CTA Case No. 3914 (Decision)

'. REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY WARNER-LAKBERT CO. INC., Petitioner, - versus - C.T.A. CASE NO. 3914 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - -X DEC I I 0 N The petitioner is a domestic corporation organized and existing under the laws of the Philippines and is engaged in the manufacture and sale of c~rtain pharmaceutical, health-care and confectionary products under different trademarks. In regard to the first cause of action, the evidence shows that petitioner has been granted a license by Warner-Lambert Company, U.S.A., <Warner- Lambert U.S.A. for short), a non-resident foreign corporation, to manufacture and sell products bearing the trademarks owned by Warner-Lambert U.S.A., as shown by their agreement, executed on April 1, 1979 <Exhibit "A" ) , as well as a Certificate of Registration issued by the Technology Transfer Board <Exhibit "A-1">. Petitioner was also obligated to pay royalties to Warner-Lambert U.S.A. pursuant to the agreement. 530

DECISION - CTA CASE NO. 3914 -2- These royalties amounted to P466t344.00 �or the period January 1983 to March 1983. Petitioner deducted and withheld 35Xt or the amount �rom the said royalties o� P466t344.00 as withholding text and remitted the same to the Bureau o� Internal Revenue <BIR; Exhibits "B"t "B-1" and "B- 2">. With respect to the second cause o� actiont it is shown that petitioner is a trans�eree o� a license granted to Parke-Davies & Co. Inc. <Parke- Davies �or short> by Parke- Davies & Company U.S.A. <Par ke - Davies U.S.A. �or short) t a non-resident �oreign corporation. Pursuant to their agreement executed on March 21t 1979 <Exhibit "D" >t the assets and obligations o� Parke-Davies were assumed by petitioner in 1980 and petitioner was also obligated to pay royalties to Parke- Davies U.S.A. which amounted to P679t014.00 �or the period Januar y 1t 1983 to March 31t 1983. Petitioner deduc ted and remitted to the BIR 35X o� the said royaltiest or P237t654.00t as withholding ta~ at source. <Exhibits "E"t "E- 1"t and "E-2"> In both the �irst and second causes o� actiont petitioner now claims that it should only deduct and pay 25X withholding tax on the royaltiest not 531

DECISION - CTA CASE NO. 3914 -3- 35Y. thereo�, as was erroneously done. Hence, i t sought �rom respondent tax credits in the amounts o� P45,534.40 and P67,901.40 under the �irst and second causes o� action, respectively, or a total o� P114,535.80, as erroneously paid withholding taxes. The �ormer amount o� P45,634.40 is the di��erence between P153,220.40 (35X o� P455,344) actually remitted to the BIR and 25X o� P466,344 which is allegedly the correct amount to have been withheld and paid to the BIR~ and the latter amount o� P67,901.40 is the di��erence between P237,654.90 (35Y. o� P679.014> which was also actually withheld and remitted to the BIR, and 25Y. o� P679,014 which -� is allegedly the correct amount to have been withheld and remitted to the BIR. The instant petition was �iled to toll the 2- year prescriptive period, respondent not having acted on the claim �or tax credits in both instances. The only issues are: 1. Whether or not petitioner is entitled to the tax credits in the total amount o� Pl14,535.80 <P46,634.40 + P67,901.40>, representing alleged overpaid withholding taxes at source on royalty payments under the �irst and second causes o� action~ and 532

DECISION - CTA CASE NO. 3914 -4- 2. Whether or not petitioner is the real party-in-interest or has legal capacity to sue in the instant petition �or tax credits. The Court �inds �or petitioner. 1. In regard to the �irst issue, it has been established, and it is in �act admitted, that the amounts o� P466,344.00 and P679,014.00 remitted by petitioner to Warner-Lambert U.S.A. and Parke- Davies, U.S.A., respectively, were royalties. It is expressly provided under Article 13 o� the Convention o� the Government o� the United States o� America and the Government o� the Republic o� the Philippines with Respect to Taxes on Income, e��ective January 1, 1983, more particularly on royalties, that "25 per cent o� the gross amount o� the royalties" will be the tax imposed. The pertinent portion is quoted: "1. Royalties derived by a resident o� one o� the Contracting States �rom sources within the other Contracting State may be taxed by both Contracting States. 2. However, the tax imposed by that other Contracting State shall not exceed <a> In the case o� the United States, 15 percent o� the gross amount o� the royalti~s, and (b) In the case o� the Philippines, the least o�: 533

