Republic of the Philippines the same to the Bureau of Internal Revenue (BIR).
On October 17, 1997,
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman
(Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January
18, 2002 Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which
granted the tax refund of respondent Juliane Baier-Nickel and reversed the
June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case
No. 5633. Petitioner also assails the May 8, 2002 Resolution 3 of the Court of
Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German
citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged
in "[m]anufacturing, marketing on wholesale only, buying or otherwise
acquiring, holding, importing and exporting, selling and disposing
embroidered textile products."4 Through JUBANITEXs General Manager,
Marina Q. Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent will receive
10% sales commission on all sales actually concluded and collected through
her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her
sales commission income from which JUBANITEX withheld the
corresponding 10% withholding tax amounting to P170,777.26, and remitted
respondent filed her 1995 income tax return reporting a taxable income of
P1,707,772.64 and a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended that her sales commission
income is not taxable in the Philippines because the same was a
compensation for her services rendered in Germany and therefore
considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for refund. 7 On
June 28, 2000, the CTA rendered a decision denying her claim. It held that
the commissions received by respondent were actually her remuneration in
the performance of her duties as President of JUBANITEX and not as a mere
sales agent thereof. The income derived by respondent is therefore an
income taxable in the Philippines because JUBANITEX is a domestic
corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the
CTA, holding that respondent received the commissions as sales agent of
JUBANITEX and not as President thereof. And since the "source" of income
means the activity or service that produce the income, the sales commission
received by respondent is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in Germany. The
dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of
Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE
and the respondent court is hereby directed to grant petitioner a tax refund in
the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied. 9 Hence, the
instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the
Philippines because the source thereof is JUBANITEX, a domestic
corporation located in the City of Makati. It thus implied that source of income
means the physical source where the income came from. It further argued
that since respondent is the President of JUBANITEX, any remuneration she
received from said corporation should be construed as payment of her
overall managerial services to the company and should not be interpreted as
a compensation for a distinct and separate service as a sales commission
agent.
Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of
nonresident aliens like her is subject to tax only if the source of the income is
within the Philippines. Source, according to respondent is the situs of the
activity which produced the income. And since the source of her income were
her marketing activities in Germany, the income she derived from said
activities is not subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable
in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business
in the Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien individual who
shall come to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar year shall be
deemed a nonresident alien doing business in the Philippines, Section
22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. There shall be levied, collected and paid for each taxable year
upon the entire income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or business within the
Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x
x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources within the
Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the incomes "source." In construing the meaning of "source" in
Section 25 of the NIRC, resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was
Act No. 2833,10 which took effect on January 1, 1920.11 Under Section 1
thereof, nonresident aliens are likewise subject to tax on income "from all
sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding calendar year
from all sources by every individual, a citizen or resident of the Philippine
Islands, a tax of two per centum upon such income; and a like tax shall be
levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources within the Philippine
Islands by every individual, a nonresident alien, including interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or
otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law
of 1916 as amended by U.S. Revenue Law of 1917. 12 Being a law of
American origin, the authoritative decisions of the official charged with
enforcing it in the U.S. have peculiar persuasive force in the Philippines. 13
The Internal Revenue Code of the U.S. enumerates specific types of income
to be treated as from sources within the U.S. and specifies when similar
types of income are to be treated as from sources outside the U.S. 14 Under
the said Code, compensation for labor and personal services performed in
the U.S., is generally treated as income from U.S. sources; while
compensation for said services performed outside the U.S., is treated as
income from sources outside the U.S.15 A similar provision is found in Section
42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the
Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the
Philippines;
The following discussions on sourcing of income under the Internal Revenue
Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated,
that income may be derived from three possible sources only: (1) capital
and/or (2) labor; and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into whether a particular item is
from "sources within the United States" and suggest an investigation into the
nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be
decisive; if it is done in this country, the income should be from "sources
within the United States." If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the
income should be from "sources within the United States." If the income is
from the sale of capital assets, the place where the sale is made should be
likewise decisive.
Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place, it is an activity or property. As such, it has
a situs or location, and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source," or situs of the
activities or property which produce the income. The result is that, on the one
hand, nonresident aliens and nonresident foreign corporations are prevented
from deriving income from the United States free from tax, and, on the other
hand, there is no undue imposition of a tax when the activities do not take
place in, and the property producing income is not employed in, this country.
Thus, if income is to be taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which the income issues or
is derived must be situated within the jurisdiction so that the source of the
income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life
and property and that the income rightly to be levied upon to defray the
burdens of the United States Government is that income which is created by
activities and property protected by this Government or obtained by persons
enjoying that protection. 16
The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the Court
addressed the issue on the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign insurance
company in respect of risks located in the Philippines. It was held therein that
the undertaking of the foreign insurance company to indemnify the local
insurance company is the activity that produced the income. Since the
activity took place in the Philippines, the income derived therefrom is taxable
in our jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the
Court emphasized that the technical meaning of source of income is the
property, activity or service that produced the same. Thus:
The source of an income is the property, activity or service that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contracts, accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said undertaking is
the activity that produced the reinsurance premiums, and the same took
place in the Philippines. x x x the reinsured, the liabilities insured and the risk
originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the
Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign airline
company which does not maintain any flight to and from the Philippines is
liable for Philippine income taxation in respect of sales of air tickets in the
Philippines, through a general sales agent relating to the carriage of
passengers and cargo between two points both outside the Philippines.
Ruling in the affirmative, the Court applied the case of Alexander Howden &
Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule that the
source of income is that "activity" which produced the income. It was held
that the "sale of tickets" in the Philippines is the "activity" that produced the
income and therefore BOAC should pay income tax in the Philippines
because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of
Internal Revenue v. British Overseas Airways Corporation in support of their
arguments, but the correct interpretation of the said case favors the theory of
respondent that it is the situs of the activity that determines whether such
income is taxable in the Philippines. The conflict between the majority and
the dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of
Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The
divergence in opinion centered on whether the sale of tickets in the
Philippines is to be construed as the "activity" that produced the income, as
viewed by the majority, or merely the physical source of the income, as
ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority,
through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale
of tickets as a business activity that gave rise to the income of BOAC.
Petitioner cannot therefore invoke said case to support its view that source of
income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated that source
of income is not the business activity of BOAC but the place where the
person or entity disbursing the income is located or where BOAC physically
received the same. But such was not the import of the ruling of the Court. It
even explained in detail the business activity undertaken by BOAC in the
Philippines to pinpoint the taxable activity and to justify its conclusion that
BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments, maintained a
general sales agent in the Philippines. That general sales agent, from 1959
to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down
the whole trip into series of trips each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are
normally incident to, and are in progressive pursuit of, the purpose and object
of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local
agent during the period covered by the assessments. x x x 21
xxxx
The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The situs of
the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection,
the flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a
common carrier, it constitutes the contract between the ticket-holder and the
carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fare and the corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth thereon. The ordinary
ticket issued to members of the traveling public in general embraces within
its terms all the elements to constitute it a valid contract, binding upon the
parties entering into the relationship.22
The Court reiterates the rule that "source of income" relates to the property,
activity or service that produced the income. With respect to rendition of labor
or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is
therefore no merit in petitioners interpretation which equates source of
income in labor or personal service with the residence of the payor or the
place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine income
taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to prove that
the services she rendered were performed in Germany. Though not raised as
an issue, the Court is clothed with authority to address the same because the
resolution thereof will settle the vital question posed in this controversy. 23
The settled rule is that tax refunds are in the nature of tax exemptions and
are to be construed strictissimi jurisagainst the taxpayer.24 To those therefore,
who claim a refund rest the burden of proving that the transaction subjected
to tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of
JUBANITEX stipulated that the activity or the service which would entitle her
to 10% commission income, are "sales actually concluded and collected
through [her] efforts."25 What she presented as evidence to prove that she
performed income producing activities abroad, were copies of documents
she allegedly faxed to JUBANITEX and bearing instructions as to the sizes
of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these
documents do not show whether the instructions or orders faxed ripened into
concluded or collected sales in Germany. At the very least, these pieces of
evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these instructions/orders
gave rise to consummated sales and whether these sales were truly
concluded in Germany, respondent presented no such evidence. Neither did
she establish reasonable connection between the orders/instructions faxed
and the reported monthly sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva
Pacheco, petitioners counsel at the hearing before the Court of Tax Appeals.
She pointed out that respondent presented no contracts or orders signed by
the customers in Germany to prove the sale transactions therein. 26 Likewise,
in her Comment to the Formal Offer of respondents evidence, she objected
to the admission of the faxed documents bearing instruction/orders marked
as Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern
raised by petitioners counsel as to the absence of substantial evidence that
would constitute proof that the sale transactions for which respondent was
paid commission actually transpired outside the Philippines, is relevant
because respondent stayed in the Philippines for 89 days in 1995. Except for
the months of July and September 1995, respondent was in the Philippines
in the months of March, May, June, and August 1995, 30 the same months
when she earned commission income for services allegedly performed
abroad. Furthermore, respondent presented no evidence to prove that
JUBANITEX does not sell embroidered products in the Philippines and that
her appointment as commission agent is exclusivelyfor Germany and other
European markets.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable
mind might accept as adequate to support the conclusion 31 that it was in
Germany where she performed the income producing service which gave
rise to the reported monthly sales in the months of March and May to
September of 1995. She thus failed to discharge the burden of proving that
her income was from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund should be
denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a
previous case for refund of income withheld from respondents
remunerations for services rendered abroad, the Court in a Minute
Resolution dated February 17, 2003,33 sustained the ruling of the Court of
Appeals that respondent is entitled to refund the sum withheld from her sales
commission income for the year 1994. This ruling has no bearing in the
instant controversy because the subject matter thereof is the income of
respondent for the year 1994 while, the instant case deals with her income
in 1995. Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that rendered
the judgment must have jurisdiction over the subject matter and the parties;
(3) it must be a judgment on the merits; (4) there must be between the two
cases identity of parties, of subject matter, and of causes of action. 34 The
instant case, however, did not satisfy the fourth requisite because there is no
identity as to the subject matter of the previous and present case of
respondent which deals with income earned and activities performed for
different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision
and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No.
59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the
Court of Tax Appeals in C.T.A. Case No. 5633, which denied respondents
claim for refund of income tax paid for the year 1995 is REINSTATED.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO
B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and
LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case
No. 617, similarly entitled as above, holding that petitioners have constituted
an unregistered partnership and are, therefore, subject to the payment of the
deficiency corporate income taxes assessed against them by respondent
Commissioner of Internal Revenue for the years 1955 and 1956 in the total
sum of P21,891.00, plus 5% surcharge and 1% monthly interest from
December 15, 1958, subject to the provisions of Section 51 (e) (2) of the
Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343
and the costs of the suit, 1 as well as the resolution of said court denying
petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oa and her five children. In 1948, Civil Case No. 4519 was
instituted in the Court of First Instance of Manila for the settlement of her
estate. Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.).
On April 14, 1949, the administrator submitted the project of partition, which
was approved by the Court on May 16, 1949 (See Exhibit K). Because three
of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were
still minors when the project of partition was approved, Lorenzo T. Oa, their
father and administrator of the estate, filed a petition in Civil Case No. 9637
of the Court of First Instance of Manila for appointment as guardian of said
 minors. On November 14, 1949, the Court appointed him guardian of the
persons and property of the aforenamed minors (See p. 3, BIR rec.).
P87,860.00 P17,590.00
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that
the heirs have undivided one-half (1/2) interest in ten parcels of land with a
total assessed value of P87,860.00, six houses with a total assessed value of
P17,590.00 and an undetermined amount to be collected from the War P24,657.65 128,566.72 96,076.26
Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among
them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were 51,301.31 120,349.28 110,605.11
acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit
3, pp. 31-34 BIR rec.).
67,927.52 87,065.28 152,674.39
The project of partition also shows that the estate shares equally with
Lorenzo T. Oa, the administrator thereof, in the obligation of P94,973.00,
consisting of loans contracted by the latter with the approval of the Court
(see p. 3 of Exhibit K; or see p. 74, BIR rec.).
61,258.27 84,925.68 161,463.83
Although the project of partition was approved by the Court on May 16, 1949,
no attempt was made to divide the properties therein listed. Instead, the
properties remained under the management of Lorenzo T. Oa who used
said properties in business by leasing or selling them and investing the 63,623.37 99,001.20 167,962.04
income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments
gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as
can be gleaned from the following year-end balances: 100,786.00 120,249.78 169,262.52

