Revenue v. Court Of Tax Appeals

AQUINO, J.:

This case is about the refund of a 1971 income tax amounting to P324,255. Smith Kline and French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is engaged in the importation, manufacture and sale of pharmaceuticals drugs and chemicals.

In its 1971 original income tax return, Smith Kline declared a net taxable income of P1,489,277 (Exh. A) and paid P511,247 as tax due. Among the deductions claimed from gross income was P501,040 ($77,060) as its share of the head office overhead expenses.

However, in its amended return filed on March 1, 1973, there was an overpayment of P324,255 "arising from underdeduction of home office overhead" (Exh. E).

It made a formal claim for the refund of the alleged overpayment. It appears that sometime in October, 1972, Smith Kline received from its international independent auditors, Peat, Marwick, Mitchell and Company, an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually $219,547 (P1,427,484). It further stated in the certification that the allocation was made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole.

By reason of the new adjustment, Smith Kline's tax liability was greatly reduced from P511,247 to P186,992 resulting in an overpayment of P324,255. On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue on its claim Smith Kline filed a petition for review with the Court of Tax Appeals. In its decision of March 21, 1980, the Tax Court ordered the Commissioner to refund the overpayment or grant a tax credit to Smith Kline.

The Commissioner appealed to this Court. The governing law is found in section 37 of the old National Internal Revenue Code, Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National Internal Revenue Code of 1977 and which reads: "SEC. 37.

Income form sources within the Philippines. - x x x x x x x x x "(b) Net income from sources in the Philippines. - From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income.

The remainder, if any, shall be included in full as net income from sources within the Philippines. x x x x x x x x x Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the deductions to be made to determine the net income from Philippine sources: "SEC. 160.

Apportionment of deductions. - From the items specified in section 37(a), as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines.

The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. "Example: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all sources for 1939 of P180,000, including therein: Interest on bonds of a domestic corporation P9,000 Dividends on stock of a domestic corporation 4,000 Royalty for the use of patents within the Philippines 12,000 Gain from sale of real property located within the Philippines 11,000 Total