Taxability of the Adamson, Inc. under its Technical Management Contract with the Bataan Pulp and Paper Mills, Inc.

January 17, 1958 BIR RULING NO. 033-58 Mr. Alexander Adamson P. O. Box 1606 Manila S i r : This has reference to your query as to the taxability of the Adamson, Inc. under its Technical Management Contract with the Bataan Pulp and Paper Mills, Inc. LLphil Paragraphs 2 and 3 of the contract provide as follows: "2. ADAMSON agrees to serve as technical manager of BATAAN and for this purpose is hereby conferred the following powers and responsibilities which it undertakes to discharge. "(a) To direct and supervise the drawing of all plans and specifications for the machinery and buildings to be erected and installed by BATAAN in connection with the aforementioned pulp and paper industry at cost. (b) To install and coordinate all the machinery necessary to operate the pulp and paper plant and to produce the required quantity and quality of pulp and paper products. It is understood that, subject to the approval of the Board, ADAMSON shall have the power to hire and engate the services competent and experienced personnel to install and run every piece of equipment in order to insure the continuity of the plant's operation as well as its possible expansion. (c) To purchase the necessary machinery either through bids or negotiated contracts, as BATAAN may decide, from reputable and experienced manufacturers, as recommended by ADAMSON and subject to the approval of BATAAN. (d) To undertake an educational and training program of key personnel for the purpose of taking over the permanent operation of the plant after the expiration of the contracts with foreign technicians. "3. In consideration of the undertakings set forth in the paragraph immediately preceding, BATAAN shall pay ADAMSON a basic technical management fee of THIRTY SIX THOUSAND PESOS (P36,000.00) per annum, effective February 15, 1957. In addition, BATAAN shall pay to ADAMSON a graduated management fee per annum, for a period of five (5) years, equal to the sum of the following schedule: cdll (a) 4% of that portion of BATAAN's net profit not exceeding P1,250,000.00. (b) 3% of that portion of BATAAN's net profit in excess of P1,250,000.00 but not exceeding P2,000,000.00. (c) 2-% of that portion of BATAAN's net profit in excess of P2,000,000.00 but not exceeding P4,000,000.00. (d) 2% of that portion of BATAAN's net profit in excess of P4,000,000.00 but not exceeding P6,000,000.00 "The payment of the above fee may be made either in cash or in shares of stock at par value, at the discretion of the Board of Directors, or upon mutual arrangement between the corporation and the Technical Managers." From the above, Adamson, Inc. is clearly selling its services for a fixed and determinable amount. Under the amendment to Section 191 of the Tax Code by Republic Act No. 1612, Adamson, Inc. is considered an "independent contractor" and as such, it is subject to a fixed tax of P20.00 per annum and to 3% tax on its gross receipts in accordance with Section 182 and said Section 191 of the Tax Code. The explanatory note to the House bill which became Republic Act No. 1612 sustains this conclusion as it is expressly provided therein that the purpose of the amendment is to place within the field of taxation persons whose activities are not among those enumerated in Section 191 of the Tax Code but which consist essentially of the sale of service. llcd Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue