Commissioner of Internal Revenue v. C.F. Braun & Co., Braun Transworld Corp.

[CA-G.R. SP No. 24609. August 30, 1994.] (C.T.A. Case No. 2624) THE COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . C.F. BRAUN & CO., BRAUN TRANSWORLD CORPORATION and THE COURT OF TAX APPEALS , respondents . D E C I S I O N MONTOYA , J p : On October 5, 1979, a petition for review on certiorari was filed with the Supreme Court by herein petitioner for the reversal of the Decision dated April 30, 1979 rendered by the Court of Tax Appeals in C.T.A. Case No. 2624 canceling for lack of legal basis the assessment for percentage and surcharges for 1964, 1965 and 1966 in the amount of P2,811,170.45 against C.F. Braun & Co., and C.T.A. Case No. 2661 modifying the decision of the Commissioner of Internal Revenue assessing C.F. Braun & Co. and/or Braun Transworld Corporation for the fiscal years ended June 30, 1964, 1965 and 1966 in the amount of P1,687,633.64 by reducing it to P46,398.78. In a resolution promulgated on March 13, 1991, the Supreme Court referred and transferred the case to this Court, pursuant to Section 9 of Batas Pambansa 129 and the ruling in the cases of Development Bank of the Philippines versus the Court of Tax Appeals and the Commissioner of Customs , 180 SCRA 609. The petitioner alleges that respondent C.F. Braun & Co., is a foreign corporation organized in accordance with the laws of the State of California, U.S.A., and has its principal office at 1000 South Fremont, Alhambra, California, U.S.A. It was made a party in this case for the services allegedly performed in the Philippines which are subject to tax, although it was not licensed to do business in the Philippines. Respondent Braun Transworld Corporation, hereinafter referred to as Transworld, is a corporation organized and existing under the laws of Liberia, which was licensed by the Securities and Exchange Commission on December 25, 1963 to engage in business in the Philippines, with home address at 80 Broad St., Monrovia, Liberia. The petitioner further alleges that sometime in 1965 and 1966, it caused the verification of the internal revenue tax liabilities of respondent Braun for the fiscal years ending June 30, 1964, 1965 and 1966. The BIR investigation showed that on September 20, 1963, respondent Braun entered into a contract (Contract No. 814 C, Exh. 3) with ESSO Standard Fertilizer and Chemical Co., Inc. (Philippines) referred to as ESFAC, whereby for a consideration of $19,333,600.00 (equivalent to P75,594,376.00 at the exchange rate of P3.91 to U.S.$1.00), the respondents undertook the job of providing engineering services and procuring imported materials in connection with the construction and erection of the fertilizer plant of ESFAC at Limay, Bataan. The pertinent provisions of the contract read as follows: "ARTICLE 1. THE WORK Contractor, who is deemed an independent Contractor hereunder, shall furnish, subject to the conditions and exceptions hereinafter noted, competent supervision, procurement, and engineering services consisting of, but not limited to, all process and mechanical engineering, purchasing and expediting, and construction drawings; also the supply of imported materials including transportation to the Philippines, required for the construction and the erection of Ammonia, Urea, Sulfuric and Phosphoric Acid, and Complex Fertilizer plants and their attendant facilities (all hereinafter referred to as the 'Work'), on a designated site on Owner's property at Bataan, Philippines (hereinafter referred to as the 'Work Site'). The Work by Contractor shall be in accordance with the following specifications, drawings, instructions and agreements identified with reference to this Contract (hereinafter called the 'Job Specification')." Petitioner also contends that while respondent Braun was not licensed to do business in the Philippines, it performed the services subject of the contract in the Philippines and failed to pay the percentage taxes due on the services rendered. Thus, the petitioner caused the issuance of the letter dated January 15, 1979 requesting respondent Braun to pay the amounts of P2,811,170.45 as contractor's fixed and percentage taxes for 1964, 1965 and 1966, and P5,245,387.34 as compensating tax on the importation of materials used in its construction. The assessments were protested by respondent Braun in a letter dated February 18, 1970 (Exh. 5). As a consequence, the petitioner decided to cancel the assessment with respect to the compensating tax, but reiterated the demand for the payment of the percentage taxes in the amount of P2,811,170.45 in its letter dated August 21, 1972 (Exh. 5). Respondent Braun asked for reconsideration of the assessment and requested that the same be cancelled in a letter dated October 11, 1972, which request was again denied by the