Alert on PPh Article 23! Tax Court Decision Affirms Toll Manufacturing Services Remain Subject to Withholding, Despite PPN Payment

Tax Court Decision on PPh Article 23 Dispute on Toll Manufacturing Fees of PT SAR

The Tax Court, in its Decision Number PUT-007042.12/2024/PP/M.XVIIIB Tahun 2025, provides a crucial legal affirmation regarding the application of Income Tax Article 23 (PPh Article 23) to Toll Manufacturing service fees. The dispute between PT SAR and the Director General of Taxes centered on a PPh Article 23 correction made due to the Taxpayer's failure to withhold tax on service fees paid, an obligation explicitly stipulated in Minister of Finance Regulation Number 141/PMK.03/2015 which categorizes Toll Manufacturing Services (Jasa Maklon) as a "type of other service."

Core Conflict and Differing Legal Classifications of the Transaction

The core conflict in this dispute lies in the differing legal classifications of the transaction. The Petitioner consistently argued that the payment constituted a purchase of goods with a unified price, supported by the fact that the transaction had been subjected to Value Added Tax (PPN). In the Taxpayer's view, applying PPh Article 23 would lead to an undue double taxation, since PPN was already charged on the total value. Conversely, the Respondent (Director General of Taxes) upheld the essential characteristics of Toll Manufacturing as stipulated in the regulation: ownership of raw materials and the final product remains with the Petitioner (the service recipient), while the service provider merely conducts the production or processing.

Judicial Consideration on Substance and Partial Grant Verdict

The Tax Court Judges delivered a firm legal consideration by strengthening the Respondent's viewpoint on the transaction's substance. The Judges ruled that the service provision characteristics—involving the Petitioner's supply of most raw materials/specifications and their retention of ownership over the final product—definitively met the criteria for Toll Manufacturing Services. Consequently, the Judges validated the PPh Article 23 correction made by the Respondent. However, the decision did not entirely reject the Taxpayer's petition. The Court issued a Partial Grant verdict after quantitatively assessing the Tax Base (DPP). The discovery of certain transactions that did not meet the Toll Manufacturing criteria or had been subjected to other types of tax withholding prompted the Judges to reduce the PPh Article 23 Tax Base value, thus legally upholding the correction but revising its amount.

Key Takeaways and Documentation Recommendations for Taxpayers

This decision underscores the importance of adequate contractual and invoice documentation. To prevent similar disputes, Taxpayers are advised to ensure a clear separation within contracts, explicitly distinguishing the service fee (which is subject to PPh Article 23) from reimbursement or material costs (which are excluded from the gross amount). The implication of this Partial Grant is the reaffirmation that the juridical essence of Toll Manufacturing in the context of PPh Article 23 will always take precedence over its PPN treatment, while simultaneously allowing Taxpayers to prove a reduction in the Tax Base if non-service components are present in the invoice.

.A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here