Commissioner of Internal Revenue v. Cyanamid Philippines, Inc.

FIFTEENTH DIVISION [CA-G.R. SP No. 39933. February 4, 1999.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CYANAMID PHILIPPINES, INC. , respondent . D E C I S I O N TUQUERO , J p : Subject of this petition for review is the decision in CTA Case No. 4724 of the Court of Tax Appeals setting aside the deficiency income tax assessment of P13,261,278.23 issued by petitioner Commissioner of Internal Revenue against respondent Cyanamid Philippines, Inc. As aptly summarized by the Court of Tax Appeals (CTA), the antecedent facts are as follows: On November 23, 1990, petitioner received a letter of assessment, dated November 14, 1990, from respondent demanding the payment of deficiency income tax allegedly arising from (a) overstatement of cost of goods due to transfer pricing of products, namely: aurofac and minocycline, which petitioner purchased from its parent company. American Cyanamid: and (b) unnecessary and unreasonable payment of royalties to the latter company for the supply of technical know-how in the processing of its own bulk products into petitioner's prepared products in the amount of thirteen million two hundred sixty one thousand two hundred seventy eight pesos and twenty three centavos (P13,261,278.23). (Exhibit "A". CTA records, pp. 9-25). In response, petitioner protested the assessment in a letter, dated December 17, 1990, received by respondent on even date, claiming that the purchase price paid by petitioner to its parent company represents fair market price, and that the physical properties and uses of aurofac and minocycline are not altogether comparable with vigofac and doxycycline, respectively. The latter are both products of Pfizer, a corporation also engaged in the same line of business as petitioner. Anent the royalty payment, petitioner contends that it is for the use of American Cyanamid's trademarks and its supply of technical know-how pursuant to licensing agreements duly registered and approved by the Central Bank of the Philippines and the Bureau of Patents. Trademarks and Technology Transfer. On July 24, 1991, petitioner wrote a supplemental letter to the respondent refuting the alleged transfer pricing scheme and expounding further on the grounds of its protest. Subsequently, respondent sent a letter, dated February 6, 1992, to the petitioner which was received on February 11, 1992, basically reiterating the original assessment and stating, to quote: "To avoid the accumulation of interest and surcharges, it is requested that you pay within ten (10) days from receipt hereof the aforesaid tax liability/ies at the Accounts Receivable/Billing Division, Room 203, BIR National Office Bldg. . . . failing in that, we shall be constrained to refer your case to the Collection Enforcement Division for the issuance of warrants of distraint and levy to enforce its collection, as provided by law, without further notice. We will appreciate your preferential attention hereon. Very truly yours, For the Commissioner of Internal Revenue (SGD.) MANUEL B. MINA Asst. Chief, Accounts Receivable/Billing Division" Petitioner deemed the preceding letter as the final decision of the respondent on the protested assessment. Hence, this instant petition. On August 28, 1995, the CTA rendered a decision granting the petition for review and cancelling the income tax assessment of P13,261,278.23 against respondent for the year 1987. Not in accord therewith, petitioner filed the instant petition contending that the CTA has no jurisdiction over the case and erred in cancelling and setting aside the 1987 deficiency income tax assessment of P13,261,278.23 against respondent. In taking cognizance of the case, the CTA ratiocinated as follows: After an exhaustive study of the material points raised, we firmly conclude that this Court has an indisputable jurisdiction over the appealed case. In the same Surigao case, the Supreme Court noted that ". . . nothing in Republic Act 1125 as amended, even remotely suggests the elements truly determinative of the appealability to the Court of Tax Appeals of a ruling of the Commissioner of Internal Revenue." It further categorically pronounced the letter of demand in question therein as unquestionably constituting the final action taken by the Commissioner where he not only demanded payment but also gave warning that in the event petitioner failed to pay, he would be constrained to enforce collection by means of the remedies provided by law. It must be observed that the present petition similarly involves a demand for payment with a warning on the issuance of warrant of distraint and levy, a collection remedy under the Tax Code. In a later case, very much akin to the surrounding circumstances, the High Court even considered a plain letter of the Chief of Manila Examiners of the Office of the Commissioner of Internal Revenue, wholly reiterating the demand by the Bureau of Internal Revenue for the settlement of the assessment already made and sans any form of warning to enforce collection in case of failure to pay, as a clear indication of the final decision of the Commissioner against the reconsideration of the disputed assessment, (Commissioner of Internal Revenue vs. Ayala Securities Corporation and the Honorable Court of Tax Appeals, 70 SCRA 209). In like manner, this Court had the occasion to pass upon as respondent's final decision, a letter coming from the Chief of Accounts Receivable/Billing Division, acting for respondent Commissioner of Internal Revenue, which reiterated the assessments made with a note thereunder on the denial of petitioner's request for reinvestigation. Afterwards, respondent therein served warrants of distraint and/or levy to enforce collection of deficiency taxes. (Oceanic Wireless Network, Inc. vs. CIR, CTA Case No. 4668, September 16, 1994). Of great concern is the fact that herein respondent never questioned the authority of the Chief of the Accounts Receivable/Billing Division to act "FOR THE COMMISSIONER OF INTERNAL REVENUE" in said CTA case. Inexplicably, respondent is now singing a different tune. Under the doctrine of estoppel in pais , the respondent has, by her own act intentionally and deliberately led this Court to believe that the Chief of the Accounts Receivable/Billing Division can act for the Commissioner of Internal Revenue, she cannot now be permitted to repudiate or change such representation to satisfy her interests, (Section 2(a), Rule 131, Revised Rules of Court). In fine, the allegations of the respondent cater only to befuddle and prolong the resolution of the merits of the case of the petitioner which in effect may deprive of vital content the import of the High Court's entreaty for the Commissioner of Internal Revenue to always indicate to the taxpayer in clear and unequivocal language her final action on the matter. There is the pressing need for fair play, regularity and orderliness of administrative action so as not to leave the taxpayer groping in the dark. (Surigao case, supra .) We fully concur with the CTA. It is a time-tested tax jurisprudence that a mere letter of the Office of the Commissioner of Internal Revenue reiterating demand for the settlement of an assessment already made constitutes the decision appealable to the CTA (Commissioner vs. Ayala Securities Corporation, 70 SCRA 204). In the case at bench, petitioner's subject letter of February 6, 1992 not only reiterates demand for the payment of respondent's tax liabilities but also contains serious warning that warrants of distraint and levy will be issued in case of non-payment. Petitioner's firm stand to resort to the remedies provided by law is unequivocably expressed in the following language: To avoid the accumulation of interest and surcharges, it is requested that you pay within ten (10) days from receipt hereof the aforesaid tax liabilities at the Accounts Receivable/Billing Division. Room 203, BIR National Office Bldg. . . Failing in that, we shall be constrained to refer your case to the Collection Enforcement Division for the issuance of warrants of distraint and levy to enforce its collection, as provided by law, without further notice . (Emphasis supplied) Undoubtedly a statement regarding resort to legal remedies embodied in a letter of demand unmistakably indicates the final nature of the determination on the disputed assessment (Surigao Electric Co. vs. CTA, 57 SCRA 523). It is worth noting that in the Surigao case , the Supreme Court merely considered it appropriate to state that the Commissioner of Internal Revenue should always indicate in clear and unequivocal language that his action on an assessment questioned by a taxpayer constitutes a final determination on the disputed assessment. LibLex It is thus clear that the tenor of the letter of demand determines the finality of an assessment. In the Ayala case , it was held that mere reiteration of the demand for immediate payment is certainly a clear indication of the firm stand of the Commissioner of Internal Revenue against the reconsideration of the disputed assessment. And, in the Surigao case , the Supreme Court ruled that a statement regarding resort to legal remedies unmistakably indicates the final nature of the determination on the disputed assessment. Needless to state, petitioner's letter of February 6, 1992 reiterating demand for payment of the assessment embodied in the letter of November 14, 1990 and warning that failure to pay the same shall result in the issuance of warrants of distraint and levy is clearly indicative of the final nature of the assessment. Anent petitioner's claim that respondent overstated its cost of sales by pricing its products by more than if not almost eight (8) times the market value of the other products having identical chemical composition and usage as those available in the local market, suffice it to state that respondent's products denominated as aurofac and minocycline possess different characteristics compared with Pfizer's products labelled as vigofac and doxycycline . It is not disputed that aurofac is classified as antibiotic while vigofac is categorized as growth promotants (Exh. "F", Table of Contents). Minocycline differs from doxycycline in that the former requires a five-step process while the latter necessitates only a three-stage process. Hence the cost of producing minocycline is higher than that of doxycycline . In this regard, the Court quotes with approval the CTA's disquisition, thus: Let us start with petitioner's aurofac vis-a-vis Pfizer's vigofac. The former contains aureomycin, an antibiotic for curing animal diseases applied at prescribed dosages. (Exhibits "F-1" and "F-2"). On the other hand, vigofac (listed as Super Vigofac in Exhibit "F-3", and Super Vigofac in Exhibit "G") is a growth promotant composed of dried extracted streptomycin meal and fermentation solubles, dried penicillin fermentation solubles, corn distillers, corn distillers dried grains, other solubles and vitamins, minerals and amino acids applied at varying dosages. It increases rate of gains and improves feed efficiency. (Exhibits "F-3" and "F-4". Super Vigofac and Growth Promotants, p. 196). At a glance, the two products are dissimilar. One is an antibiotic and the other is a growth promotant. While respondent insists that vigofac contains and antibiotic which is penicillin (TSN, October 27, 1993, p. 20), presumably from her reading of dried extracted penicillin fermentation solubles, petitioner, speaking through George N. Gagliardi, Executive Director of Biochemical and International Process Development, Agricultural Division of American Cyanamid, has explained the difference of the latter, to quote: "Q Have you had any occasion in the past to hear of competitive product such as VIGOFAC, which is manufactured by Pfizer? A Yes, I've never until recently. I never heard of VIGOFAC itself, but I'm quite familiar of the class of materials they are, which is they're known as unidentified growth factors . And they've been around for 30, 40 years in the business. But VIGOFAC is a trade name which I was not familiar with until, you know, recent involvement in this case. But unidentified growth factors have been around for many years. Q When you say unidentified growth factors, can you explain further what you mean by that, Mr. Gagliardi. prcd A These products, unidentified growth products, factors and VIGOFAC, there's three of them, which are by-products of the fermentation processes. And they're the by-products after you have removed the product you intensely want to produce, whether it be an antibiotic or an alcohol. In VIGOFAC, it contains I want to get the right terminology dried extracted streptomyces fermentation residue. What that is, after your run your fermentation for some products, you want to remove the product by an extraction process, an extraction to be done either with a solvent or by pH adjustments and it solubilizes the antibiotic. Now you make a separation and the antibiotic is removed in the liquid phase and the cake is the residue or what is not contained in the antibiotics. It is a waste product from that process ."(Exhibit "D" Deposition, dated September 16, 1992, p. 15-16, emphasis supplied.) The above statement is fully supported by a cursory reading of the literature of super vigofac which shows that it provides a low-cost and highly dependable source of unidentified growth factors (UFGs) sourced from dried fermentation solubles for increasing weight gains and feed efficiency of chicken, turkeys, etc. (Exhibits "G", CTA records, p. 451). xxx xxx xxx Minocycline uses declomycin, a natural antibiotic whereas doxycycline uses oxytetracycline, also a natural antibiotic in their respective production processes. (Petitioner's Memorandum, CTA records, p. 106 and 109). Mr. Charles Vincent Hilderbrand, manager of American Cyanamid, who had extensive experience in handling minocycline production summed up the subject this way: "Q If you were to summarize Mr. Hilderbrand, the basic difference between Doxycycline and Minocycline, how would you summarize this basic difference between Doxycycline and Minocycline? A In summary, Doxycycline