ar Investment Land Building

175,028.68 135,714.68 169,262.52

Account Account Account (See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as

profits from installment sales of subdivided lots, profits from sales of stocks,
dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n.,
pp. 37-38). The said incomes are recorded in the books of account kept by
Lorenzo T. Oa where the corresponding shares of the petitioners in the net
income for the year are also known. Every year, petitioners returned for
income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them (Exhibit
3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their
shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T. Oa who, as heretofore pointed out,
invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal
Revenue) decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax Code. Accordingly, he assessed against
the petitioners the amounts of P8,092.00 and P13,899.00 as corporate
income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by
Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the ruling of respondent that
they have formed an unregistered partnership. Finding no merit in petitioners'
request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in
line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously referring
to the compromise in lieu of the criminal liability for failure of petitioners to file
the corporate income tax returns for said years. (See Exh. 17, page 86, BIR
records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED
AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM
(sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS
WERE LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956
AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED
IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE
PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS
COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON,
FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1)
Under the facts found by the Court of Tax Appeals, should petitioners be
considered as co-owners of the properties inherited by them from the
deceased Julia Buales and the profits derived from transactions involving
the same, or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common
and the loans granted to them upon the security of the said properties, with
the result that as far as their respective shares in the inheritance are
concerned, the total income thereof should be considered as that of co-
owners and not of the unregistered partnership? And (3) assuming again that
they are taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956 as
individual income taxes on their respective shares of the profits accruing from
the properties they owned in common be deducted from the deficiency
corporate taxes, herein involved, assessed against such unregistered
partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that
whereas petitioners' predecessor in interest died way back on March 23,
1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the
administration or management of the head of the family, the widower and
father Lorenzo T. Oa, the assessment in question refers to the later years
1955 and 1956. We believe this point to be important because, apparently, at
the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate
tax, and it was only from 1955 that he considered them as having formed an
unregistered partnership. At least, there is nothing in the record indicating
that an earlier assessment had already been made. Such being the case,
and We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered co-
partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition approved in
1949, "the properties remained under the management of Lorenzo T. Oa
who used said properties in business by leasing or selling them and investing
the income derived therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and
P17,590.00 in "building account" in 1949 to P175,028.68 in "investment
account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because, admittedly,
petitioners never actually received any share of the income or profits from
Lorenzo T. Oa and instead, they allowed him to continue using said shares
as part of the common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective shares of the
profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention,
merely limit themselves to holding the properties inherited by them. Indeed, it
is admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in accordance with
their respective shares in the inheritance. In these circumstances, it is Our
considered view that from the moment petitioners allowed not only the
incomes from their respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oa as a common fund in
undertaking several transactions or in business, with the intention of deriving
profit to be shared by them proportionally, such act was tantamonut to
actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the
heirs can be considered as co-owners rather than unregistered co-partners
within the contemplation of our corporate tax laws aforementioned. Before
the partition and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is actually and
physically distributed among the heirs, for it is easily conceivable that after
knowing their respective shares in the partition, they might decide to continue
holding said shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of
the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among
the reasons for holding the appellants therein to be unregistered co-partners
for tax purposes, that their common fund "was not something they found
already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are
doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated,
for tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple.
From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of
them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion
to his share, there can be no doubt that, even if no document or instrument
were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this
case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the
Civil Code, providing that: "The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns are
derived," and, for that matter, on any other provision of said code on
partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice
Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code exempts from the aforementioned
tax "duly registered general partnerships," which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined
in section 84(b) of said Code, "the term corporation includes partnerships, no
matter how created or organized." This qualifying expression clearly indicates
that a joint venture need not be undertaken in any of the standard forms, or
in confirmity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporation.
Again, pursuant to said section 84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en participacion)" and "associations", none
of which has a legal personality of its own, independent of that of its
members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, "duly registered general co-
partnerships" which are possessed of the aforementioned personality
have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. ... . (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships with the exception only of duly registered
general copartnerships within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24
SCRA 198, wherein the Court ruled against a theory of co-ownership
pursued by appellants therein.
As regards the second question raised by petitioners about the segregation,
for the purposes of the corporate taxes in question, of their inherited
properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:
In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business
engaged in apart from the properties inherited by petitioners. In other words,
the taxable income of the partnership should be limited to the income derived
from the acquisition and sale of real properties and corporate securities and
should not include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived therefrom were
used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the
income derived from the purchase and sale of other properties but also the
income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited
properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part
of the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the clear
intent of the law.
Likewise, the third question of petitioners appears to have been adequately
resolved by the Tax Court in the aforementioned resolution denying
petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on their respective
shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the unregistered
partnership. (page 7, Memorandum for the Petitioner in Support of Their
Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the Castro, J., took no part.
partnership must be reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is not correct; rather, it Concepcion, C.J., is on leave.
should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income tax
assessed against the partnership. Consequently, each of the petitioners in
his individual capacity overpaid his income tax for the years in question, but
the income tax due from the partnership has been correctly assessed. Since FIRST DIVISION
the individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same. [G.R. No. L-9996. October 15, 1957.]

