BIR Ruling

September 7, 1977 Income from Sources Within the Philippines, Subject to 35% Withholding Tax at Source In reply to your letter dated September 1, 1977, we regret to inform you that your request for exemption from withholding tax at source on your payments of alleged technical service fees to HINDUSTAN MACHINE TOOLS LTD. of India cannot be granted. You represented in your letter that as of September 1, 1977, no actual technical service has been rendered in your favor in the Philippines by the said foreign company and that the technical licensing fee you will remit thereto is on account of ". . . a technical arrangement between the above-mentioned firm and our company by way of documentations such as drawings, specifications and other related matters documented in India and sent to the Philippines in document from. . . " cd It was noted, however, from the technical assistance agreement between your company and the said foreign corporation that your payments thereto shall be on account of the following: "1.1 The object of this Agreement is as follows: a) To enable MTM to manufacture Centre Lathes LT20, L817, LB20 and LB25 including their standard and special equipment (as described in Schedule 'A' hereinafter described as the 'Products'). b) To grant MTM exclusive selling rights in the Philippines as well as non-exclusive selling rights for export through HMT or its authorized agents to all other countries except to the countries where HMT has license arrangements for the products." A cursory examination of the said agreement disclosed that is actually is licensing agreement for the manufacture and sale in the Philippines of patented products of Hindustan Machine Tools, Ltd., India, rather than a technical assistance agreement. The fact that this foreign corporation provides you with technical information for the manufacture of said producers does not make said agreement a technical service agreement. Under Sections 37(a)(4) of the Tax Code, ". . . rentals and royalties for the use of or for the privilege of using in the Philippines patents, copyrights, secret processes and formulas , goodwill, trademarks, trade brands, franchises and other like properties " are considered income from sources within the Philippines. (EMPHASIS SUPPLIED). Since your payments to Hindustan Machine Tools Ltd. of India are actually income from sources within the Philippines the same are subject to 35% withholding tax at source pursuant to Sections 53 and 54, in relation to Section 24 of the Tax Code. cdt