uses a much cheaper and more readily-available raw material. The process is a shorter process, three steps versus Minocycline's five steps, and it, therefore, uses less raw materials. If one would review each step requiring individual raw materials, there's only three steps to require raw materials versus Minocycline's five. And assuming reasonable yields through the process, you would also say that the yield would be higher in a Doxycycline process just because there's less steps, less physical handling. In addition, the requirement for precious metal catalyst, being only one-third the requirement of the Minocycline process. You also have far less handling of very expensive precious metals and the associated recovery cost of those precious metals and replacing losses with precious metals. So it would be my expectation that the production of Doxycycline would be far cheaper and easier than the production of the complex Minocycline product. (Exhibit "C", Deposition, p. 19). Respondent's witness, Lourdes Geocaniga, on the other hand, testified on her lack of knowledge of the technical attributes of the two products but stated otherwise, to quote: "A Yes, but my point is the difference between minocycline and doxycycline you stated in your position paper that doxycycline is a third generation and minocycline is a fo[u]rth generation. But considering the price which is about eight times, is it not unreasonable the cost of improving that product is eight times more than the third generation which is doxycycline which is the product of Pfizer. That is our reason." (TSN, October 27, 1993, pp. 24-26). xxx xxx xxx Analyzing the physical characteristics and the circumstances involved in their production, minocycline is a completely different kind of antibiotic from doxycycline with each one having separate and unique chemical structure and production process. (CTA records, p. 16) It is already demonstrated that minocycline did not originate from doxycycline but rather from declomycin, another type of natural antibiotic. Also, their production process and cost of development are at variance with one another. Most important of all, there is no sufficient basis to compare the two as they are not within the same level of generation. If ever, the cost of improvement for minocycline should be gauged with another fourth generation tetracycline developed likewise from declomycin in order to produce a comparable and reliable data. Petitioner's reliance on the ruling in the cases of Schepp Co., 25 CTA 419, and Attambic Montaly Corp., 57 CIO 25, is misplaced. In said cases, royalty payments are non-deductible if the process are not susceptible of patent, copyright or trade mark and the subsidiary company is under no obligation to pay royalty to the parent company. This is not so in the instant case. The subject know-how is patentable. In fact, it is the subject of a license agreement duly registered with the Bureau of Patents, Trademark and Technology Transfer and approved by the Central Bank of the Philippines (Exhs. "H"-"H-37" and "I"). By virtue of the aforesaid license agreement, respondent subsidiary company, a domestic corporation possessing separate juridical personality, is obliged to pay American Cyanamid for the use of the secret formula or process. It is undeniable that payments for the use of technical know-how or secret formula or process may qualify as rentals and royalties for purposes of deduction. Article 13, par. (3), of the RP-US Tax Treaty defines royalties as payments of any kind received as a consideration, among others, for information concerning industrial, commercial or scientific experience. To be considered royalties, there must be transferred in this country of technology, equipment or other property where the payee has proprietary interest (BIR Ruling No. 093-89, dated May 2, 1989). Moreover, respondent's royalty payments were incurred in carrying on or which were directly attributable to, the development, management, operation and/or conduct of the trade of business in the Philippines. Hence, such payments qualify as ordinary and necessary expenses (Sec. 34, RA 8424 otherwise known as The Tax Reform Act of 1997). As regards petitioner's claim that respondent is an alter ego of parent company, American Cyanamid, the rule is well established that to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed (Del Rosario vs . NLRC, 187 SCRA 777, 780). In this regard, there is nothing on record to show that respondent is a dummy of American Cyanamid. WHEREFORE, being in accord with law and the evidence, the decision appealed from is hereby AFFIRMED in toto . Accordingly, the instant petition is DENIED. SO ORDERED. Versola and Velasco, Jr . , JJ . , concur.