Rules and Regulations Implementing the Provisions Relative to SSEFZ and SBMA

EN BANC [C.T.A. EB CASE NO. 534 . April 19, 2011.] (C.T.A. Case No. 7357) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ITW TEXWIPE PHILIPPINES, INC. , respondent . RESOLUTION COTANGCO-MANALASTAS , J p : For the consideration of the Court En Banc is the Motion for Reconsideration 1 filed by petitioner Commissioner of Internal Revenue (CIR), by counsel, on November 23, 2010, with a prayer that the Decision 2 of this Court promulgated on November 9, 2010 be reversed and set aside and another one be rendered ordering respondent ITW Texwipe Philippines, Inc. (ITW) to pay the amounts of P15,575,801.16 and P6,908,314.52 representing deficiency final withholding tax on royalty expenses and sales commission expense and deficiency final withholding tax on VAT, respectively, for taxable year 2000 plus 25% surcharge and 20% deficiency and delinquency interest for late payment until fully paid pursuant to Sections 248 and 249 of the National Internal Revenue Code (NIRC) of 1997. The dispositive portion of the subject Decision is quoted hereunder: "xxx xxx xxx WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED. Accordingly, the assailed Decision and Resolution dated June 17, 2009 and August 24, 2009, respectively, of the Court in Division in CTA Case No. 7357 are hereby AFFIRMED IN TOTO. SO ORDERED. xxx xxx xxx" In the said Motion , petitioner's main argument is based on the following ground: THE ASSESSMENT ON THE FINAL WITHHOLDING TAX ON ROYALTY EXPENSE HAS NOT YET PRESCRIBED, AND THAT RESPONDENT IS LIABLE FOR FINAL WITHHOLDING TAX ON SALES COMMISSION EXPENSE. Petitioner stressed that the amount sought to be collected from respondent is not the tax itself as it would be ridiculous to collect the said tax from respondent when no income flowed into its person, and that jurisprudence affirms the same citing the cases of Commissioner of Internal Revenue vs. The Court of Appeals, The Court of Tax Appeals, and A. Soriano Corp . 3 In instances of non-withholding of the tax, such as the case herein, the liability of the withholding agent becomes separate and distinct from the liability of the person on whom the tax is primarily imposed because the cause of action against the withholding agent is not for the collection of the tax but for the enforcement of the withholding tax provision of the NIRC of 1997. HSCAIT In case of breach by the agent of his legal duty, he is assessed not for the collection of income tax; he is merely penalized for failure to comply with the withholding tax provision. Therefore, the tax cannot be collected from the agent because as stated in the above-cited case of Commissioner of Internal Revenue vs. The Court of Appeals, The Court of Tax Appeals, and A. Soriano Corp. "(t)he agent is not liable for the tax as no wealth flowed into him he earned no income." The cause of action against the withholding agent is not for the collection of the tax but for the enforcement of the withholding tax provision of Section 251 of the NIRC of 1997, viz. : "SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. Any person required to withhold, account for, and remit any tax imposed by this Code or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted." Taking into consideration the foregoing provision, petitioner argued that the withholding agent is merely liable to a penalty equal to the total amount of tax not collected and remitted, thus, since the liability of the withholding agent is a penalty, the period of limitation provided in Section 203 of the NIRC of 1997 should not be applied, as the said provision prescribes a limitation only as to assessment and collection of taxes, not penalties. Petitioner asserts that: respondent incurred royalty expense (P10,700,000.00), general/administrative expenses (P3,863,130.00), and sales commission expenses (P17,911,462.00) for which income payments were made to Texwipe International LCC (Texwipe U.S.A.), a non-resident foreign corporation; respondent failed to remit any final withholding tax due on the income payments made to a non-resident foreign corporation pursuant to Section 28 (B) (1) of the NIRC of 1997 and as implemented by Section 2.57.1 (I) (1) of Revenue Regulations No. 2-98 for the entire taxable year 2000. In response to the foregoing Motion , respondent ITW filed its Comment/Opposition 4 on January 13, 2011. Respondent submits that the right of the petitioner to assess final withholding tax on royalty expense has already prescribed, and subscribes to the ratio of the Court in Division in its Decision 5 dated June 17, 2009 which rejected or overthrew the contention of petitioner that the "penalty" imposed under Section 251 is not an internal revenue tax but simply a "penalty" and thus not governed by the 3-year prescriptive period under Section 203 of the NIRC of 1997. In substance, the Court in Division pronounced that the law intended such "penalty" under Section 251 of the NIRC of 1997 to be an additional part of the deficiency withholding tax being assessed and that such pronouncement can be gleaned from the general provisions contained in Section 247, where it is categorically stated that "the additions to the tax or deficiency tax" prescribed in the chapter shall apply to "all" taxes, fees and charges imposed under the NIRC and likewise, "shall be collected at the same time, in the same manner and as part of the tax". Thereafter the Court in Division concluded that considering the penalty under Section 251 is part and parcel of a deficiency tax to be collected, the assessment notice sent by the petitioner to the respondent is undeniably subject to the 3-year prescriptive period as provided under Section 203 of the NIRC of 1997. TAcSCH Respondent also pointed out that it is not liable for final withholding income tax and value added tax on sales commission expenses paid to Texwipe U.S.A. for services rendered outside the Philippines. The provision of the Sales Commission Agreement by and between the respondent and Texwipe U.S.A., which states that the sales services are to be rendered in European Common and Asian Markets, dispels any doubt whatsoever as to the place where the services subject of said agreement were performed. Lastly, respondent maintains that the presumption in favor of the correctness of tax assessments have been sufficiently rebutted by clear and convincing evidence. Respondent submits that it has presented more than sufficient evidence to establish that the assessment for final withholding tax on royalties was issued by the petitioner well beyond the 3-year period, and it has also proven that the services under the Sales Commission Agreement were performed by Texwipe U.S.A. outside the Philippines. In a Resolution 6 dated on March 1, 2011, the instant Motion for Reconsideration was declared submitted for resolution. In light of all the arguments interposed by the parties and careful re-evaluation of the records at hand, the Court En Banc finds the Motion for Reconsideration to be bereft of merit. The conclusion in the challenged Decision of this Court was reached after a thorough review of the records at hand, taking into consideration the application of Section 203 of the NIRC of 1997 pertaining to the 3-year limitation upon assessment and collection, Section 251 of the same Code involving the provisions on statutory offenses and penalties imposed in addition to taxes, other pertinent provisions of the NIRC of 1997, and the rules of statutory construction. To recapitulate, in the said Decision , the Court En Banc sustained the ruling of the Court in Division that, with respect to the final withholding tax on the royalty expenses , the prescriptive period under Section 203 of the NIRC of 1997 applies in the instant case, taking into account that the BIR issued the deficiency final withholding tax assessment on royalties only on May 31, 2005 or more than 3 years after the filing of the return on August 27, 2001, the assessment on royalty expense has already prescribed. Moreover, by simply reading the text of the challenged Decision , one can easily verify that this Court has already addressed the contention of petitioner that the "penalty" imposed under Section 251 is not an internal revenue tax but simply a "penalty" and thus not governed by the 3-year prescriptive period under Section 203 of the NIRC of 1997. The Court En Banc affirmed the findings of the Court in Division that the penalty under Section 251 of the NIRC of 1997 falls under the provisions on statutory offenses and penalties imposed in addition to taxes, thus, they are considered as additional part of the deficiency taxes, and they are assessed and collected at the time the primary taxes are assessed and collected which is within the 3-year prescriptive period. Hence, inasmuch as the period for the assessment of deficiency final withholding tax on royalty expenses has already prescribed, it follows that any assessment over the penalty imposed on said tax has also prescribed. cHCIEA As to respondent's liability for final withholding tax on sales commission expense, We stand by our ruling that the income of Texwipe U.S.A. arising from the services it rendered for respondent ITW should not be subject to final withholding tax in the Philippines, having established through the Sales Commission Agreement entered into between respondent ITW and Texwipe U.S.A. that the sales services were performed outside the Philippines. Clearly, petitioner's Motion for Reconsideration failed to present new matters or issues for the consideration of this Court. As can be readily observed, the issues and arguments raised therein were a mere rehash of the issues exhaustively and sufficiently PASSED UPON and RESOLVED by this Court in its Decision promulgated on November 9, 2010. Hence, We find no plausible reason to disturb the ruling of this Court in the assailed Decision. WHEREFORE , premises considered, the Motion for Reconsideration of petitioner Commissioner of Internal Revenue is hereby DENIED for lack of merit. SO ORDERED. (SGD.) AMELIA R. COTANGCO-MANALASTAS Associate Justice Ernesto D. Acosta, P.J., Juanito C. Castaeda, Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino and Cielito N. Mindaro-Grulla, JJ., concur. Footnotes 1. Rollo , pp. 138-146. 2. Rollo , pp. 119-133. 3. G.R. No. 108576, January 20, 1999. 4. Rollo , pp. 153-161. 5. Rollo , pp. 25-44. 6. Rollo , pp. 181-182.