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Administrative Judgment of Taipei High Administrative Court

Case No: 2001/6015 Date: Oct. 30, 2002  

Plaintiff: Babcock & Wilcox International Investments Co. Inc.
Defendant: Taipei National Tax Administration, Ministry of Finance

Introduction

The Plaintiff Babcock & Wilcox International Investments Co. Inc. did not accept the decision No. 0890045479, made by the Defendant Ministry of Finance on Aug. 29, 2001 regarding business income tax. The Plaintiff submitted an administrative litigation to this court. The case is now completed.

Approved Judgment
The administrative litigation submitted by the Plaintiff was dismissed.
The litigation cost shall be paid by the Plaintiff.

Facts

I. Brief:
The Plaintiff declared total business income of NTD56,298,783 while filing Business Income Tax Statement of 1995. Based on Explanatory Decree No. 16118 issued on May 17, 1985 and No. 770526922 issued on March 28, 1988 by the MOF, the Defendant determined that total income the Plaintiff rising from the project under contract with Taiwan Power Company should be NTD182,653,862. The Plaintiff did not accept the decision and applied for a double check. With no change on the decision, the Plaintiff submitted the appeal which was finally dismissed. In the end, the plaintiff submitted administrative litigation.

II. Appeals:

 1. The Plaintiff: Original penalty, decision of double check and decision of appeal must be canceled.
 2. The Defendant: Litigation of the Plaintiff must be dismissed.

III. Dispute:

Whether the procurement contract of boilers for No.5-No.8 stations in Taichung Thermal Power Plant between the plaintiff and Taiwan Power Company is subject to a contract for labor and material in construction or just a contract of purchase?

 1.The plaintiff claims:
The plaintiff, Babcock & Wilcox International Investments Co. Inc., established an independent book of account and calculated the business income for filing Business Income Tax Return in accordance with Article 41 of Income Tax Act. Business rendered in the Republic of China (R.O.C) by the Plaintiff in 1995 were as follows:
   a. Equipment procurement: Procurement of partial equipments of Kaohsiung Dalin No. 6 generator for Taiwan Power Company; Procurement of boilers for No.5-No.8 stations in Taichung Thermal Power Plant; Procurement of sulfur elimination system for No.5-No.8 stations in Taichung Thermal Power Plant. Since cost of supply contract was easy to be determined, business income was calculated based on actual cost. Items and unit price of procured equipments were specified in the contract signed between the Plaintiff and Taiwan Power Company. Calculations of price were based on FOB for shipping port delivery (overseas procurement) or FOB for Taichung plant delivery (local procurement). Since the overseas procurement was completed in the name of Taiwan Power Company, income of such procurement was not subject to business income within the territory of R.O.C. of the Plaintiff. Local procurement was completed by the Plaintiff and the equipments were installed by Taiwan Power Company. Condition of the transaction showed that the procurement contract was subject to supply contract which did not cover the service of installation. The contract must not be subject to a contract for labor and material in construction and Explanatory Decree No. 16118 No. 770526922 must not be applied.
   b. Technical consulting: Consulting and training services of Kaohsiung Dalin No. 6 generator for Taiwan Power Company; Installation and testing consulting for boilers of No.5-No.8 stations in Taichung Thermal Power Plant; Necessary training and consulting services for engineers and operators of Taiwan Power Company for sulfur elimination system for No.5-No.8 stations in Taichung Thermal Power Plant. Consulting service contract signed between the Plaintiff and Taiwan Power Company showed that services provided by the Plaintiff only covered technical consulting services regarding installation, testing, operation and maintenance of the equipments procured by Taiwan Power Company. Installation or testing was not completed by the Plaintiff.
     2) Any profit-seeking enterprise having its head office outside the territory of the Republic of China, and which is engaged in providing technical services and the cost and expenses of which are difficult to calculate may apply for approval from the Ministry of Finance in accordance with Article 25 of Income Tax Act. According to Article 24 of Auditing Standards of Taxation, in case the enterprise is engaged in two or more projects in the same year, cost of project must be calculated separately. The Plaintiff signed three procurement contracts and three technical consulting service contracts. Costs of two consulting service contracts are difficult to calculate and the Plaintiff applied for approval from MOF. Costs of other contracts were easy to calculate according to Article 24 of Auditing Standards of Taxation. The Defendant and relevant government authority did not comply with related regulations in Income Tax Act and did not investigate nature of each project before they decided that since the business income of service contract for installation and testing consulting for boilers of No.5-No.8 stations in Taichung Thermal Power Plant could be calculated based on Article 25 of Income Tax Act, business income of all other contract could also be calculated base on the same regulation, i.e., business income shall be 15% of all revenue.
     3) Service contract for sulfur elimination system for No.5-No.8 stations in Taichung Thermal Power Plant signed between The Plaintiff and Taiwan Power Company was not of the nature of integral projection contract for No.5-No.8 stations in Taichung Thermal Power Plant??decided by the Defendant and government authority. The fact that Taiwan Power Company paid the Plaintiff for procurement and technical consulting service was part of the whole project.
     4) Documents regarding responsible persons and contracts of the Plaintiff and Taiwan Power Company showed that the nature of boiler procurement shall not be subject to contract for labor and material.
     5) According to Explanatory Decree No. 7575300 issued on Jan 9, 1987, goods selling to local client shall be recognized as general international trade instead of business income within the territory of Taiwan.

 2.The Defendant claims:
Reasons
I. First paragraph of Article 25 of Income Tax Act,
II. Total income
III. The contract
IV. Not influencing the final judgment, other statements of both parties will not be discussed.
V. Without reasonable claim in the appeal of the plaintiff, the approved judgment are made as above in accordance with third paragraph of Article 98 of Administrative Litigation Law.

Presiding Judge: Zheng Chung-Jen
JUDGE: Lin Yu-Ru, Yang Li-li
Reference
Income Tax Act

Article 25
Any profit-seeking enterprise having its head office outside the territory of the Republic of China, and which is engaged in international transport, construction contracting, providing technical services, or machinery and equipment leasing, etc., in the territory of the Republic of China, and the cost and expenses of which are difficult to calculate may apply for approval from the Ministry of Finance, or the Ministry of Finance may make the decision to consider ten per cent of its total business revenue for an enterprise engaged in international transport business, or fifteen per cent of its total business revenue for one engaged in any other businesses as its income derived within the territory of the Republic of China regardless whether or not it has a branch office or business agent in the territory of the Republic of China. In such cases, however, the regulation in Article 39 regarding the deduction of losses cannot be applied.
Business revenue derived by an international transport enterprise within the Republic of China as provided in the preceding paragraph shall be as follows:
  1. Marine transport enterprises: Referring to all ticket fares or transportation charges for outbound passengers and cargo accepted for carriage inside the territory of the Republic of China;
  2. Air transport enterprises:
    (1) Passenger transport: refers to ticket fares from the stations of embarkation inside the territory of the Republic of China to first-leg stations outside the territory of the Republic of China,
    (2) Cargo transport: refers to freight charges for the entire trip for the cargo accepted for carriage. However, whereas an international air transport enterprise has transshipped its outbound cargo enroute to an aircraft of another international air transport enterprise due to the route restrictions or other reasons, its freight charges shall be calculated according to the distance of the trip actually made.
First-leg stations outside the territory of the Republic of China as provided in item 2 of the preceding paragraph shall be prescribed by decree of the Ministry of Finance


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