Petitioners insist that it was error for the Tax Court to so rule that whatever EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA
excess they might have paid as individual income tax cannot be credited as EVANGELISTA, Petitioners, v. THE COLLECTOR OF INTERNAL
part payment of the taxes herein in question. It is argued that to sanction the REVENUE and THE COURT OF TAX APPEALS, Respondents.
view of the Tax Court is to oblige petitioners to pay double income tax on the
same income, and, worse, considering the time that has lapsed since they Santiago F. Alidio and Angel S. Dakila, Jr. for Petitioner.
paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do Solicitor General Ambrosio Padilla, Assistant Solicitor General
not agree. As We see it, the case of petitioners as regards the point under Esmeraldo Umali and Solicitor Felicisimo R. Rosete for the
discussion is simply that of a taxpayer who has paid the wrong tax, assuming respondents.
that the failure to pay the corporate taxes in question was not deliberate. Of
course, such taxpayer has the right to be reimbursed what he has
erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for
the recovery of the excess income taxes in the case of herein petitioners has SYLLABUS
already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because
the taxpayers failed to make the proper return and payment of the corporate
taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above
suspicion in their conduct vis-a-vis their tax obligation to the State. 1. TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION
WHICH ARE NOT NECESSARY PARTNERSHIP. "Corporations" strictly
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax speaking are distinct and different from "partnership." When our Internal
Appeals appealed from is affirm with costs against petitioners. Revenue Code includes "partnership" among the entities subject to the tax
on "corporations", it must be allude to organization which are not necessarily
"partnership" in the technical sense of the term.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
2. ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED
Reyes, J.B.L. and Teehankee, JJ., concur in the result. FROM THE TAX UPON CORPORATIONS. Section 24 of the Internal
Revenue Code exempts from the tax imposed upon corporations "duly
registered general partnership", which constitute precisely one of the most
typical form of partnership in this jurisdiction.
3. ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW
ORGANIZED. As defined in section 84 (b) of the Internal Revenue Code
"the term corporation includes partnership, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture
need not be undertaken in any of the standards form, or conformity with the
usual requirements of the law on partnerships, in order that one could be
deemed constituted for the purposes of the tax on corporations.
4. ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND
ASSOCIATIONS WITHOUT LEGAL PERSONALITY. Pursuant to Section
84 (b) of the Internal Revenue Code, the term "corporations" includes,
among the others, "joint accounts (cuenta en participacion)" and
"associations", none of which has a legal personality of its own independent
of that of its members. For purposes of the tax on corporations, our National
Internal Revenue Code includes these partnership. with the exception only
of duly registered general partnership. within the purview of the term
"corporations." Held: That the petitioners in the case at bar, who are engaged
in real estate transactions for monetary gain and divide the same among
themselves, constitute a partnership, so far as the said Code is concerned,
and are subject to the income tax for the corporation.
5. ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY
SUBJECT TO RESIDENCE TAX ON CORPORATION. The pertinent part
of the provision of Section 2 of Commonwealth Act No. 465 which says: "The
term corporation as used in this Act includes joint-stock company,
partnership, joint account (cuentas en participacion), association or
insurance company, no matter how created or organized." is analogous to
that of Section 24 and 84 (b) of our Internal Revenue Code which was
approved the day immediately after the approval of said Commonwealth Act
No. 565. Apparently, the terms "corporation" and "Partnership" are used both
statutes with substantially the same meaning, Held: That the petitioners are
subject to the residence tax corporations.
DECISION
CONCEPCION, J.:
This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and
Francisca Evangelista, for review of a decision of the Court of Tax Appeals,
the dispositive part of which reads:jgc:chanrobles.com.ph
"FOR ALL THE FOREGOING, we hold that the petitioners are liable for the
income tax, real estate dealers tax and the residence tax for the years 1945
to 1949, inclusive, in accordance with the respondents assessment for the
same in the total amount of P6,878.34, which is hereby affirmed and the
petition for review filed by petitioners is hereby dismissed with costs against
petitioners."cralaw virtua1aw library
It appears from the stipulation submitted by the
parties:jgc:chanrobles.com.ph
"1. That the petitioners borrowed from their father the sum of P59,140.00
which amount together with their personal monies was used by them for the
purpose of buying real properties;
"2. That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot
with an area of 3,713.40 sq. m. including improvements thereon for the sum
of P100,000.00; this property has an assessed value of P57,517.00 as of
1948;
"3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels
of land with an aggregate area of 3,718.40 sq. m. including improvements
thereon for P18,000.00; this property has an assessed value of P8,255.00 as
of 1948;
"4. That on April 23, 1944 they purchased from the Insular Investments, Inc.,
a lot of 4,358 sq. m. including improvements thereon for P108,825.00. This
property has an assessed value of P4,983.00 as of 1943;
 .1,144.71
"5. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371
sq. m. including improvements thereon for P237,234.14. This property has 1947. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
an assessed value of P59,140.00 as of 1948; . . . .910.34

"6. That in a document dated August 16, 1945, they appointed their brother 1948. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Simeon Evangelista to manage their properties with full power to lease; to .1,912.30
collect and receive rents; to issue receipts therefor; in default of such
payment, to bring suits against the defaulting tenant; to sign all letters, 1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
contracts, etc., for and in their behalf, and to endorse and deposit all notes .1,575.90
and checks for them;
_______________
"7. That after having bought the above-mentioned real properties, the
petitioners had the same rented or leased to various tenants; Total including surcharge and compromise P6,157.09

"8. That from the month of March, 1945 up to and including December, 1945, REAL ESTATE DEALERS FIXED TAX
the total amount collected as rents on their real properties was P9,599.00
while the expenses amounted to P3,650.00 thereby leaving them a net rental 1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
income of P5,948.33; . . . . . . .P37.50

"9. That in 1946, they realized a gross rental income in the sum of 1947. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P24,786.30, out of which amount was deducted the sum of P16,288.27 for . . . . . . .150.00
expenses thereby leaving them a net rental income of P7,498.13;
1948. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"10. That in 1948 they realized a gross rental income of P17,453.00 out of . . . . . . .150.00
the which amount was deducted the sum of P4,837.65 as expenses, thereby
leaving them a net rental income of P12,615.35."cralaw virtua1aw library 1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .150.00
It further appears that on September 24, 19a4, respondent Collector of
Internal Revenue demanded the payment of income tax on corporations, real ____________
estate dealers fixed tax and corporation residence tax for the years 1945-
1949, computed, according to the assessments made by said officer, as Total including penalty P527.50
follows:chanrob1es virtual 1aw library
RESIDENCE TAXES OF CORPORATION
INCOME TAXES
1945. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1945. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P38.75
.P614.84
1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38.75

1947. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .38.75
1948. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .38.75
1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .38.75
______________
Total including surchage P193.75
TOTAL TAXES DUE P6,878.34
Said letter of demand and the corresponding assessments were delivered to
petitioners on December 3, 1954, whereupon they instituted the present case
in the Court of Tax Appeals, with a prayer that "the decision of the respondent
contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question, with
costs against the Respondent.
After appropriate proceedings, the Court of Tax Appeals rendered the above-
mentioned decision for the respondent, and, a petition for reconsideration
and new trial having been subsequently denied, the case is now before Us
for review at the instance of the petitioners.
The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the
terms "corporation" and "partnership", as used in sections 24 and 84 of said
Code, the pertinent parts of which read:jgc:chanrobles.com.ph
"SEC. 24. Rate of tax on corporations. There shall be levied, assessed,
collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships
(compaias colectivas), a tax upon such income equal to the sum of the
following: . . . ."cralaw virtua1aw library
"Sec. 84(b). The term corporation includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations or insurance companies, but does not include
duly registered general copartnerships (compaias colectivas)."cralaw
virtua1aw library
Article 1767 of the Civil Code of the Philippines
provides:jgc:chanrobles.com.ph
"By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves."cralaw virtua1aw library
Pursuant to this article, the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage
in real estate transactions for monetary gain and then divide the same
among themselves, because:chanrob1es virtual 1aw library
1. Said common fund was not something they found already in existence. It
was not a property inherited by them pro indiviso. They created it purposely.
What is more they jointly borrowed a substantial portion thereof in order to
establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On
April 3, 1944, they purchased 21 lots for P18,000.000. This was soon
followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken,
as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common
fund or even of the property acquired by petitioners in February, 1943. In
other words, one cannot but perceive a character of habituality peculiar to
business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were leased separately
to several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of
one person, namely, Simeon Evangelista, with full power to lease, to collect
rents, to issue receipts, to bring suits, to sign letters and contracts, and to
indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or
business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to
be exact, over fifteen (15) years, since the first property was acquired, and
over twelve (12) years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of said
intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for,
in consequence of the acts performed by them, a legal entity, with a
personality independent of that of its members, did not come into existence,
and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships." When our
Internal Revenue Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code exempts from the aforementioned
tax "duly registered general partnerships", which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined
in section 84(b) of said Code, "the term corporation includes partnerships, no
matter how created or organized." This qualifying expression clearly indicates
that a joint venture need not be undertaken in any of the standard forms, or
in conformity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on
corporations. Again, pursuant to said section 84(b), the term "corporation"
includes, among other, "joint accounts, (cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded
that personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, "duly registered general
copartner ships" which are possessed of the aforementioned personality
have been expressly excluded by law (sections 24 and 84 [b]) from the
connotation of the term "corporation." It may not be amiss to add that
petitioners allegation to the effect that their liability in connection with the
leasing of the lots above referred to, under the management of one person
even if true, on which we express no opinion tends to increase the
similarity between the nature of their venture and that of corporations, and is,
therefore, an additional argument in favor of the imposition of said tax on
corporations.
Under the Internal Revenue Laws of the United States, "corporations" are
taxed differently from "partnerships." By specific provision of said laws, such
"corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the
aforementioned laws
". . . in any narrow or technical sense. It includes any organization, created
for the transaction of designated affairs, or the attainment of some object,
which, like a corporation, continues notwithstanding that its members or
participants change, and the affairs of which, like corporate affairs, are
conducted by a single individual, a committee, a board, or some other group,
acting in a representative capacity. It is immaterial whether such organization
is created by an agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or company, a
business trusts a Massachusetts trust, a common law trust, and insurance company, no matter how created or organized." (italics ours.)
investment trust (whether of the fixed or the management type), an
interinsurance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known)
which is not, within the meaning of the Code, a trust or an estate, or a
partnership." (7A Mertens Law of Federal Income Taxation, p. 788; italics
ours.)
Similarly, the American Law.
". . . provides its own concept of a partnership. Under the term partnership it
includes not only a partnership as known at common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. . . . ."
(7A Mertens Law of Federal Income Taxation, p. 789; italics ours.)
"The term partnership includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on, . . . ." (8 Mertens Law
of Federal Income Taxation, p. 562 Note 63; italics ours.)
For purposes of the tax on corporations, our National Internal Revenue
Code, includes these partnerships with the exception only of duly
registered general copartnerships within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject
to the income tax for corporations.
As regards the residence tax for corporations, section 2 of Commonwealth
Act No. 465 provides in part:jgc:chanrobles.com.ph
"Entities liable to residence tax. Every corporation, no matter how created
or organized, whether domestic or resident foreign, engaged in or doing
business in the Philippines shall pay an annual residence tax of five pesos
and an annual additional tax which, in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .
"The term corporation as used in this Act includes joint-stock company,
partnership, joint account (cuentas en participacion), association or
Considering that the pertinent part of this provision is analogous to that of
sections 24 and 84(b) of our National Internal Revenue Code
(Commonwealth Act No. 466), and that the latter was approved on June 15,
1939, the day immediately after the approval of said Commonwealth Act No.
465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning.
Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing
the properties above mentioned for a period of over twelve years, and that
the yearly gross rentals of said properties from 1945 to 1948 ranged from
P9,599 to P17,453. Thus, they are subject to the tax provided in section 193
(q) of our National Internal Revenue Code, for "real estate dealers,"
inasmuch as, pursuant to section 194(s) thereof:jgc:chanrobles.com.ph
"Real estate dealer includes any person engaged in the business of buying,
selling, exchanging, leasing, or renting property or his own account as
principal and holding himself out as a full or part- time dealer in real estate or
as an owner of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . . . ." (Italics
ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is hereby
affirmed with costs against the petitioners herein. It is so ordered.
Paras, C.J., Bengzon, Padilla, Reyes, A., Reyes, J. B. L., Endencia and
Felix, JJ., concur.
Separate Opinions
BAUTISTA ANGELO, J., concurring:chanrob1es virtual 1aw library

