PHILAMLIFE v.

CTA DOCTRINE: In our jurisprudence, the test of taxability is the 'source', and the source of an income is "that activity . . . which produced the income". It is not the presence of any property from which one derives rentals and royalties that is controlling, but rather as expressed under the expanded meaning of "royalties", it includes " royalties for the supply of scientific, technical, industrial, or commercial knowledge or informations; and the technical advice, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme", and others (Section 37 (a) (7) as amended FACTS: Philamlife, a domestic corp., entered into a Management Service Agreement w/ American Internatinal Reinsurance Co. (Airco), a nonresident foreign corp. w/ principal place of business in Pembroke Bermuda, whereby Airco shall perform a series of advisory service to Philamlife for a fee not exceeding $250,000.00 per annum. Later on Airco merged w/ American International Group Inc. (Aigi) w/ the latter as surviving corporation. CIR issued to Philamlife a tax credit of P643,125 representing erroneous payment of w/holding tax at surce on remittances to Aigi for services rendered in 1979. Because of the tax refund, Philamlife filed a claim for refund. W/o waiting for the CIR to resolve the claim for refund, Philamlife filed w/ the CTA (Case No. 3540) the claim for refund. While the CTA case was pending, CIR issued a denial of the request for refund and they also cancelled the tax credit granted to Philamlife. Instead, CIR now claims the Philamlife has deficiency of P643,125. W/o protesting the CIR assessment of deficiency, Philamlife filed w/ the CTA (Case No. 3943) a petition to annul the said assessment. CTA favors CIR and ordered Philamlife to pay the deficiency taxes of 1979. ISSUE: W/N compensation for advisory services admittedly performed abroad by the personnel of a non-resident foreign corporation not doing business in the Philippines (AIGI) are subject to Philippines withholding income tax - YES W/N the revoking of the tax credit was proper? - YES HELD: Philamlife insist that that there is no legal nor factual bias for the respondent court to conclude that the compensation paid for advisory services rendered outside the Philippines to petitioner AIGI, a non-resident foreign corporation not engaged in trade or business in the Philippines, is considered "rentals and royalties from properties locate d in the Philippines" pursuant to Section 37 (a) (4) of the National Internal Revenue Code. Petitioners contend that petitioner AIGI is not covered by the above provision of the Tax Code considering that it has no properties located in the Philippines from which rentals and royalties can be derived. Pursuant to Section 37 (a)(3) of the Tax Code, compensation for labor or personal services are considered from sources within the Philippines where the services are performed within the Philippines and since the services were ascertained by the Examiner to have been rendered outside the Philippines the same should not have been subjected to Philippine tax. A reading of the various management services enumerated in the said Management Services Agreement will show that they can easily fall under Section 37 expanded meaning of royalties. Basically, from the heading 'Investments' to 'Personnel', the services call for the supply by the non-resident foreign corporation of technical and commercial information, knowledge, advice, assistance or services in connecton with technical management or administration of an insurance business a commercial undertaking. Therefore, the income derived for the services performed by AIGI for PHILAMLIFE under the said management contract shall be considered as income from services within the Philippines. AIGI being a non-resident foreign corporation not engaged in trade or business in the Philippines 'shall pay a tax equal to thirty-five (35%) percent of the gross income received during each taxable year from all sources within the Philippines as interest, dividends, rents, royalties (including remuneration for technical services) , salaries, premiums, annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits and income and capital gains: . . . (Section 12(6) (I) of the National Internal Revenue Code. The argument of Philamlife may be true perhaps prior to the amendment of section 37(a)(4) by P.D. 1457 on June 11, 1978. Prior of said amendment, the term 'rentals or royalties' has a very limited meaning. It refers only to rentals or royalties for 'the use of or for the privilege of using in the Philippine patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brand, franchise and other like properties'. However, when the said provision of law was amended to include the expanded meaning of royalties, this jurisprudence is accordingly modified to exclude all the type of services enumerated in the amended law." Thus, this Court rules that while it is true petitioner AIGI has no properties in the Philippines, agreement with PHILAMLIFE necessary for the latter company's efficient operation and growth, with petitioner AIGI deriving income form said agreement, petitioner AIGI is well-within the ambit of Section 37 (a)(7) of the Tax Code. This Court believes that the rule on prescription of assessment and the filing of formal protest will not apply in the C.T.A. Case No. 3943. The decision of the Commissioner of Internal Revenue revoking the tax credit memo he has issued and issuing an assessment accordingly was actually a denial of the claim for refund covering the 1979 withholding tax at source which was previously granted. Therefore, the rules on prescription of action in the case of recovery of tax erroneously or illegally collected shall apply. Pursuant to Section 292 (now 230) of the NIRC 'no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment'.