petitioner's net realized sales. There1ore, the petitioner"s liability to pay royalties to Uniroyal Goodrich U.S.A. became 1ixed and determinable 1rom the time the sales were made. The de1erment o1 the actual payment does not alter the 1act that the income o1 Uniroya l Goodrich U.S.A . 1rom royalties accrued from the time o1 sale since it is from that time that the right o1 the petitioner to a 1ixed sum became determinabl e. It is o1 no moment that the Agreement provides 1or a de1erred pa yJne nt o1 the royalties due to Uniroyal Goodrich U.S.A �. Wh a t is important is the fact that the income on 72 2 ''

DECISION - - 13 - C.T.A. CASE RO. 444B . r oyalties ha v e already been earned and accrued in favor o f Uniroyal Goodrich U.S.A .. WHEREFORE, judgment is hereby rendered cancelli ng the deficiency income and sales tax assessments for the fiscal years ending June 30, 1986 and June 30, 1987 is sued by responde�nt against petitioner. pet.i t .ioner is hereby ordered to :J:�ay in favor o.f r espondent the sum of Pl85, 4 37.72 as penalty for late .filiiJg and payment. of r oyalty ta:-t f or the .fourth qua rt.er ending Jun e 30, 1987. No pro n ouncement as to costs . SO ORDERED. Quez on City , Met r o Manila, August 8, 1994. ~Q---~ ERHESTO �� ACOSTA Presiding Judg e WE CONCUR: GRUBA .Judge I 723

DECISION - - 14 - C.T.A. CASE NO. 4448 ~ CEH.� r i F ' " I C A T I O N I hereby cer tify t hat this decision was reached after due consultation among the members of the Court of Ta:K Appeals in accordaw:=e with Sect ion 1:3 Articl e VIII of the Gonstitu.tion. ~Q_.. ~ ERHESTO D. ACOSTA Presiding ~h1clge Court of Tax Appeals 724