I agree with the opinion that petitioners have actually contributed money to a
common fund with express purpose of engaging in real estate business for
profit. The series of transactions which they had undertaken attest to this.
This appears in the following portion of of the decision:jgc:chanrobles.com.ph
"2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000. On April
3, 1944, they purchased 21 lots for P18,000. This was soon followed on April
23, 1944, by the acquisition of another real estate for P108,825. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number
of lots (24) acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not limited to the
conservation and preservation of the afore-mentioned common fund or even
of the property acquired by petitioner in February, 1943. In other words, one
cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain."cralaw virtua1aw library
I wish however to make the following observation: Article 1769 of the new
Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides:jgc:chanrobles.com.ph
"(2) Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
"(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;"
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property
held in common does not convert their venture into a partnership Or the
sharing of the gross returns does not of itself establish a partnership whether
or not the persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance of profit, the
presence of other elements constituting partnership is necessary, such as the
clear intent to form a partnership, the existence of a juridical personality
different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others
(Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-
636).
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a
partnership.
"Persons who contribute property or funds for a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective contribution,
are not thereby rendered partners. They have no common stock or capital,
and no community of interest as principal proprietors in the business itself
which the proceeds derived." (Elements of the law of Partnership by Floyd R.
Mechem, 2n Ed., section 83, p. 74.)
"A joint purchase of land, by two, does not constitute a copartnership in
respect thereto; nor does an agreement to share the profits and losses on
the sale of land create a partnership; the parties are only tenants in
common." (Clark v. Sideway, 142 U. S. 682, 12 S. Ct. 327, 35 L. Ed., 1157.)
"Where plaintiff, his brother, and another agreed to become owners of a
single tract of realty, holding as tenants in common, and to divide the profits
of disposing of it, the brother and the other not being entitled to share in
plaintiffs commissions, no partnership existed as between the three parties,
whatever their relation may have been as to third parties." (Magee v. Magee,
123 N. E. 673, 233 Mass. 341.)
"In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally a participating in both profits and losses; (c) and
such a community of interest, as far as third persons are concerned as
enables each party to make contract, manage the business, and dispose of
the whole property." (Municipal Paving Co. v. Herring, 150 P. 1067, 50 Ill.
470.)
"The common ownership of property does not itself create a partnership
between the owners, though they may use it for purpose of making gains;
and they may, without becoming partners, agree among themselves as to the
management and use of such property and the application of the proceeds
therefrom." (Spurlock v. Wilson, 142 S. W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision:
"Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances (referring to the series of transactions) such as to leave no
room for doubt on the existence of said intent in petitioners herein."
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two
parcels of land which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two
lots with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal.
The next day he transferred his rights to his four children, the petitioners, to enable
them to build their residences. The company sold the two lots to petitioners for
P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles
issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold
them to the Walled City Securities Corporation and Olga Cruz Canda for the total
sum of P313,050 (Exh. C and D). They derived from the sale a total profit of
P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain
and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period,
the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual
income tax on their shares thereof He assessed P37,018 as corporate income tax,
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a
total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum
of P33,584 as a " taxable in full (not a mere capital gain of which is taxable) and
required them to pay deficiency income taxes aggregating P56,707.20 including the
50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties
totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital
gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture within the meaning of sections 24(a) and
84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102
Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained
the same. Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership
under article 1767 of the Civil Code simply because they allegedly contributed
P178,708.12 to buy the two lots, resold the same and divided the profit among
themselves.
To regard the petitioners as having formed a taxable unregistered partnership would
result in oppressive taxation and confirm the dictum that the power to tax involves
the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners
pure and simple. To consider them as partners would obliterate the distinction
between a co-ownership and a partnership. The petitioners were not engaged in
any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the co-
ownership. The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,
en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice
que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la
linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota fundamental de
diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la sociedad,
y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol,
Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not
of itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are
derived". There must be an unmistakable intention to form a partnership or joint
venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666,
where 15 persons contributed small amounts to purchase a two-peso sweepstakes
ticket with the agreement that they would divide the prize The ticket won the third
prize of P50,000. The 15 persons were held liable for income tax as an unregistered
partnership.
The instant case is distinguishable from the cases where the parties engaged in joint
ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa
heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the
inherited properties; they merely continued dedicating the property to the use to
which it had been put by their forebears; they individually reported in their tax
returns their corresponding shares in the income and expenses of the 'hacienda',
and they continued for many years the status of co-ownership in order, as conceded
by respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa
vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who
own properties which produce income should not automatically be considered
partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income
tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after
an extrajudicial settlement the co-heirs used the inheritance or the incomes derived
therefrom as a common fund to produce profits for themselves, it was held that
they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA
198, where father and son purchased a lot and building, entrusted the
administration of the building to an administrator and divided equally the net
income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where
the three Evangelista sisters bought four pieces of real property which they leased
to various tenants and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether
the father donated the two lots to the petitioners and whether he paid the donor's
tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have
already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
assessments are cancelled. No costs.
SO ORDERED.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.
Concepcion, Jr., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint
venture for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of
land from Juan Roque. The first two parcels of land were sold by petitioners in 1968
toMarenir Development Corporation, while the three parcels of land were sold by
petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners
realized a net profit in the sale made in 1968 in the amount of P165,224.70, while
they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I.
Plana, petitioners were assessed and required to pay a total amount of P107,101.70
as alleged deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that
they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that
in the years 1968 and 1970, petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable as a corporation under
Section 20(b) and its income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code 1 that the unregistered partnership was
subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the
tax liability of the unregistered partnership. Hence, the petitioners were required to
pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals
docketed as CTA Case No. 3045. In due course, the respondent court by a majority
decision of March 30, 1987, 2 affirmed the decision and action taken by respondent
commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered
partnership was in fact formed by petitioners which like a corporation was subject
to corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that
considering the circumstances of this case, although there might in fact be a co-
ownership between the petitioners, there was no adequate basis for the conclusion
that they thereby formed an unregistered partnership which made "hem liable for
corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE
BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS,
THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE
REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-
13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which
together with their own personal funds they used in buying several real properties.
They appointed their brother to manage their properties with full power to lease,
collect, rent, issue receipts, etc. They had the real properties rented or leased to
various tenants for several years and they gained net profits from the rental income.
Thus, the Collector of Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (companies collectives), a tax upon such income equal to
the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not include duly registered general
co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide
the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not
a property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said
common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23,
1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transcations undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of
rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest
that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business enterprise operated
for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over twelve
(12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose
in creating the set up already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only
one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement
to contribute money, property or industry to a common fund, and that they
intended to divide the profits among themselves. Respondent commissioner and/ or
his representative just assumed these conditions to be present on the basis of the
fact that petitioners purchased certain parcels of land and became co-owners
thereof.
In Evangelists, there was a series of transactions where petitioners purchased
twenty-four (24) lots showing that the purpose was not limited to the conservation
or preservation of the common fund or even the properties acquired by them. The
character of habituality peculiar to business transactions engaged in for the purpose
of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not
sell the same nor make any improvements thereon. In 1966, they bought another
three (3) parcels of land from one seller. It was only 1968 when they sold the two (2)
parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business transactions for the
purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The
business was under the management of one of the partners. Such condition existed
for over fifteen (15) years. None of the circumstances are present in the case at bar.
The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property held in
common does not convert their venture into a partnership. Or the sharing of the
gross returns does not of itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. This only
means that, aside from the circumstance of profit, the presence of other elements
constituting partnership is necessary, such as the clear intent to form a partnership,
the existence of a juridical personality different from that of the individual partners,
and the freedom to transfer or assign any interest in the property by one with the
consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953
ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but
who severally retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital, and no community of
interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway,
142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract
of realty, holding as tenants in common, and to divide the profits of disposing of it,
the brother and the other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form
the same; (b) generally participating in both profits and losses; (c) and such a
community of interest, as far as third persons are concerned as enables each party
to make contract, manage the business, and dispose of the whole property.-
Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between
the owners, though they may use it for the purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management, and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the
persons sharing therein have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that they thereby
formed an unregistered partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty thereby. Under
the circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership
appears to have been formed, since there is no such existing unregistered
partnership with a distinct personality nor with assets that can be held liable for said
deficiency corporate income tax, then petitioners can be held individually liable as
partners for this unpaid obligation of the partnership p. 7 However, as petitioners
have availed of the benefits of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent
Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and
another decision is hereby rendered relieving petitioners of the corporate income
tax liability in this case, without pronouncement as to costs.
SO ORDERED.
Cruz, Grio-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,
MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,
JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U.
ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No.
109289, the constitutionality of Republic Act No. 7496, also commonly known as the
Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the
National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93,
promulgated by public respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued
implementation of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one
subject which shall be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without due
process of law, nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93,
argue that public respondents have exceeded their rule-making authority in
applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with
the Court's directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act
No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified
Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No.
109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections 21
and 29 of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National
Internal Revenue Code, as now amended, provide:
Sec. 21. Tax on citizens or residents.
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. A tax is hereby imposed upon the taxable net income
as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-
employed or practices his profession herein, determined in accordance with the
following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. In computing taxable income subject to
tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant
to the business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for
the rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from
accredited financial institutions which must be proven to have been incurred in
connection with the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as
deductions to answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept
petitioner's view that the amendatory law should be considered as having now
adopted a gross income, instead of as having still retained the net income, taxation
scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior to
the amendment; limiting, however, allowable deductions from gross income is
neither discordant with, nor opposed to, the net income tax concept. The fact of the
matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent
log-rolling legislation intended to unite the members of the legislature who favor
any one of unrelated subjects in support of the whole act, (b) to avoid surprises or
even fraud upon the legislature, and (c) to fairly apprise the people, through such
publications of its proceedings as are usually made, of the subjects of
legislation. 1 The above objectives of the fundamental law appear to us to have been
sufficiently met. Anything else would be to require a virtual compendium of the law
which could not have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional
requirement that taxation "shall be uniform and equitable" in that the law would
now attempt to tax single proprietorships and professionals differently from the
manner it imposes the tax on corporations and partnerships. The contention clearly
forgets, however, that such a system of income taxation has long been the prevailing
rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires
that all subjects or objects of taxation, similarly situated, are to be treated alike both
in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371).
Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to
achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all
those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco
vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the
legislative intent to increasingly shift the income tax system towards the schedular
approach 2 in the income taxation of individual taxpayers and to maintain, by and
large, the present global treatment 3 on taxable corporations. We certainly do not
view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in
the process, what he believes to be an imbalance between the tax liabilities of those
covered by the amendatory law and those who are not. With the legislature
primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. This court cannot freely
delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust
as to amount to confiscation of property, courts will not hesitate to strike it down,
for, despite all its plenitude, the power to tax cannot override constitutional
proscriptions. This stage, however, has not been demonstrated to have been
reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared
unconstitutional for being violative of due process must perforce fail. The due
process clause may correctly be invoked only when there is a clear contravention of
inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of
whether or not public respondents have exceeded their authority in promulgating
Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional partnership
(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in
said law are to be deducted from partnership income. Also, the expenses paid or
incurred by partners in their individual capacities in the practice of their profession
which are not reimbursed or paid by the partnership but are not considered as
direct cost, are not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of
public respondents that would apply SNIT to partners in general professional
partnerships. Petitioners cite the pertinent deliberations in Congress during its
enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B.
Perez, minority floor leader of the House of Representatives, in the latter's privilege
speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill.
Do we speak here of individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It
applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that
this bill is intended to increase collections as far as individuals are concerned and to
make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate
version of the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to partnerships;
it is only with respect to individuals and professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general
professional partnerships are subject to the payment of income tax or that there is a
difference in the tax treatment between individuals engaged in business or in the
practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership, unlike
an ordinary business partnership (which is treated as a corporation for income tax
purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is
tax exempt, but on the partners themselves in their individual capacity computed
on their distributive shares of partnership profits. Section 23 of the Tax Code, which
has not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in
accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each
partner
(1) Shall take into account separately his distributive share of the partnership's
income, gain, loss, deduction, or credit to the extent provided by the pertinent
provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through
partnership (whether registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax and the final tax
on passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the
same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to
consider Republic Act No. 7496 as an entirely independent, not merely as an
amendatory, piece of legislation. The view can easily become myopic, however,
when the law is understood, as it should be, as only forming part of, and subject to,
the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all
embracing term used in the Tax Code, and it practically covers all persons who
derive taxable income. The law, in levying the tax, adopts the most comprehensive
tax situs of nationality and residence of the taxpayer (that renders citizens,
regardless of residence, and resident aliens subject to income tax liability on their
income from all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident aliens and foreign
corporations to income tax on their income from Philippine sources). In the process,
the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts
(irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt
partnerships." Ordinarily, partnerships, no matter how created or organized, are
subject to income tax (and thus alluded to as "taxable partnerships") which, for
purposes of the above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations. Except for few variances,
such as in the application of the "constructive receipt rule" in the derivation of
income, the income tax approach is alike to both juridical persons. Obviously, SNIT is
not intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to cover
corporations and partnerships which are independently subject to the payment of
income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for income tax
purposes. A general professional partnership is such an example. 4Here, the partners
themselves, not the partnership (although it is still obligated to file an income tax
return [mainly for administration and data]), are liable for the payment of income
tax in their individual capacity computed on their respective and distributive shares
of profits. In the determination of the tax liability, a partner does so as an individual,
and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere
mechanism or a flow-through entity in the generation of income by, and the
ultimate distribution of such income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the
above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual
income taxpayers on their non-compensation income. There is no evident intention
of the law, either before or after the amendatory legislation, to place in an unequal
footing or in significant variance the income tax treatment of professionals who
practice their respective professions individually and of those who do it through a
general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo,
Quiason, Puno, Kapunan and Mendoza, JJ., concur.
Padilla and Bidin, JJ., are on leave.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 76573 September 14, 1989
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs.
 COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
(three months (three months and THIRD
APPEALS, respondents.
ended 3.31.81) ended 9.30.81) quarters
Melquiades C. Gutierrez for petitioner. (In Pesos)

