ABS CBN Broadcasting vs. CTA [G.R. No. L-52306. October 12, 1981.

]
First Division, Melencio-Herrera (J): 4 concurring
Facts: ABS-CBN Broadcasting Corporation was engaged in the business of telecasti
ng local as well as
foreign films acquired from foreign corporations not engaged in trade or busines
s within the Philippines, for
which it paid rentals after withholding income tax of 30% of one-half of the fil
m rentals. On 12 April 1961, in
implementation of Section 24 (b) of the National Internal Revenue Code, the Comm
issioner of Internal
Revenue issued General Circular V-334. Pursuant to the foregoing, the company du
tifully withheld and turned
over to the Bureau of Internal Revenue the amount of 30% of one-half of the film
rentals paid by it to foreign
corporations not engaged in trade or business within the Philippines. The last y
ear that the company withheld
taxes pursuant to the foregoing Circular was in 1968. On 27 June 1968, RA 5431 a
mended Section 24(b) of
the Tax Code increasing the tax rate from 30% to 35% and revising the tax basis
from such amount
referring to rents. etc. to gross income. On 8 February 1971, the Commissioner of
Internal Revenue issued
Revenue Memorandum Circular 4-71, revoking General Circular V-334, and holding t
hat the latter was
erroneous for lack of legal basis, because the tax therein prescribed should be bas
ed on gross income
without deduction whatever. On the basis of the new Circular, the Commissioner is
sued against the company
a letter of assessment and demand dated 16 April 1971, but allegedly released by
it and received by the
Commissioner on 12 April 1971, requiring them to pay deficiency withholding inco
me tax on the remitted
film rentals for the years 1965 through 1968 and film royalty as of the end of 1
968 in the total amount of
P525,897.06. On 5 May 1971, the company requested for a reconsideration and with
drawal of the assessment.
However, without acting thereon, the Commissioner, on 6 April 1976, issued a war
rant of distraint and levy
over the company s personal as well as real properties. The company then filed its
Petition for Review with
the Court of Tax Appeals (CTA Case 2809) whose Decision, dated 29 November 1979,
affirmed the
assessment by the Commissioner of Internal Revenue of a deficiency withholding i
ncome tax against the
company for the years 1965 to 1968 for a total amount of P525,897.06 (P75,895.24
, P99,239.18, P128,502.00
and P222,260.64), plus the surcharge and interest which have accrued thereon inc
ident to delinquency,
pursuant to Section 51(e) of the National Internal Revenue Code, as amended; wit
h the costs against the
company. Hence, the Petition for Review on Certiorari.
The Supreme Court reversed the judgment of the Court of Tax Appeals, and set asi
de the questioned
assessment; without costs.
1. General Circular V-334 (12 April 1961)
General Circular V-334 issued by Commissioner of Internal Revenue reads: In conne
ction with
Taxation Law I, 2003 ( 3 )
Haystacks (Berne Guerrero)
Section 24(b) of Tax Code, the amendment introduced by Republic Act No. 2343, un

der which an income tax

equal to 30% is levied upon the amount received by every foreign corporation not
engaged in trade or
business within the Philippines from all sources within this country as interest
, dividends, rents, salaries,
wages, premiums, annuities, compensations, remunerations, emoluments, or other f
ixed or determinable
annual or periodical gains, profits and income, it has been determined that the
tax is still imposed on income
derived from capital, or labor, or both combined, in accordance with the basic p
rinciple of income taxation
(Sec. 39, Income Tax Regulations), and that a mere return of capital or investme
nt is not income (Par. 5.06, 1
Mertens Law of Federal Taxation). Since according to the findings of the Special
Team who inquired into
business of the non-resident foreign film distributors, the distribution or exhi
bition right on a film is
invariably acquired for a consideration, either for a lump sum or a percentage o
f the film rentals, whether
from a parent company or an independent outside producer, a part of the receipts
of a non-resident foreign
film distributor derived from said film represents, therefore, a return of inves
tment. xxx 4. The local
distributor should withhold 30% of one-half of the film rentals paid to the nonresident foreign film
distributor, and pay the same to this office in accordance with law unless the n
on-resident foreign film
distributor makes a prior settlement of its income tax liability.
2. Revenue Memorandum Circular 4-71 (8 February 1971)
Revenue Memorandum Circular 4-71 by the Commissioner of Internal Revenue stated
that After a
restudy and analysis of Section 24(b) of the National Internal Revenue Code, as
amended by Republic Act
No. 5431, and guided by the interpretation given by tax authorities to a similar
provision in the Internal
Revenue Code of the United States, on which the aforementioned provision of our
Tax Code was patterned,
this Office has come to the conclusion that the tax therein prescribed should be
based on gross income
without deduction whatever. Consequently, the ruling in General Circular No. V-3
34, dated April 12, 1961,
allowing the deduction of the proportionate cost of production or exhibition of
motion picture films from the
rental income of non-resident foreign corporations, is erroneous for lack of leg
al basis. In view thereof,
General Circular No. V-334, dated April 12, 1961, is hereby revoked and hencefor
th, local films distributors
and exhibitors shall deduct and withhold 35% of the entire amount payable by the
m to non-resident foreign
corporations, as film rental or royalty, or whatever such payment may be denomin
ated, without any deduction
whatever, pursuant to Section 24(b), and pay the withheld taxes in accordance wi
th Section 54 of the Tax
Code, as amended. All rulings inconsistent with his Circular is likewise revoked
.
3. Statutory basis of General Circular V-334 and Memorandum Circular 4-71, affec
ting Section
24(b) of the Tax Code
RA 2343, dated 20 June 1959, which was the basis of General Circular No. V-334,
was just one in a