\ \ DECISION - CTA CASE NO. 3914 -5- ..L!...t__ 2q__p_~_:r._qe~ t o ;t_ t h~ g r o as �--~mount o ~ :!:_h.l�?_. I..Q.Y..<\l_J:..t t.~.~_,__ (ii) 15 percent o� the gross amount o� the royalties, where the royalties are paid by a corporation registered with the Philippine Board o� Investments and engaged in pre�erred areas o� activities, and (iii) The lowest rate o� Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident o� a third State."<Emphasis SURplied. > Additionally, respondent admits paragraph 8 o� the subject petition, citing BIR Ruling No. 149, dated August 25, 1983, con�irming that royalty ~ayments are subject to only 25Y. thereo� a�ter January 1, 1983, the pertinent portion o� which is likewise quoted: XXX XXX XXX "In reply, please be in�ormed that under par. ( 3 >, Article 13 o� the RP-US Tax Treaty, the term "royalties" as used therein means payments o� any kind received in consideration �or the use o�, or the right to use any patent, trademark, design or model, plan, secret �ormula or process o� other like right or property, �or in�ormation concerning industrial, commercial or scienti�ic experience. Accordingly, under the �oregoing facts, the technical service �ee is considered as royalty. Pursuant to Article 13(2)(b) o� the RP-US Tax Treaty; i~e gross a~ount o� -~~~~ ro~lty i~L_�_ubj ec.;:t to _t.h~:?5Y.__w:!- thholding tax 53 4

- DECISION - CTA CASE NO. 3914 -6- a�ter January 1, 1983 when the RP-US Tax :rreaty -t;.ook e��ect. _<Emphasis supplied. > Very truly yours, <Sgd. > RUBEN B. ANCHETA Acting Commissioner Bureau o� Internal Revenue" This Court, there�ore, sustains petitioner's contention that the royalties remitted to the said two non-resident corporations are subject to only 25X withholding tax. With respect to the second issue, recent Supreme Court decisions, more speci�ically Co~~~ssioner o� Internal Revenue v. ~curt o� Tax ~~als and Hawaiian- Philippines Co., GR No. 939.01, dated February 9, 199~ and Comm~ssioner o� ~nt~~nal Revenue v. Procter & Gamble Corporation, dat~_!:f December 2 .t.__!99!. (setting aside an earlier ruling in the same case, 166 SCRA 560 [ 1988]), clearly held that a withholding agent is a real party-in-interest and has legal capacity to sue �or re�und o� taxes or �or a tax credit. The withholding agen~ is properly considered as a taxpayer, having an obligation to pay the withholding tax, which obligation is a personal, direct and independent liability o� the withholding 535

DECISION - CTA CASE NO. 3914 -7- agent. Being statutorily liable �or the tax, he ~hould be regarded as a real party-in-interest to bring the suit �or re�und o� the tax or issuance o� a tax credit certi�icate. WHEREFORE. judgment is hereby rendered in :favor o:f petitioner, ordering respondent Commissioner o:f Internal Revenue to issue to petitioner a tax credit certificate :for the total amount o:f P114.535.80 <P46,634.40 + P67,901.40) as overpaid withholding tax at source. No costs. SO ORDERED. Quezon City, Metro Manila, August 6, 1992. I CONCUR: cz~~Q.~'"" ERNESTO D. ACOSTA Presiding Judge 536

DECISION - CTA CASE NO. 3914 -8- CERT I F I CAT I 0 N I hereby certi�y that this decision wa s reached a�ter due consultation between the members o� the Court o� Tax Appeals in accordance with Section 13, Article VIII o� the Constitution. Presiding Judge Court o� Tax Appeals 537