BIR Ruling

April 15, 1969 2nd Indorsement Returned to the Revenue Operations Head (Assessment) the tax case of GRANT ADVERTISING (PHIL.) INC. for the year 1965 involving a proposed deficiency percentage tax assessment in the amount of P108,022.08, corporate residence tax (C-1) in the amount of P360.00 and P340.00 as 25% surcharge, or a total amount of P108,722.08. cdll Upon investigation by revenue examiners (Pedro R. Zapanta, assisted by Oscar O. Liwanag under Group Supervisor Gil Umali) of Revenue Region No. 6, South Manila, it was discovered that subject-taxpayer did not include its computation of the 3% contractor's tax all the money it received from its customers as payment for its services as an independent contractor. It computed 15% only of all the money received, excluding the 85% allegedly earmarked for the advertising media. In their memorandum-report dated July 5, 1966, said agents recommended that the 3% contractor's tax be based on its gross receipts instead of its gross earnings. Based on said recommendation, the Acting Director in a letter dated July 21, 1967 advised the taxpayer of the proposed assessment. Counsel for taxpayer in his letter dated August 15 and September 20, 1967 protested against the said proposed assessment as without basis in fact and in law, contending that the gross receipts of an advertising agency should not include any money which passed through their hands temporarily; that their client actually earned only 15% as commission for services rendered to their customers and the 85% received by them was turned over to the advertising media, such as publishers and radio-teevee networks; and that only the 15% received by them as their commission as advertising agent should be subject to the 3% contractor's tax, invoking the case of Visayan Cebu Terminal Co., vs. Bureau of Internal Revenue, CTA Case No. 719, December 8, 1961 as having upheld BIR Rulings Nos. 105.02 dated December 6, 1950, 105.02 dated January 27, 1948 and 65-103 dated September 14, 1963, the latter ruling citing also the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. G.R. Nos. L-13890 and 13887, June 30, 1960. In the above-cited case of Manila Jockey Club, the Supreme Court however, ruled that ". . . gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the proprietor. (Emphasis supplied) The other cited Visayan Cebu Terminal case also revolved around the contract between the government (Bureau of Customs) and the Visayan Cebu Terminal Company as arrastre contractor, wherein as stipulated, 28% of the gross receipts goes to the Bureau of Customs and the remaining 72% for the Visayan Cebu Terminal Company. This contract between the government and the arrastre contractor may be lawfully construed as the "regulation" that may support in invoking the Manila Jockey Club case as its authority for not including the 28% share of the government in the computation of the 3% tax of the Visayan Cebu Terminal Company as arrastre contractor, concluded the Supreme Court in Visayan Cebu Terminal Company vs. Bureau of Internal Revenue, G.R. Nos. L-19530 and L-19444 as appealed from CTA Case No. 719. There is no law nor regulation in the instant case to warrant the exclusion of the 85% allegedly earmarked for other persons from the gross receipts of the herein taxpayer. Neither is the government or any of its instrumentalities one of the contracting parties to the advertising agreements. Moreover, the taxpayer is not assessed as a business agent but as an independent contractor. The findings of fact show that taxpayer makes business by contracting with industrial, commercial, manufacturing, motor and other big business firms into selling their products thru the use of advertisements; that to perfect or consummate a business deal, the taxpayer introduces designs or methods on how advertisements should come out of the medias, i.e., if an advertisement calls for space in newspapers and magazines, the taxpayer prepares designs thru artwork, illustrations and pictures and even provides words and phrases to invite the attention of readers of those newspapers and magazines to the advertised products; and that all bills are payable to the taxpayer which in turn pays the advertising medias. As to the corporate residence tax, the examiner reported, thus: "(6) That the amount of P226.00 was paid as residence tax (C-1) based on its gross earnings (net, gross receipts), of P565,795.75, while on the basis of gross receipts per investigation