series of enactments regarding Sec. 24(b) of the Tax Code. RA 3825 came next on
22 June 1963; and RA
3841 similarly dated 22 June 1963. It was only on 27 June 1968 under RA 5431 whi
ch became the basis of
Revenue Memorandum Circular No. 4-71, that Sec. 24(b) was amended to refer speci
fically to 35% of the
gross income.
4. Section 24 (b) of the National Internal Revenue, as amended by RA 2343 (20 Ju
ne 1959)
In so far as the income tax on non-resident corporations is concerned, Section 2
4(b) of the National
Internal Revenue Code, as amended by RA 2343 dated 20 June 1959, used to provide
: (b) Tax on foreign
corporations.
(1) Non-resident corporations. There shall be levied, collected, a
nd paid for each taxable
year, in lieu of the tax imposed by the preceding paragraph, upon the amount rec
eived by every foreign
corporation not engaged in trade or business within the Philippines, from all so
urces within the Philippines, as
interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments,
or other fixed or determinable annual or periodical gains, profits and income, a
tax equal to thirty per centum
of such amount.
5. Section 24 (b) of the National Internal Revenue, as amended by RA 3825 (22 Ju
ne 1963)
Section 24(b) of the National Internal Revenue Code, as amended by RA 3825 dated
22 June 1963,
Taxation Law I, 2003 ( 4 )
Haystacks (Berne Guerrero)
provides: (b) Tax on foreign corporation. (1) Non-resident corporations.
There sh
all be levied,
collected, and paid for each taxable year, in lieu of the tax imposed by the pre
ceding paragraph, upon the
amount received by every foreign corporation not engaged in trade or business wi
thin the Philippines, from
all sources within the Philippines, as interest, dividends, rents, salaries, wag
es, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical gains, profits
and income, a tax equal to thirty per centum of such amount: PROVIDED, HOWEVER,
THAT PREMIUMS
SHALL NOT INCLUDE REINSURANCE PREMIUMS.
6. Section 24 (b) of the National Internal Revenue, as amended by RA 3841 (22 Ju
ne 1963)
Section 24(b) of the National Internal Revenue Code, as amended by RA 3841 simil
arly dated 22
June 1963, provides: Tax on foreign corporations.
(1) Non-resident corporations.
There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the prec
eding paragraph, upon the
amount received by every foreign corporation not engaged in trade or business wi
thin the Philippines, from
all sources within the Philippines, as interest, dividends, rents, salaries, wag
es, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical OR CASUAL
gains, profits and income, AND CAPITAL GAINS, a tax equal to thirty per centum o
f such amount.
7. Section 24 (b) of the National Internal Revenue, as amended by RA 5431 (27 Ju