petitioner in a letter dated June 18, 1974. However, instead of paying the taxes, respondent Braun filed on September 5, 1974 a petition for review of petitioner's decision with the respondent court in C.T.A. Case No. 2624 entitled "C.F. Braun & Co. vs. The Commissioner of Internal Revenue", alleging that the services rendered by respondent Braun in the construction and erection of the fertilizer plant were all performed outside the Philippines, hence, the proceeds realized therefrom were not subject to the 3% contractor's tax. It further contended that, since the assessment was issued only on January 15, 1970, the right of the petitioner assess with respect to the period up to November, 1964 has already prescribed. The petitioner Commissioner of Internal Revenue countered that, based on its investigations, it found that Transworld is an alter ego of Braun, thus, it disregarded the separate juridical personality of the two (2) corporations and viewed the two (2) contracts (Contracts Nos. 814C and 814E), which the respondents separately executed with ESFAC, as a single contract. On the basis of said findings, petitioner issued a letter dated July 16, 1970 (Exh. 6, pp. 177-178, BIR rec.) demanding payment from respondent corporations of deficiency income tax for fiscal years June 30, 1964, 1965 and 1966 in the amount of P1,687,633.64. The respondents protested the assessment and requested that the same be reconsidered through a letter dated September 17, 1970 (Exh. 7), which protest was denied by the petitioner in its letter dated November 26, 1974 (Exh. 8). On February 7, 1975, the respondents appealed the petitioner's decision by filing a petition for review with respondent court docketed as C.T.A. case No. 2661 entitled "C.F. Braun & Co. and Braun Transworld Corporation vs. The Commissioner of Internal Revenue". After conducting a joint hearing in the two (2) cases, Nos. 2624 and 2661, the respondent court of Tax Appeals rendered its consolidated decision on April 30, 1979, the dispositive portion of which is quoted as follows: "WHEREFORE, the appealed decision of the Commissioner of Internal Revenue in CTA Case No. 2624 is hereby reversed. The appealed decision of the Commissioner of Internal Revenue in CTA Case No. 2661 is hereby modified. Petitioner Braun Transworld Corporation is hereby ordered to pay respondent deficiency income tax in the total sum of P46,398.78 for taxable year 1965 and 1966, inclusive of surcharges and interests pursuant to Section 51(e) of the National Internal Revenue Code, as amended. With costs against petitioner Braun Transworld Corporation. SO ORDERED." Hence, this petition was filed alleging that: "I THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE SERVICES PERFORMED BY C.F. BRAUN & CO. IN CONNECTION WITH THE CONSTRUCTION OF THE FERTILIZER PLANT OF ESFAC AT LIMAY, BATAAN, WERE PERFORMED OUTSIDE OF THE PHILIPPINES. II THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE ASSESSMENT AGAINST RESPONDENT BRAUN TRANSWORLD CORPORATION IN THE AMOUNT OF P1,615,843.62 AS DEFICIENCY INCOME TAX FOR FISCAL YEAR ENDED JUNE 30, 1964 WAS ISSUED BEYOND THE PERIOD PRESCRIBED BY LAW." We find this petition meritorious. We are in full accord with the arguments of the petitioner that respondents Braun and Transworld are one and the same entity, the latter being a mere adjunct or alter ego of the former, as shown by the circumstances enumerated by the petitioner in its brief as follows: "(a) Mr. William G. Field, comptroller of Braun, in effect admitted in his deposition that Transworld is a subsidiary of Braun. Braun owned 100% of the shares of stock of Transworld (p. 10, Deposition, Exh. 7 ts); (b) The two respondent corporations hold office in the same building as shown in the letter dated March 18, 1966 of Mr. Arthur Anderson & Co. addressed to Mr. Donald R. Walker, Manager of Accounting of Braun Transworld Corporation, Alhambra, California (p. 23, BIR Rec., CTA, 2624) as well as in the 'Lease Agreement' (p. 139 BIR rec., CTA 2624), relative to the construction tools and equipment, executed on January 31, 1964 by Transworld and ESFAC, with respect to the construction and erection of the fertilizer plant of the latter. The lease agreement was executed at Alhambra, California , the office address of Braun. (c) The employees of Braun are also the employees of Transworld, and the business affairs of the latter are controlled by the former. (Examiner's Report, p. 101, BIR rec., C.T.A. Case No. 2624); (d) ESFAC maintains a single record of the construction costs of the fertilizer plant, including all billings for both Braun and Transworld. (Examiner's Report, p. 101, BIR rec., C.T.A. Case No. 2624); (e) Transworld was licensed to do business in the Philippines only on December 17, 1963 or about two months after execution of Contract No. 