Beruflich Dokumente
Kultur Dokumente
RELEVANT FACTS
CASE: (Commissioner) assails the resolution of the CA reversing the decision of the Court of Tax Appeals which in turn
denied the protest filed by respondent General Foods (Phils.), Inc., regarding the assessment made against the latter for
deficiency taxes.
June 14, 1985: respondent corporation, which is engaged in the manufacture of beverages such as "Tang,"
"Calumet" and "Kool-Aid," filed its income tax return for the fiscal year ending February 28, 1985.
o In said tax return, respondent corporation claimed as deduction, among other business expenses, the
amount of P9,461,246 for media advertising for "Tang."
May 31, 1988: The Commissioner disallowed 50% or P4,730,623 of the deduction claimed by respondent
corporation.
o Consequently, respondent corporation was assessed deficiency income taxes in the amount of P2,635,
141.42. The latter filed a motion for reconsideration but the same was denied.
September 29, 1989: respondent corporation appealed to the Court of Tax Appeals but the appeal was dismissed:
Respondent corporation filed a petition for review at the Court of Appeals which rendered a decision reversing and
setting aside the decision of the Court of Tax Appeals
(a) In general.- There shall be allowed as If the expenditures are for the advertising of the
deduction from gross income all ordinary 1st kind then, except as to the question of the
and necessary expenses paid or incurred reasonableness of amount, there is no doubt such
during the taxable year in carrying on, or expenditures are deductible as business expenses.
which are directly attributable to, the If the expenditures are for advertising of the 2nd
development, management, operation kind then normally they should be spread out
and/or conduct of the trade, business or over a reasonable period of time.
exercise of a profession.
In the case at bar: The P9,461,246 claimed as media advertising expense for "Tang"
alone was almost one-half of its total claim for "marketing expenses." Respondent-
corporation also claimed P2,678,328 as "other advertising and promotions expense"
and another P1,548,614, for consumer promotion. Furthermore, the subject
P9,461,246 media advertising expense for "Tang" was almost double the amount of
respondent corporation’s P4,640,636 general and administrative expenses.
2) We agree with the Court of Tax Appeals that the subject advertising
expense was of the second kind.
Not only was the amount staggering; the respondent corporation itself also
admitted, in its letter protest to the CIR’s assessment, that the subject
media expense was incurred in order to protect respondent corporation’s
brand franchise, a critical point during the period under review.
o The protection of brand franchise is analogous to the maintenance
of goodwill or title to one’s property. This is a capital expenditure
which should be spread out over a reasonable period of time.
o Respondent corporation’s venture to protect its brand franchise was
tantamount to efforts to establish a reputation.
o This was akin to the acquisition of capital assets and therefore
expenses related thereto were not to be considered as business
expenses but as capital expenditures.
True, 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.
In this case: The Court of Tax Appeals ruled that respondent corporation failed to
meet the two foregoing limitations. We find said ruling to be well founded.
Respondent corporation incurred the subject advertising expense in order to protect
its brand franchise. We consider this as a capital outlay since it created goodwill for
its business and/or product. The P9,461,246 media advertising expense for the
promotion of a single product, almost one-half of petitioner corporation’s entire
claim for marketing expenses for that year under review, inclusive of other
advertising and promotion expenses of P2,678,328 and P1,548,614 for consumer
promotion, is doubtlessly unreasonable.
RULING: WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the Court of Appeals
is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax Code, respondent General Foods (Phils.),
Inc. is hereby ordered to pay its deficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment
and 20% annual interest computed from August 25, 1989, the date of the denial of its protest, until the same is fully paid.