Thursday, January 20, 2005

Is the CTA an administrative body?

Is the CTA an administrative body?

Updated 01:40am (Mla time) Jan 15, 2005
By Isagani Cruz
Inquirer News Service

Editor's Note: Published on page A14 of the January 15, 2005 issue of the Philippine Daily Inquirer

COMPANIES spend a lot of money to advertise their products, especially now with TV and radio facilities, as well as billboards, available to supplement the print media. Advertisements in newspapers and magazines are by themselves already enough to overwhelm the consuming public, but the successful advertising agencies do not believe in half-measures. They must go whole-hog to impress the public with their exaggerations.

Commercial interruptions are often exasperating, and advertisements in periodicals often crowd out the substantial matters, like the news and articles for which the reader buys the issue in the first place. The individual in the modern ambience has no choice. Watching or listening to a boxing bout, for example, means he will have to abide the commercials, too. If he missed the show on TV or the radio, he will have to plow through pages of come-ons for bras and airlines and medicines and what-have-you if he wants to read about the fight later on the sports pages.

The sad part is that for all their unwelcome ubiquity, these advertisements will be charged to the consumers they have irritated. Their cost, including the talent fees of the celebrities that could run to tens of millions of pesos, will be added to the price of the product. Those who patronize the things or services being sold (which are not as good as their hyperbolic sales talk) are paying for those fees although not many realize it.

As if that were not enough, the advertisements will also be claimed as deductible expenses when these companies file their income tax returns. The reason they can be extravagant in promoting their products is that they are able to get away with their claims if the tax examiners are not so vigilant or are questionably permissive. The savings to the claiming corporations can be tremendous. In effect, the companies will have successfully advertised their products for free, with the customers and the government footing the bill.

That is why I was glad when I read the case of Commissioner of Internal Revenue v. General Foods (Phil), Inc., 401 SCRA 545, where the government was sustained against the respondent's claim. Its deduction of more than P9 million for advertising was slammed down by the BIR.

In its income tax return for 1985, the respondent claimed as deduction, among other business expenses, the amount of P9,461,246 for media advertising for "Tang." In 1988, the BIR disallowed 50 percent of the deduction claimed, and the corporation appealed to the Court of Tax Appeals. The CTA dismissed the appeal, and the respondent went to the Court of Appeals, where it was sustained. The BIR then elevated the case to the Supreme Court, which affirmed the decision of the Court of Tax Appeals.

The high tribunal held that "it is the taxpayer's prerogative to determine the amount of advertising expenses it will incur and where to apply them. Said prerogative, however, is subject to certain considerations. The first relates to the extent to which such expenditures are actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures. The second, which must be applied in harmony with the first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that respondent corporation failed to meet the two foregoing limitations.... We find said ruling to be well-founded."

The unanimous decision of the Third Division is perfectly acceptable except for the following portion that must have confused many members of the bar and the bench:

"It has been a long-standing policy and practice of the Court to respect the conclusions of quasi-judicial agencies such as the Court of Tax Appeals, a highly specialized body specifically created for the purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems. It has necessarily developed an expertise on the subject. We extend due consideration to its opinion unless there is abuse or improvident exercise of its authority. Since there is none in the case at bar, the Court adheres to the findings of the CTA." (Emphasis mine.)

The CTA a quasi-judicial body? In Ursal v. Court of Tax Appeals, 101 Phil. 209, it was held that "instead of being another superior administrative agency, as was the former Board of Tax Appeals, the Court of Tax Appeals as created by Republic Act No. 1125 is part of the judicial system." In other words, it is a court of justice. Has the Supreme Court reversed that decision with the above-quoted obiter dictum or has it forgotten its own rulings? I believe a clarification is in order for the benefit of the legal profession.


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