Author: Kycia Cue
part of any expenses, losses, or other deductions which cannot definitely be
CIR v. CTA and Smith Kline & French Overseas Co. (1984)
Petitioner: Commissioner on Internal Revenue
Respondent: CTA, Smith Kline & French Overseas Co.
Ponente: Aquino, J.
DOCTRINE:
A company’s local branch may claim overhead expenses as deductions
based on the ratio of the local branch’s gross income to the total gross
income of its parent company
FACTS:
1. Smith Kline and French Overseas Company, is a multinational firm domiciled in
Philadelphia, Pennsylvania, which is licensed to do business in the Philippines. It is
engaged in the importation, manufacture and sale of pharmaceuticals drugs and
chemicals.
2. In its 1971 original income tax return, Smith Kline claimed as deductions, a
proportion of the overhead expenses of the head office (P501,040), pursuant to
their service agreement.
3. Smith Kline however amended its income returns in March 1973 claiming that it
had made an overpayment of P324,255 "arising from under-deduction of home
office overhead" as determined by Smith Kline’s independent auditors, Peat,
Marwick, Mitchell and Company where they determined that the unallocated
overhead expenses of the main office for the year 1971 was actually P1,427,484
and that, the allocation was made based on the percentage of gross income in the
Philippines to gross income of the corporation as a whole (pursuant to tax laws).
4. By reason of the new adjustment, Smith Kline's tax liability should only be
P186,992 instead of P511,247 to P186,992 resulting in an overpayment
of P324,255.
5. Smith Kline then filed a petition for review with CTA, without waiting for the action
of the CIR on it’s claim.
6. CTA ordered CIR to refund to Smith Kline. CIR appealed.
ISSUES: WON there was overpayment by Smith Kline
PROVISION: NIRC SEC. 37
SEC. 37. Income form sources within the Philippines. —
(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
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.
REV REG 2, SEC. 160. Apportionment of deductions. —….The ratable part is
based upon the ratio of gross income from sources within the Philippines to the total
gross income.
RULING + RATIO: YES
1. Smith Kline’s claim for deduction based on the ratable portion of the overhead
expenses is correct. The amount of P1,427,484 represents the correct ratable
share, the same having been computed pursuant to section 37(b) and section 160.
2. The Tax Court correctly held that the refund or credit of the resulting
overpayment is in order.
3. RULE: Deductions on Gross income from sources in the Phil include
- apportioned or allocated expenses, losses, and other deductions
- AND a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of GI
- The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
- The remainder, if any, shall be included in full as net income from
sources within the Philippines.
4. Overhead expenses are expenses incurred by the parent company in connection
with finance, administration, and research and development, all of which direct
benefit its branches all over the world.
DISPOSITION: WHEREFORE, the decision of the Tax Court is hereby affirmed. No
costs.
EXTRA INFO
CIR claims that allowing Smith to claim more than the deduction agreed upon in the
service contract would violate the cardinal rule that a contract is the law between
contracting parties.
Smith Kline was saying that the contract cannot amend existing tax laws and
regulations.
Peat, Marwick, Mitchell and Company certification and Sycip audit report
GI (all soures) = P44,812,766
GI (phil source) = P7,143,155
Ratio: 15.94%
Smith Kline’s share of the home office overhead expenses = 15.94% of the total
expenses= P1,427,484.