814, under which Transworld was to perform services for ESFAC in connection with the construction and erection of the fertilizer plant of the latter at Limay, Bataan. (Examiner's Report, p. 101, C.T.A. Case No. 2624); (f) Transworld was organized solely for the purpose of rendering services in connection with the aforementioned services for ESFAC (Examiner's Report, p. 101, BIR rec., C.T.A. Case No. 2624; letter dated October 30, 1965, pp. 92-93, BIR rec., CTA 2624); (g) Under the contract entered into between Braun and ESSO Standard Fertilizer and Chemical Company, Inc. (Phil.) ESFAC, Braun was to furnish competent supervision, procurement and engineering services. The contract also states that the work to be performed by Braun was to be in accordance with the specifications, drawings, instructions and agreements in the job specification. The said supervision procurement and engineering services were actually performed in the construction site at Limay, Bataan. (pp. 178-206, BIR Rec. of CTA Case No. 2624); (h) The accounting records of ESFAC relative to subject contract show, ESFAC paid Braun on the basis of the monthly stages of completion of the work. If it is true, as claimed, that Braun's services were rendered outside the Philippines, ESFAC would not have been able to determine the correct amount that should be due to Braun at the end of each month. (Examiner's Report, p. 101, BIR Rec., CTA Case No. 2624)". Since Transworld is licensed to do business in the Philippines, the services rendered by respondent Braun, as an alter ego of Transworld, are subject to the contractor's tax and also to income tax. Based on the findings of the petitioner, the respondent corporations incurred deficiency income tax for the fiscal years ended June 30, 1964, 1965 and 1966 in the amount of P1,687,633.64, the details of which are as follows: "FY 6-30-64 Net income per investigation P5,854,251.70 Tax due thereon 1,748,275.00 Less: Amount already assessed 378,916.00 Balance P1,369,359.00 Add: 1/2% mo. int. from 10-16-64 to 10-17-67 246,484.62 TOTAL AMOUNT DUE & COLLECTIBLE P1,615,843.62 =========== FY 6-30-65 Net income per return P64,792.39 Add: Unallowable deductions (1) Billings received from ESFAC by C.F. Braun & Co., Inc. P425,056.96 Less: Allowable deduction based on net profits rate method 418,893.63 Balance P6,163.33 (2) Vacation leave liability 20,766.50 (3) Profit sharing & retirement exp. 19,500.00 46,429.83 Net income per investigation P111,222.22 Tax due thereon 25,367.00 Less: Amount already assessed 14,254.00 B a l a n c e P11,113.00 Add: 1/2% mo. int. fr. 10-16-65 to 10-16-68 2,000.34 TOTAL AMOUNT DUE & COLLECTIBLE P13,133.34 FY 6-30-66 Net income per return P943,626.00 Add: Unallowable deductions: (1) Billings received from ESFAC by C. F. Braun & Co., Inc. P43,709,738.88 Less: Allowable deductions based on net profit rate method 43,644,174.27 Balance P65,654.61 (2) Vacation leave liability; profit sharing & retirement expenses & unsupported expenses 121,953.80 P187,518.41 Net income per investigation P1,131,144.75 Tax due thereon 331,343.00 Less: Amount already assessed 281,617.00 Balance P49,726.00 Add: 1/2% mo. int. from 10-16-66 to 10-17-69 8,950.68 TOTAL AMOUNT DUE & COLLECTIBLE P58, 676.68 GRAND TOTAL AMOUNT DUE P1,687,633.64" ============ Anent the respondents' claim that the causes of action of the petitioner had prescribed, we agree with the petitioner's contention that the respondents failed to invoke the defense of prescription and therefore they are precluded from availing of the defense under the principle of estoppel. In the case of Philippine National Bank vs. Parina , 22 SCRA 912, the Supreme Court held that the defense based on prescription must be pleaded and failure to plead it constitutes a waiver of the defense. Likewise, in the case of Commissioner of Internal Revenue vs. Villa and the Court of Appeals , 22 SCRA 3, the Supreme Court held that in order that the respondent court could take cognizance of the issue of prescription, there must be a showing that the respondent corporation has made a prior protest against the assessment on the ground of prescription and that the petitioner has rendered a decision thereon. There being no appealable decision of petitioner on the issue of prescription, respondents are barred from raising the same. WHEREFORE, the decision of the respondent court dated April 30, 1979 is REVERSED and SET ASIDE, and judgment is hereby rendered ordering the respondent C.F. Braun & Co. to pay herein petitioner the amount of P2,811,170.45 as contractor's tax for 1964, 1965, and 1966; and respondent Braun Transworld Corporation to pay the amount of P1,687,633.64 as deficiency income tax for fiscal years ended June 30, 1964, 1965 and 1966, plus legal interest from July 16, 1970. SO ORDERED. Francisco and Barcelona, JJ ., concur.