of P3,385,365.39, the amount of tax will amount to P675.00 exclusive of interest. The deficiency residence tax (C-1) therefore is P449.00 and interest of 15% or P67.35 (5% monthly interest from May 1, 1966 to July 31, 1966 not to exceed 25%) or a total of P516.35." cdt Upon review of the report of said examiners, the Acting Director of Revenue Region No. 6, South Manila, increased the amount of residence tax to P1,360.00 plus 25% surcharge, or a total of P1,700.00 (or decrease to P360.00). Counsel for taxpayer, in his letter dated September 3, 1967, contends that, as in the proposed deficiency percentage tax assessment, the gross receipts subject to additional residence tax refers only to the 15% commission that their client received during the year under review and do not include the 85% that is remitted to the advertising media. The pertinent law, Section 2(b) of Commonwealth Act No. 465 as amended, provides: "Section 2. Entities liable to residence tax . Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax which, in no case, shall exceed two thousand pesos, in accordance with the following schedule: "(b) For every five thousand pesos of gross receipts or earnings, derived by it from its business in the Philippines during the preceding year, two pesos: . . ." The meaning of "gross receipts or earnings" is found in Section 9, Revenue Regulations No. 1 as amended, viz: ". . . As employed in Section 2 of the Act, the term "gross receipts" or "earnings" means the actual gross proceeds received by a corporation from its business in the Philippines during the preceding calendar year. Accounts and notes receivable are not considered part of the gross receipts or earnings. The amounts realized from these accounts and notes receivable are, however, deemed part of such gross receipts or earnings and should be included in determining the amount of the additional residence tax." Also, BIR Ruling dated March 16, 1962, cited in Araas Annotations and Jurisprudence on the National Internal Revenue Code, defines "gross receipts" correctly thus: "For purposes of the contractor's tax prescribed in Section 191 of the Tax Code the term 'gross receipts' means the actual amount received by a contractor for the services rendered by him without any deduction ." (Emphasis supplied) The taxpayer's counsel invoked BIR Ruling No. 65-103 dated September 14, 1965 which says that ". . . As the security Agency actually received from clients amounts corresponding to the salaries of the guards only for and in behalf of the latter, said amounts cannot be considered part of its compensation for purposes of the 3% tax prescribed by Section 191 of the Tax Code . . ." The aforecited ruling and other such rulings supporting such view however, are errors or mistakes because it violates or is clearly in conflict with the provisions of Section 191 of the Tax Code. As a matter of fact, after realizing this mistake, this Office issued another ruling, BIR Ruling No. 69-002 dated February 17, 1969 expressly revoking the above-cited ruling. The Supreme Court in a line of cases rules that ". . . the government is not precluded from correcting the mistakes upon discovery thereof." (Pacific Oxygen & Acetylene Co., vs. Commissioner of Internal Revenue, G.R. No. L-17708; Genato Commercial Corporation vs. C.T.A., et al, G.R. No. L-11727) And the highest court furthermore ruled that ". . . even if there is such ruling . . . the government cannot be precluded from collecting the proper tax if it is discovered later that an error was committed. . . . The government is never stopped to collect legitimate taxes by the error committed by its agents." (Genato Commercial Corporation, supra; Pineda vs. CFI of Tayabas, 52 Phil., 803; Phil. Islands vs. Galarosa, 36 Phil., 338; Pacific Oxygen and Acetylene Co. vs. Commissioner of Internal Revenue, G.R. No. L-17708, April 30, 1965; Visayan Cebu Terminal Company, Inc. vs. BIR, G.R. No. L-19530 and G.R. No. L-19444). It has long been established in this jurisdiction that administrative ruling or policy which is contrary to express provisions of law or decisions of the Supreme Court cannot always prevail and should not be followed unless the law itself is also contrary to the fundamental law of the land. In view of the foregoing, he is instructed to proceed with the proposed assessment and issue forthwith the correct corresponding assessment notice. aisadc Be guided accordingly. (SGD.) MISAEL P. VERA Commissioner of Internal Revenue