The Solicitor General for respondents.

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

FERNAN, C.J.: 10% Dividend Tax Withheld 84,972.00 84,972.00 169,944.00

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly Cash Dividend net of 10% 764,748.00 764,748.00 1,529,496.00
organized and existing under the laws of Japan and duly licensed to engage in Dividend Tax Withheld
business under Philippine laws with branch office at the 4th Floor, FEEMI Building,
Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of
Tax Appeals 1dated February 12, 1986 denying its claim for refund or tax credit in 15% Branch Profit 114,712.20 114,712.20 229,424.40 3
the amount of P229,424.40 representing alleged overpayment of branch profit Remittance Tax Withheld
remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila
(AG&P). Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60
Petitioner
The following facts are undisputed: Marubeni Corporation of Japan has equity
investments in AG&P of Manila. For the first quarter of 1981 ending March 31, The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal
withheld the corresponding 10% final dividend tax thereon. Similarly, for the third Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880.
quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit
dividends to petitioner and withheld the corresponding 10% final dividend tax remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of
thereon. 2 Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Receipt No. 7905930. 4
Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15%
first and third quarters of 1981, but also of the withheld 15% profit remittance tax branch profit remittance on cash dividends declared and remitted to petitioner at its
based on the remittable amount after deducting the final withholding tax of 10%. A head office in Tokyo in the total amount of P229,424.40 on April 20 and August 4,
schedule of dividends declared and paid by AG&P to its stockholder Marubeni 1981. 5
Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch
profit remittance tax paid thereon, is shown below: In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip,
Gorres, Velayo and Company, sought a ruling from the Bureau of Internal Revenue
1981 FIRST QUARTER THIRD QUARTER TOTAL OF FIRST on whether or not the dividends petitioner received from AG&P are effectively
connected with its conduct or business in the Philippines as to be considered branch
profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of
the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705
and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its
trade or business in the Philippines are subject to the 15% profit remittance tax. To
be effectively connected it is not necessary that the income be derived from the
actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income
arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as
amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner claimed for
the refund or issuance of a tax credit of P229,424.40 "representing profit tax
remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific
Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10
(2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan
is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate
dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount
refundable offsets the liability, hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the
refund by the Commissioner of Internal Revenue in its assailed judgment of
February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court
explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that
the dividends in question are income taxable to the Marubeni Corporation of Tokyo,
Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific
Company of Manila to its shareholder out of its profits on the investments of the
Marubeni Corporation of Japan, a non-resident foreign corporation. The
investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of
Japan were directly made by it and the dividends on the investments were likewise
directly remitted to and received by the Marubeni Corporation of Japan. Petitioner
Marubeni Corporation Philippine Branch has no participation or intervention,
directly or indirectly, in the investments and in the receipt of the dividends. And it
appears that the funds invested in the Atlantic Gulf & Pacific Company did not come
out of the funds infused by the Marubeni Corporation of Japan to the Marubeni
Corporation Philippine Branch. As a matter of fact, the Central Bank of the
Philippines, in authorizing the remittance of the foreign exchange equivalent of (sic)
the dividends in question, treated the Marubeni Corporation of Japan as a non-
resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting
documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person
who earned it. Admittedly, the dividends under consideration were earned by the
Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it
is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in
business under Philippine laws, such dividends are not the income of the Philippine
Branch and are not taxable to the said Philippine branch. We see no significance
thereto in the identity concept or principal-agent relationship theory of petitioner
because such dividends are the income of and taxable to the Japanese corporation
in Japan and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent
relationship theory, Marubeni Japan is likewise a resident foreign corporation
subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977
which states:
Dividends received by a domestic or resident foreign corporation liable to tax under
this Code (1) Shall be subject to a final tax of 10% on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a
non-resident foreign corporation and not engaged in trade or business in the
Philippines, is subject to tax on income earned from Philippine sources at the rate of
35 % of its gross income under Section 24 (b) (1) of the same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign
corporation not engaged in trade or 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 ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the
Tax Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State
to a resident of the other Contracting State may be taxed in that other Contracting
State.
(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that
Contracting State, but if the recipient is the beneficial owner of the dividends the
tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from
Philippine sources is therefore the determination of whether it is a resident or a
non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade
or business" within the Philippines. Petitioner contends that precisely because it is
engaged in business in the Philippines through its Philippine branch that it must be
considered as a resident foreign corporation. Petitioner reasons that since the
Philippine branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all. A single corporate
entity cannot be both a resident and a non-resident corporation depending on the
nature of the particular transaction involved. Accordingly, whether the dividends are
paid directly to the head office or coursed through its local branch is of no moment
for after all, the head office and the office branch constitute but one corporate
entity, the Marubeni Corporation, which, under both Philippine tax and corporate
laws, is a resident foreign corporation because it is transacting business in the
Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that
the business of the foreign corporation is conducted through its branch office,
following the principal agent relationship theory. It is understood that the branch
becomes its agent here. So that when the foreign corporation transacts business in
the Philippines independently of its branch, the principal-agent relationship is set
aside. The transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the
resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and distinct income
taxpayer from the branch in the Philippines. There can be no other logical
conclusion considering the undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for purposes peculiarly germane to the
conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch
in the Philippines. It is thus clear that petitioner, having made this independent
investment attributable only to the head office, cannot now claim the increments as
ordinary consequences of its trade or business in the Philippines and avail itself of
the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute were
neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate
dividend tax, the recipient being a non-resident stockholder, they grossly erred in
holding that no refund was forthcoming to the petitioner because the taxes thus
withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention
pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule
in taxation that each tax has a different tax basis. While the tax on dividends is
directly levied on the dividends received, "the tax base upon which the 15 % branch
profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under
Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the
Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by the
contracting state concerned should not exceed the 25 % limitation and that said rate
would apply only if the tax imposed by our laws exceeds the same. In other words,
by reason of our bilateral negotiations with Japan, we have agreed to have our right
to tax limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction
in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in
conjunction with the Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On
dividends received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends received, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against
the tax due from the non-resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20 % which represents the difference between
the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided
in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-
resident foreign corporation, as a general rule, is taxed 35 % of its gross income
from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from
a domestic corporation (AG&P) on the condition that its domicile state (Japan)
extends in favor of petitioner, a tax credit of not less than 20 % of the dividends
received. This 20 % represents the difference between the regular tax of 35 % on
non-resident foreign corporations which petitioner would have ordinarily paid, and
the 15 % special rate on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be
computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a
foreign non-resident stockholder from a domestic corporation under Section 24 (b)
(1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the
dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal
Revenue is laboring under the impression that the Court of Tax Appeals is covered
by Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of
1980. He alleges that the instant petition for review was not perfected in
accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal
from final orders, resolutions, awards, judgments, or decisions of any court in all
cases shall be fifteen (15) days counted from the notice of the final order, resolution,
award, judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax
Appeals which has been created by virtue of a special law, Republic Act No. 1125.
Respondent court is not among those courts specifically mentioned in Section 2 of
BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an
order, ruling or decision of the Court of Tax Appeals is given thirty (30) days from
notice to appeal therefrom. Otherwise, said order, ruling, or decision shall become
final.
Records show that petitioner received notice of the Court of Tax Appeals's decision
denying its claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986
(the last day for appeal), petitioner filed a motion for reconsideration which
respondent court subsequently denied on November 17, 1986, and notice of which
was received by petitioner on November 26, 1986. Two days later, or on November
28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax
Appeals and a petition for review with the Supreme Court. 14 From the foregoing, it
is evident that the instant appeal was perfected well within the 30-day period
provided under R.A. No. 1125, the whole 30-day period to appeal having begun to
run again from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated
February 12, 1986 which affirmed the denial by respondent Commissioner of
Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby
REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as
tax credit in favor of petitioner the amount of P144,452.40 representing
overpayment of taxes on dividends received. No costs.
So ordered.
Gutierrez, Jr., Bidin and Cortes, JJ., concur.
Feliciano, J., is on leave.
FIRST DIVISION
[G.R. No. 137377. December 18, 2001]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI
CORPORATION, respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision
dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which
affirmed the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case
No. 4109. The tax court ordered the Commissioner of Internal Revenue to desist
from collecting the 1985 deficiency income, branch profit remittance and
contractors taxes from Marubeni Corporation after finding the latter to have
properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as
amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing
under the laws of Japan. It is engaged in general import and export trading,
financing and the construction business. It is duly registered to engage in such
business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a
letter of authority to examine the books of accounts of the Manila branch office of
respondent corporation for the fiscal year ending March 1985. In the course of the
examination, petitioner found respondent to have undeclared income from two (2)
contracts in the Philippines, both of which were completed in 1984. One of the
contracts was with the National Development Company (NDC) in connection with
the construction and installation of a wharf/port complex at the Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte. The other
contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial
Development Estate.
On March 1, 1986, petitioners revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractors and commercial brokers
taxes. Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15,
1986 from petitioner assessing respondent several deficiency taxes. The assessed
deficiency internal revenue taxes, inclusive of surcharge and interest, were as
follows:
I. DEFICIENCY INCOME TAX
FY ended March 31, 1985
Undeclared gross income (Philphos and
and NDC construction projects). . . . . . . . . . . . P 967,269,811.14
Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57
Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57
Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
20% int. p.a. fr. 7-15-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Undeclared net income from
Philphos and NDC construction projects . . . . . P 483,634,905.57
Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57
Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50
20% int. p.a. fr. 4-26-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16
III. DEFICIENCY CONTRACTORS TAX
FY ended March 31, 1985
Undeclared gross receipts/ gross income from
Philphos and NDC construction projects . . . . P 967,269,811.14
Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00
Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00
25% surcharge for late payment . . . . . . . . . 9,672,698.00
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00
Add: 20% int. p.a. fr. 4-21-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKERS TAX
FY ended March 31, 1985
Undeclared share from commission income
(denominated as subsidy from Home
Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00
Add: 50% surcharge for non-declaration. . . . . . . 814,284.50
25% surcharge for late payment . . . . . . . . . 407,142.25
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75
Add: 20% int. p.a. fr. 4-21-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68
The 50% surcharge was imposed for your clients failure to report for tax purposes
the aforesaid taxable revenues while the 25% surcharge was imposed because of
your clients failure to pay on time the above deficiency percentage taxes.
x x x x x x x x x. [1]
Petitioner found that the NDC and Philphos contracts were made on a turn-key basis
and that the gross income from the two projects amounted to P967,269,811.14.
Each contract was for a piece of work and since the projects called for the
construction and installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources, hence, subject to internal
revenue taxes. The assessment letter further stated that the same was petitioners
final decision and that if respondent disagreed with it, respondent may file an
appeal with the Court of Tax Appeals within thirty (30) days from receipt of the
assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court
of Tax Appeals. The first petition, CTA Case No. 4109, questioned the deficiency
income, branch profit remittance and contractors tax assessments in petitioners
assessment letter. The second, CTA Case No. 4110, questioned the deficiency
commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 [2] declaring a one-time
amnesty covering unpaid income taxes for the years 1981 to 1985 was issued.
Under this E.O., a taxpayer who wished to avail of the income tax amnesty should,
on or before October 31, 1986: (a) file a sworn statement declaring his net worth as
of December 31, 1985; (b) file a certified true copy of his statement declaring his net
worth as of December 31, 1980 on record with the Bureau of Internal Revenue
(BIR), or if no such record exists, file a statement of said net worth subject to
verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent
(10%) of the increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return
dated October 30, 1986 and attached thereto its sworn statement of assets and
liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was
received by the BIR on November 3, 1986 and respondent paid the amount
of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between
1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986
to December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by
Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O.
No. 41 for the years 1981 to 1985, E.O. No. 64 [3] included estate and donors taxes
under Title III and the tax on business under Chapter II, Title V of the National
Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges under E.O. No. 41 were extended to the
foregoing tax liabilities, and the period within which the taxpayer could avail of the
amnesty was extended to December 15, 1986. Those taxpayers who already filed
their amnesty return under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an amended return
and paying an additional 5% on the increase in net worth to cover business, estate
and donors tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O
No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under
the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR
equivalent to five percent (5%) of the increase of its net worth between 1981 and
1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax
Appeals rendered a decision in CTA Case No. 4109. The tax court found that
respondent had properly availed of the tax amnesty under E.O. Nos. 41 and 64 and
declared the deficiency taxes subject of said case as deemed cancelled and
withdrawn. The Court of Tax Appeals disposed of as follows:
WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED
to DESIST from collecting the 1985 deficiency taxes it had assessed against
petitioner and the same are deemed considered [sic] CANCELLED and WITHDRAWN
by reason of the proper availment by petitioner of the amnesty under Executive
Order No. 41, as amended.[4]
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518
with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the
decision of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court
of Tax Appeals which ruled that herein respondents deficiency tax liabilities were
extinguished upon respondents availment of tax amnesty under Executive Orders
Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance,
and contractors taxes assessed by petitioner.[5]
The main controversy in this case lies in the interpretation of the exception to the
amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved
herein income tax, branch profit remittance tax and contractors tax. These taxes are
covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims,
however, that respondent is disqualified from availing of the said amnesties because
the latter falls under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty
granted thereunder, viz:
Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty
herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed
in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue
Code, as amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as
of the effectivity hereof as a result of information furnished under Section 316 of
the National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth
before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended.
Petitioner argues that at the time respondent filed for income tax amnesty on
October 30, 1986, CTA Case No. 4109 had already been filed and was pending
before the Court of Tax Appeals. Respondent therefore fell under the exception in
Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers with income tax
cases already filed in court as of the effectivity hereof. The point of reference is the
date of effectivity of E.O. No. 41. The filing of income tax cases in court must have
been made before and as of the date of effectivity of E.O. No. 41. Thus, for a
taxpayer not to be disqualified under Section 4 (b) there must have been no income
tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of
when the taxpayer filed for income tax amnesty, provided of course he files it on or
before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractors tax assessments was
filed by respondent with the Court of Tax Appeals on September 26, 1986. When
E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet
been filed in court. Respondent corporation did not fall under the said exception in
Section 4 (b), hence, respondent was not disqualified from availing of the amnesty
for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax
assessment. A branch profit remittance tax is defined and imposed in Section 24 (b)
(2) (ii), Title II, Chapter III of the National Internal Revenue Code. [6] In the tax code,
this tax falls under Title II on Income Tax. It is a tax on income. Respondent therefore
did not fall under the exception in Section 4 (b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractors tax assessment and
respondents availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the
coverage of E.O. No. 41 by including estate and donors taxes and tax on business.
Estate and donors taxes fall under Title III of the Tax Code while business taxes fall
under Chapter II, Title V of the same. The contractors tax is provided in Section 205,
Chapter II, Title V of the Tax Code; it is defined and imposed under the title on
business taxes, and is therefore a tax on business. [7]
When E.O. No. 64 took effect on November 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate and donors taxes.
Instead, Section 8 of E.O. No. 64 provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary
to or inconsistent with this amendatory Executive Order shall remain in full force
and effect.
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to
or inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus,
Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O.
No. 64. With respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has income tax cases already filed in court as of
the effectivity hereof. As to what Executive Order the exception refers to,
respondent argues that because of the words income and hereof, they refer to
Executive Order No. 41.[8]
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be
construed to refer to E.O. No. 41 and its date of effectivity. The general rule is that
an amendatory act operates prospectively.[9] While an amendment is generally
construed as becoming a part of the original act as if it had always been contained
therein,[10] it may not be given a retroactive effect unless it is so provided expressly
or by necessary implication and no vested right or obligations of contract are
thereby impaired.[11]
There is nothing in E.O. No. 64 that provides that it should retroact to the date of
effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from
E.O. No. 64 that it or any of its provisions should apply retroactively. Executive Order
No. 64 is a substantive amendment of E.O. No. 41. It does not merely change
provisions in E.O. No. 41. It supplements the original act by adding other taxes not