ne 1968)
Section 24(b) of the National Internal Revenue Code, as amended by RA 5431 dated
27 June 1968,
provides: (b) Tax on foreign corporations.
(1) Non-resident corporations. A forei
gn corporation not
engaged in trade or business in the Philippines including a foreign life insuran
ce company not engaged in the
life insurance business in the Philippines shall pay a tax equal to thirty-five
per cent of the gross income
received during each taxable year from all sources within the Philippines, as in
terests, dividends, rents,
royalties, salaries, wages, premiums, annuities, compensations, remunerations fo
r technical servicesor
otherwise, emoluments or other fixed or determinable annual, periodical or casua
l gains, profits and income,
and capital gains, Provided, however, That premiums shall not include reinsuranc
e premiums.
8. Section 338-A, as inserted by RA 6110 (9 August 1969); Non-retroactivity of R
ulings
Section 338-A (now Sec. 327; Non-retroactivity of rulings) of the Tax Code, as i
nserted by RA 6110
on 9 August 1969, provides: Any revocation, modification, or reversal of any of t
he rules and regulations
promulgated in accordance with the preceding Section or any of the rulings or ci
rculars promulgated by the
Commissioner of Internal Revenue shall not be given retroactive application if t
he revocation, modification,
or reversal will be prejudicial to the taxpayers, except in the following cases:
(a) where the taxpayer
deliberately mis-states or omits material facts from his return or any document
required of him by the Bureau
of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are
materially different from the facts on which the ruling is based; or (c) where t
he taxpayer acted in bad faith.
9. Rulings without retroactive application if application prejudicial to taxpaye
r; Company does
not fall under exceptions to allow retroactivity
Rulings or circulars promulgated by the Commissioner of Internal Revenue have no
retroactive
application where to so apply them would be prejudicial to taxpayers. In the pre
sent case, the prejudice to the
company of the retroactive application of Memorandum Circular 4-71 is beyond que
stion. It was issued only
in 1971, or 3 years after 1968, the last year that the company had withheld taxe
s under General Circular V334. The assessment and demand on company to pay deficiency withholding income t
ax was also made 3
years after 1968 for a period of time commencing in 1965. The company was no lon
ger in a position to
withhold taxes due from foreign corporations because it had already remitted all
film rentals and no longer
had any control over them when the new Circular was issued. And in so far as the
enumerated exceptions are
concerned, admittedly, the company does not fall under any of them.
10. Rationale behind General Circular V-334
The rationale behind General Circular V-334 was clearly stated in the CTA ruling
, i.e. It had been
Taxation Law I, 2003 ( 5 )
Haystacks (Berne Guerrero)

determined that the tax is still imposed on income derived from capital, or labo
r, or both combined, in
accordance with the basic principle of income taxation . . . and that a mere ret
urn of capital or investment is
not income. . . .
A part of the receipts of a non-resident foreign film distributo
r derived from said film
represents, therefore, a return of investment. The circular thus fixed the return
of capital at 50% to simplify
the administrative chore of determining the portion of the rentals covering the
return of capital. Were the
gross income base clear from Sec. 24(b), perhaps, the ratiocination of the Tax Cou
rt could be upheld.
10. Principle of legislative approval of administrative interpretation by re-ena
ctment
The principle of legislative approval of administrative interpretation by re-ena
ctment clearly obtains
in the present case. It provides that the re-enactment of a statute substantially
unchanged is persuasive
indication of the adoption by Congress of a prior executive construction. Note sh
ould be taken of the fact
that the case involves not a mere opinion of the Commissioner or ruling rendered
on a mere query, but a
Circular formally issued to all internal revenue officials by the then Commissione
r of Internal Revenue.
11. Government never estopped from collecting taxes because of errors on part of
its agents;
Exception: good faith
The Government is never estopped from collecting taxes because of mistakes or er
rors on the part of
its agents. But, like other principles of law, this also admits of exceptions in
the interest of justice and fairplay.
The insertion of Sec. 338-A into the National Internal Revenue Code, as held in
the case of Tuason, Jr. vs.
Lingad, is indicative of legislative intention to support the principle of good
faith. In fact, in the United States,
from where Sec. 24(b) was patterned, it has been held that the Commissioner or C
ollector is precluded from
adopting a position inconsistent with one previously taken where injustice would
result therefrom, or where
there has been a misrepresentation to the taxpayer.
12. Order to pay interest and surcharge uncalled for
The Decision of the Court of Tax Appeals requiring the company to pay interest a
nd surcharge, as
provided for in Sec. 51(e) of the Tax Code in addition to the deficiency withhol
ding tax of P525,897.06, is
much less called for because the company relied in good faith and religiously co
mplied with no less than a
Circular issued to all internal revenue officials by the highest official of the B
ureau of Internal Revenue and
approved by the then Secretary of Finance.