COLGATE-PALMOLIVE PHILIPPINES, INC., PETITIONER, VS. COMMISSIONER OF CUSTOMS, RESPONDENT.

Colgate-Palmolive Philippines versus Commissioner of Customs

The Case

This is a petition for review on certiorari brought by Colgate-Palmolive Philippines, Inc. against the Commissioner of Customs, asking the Supreme Court to overturn the rulings of the Court of Tax Appeals in a customs valuation dispute. The Commissioner of Customs had assessed the company for deficiency customs duties and value-added tax on royalty payments made to its foreign parent, on arrastre and wharfage fees, plus surcharges and delinquency interest. The case matters because it is the Court's clearest statement of the three-pronged test for when royalties and license fees become part of the dutiable value of imported goods, and because it fixes the tax treatment of arrastre and wharfage charges as "other charges" under the value-added tax on importation.

Procedural History

The Commissioner of Customs issued an audit notification letter in October 2006, and after the Post-Entry Audit Group issued its findings and a final audit report, the Commissioner affirmed the assessment in a letter dated May 5, 2008. The company filed a petition for review with the First Division of the Court of Tax Appeals on June 24, 2008. In a decision dated January 26, 2016, the Court of Tax Appeals First Division partially granted the petition, ordering the company to pay deficiency duties and taxes on royalty fees, arrastre and wharfage in the amount of 39,373,571.93 pesos, inclusive of the 25 percent surcharge, plus delinquency interest at 20 percent per annum on the amount of 4,842,169.59 pesos from June 9, 2008 until full payment. Both sides moved for partial reconsideration, and the Division denied their motions in a resolution dated May 26, 2016.

Both the company and the Commissioner then filed petitions for review with the Court of Tax Appeals En Banc. In a decision dated January 4, 2018, the En Banc denied both petitions for lack of merit and affirmed the Division. Two justices wrote separate opinions, one concurring and one concurring and dissenting. Motions for reconsideration were denied in a resolution dated June 4, 2018. The company then filed the present petition for review on certiorari under Rule 45 of the Rules of Court, and the case reached the Supreme Court by that appeal.

Facts

Colgate-Palmolive Philippines, Inc. imported goods from its parent, Colgate-Palmolive Company, and sold them in the Philippines under the parent's patents, trademarks, trade names, packaging, trade dress, and know-how. Under a Memorandum of Agreement with the parent, the company paid a royalty of 5 percent of its total net sales of licensed products, without distinction as to whether those products were imported or locally manufactured. The agreement allowed the parent to terminate the arrangement if the company failed to pay the royalty.

On October 26, 2006, the Commissioner of Customs issued an audit notification letter, received by the company on November 7, 2006, initiating a post-entry audit of its imports from October 27, 2003 to October 26, 2006. The Post-Entry Audit Group recommended assessment of deficiency customs duties on royalties paid to the parent and deficiency value-added tax on arrastre and wharfage fees. The company objected, but the group issued a final audit report and the Commissioner affirmed it.

The company challenged the assessment before the Court of Tax Appeals. It argued that the royalties were paid for the use of intellectual property in the Philippines and were not a condition of the importation or sale of goods, that arrastre and wharfage fees were not "other charges" subject to value-added tax, and that the delinquency interest could not be imposed because the notice and demand came from the Commissioner of Customs and not the Commissioner of Internal Revenue. The tax court ruled that the royalties were dutiable, but only to the extent attributable to imported goods, and that the value-added tax on arrastre and wharfage fees was proper.

Issues

• Whether or not the Court of Tax Appeals En Banc erred in affirming that the royalty payments made by the company to its parent are dutiable under Section 201 of the Tariff and Customs Code of the Philippines.
• Whether or not the Court of Tax Appeals En Banc erred in upholding the imposition of value-added tax on arrastre and wharfage fees under Section 107 of the National Internal Revenue Code.
• Whether or not the Court of Tax Appeals En Banc erred in sustaining the imposition of delinquency interest on the assessed deficiency value-added tax on arrastre and wharfage fees.

Applicable Provisions

Section 201 of the Tariff and Customs Code of the Philippines, as amended, provides:

Section 201. Basis of Dutiable Value. (A) Method One. Transaction Value. The dutiable value of an imported article subject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding: (1) The following to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods: (e) The amount of royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods to the buyer.

This is the provision that determines whether the royalty payments must be added to the price actually paid or payable for the imported goods.

Section 107 of the National Internal Revenue Code of 1997, as amended, provides:

Section 107. Value-Added Tax on Importation. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent of the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody.

This is the provision that determines whether arrastre and wharfage fees fall within "other charges" and thus form part of the value-added tax base on importation.

Ruling

On the first issue, the Court affirmed that the royalty payments are dutiable. It held that the three-pronged test adopted by the tax court was lifted from the text of Section 201 of the Tariff and Customs Code: royalties are dutiable if they are related to the goods being valued, the relationship test; if they are paid by the buyer to the seller, directly or indirectly, the payment test; and if the payment is a condition of the sale of the goods to the buyer, the condition test. On the relationship test, the Court noted that the royalties were computed at 5 percent of net sales of licensed products regardless of source, and that the imported goods bore the licensed trademark or were manufactured using the licensed patent or know-how. On the payment test, it was undisputed that the company paid the royalties directly to the parent. On the condition test, the Court asked whether the buyer could purchase the imported goods without paying the royalty, and answered that it could not, because the agreement allowed the parent to terminate upon the company's failure to pay. The Court also sustained the exclusion of royalties attributable to locally manufactured goods, since goods manufactured in the Philippines are not importations subject to customs duties.

On the second issue, the Court affirmed the imposition of value-added tax on arrastre and wharfage fees as "other charges" under Section 107. The plain text of the provision includes "the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges."

On the third issue, the Court sustained the delinquency interest on the assessed deficiency value-added tax, consistent with the rulings below.

Doctrine

Royalties and license fees form part of the dutiable value of imported goods under the transaction value method when three requisites concur: first, the royalties are related to the goods being valued; second, they are paid by the buyer to the seller, directly or indirectly; and third, their payment is a condition of the sale of the goods to the buyer. The pivotal question in the condition test is whether the buyer could purchase the imported goods without paying the royalty; if it could not, the royalty is paid for the goods and must be added to the price. Only royalties attributable to imported goods are dutiable; royalties attributable to locally manufactured goods are excluded, because goods manufactured in the Philippines are not importations subject to customs duties. Arrastre and wharfage fees are "other charges" that form part of the value-added tax base on importation under Section 107 of the National Internal Revenue Code.

Disposition

The Supreme Court denied the petition and affirmed the rulings of the Court of Tax Appeals En Banc, holding the company liable for the assessed deficiency duties and taxes, surcharge, and delinquency interest.

Remember This

Memorize the three-pronged test for dutiable royalties: relationship, payment, and condition, with the condition test turning on whether the buyer could purchase the goods without paying the royalty. Examiners use this case in customs valuation problems involving royalties and license fees, and in value-added tax questions on whether arrastre and wharfage fees are "other charges" on importation.