covered in the first.[12] It has been held that where a statute amending a tax law is
silent as to whether it operates retroactively, the amendment will not be given a
retroactive effect so as to subject to tax past transactions not subject to tax under
the original act.[13] In an amendatory act, every case of doubt must be resolved
against its retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a revenue or tax law. [15] It
partakes of an absolute forgiveness or waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a chance to start
with a clean slate.[16] A tax amnesty, much like a tax exemption, is never favored nor
presumed in law.[17] If granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer and liberally in favor of
the taxing authority.[18] For the right of taxation is inherent in government. The State
cannot strip itself of the most essential power of taxation by doubtful words. He
who claims an exemption (or an amnesty) from the common burden must justify his
claim by the clearest grant of organic or state law. It cannot be allowed to exist upon
a vague implication. If a doubt arises as to the intent of the legislature, that doubt
must be resolved in favor of the state.[19]
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64
should therefore be construed strictly against the taxpayer. The term income tax
cases should be read as to refer to estate and donors taxes and taxes on business
while the word hereof, to E.O. No. 64. Since Executive Order No. 64 took effect on
November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned,
the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November
17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took
effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in
court. By the time respondent filed its supplementary tax amnesty return on
December 15, 1986, respondent already fell under the exception in Section 4 (b) of
E.O. Nos. 41 and 64 and was disqualified from availing of the business tax amnesty
granted therein.
It is respondents other argument that assuming it did not validly avail of the
amnesty under the two Executive Orders, it is still not liable for the deficiency
contractors tax because the income from the projects came from the Offshore
Portion of the contracts. The two contracts were divided into two parts, i.e., the
Onshore Portion and the Offshore Portion. All materials and equipment in the
contract under the Offshore Portion were manufactured and completed in Japan,
not in the Philippines, and are therefore not subject to Philippine taxes.
Before going into respondents arguments, it is necessary to discuss the background
of the two contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos
to engage in the large-scale manufacture of phosphatic fertilizer for the local and
foreign markets.[20] The Philphos plant complex which was envisioned to be the
largest phosphatic fertilizer operation in Asia, and among the largest in the world,
covered an area of 180 hectares within the 435-hectare Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a
modern, reliable, efficient and integrated wharf/port complex at the Leyte Industrial
Development Estate. The wharf/ port complex was intended to be one of the major
facilities for the industrial plants at the Leyte Industrial Development Estate. It was
to be specifically adapted to the site for the handling of phosphate rock, bagged or
bulk fertilizer products, liquid materials and other products of Philphos, the
Philippine Associated Smelting and Refining Corporation (Pasar), [21] and other
industrial plants within the Estate. The bidding was participated in by Marubeni
Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent
entered into an agreement entitled Turn-Key Contract for Leyte Industrial Estate
Port Development Project Between National Development Company and Marubeni
Corporation.[22] The Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems, fuel oil depot,
utilities systems, storage and service buildings, offsite facilities, harbor service
vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.[23] The scope of the works under
the contract covered turn-key supply, which included grants of licenses and the
transfer of technology and know-how,[24] and:
x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole
of the Wharf/Port Complex through the Owner, with the design and construction of
other facilities around the site. The scope of works shall also include any activity,
work and supply necessary for, incidental to or appropriate under present
international industrial port practice, for the timely and successful implementation
of the object of this Contract, whether or not expressly referred to in the
abovementioned Annex I.[25]
The contract price for the wharf/ port complex was Y12,790,389,000.00
and P44,327,940.00. In the contract, the price in Japanese currency was broken
down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion
II, while the price in Philippine currency was referred to as the Philippine Pesos
Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen
credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by
suppliers credit in favor of Marubeni from the Export-Import Bank of Japan. The
OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote economic
development.[26] The OECF extended to the Philippine Government a loan
of Y7,560,000,000.00 for the Leyte Industrial Estate Port Development Project and
authorized the NDC to implement the same.[27] The other type of financing is an
indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-
Import Bank of Japan to advance payment to its sub-contractors. [28]
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine
Pesos Portion were further broken down and subdivided according to the materials,
equipment and services rendered on the project. The price breakdown and the
corresponding materials, equipment and services were contained in a list attached
as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened for public
bidding a project to construct and install two ammonia storage tanks in Isabel. Like
the NDC contract, it was Marubeni Head Office in Japan that participated in and
won the bidding. Thus, on May 2, 1982, Philphos and respondent corporation
entered into an agreement entitled Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni
Corporation.[30] The object of the contract was to establish and place in operating
condition a modern, reliable, efficient and integrated ammonia storage complex
adapted to the site for the receipt and storage of liquid anhydrous ammonia [31]and
for the delivery of ammonia to an integrated fertilizer plant adjacent to the storage
complex and to vessels at the dock.[32] The storage complex was to consist of
ammonia storage tanks, refrigeration system, ship unloading system, transfer
pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and
other related facilities.[33] The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses and
transfer of technology and know-how,[34] and:
x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole
of the Ammonia Storage Complex through the Owner with the design and
construction of other facilities at and around the Site. The scope of works shall also
include any activity, work and supply necessary for, incidental to or appropriate
under present international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to
in the abovementioned Annex I.[35]
The contract price for the project was Y3,255,751,000.00 and P17,406,000.00. Like
the NDC contract, the price was divided into three portions. The price in Japanese
currency was broken down into the Japanese Yen Portion I and Japanese Yen Portion
II while the price in Philippine currency was classified as the Philippine Pesos
Portion. Both Japanese Yen Portions I and II were financed by suppliers credit from
the Export-Import Bank of Japan. The price stated in the three portions were further
broken down into the corresponding materials, equipment and services required for
the project and their individual prices. Like the NDC contract, the breakdown in the
Philphos contract is contained in a list attached to the latter as Annex III. [36]
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the
contracts were classifiedthe Foreign Offshore Portion and the Philippine Onshore
Portion. In both contracts, the Japanese Yen Portion I corresponds to the Foreign
Offshore Portion.[37] Japanese Yen Portion II and the Philippine Pesos Portion
correspond to the Philippine Onshore Portion. [38]
Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractors tax on the income from the two projects. In fact respondent claims,
which petitioner has not denied, that the income it derived from the Onshore
Portion of the two projects had been declared for tax purposes and the taxes
thereon already paid to the Philippine government.[39] It is with regard to the gross
receipts from the Foreign Offshore Portion of the two contracts that the liabilities
involved in the assessments subject of this case arose. Petitioner argues that since
the two agreements are turn-key,[40] they call for the supply of both materials and
services to the client, they are contracts for a piece of work and are indivisible. The
situs of the two projects is in the Philippines, and the materials provided and
services rendered were all done and completed within the territorial jurisdiction of
the Philippines.[41] Accordingly, respondents entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from Philippine
sources. The total gross receipts covering both labor and materials should be
subjected to contractors tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as
follows:
Sec. 205. Contractors, proprietors or operators of dockyards, and others.A
contractors tax of four percent of the gross receipts is hereby imposed on
proprietors or operators of the following business establishments and/or persons
engaged in the business of selling or rendering the following services for a fee or
compensation:
(a) General engineering, general building and specialty contractors, as defined in
Republic Act No. 4566;
xxxxxxxxx
(q) Other independent contractors. The term independent contractors includes
persons (juridical or natural) not enumerated above (but not including individuals
subject to the occupation tax under the Local Tax Code) whose activity consists
essentially of the sale of all kinds of services for a fee regardless of whether or not
the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. It does not include regional or area
headquarters established in the Philippines by multinational corporations, including
their alien executives, and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.
x x x x x x x x x.[43]
Under the afore-quoted provision, an independent contractor is a person whose
activity consists essentially of the sale of all kinds of services for a fee, regardless of
whether or not the performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their employees. The word
contractor refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the petty details. [44]
A contractors tax is a tax imposed upon the privilege of engaging in business. [45] It is
generally in the nature of an excise tax on the exercise of a privilege of selling
services or labor rather than a sale on products; [46] and is directly collectible from
the person exercising the privilege.[47] Being an excise tax, it can be levied by the
taxing authority only when the acts, privileges or business are done or performed
within the jurisdiction of said authority. [48] Like property taxes, it cannot be imposed
on an occupation or privilege outside the taxing district. [49]
In the case at bar, it is undisputed that respondent was an independent contractor
under the terms of the two subject contracts. Respondent, however, argues that the
work therein were not all performed in the Philippines because some of them were
completed in Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and
equipment to be made and the works and services to be performed by respondent
are indeed classified into two. The first part, entitled Breakdown of Japanese Yen
Portion I provides:
Japanese Yen Portion I of the Contract Price has been subdivided according to
discrete portions of materials and equipment which will be shipped to Leyte as
units and lots. This subdivision of price is to be used by owner to verify invoice for
Progress Payments under Article 19.2.1 of the Contract. The agreed subdivision of pulled to the pier to the spot where they were installed. [60] Their installation simply
Japanese Yen Portion I is as follows: consisted of bolting them onto the pier.[61]

