Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No.

143672 April 24, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOO S !P"ILS.#, INC., respondent. CORONA, J.$ Petitioner o!!issioner of Internal Revenue " o!!issioner# assails the resolution $ of the ourt of %ppeals reversin& the decision' of the ourt of Ta( %ppeals )hich in turn denied the protest filed b* respondent +eneral ,oods "Phils.#, Inc., re&ardin& the assess!ent !ade a&ainst the latter for deficienc* ta(es. The records reveal that, on -une $., $/01, respondent corporation, )hich is en&a&ed in the !anufacture of bevera&es such as 2Tan&,2 2 alu!et2 and 23ool4%id,2 filed its inco!e ta( return for the fiscal *ear endin& ,ebruar* '0, $/01. In said ta( return, respondent corporation clai!ed as deduction, a!on& other business e(penses, the a!ount of P/,.5$,'.5 for !edia advertisin& for 2Tan&.2 On Ma* 6$, $/00, the o!!issioner disallo)ed 178 or P.,967,5'6 of the deduction clai!ed b* respondent corporation. onse:uentl*, respondent corporation )as assessed deficienc* inco!e ta(es in the a!ount of P',561, $.$..'. The latter filed a !otion for reconsideration but the sa!e )as denied. On Septe!ber '/, $/0/, respondent corporation appealed to the appeal )as dis!issed; ourt of Ta( %ppeals but the

<ith such a &ar&antuan e(pense for the advertise!ent of a sin&ular product, )hich even e(cludes 2other advertisin& and pro!otions2 e(penses, )e are not prepared to accept that such a!ount is reasonable 2to sti!ulate the current sale of !erchandise2 re&ardless of Petitioner=s e(planation that such e(pense 2does not connote unreasonableness considerin& the &rave econo!ic situation ta>in& place after the %:uino assassination characteri?ed b* capital fi&ht, stron& deterioration of the purchasin& po)er of the Philippine peso and the slac>in& de!and for consu!er products2 "Petitioner=s Me!orandu!, T% Records, p. '96#. <e are not convinced )ith such an e(planation. The sta&&erin& e(pense led us to believe that such e(penditure )as incurred 2to create or !aintain so!e for! of &ood )ill for the ta(pa*er=s trade or business or for the industr* or profession of )hich the ta(pa*er is a !e!ber.2 The ter! 2&ood )ill2 can hardl* be said to have an* precise si&nification@ it is &enerall* used to denote the benefit arisin& fro! connection and reputation "<ords and Phrases, Vol. $0, p. 115 citin& Douhart vs. Loagan, 05 III. %pp. '/.#. %s held in the case of Welch vs. Helvering, efforts to establish reputation are a>in to ac:uisition of capital assets and, therefore, e(penses related thereto are not business e(penses but capital e(penditures. "Atlas Mining and Development Corp. vs. Commissioner of Internal Revenue , supra#. ,or sure such e(penditure )as !eant not onl* to &enerate present sales but !ore for future and prospective benefits. Hence, 2abnor!all* lar&e e(penditures for advertisin& are usuall* to be spread over the period of *ears durin& )hich the benefits of the e(penditures are received2 "Mertens, supra, citing Colonial Ice Cream Co., 9 AT% $1.#.

<HBRB,ORB, in all the fore&oin&, and findin& no error in the case appealed fro!, )e hereb* RBSOCVB to DISMISS the instant petition for lac> of !erit and ORDBR the Petitioner to pa* the respondent o!!issioner the assessed a!ount of P',561,$.$..' representin& its deficienc* inco!e ta( liabilit* for the fiscal *ear ended ,ebruar* '0, $/01.26 %&&rieved, respondent corporation filed a petition for revie) at the ourt of %ppeals )hich rendered a decision reversin& and settin& aside the decision of the ourt of Ta( %ppeals; Since it has not been sufficientl* established that the ite! it clai!ed as a deduction is e(cessive, the sa!e should be allo)ed. <HBRB,ORB, the petition of petitioner +eneral ,oods "Philippines#, Inc. is hereb* +R%NTBD. %ccordin&l*, the Decision, dated 0 ,ebruar* $//. of respondent ourt of Ta( %ppeals is RBVBRSBD and SBT %SIDB and the letter, dated 6$ Ma* $/00 of respondent o!!issioner of Internal Revenue is %N BCCBD. SO ORDBRBD.. Thus, the instant petition, )herein the o!!issioner presents for the ourt=s consideration a lone issue; )hether or not the subDect !edia advertisin& e(pense for 2Tan&2 incurred b* respondent corporation )as an ordinar* and necessar* e(pense full* deductible under the National Internal Revenue ode "NIR #. It is a &overnin& principle in ta(ation that ta( e(e!ptions !ust be construed in strictissimi juris a&ainst the ta(pa*er and liberall* in favor of the ta(in& authorit*@ 1 and he )ho clai!s an e(e!ption !ust be able to Dustif* his clai! b* the clearest &rant of or&anic or statute la). %n e(e!ption fro! the co!!on burden cannot be per!itted to e(ist upon va&ue i!plications. 5 Deductions for inco!e ta( purposes parta>e of the nature of ta( e(e!ptions@ hence, if ta( e(e!ptions are strictl* construed, then deductions !ust also be strictl* construed. <e then proceed to resolve the sin&ular issue in the case at bar. <as the !edia advertisin& e(pense for 2Tan&2 paid or incurred b* respondent corporation for the fiscal *ear endin& ,ebruar* '0, $/01 2necessar* and ordinar*,2 hence, full* deductible under the NIR E Or )as it a capital e(penditure, paid in order to create 2&ood)ill and reputation2 for respondent corporation andFor its products, )hich should have been a!orti?ed over a reasonable periodE Section 6. "%# "$#, for!erl* Section '/ "a# "$# "%#, of the NIR "%# E penses.4 "$# !rdinar" and necessar" trade# $usiness or professional e penses .4 "a# In general.4 There shall be allo)ed as deduction fro! &ross inco!e all ordinar* and necessar* e(penses paid or incurred durin& the ta(able *ear in carr*in& on, or )hich are directl* attributable to, the develop!ent, !ana&e!ent, operation andFor conduct of the trade, business or e(ercise of a profession. Si!pl* put, to be deductible fro! &ross inco!e, the subDect advertisin& e(pense !ust co!pl* )ith the follo)in& re:uisites; "a# the e(pense !ust be ordinar* and necessar*@ "b# it !ust have been paid or incurred durin& the ta(able *ear@ "c# it !ust have been paid or incurred in carr*in& on the trade or business of the ta(pa*er@ and "d# it !ust be supported b* receipts, records or other pertinent papers.9 provides;

The parties are in a&ree!ent that the subDect advertisin& e(pense )as paid or incurred )ithin the correspondin& ta(able *ear and )as incurred in carr*in& on a trade or business. Hence, it )as necessar*. Ho)ever, their vie)s conflict as to )hether or not it )as ordinar*. To be deductible, an advertisin& e(pense should not onl* be necessar* but also ordinar*. These t)o re:uire!ents !ust be !et. The o!!issioner !aintains that the subDect advertisin& e(pense )as not ordinar* on the &round that it failed the t)o conditions set b* G.S. Durisprudence; first, 2reasonableness2 of the a!ount incurred and second, the a!ount incurred !ust not be a capital outla* to create 2&ood)ill2 for the product andFor private respondent=s business. Other)ise, the e(pense !ust be considered a capital e(penditure to be spread out over a reasonable ti!e. <e a&ree. There is *et to be a clear4cut criteria or fi(ed test for deter!inin& the reasonableness of an advertisin& e(pense. There bein& no hard and fast rule on the !atter, the ri&ht to a deduction depends on a nu!ber of factors such as but not li!ited to; the t*pe and si?e of business in )hich the ta(pa*er is en&a&ed@ the volu!e and a!ount of its net earnin&s@ the nature of the e(penditure itself@ the intention of the ta(pa*er and the &eneral econo!ic conditions. It is the interpla* of these, a!on& other factors and properl* )ei&hed, that )ill *ield a proper evaluation. In the case at bar, the P/,.5$,'.5 clai!ed as !edia advertisin& e(pense for 2Tan&2 alone )as al!ost one4half of its total clai! for 2!ar>etin& e(penses.2 %side fro! that, respondent4 corporation also clai!ed P',590,6'0 as 2other advertisin& and pro!otions e(pense2 and another P$,1.0,5$., for consu!er pro!otion. ,urther!ore, the subDect P/,.5$,'.5 !edia advertisin& e(pense for 2Tan&2 )as al!ost double the a!ount of respondent corporation=s P.,5.7,565 &eneral and ad!inistrative e(penses. <e find the subDect e(pense for the advertise!ent of a sin&le product to be inordinatel* lar&e. Therefore, even if it is necessar*, it cannot be considered an ordinar* e(pense deductible under then Section '/ "a# "$# "%# of the NIR . %dvertisin& is &enerall* of t)o >inds; "$# advertisin& to sti!ulate the current sale of !erchandise or use of services and "'# advertisin& desi&ned to sti!ulate the future sale of !erchandise or use of services. The second t*pe involves e(penditures incurred, in )hole or in part, to create or !aintain so!e for! of &ood)ill for the ta(pa*er=s trade or business or for the industr* or profession of )hich the ta(pa*er is a !e!ber. If the e(penditures are for the advertisin& of the first >ind, then, e(cept as to the :uestion of the reasonableness of a!ount, there is no doubt such e(penditures are deductible as business e(penses. If, ho)ever, the e(penditures are for advertisin& of the second >ind, then nor!all* the* should be spread out over a reasonable period of ti!e. <e a&ree )ith the ourt of Ta( %ppeals that the subDect advertisin& e(pense )as of the second >ind. Not onl* )as the a!ount sta&&erin&@ the respondent corporation itself also ad!itted, in its letter protest0 to the o!!issioner of Internal Revenue=s assess!ent, that the subDect !edia e(pense )as incurred in order to protect respondent corporation=s brand franchise, a critical point durin& the period under revie). The protection of brand franchise is analo&ous to the !aintenance of &ood)ill or title to one=s propert*. This is a capital e(penditure )hich should be spread out over a reasonable period of ti!e./ Respondent corporation=s venture to protect its brand franchise )as tanta!ount to efforts to establish a reputation. This )as a>in to the ac:uisition of capital assets and therefore e(penses related thereto )ere not to be considered as business e(penses but as capital e(penditures. $7

True, it is the ta(pa*er=s prero&ative to deter!ine the a!ount of advertisin& e(penses it )ill incur and )here to appl* the!.$$ Said prero&ative, ho)ever, is subDect to certain considerations. The first relates to the e(tent to )hich the e(penditures are actuall* capital outla*s@ this necessitates an in:uir* into the nature or purpose of such e(penditures. $' The second, )hich !ust be applied in har!on* )ith the first, relates to )hether the e(penditures are ordinar* and necessar*. onco!itantl*, for an e(pense to be considered ordinar*, it !ust be reasonable in a!ount. The ourt of Ta( %ppeals ruled that respondent corporation failed to !eet the t)o fore&oin& li!itations. <e find said rulin& to be )ell founded. Respondent corporation incurred the subDect advertisin& e(pense in order to protect its brand franchise. <e consider this as a capital outla* since it created &ood)ill for its business andFor product. The P/,.5$,'.5 !edia advertisin& e(pense for the pro!otion of a sin&le product, al!ost one4half of petitioner corporation=s entire clai! for !ar>etin& e(penses for that *ear under revie), inclusive of other advertisin& and pro!otion e(penses of P',590,6'0 and P$,1.0,5$. for consu!er pro!otion, is doubtlessl* unreasonable. It has been a lon& standin& polic* and practice of the ourt to respect the conclusions of :uasi4 Dudicial a&encies such as the ourt of Ta( %ppeals, a hi&hl* speciali?ed bod* specificall* created for the purpose of revie)in& ta( cases. The T%, b* the nature of its functions, is dedicated e(clusivel* to the stud* and consideration of ta( proble!s. It has necessaril* developed an e(pertise on the subDect. <e e(tend due consideration to its opinion unless there is an abuse or i!provident e(ercise of authorit*.$6 Since there is none in the case at bar, the ourt adheres to the findin&s of the T%. %ccordin&l*, )e find that the ourt of %ppeals co!!itted reversible error )hen it declared the subDect !edia advertisin& e(pense to be deductible as an ordinar* and necessar* e(pense on the &round that 2it has not been established that the ite! bein& clai!ed as deduction is e(cessive.2 It is not incu!bent upon the ta(in& authorit* to prove that the a!ount of ite!s bein& clai!ed is unreasonable. The burden of proof to establish the validit* of clai!ed deductions is on the ta(pa*er.$. In the present case, that burden )as not dischar&ed satisfactoril*. %"EREFORE, pre!ises considered, the instant petition is +R%NTBD. The assailed decision of the ourt of %ppeals is hereb* RBVBRSBD and SBT %SIDB. Pursuant to Sections '.0 and './ of the Ta( ode, respondent +eneral ,oods "Phils.#, Inc. is hereb* ordered to pa* its deficienc* inco!e ta( in the a!ount of P',561,$.$..', plus '18 surchar&e for late pa*!ent and '78 annual interest co!puted fro! %u&ust '1, $/0/, the date of the denial of its protest, until the sa!e is full* paid. SO OR ERE . %uno# &Chairman'# %angani$an# (andoval)*utierre+# and Carpio)Morales# ,,.# concur.

Foo&'o&() Penned b* %ssociate -ustice %ndres A. Re*es and concurred in b* %ssociate -ustices Huirino D. %bad Santos, -r. and Ro!eo %. Ara)ner of the Third Division.
$

Penned b* %ssociate -ud&e Manuel 3. +ruba and concurred in b* %ssociate -ud&e Ra!on O. de Ve*ra.
' 6

Rollo, pp. ''4'6.

Id., p. '.. Commissioner of Internal Revenue vs. -isa"an Electric Co., '6 S R% 9$1 I$/50J.

Asiatic %etrolium Co. vs. Llanas, ./ Phil .55 I$/'5J cited in Davao Light . %o/er Co. vs. Commissioner of Customs, .. S R% $'' I$/9'J.
5 9

0amora vs. Collector, 0 S R% $56 I$/56J.

Dated -une $., $/00@ Petition for Revie), p. 0 citin& AIR Records, pp. $/04$//@ Rollo, p. $1.
0 /

Mertens, Vol. .% '1.60 p. $/7 citin& Colonial Ice Cream Co., 9 AT% $1.. Welch vs. Helvering, '/7 GS $$$ I$/66J. Revenue %udit Me!orandu! Order No. $409. Mertens, Vol. .% '1.60 p.$/7, citin& E.H. (heldon . Co.# $/ T .0$ I$/1'J.

$7

$$

$'

Commissioner vs. Court of 1a Appeals . Atlas Consolidated Mining and Development Co., '7. S R% $0' I$//$J.
$6 $.

Commissioner vs. Algue# Inc., $10 S R% / I$/00J.