x x x x x x x x x. [50] Like the ship unloader and loader, the three tugboats and a line boat were
completely manufactured in Japan. The boats sailed to Isabel on their own power.
The subdivision of Japanese Yen Portion I covers materials and equipment while
The mobile equipment, consisting of three to four sets of tractors, cranes and
Japanese Yen Portion II and the Philippine Pesos Portion enumerate other materials
dozers, trailers and forklifts, were also manufactured and completed in Japan.
and equipment and the construction and installation work on the project. In other
They were loaded on to a shipping vessel and unloaded at the Isabel Port. These
words, the supplies for the project are listed under Portion I while labor and other
pieces of equipment were all on wheels and self-propelled. Once unloaded at the
supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi
port, they were ready to be driven and perform what they were designed to do. [62]
Hojo, then General Manager of the Industrial Plant Section II of the Industrial Plant
Department of Marubeni Corporation in Japan who supervised the implementation In addition to the foregoing, there are other items listed in Japanese Yen Portion I in
of the two projects, testified that all the machines and equipment listed under Annex III to the NDC contract. These other items consist of supplies and materials
Japanese Yen Portion I in Annex III were manufactured in Japan. [51] The machines for five (5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an
and equipment were designed, engineered and fabricated by Japanese firms sub- administration building and a security building. Most of the materials consist of
contracted by Marubeni from the list of sub-contractors in the technical appendices steel sheets, steel pipes, channels and beams and other steel structures,
to each contract.[52] Marubeni sub-contracted a majority of the equipment and navigational and communication as well as electrical equipment. [63]
supplies to Kawasaki Steel Corporation which did the design, fabrication,
In connection with the Philphos contract, the major pieces of equipment supplied
engineering and manufacture thereof;[53] Yashima & Co. Ltd. which manufactured
by respondent were the ammonia storage tanks and refrigeration units. [64] The steel
the mobile equipment; Bridgestone which provided the rubber fenders of the
plates for the tank were manufactured and cut in Japan according to drawings and
mobile equipment;[54] and B.S. Japan for the supply of radio equipment.[55] The
specifications and then shipped to Isabel. Once there, respondents employees put
engineering and design works made by Kawasaki Steel Corporation included the lay-
the steel plates together to form the storage tank. As to the refrigeration units, they
out of the plant facility and calculation of the design in accordance with the
were completed and assembled in Japan and thereafter shipped to Isabel. The units
specifications given by respondent.[56] All sub-contractors and manufacturers are
were simply installed there.[65] Annex III to the Philphos contract lists down under
Japanese corporations and are based in Japan and all engineering and design works
the Japanese Yen Portion I the materials for the ammonia storage tank, incidental
were performed in that country.[57]
equipment, piping facilities, electrical and instrumental apparatus, foundation
The materials and equipment under Portion I of the NDC Port Project is primarily material and spare parts.
composed of two (2) sets of ship unloader and loader; several boats and mobile
All the materials and equipment transported to the Philippines were inspected and
equipment.[58] The ship unloader unloads bags or bulk products from the ship to the
tested in Japan prior to shipment in accordance with the terms of the contracts.
port while the ship loader loads products from the port to the ship. The unloader [66]
The inspection was made by representatives of respondent corporation, of NDC
and loader are big steel structures on top of each is a large crane and a
and Philphos. NDC, in fact, contracted the services of a private consultancy firm to
compartment for operation of the crane. Two sets of these equipment were
verify the correctness of the tests on the machines and equipment [67]while Philphos
completely manufactured in Japan according to the specifications of the project.
sent a representative to Japan to inspect the storage equipment. [68]
After manufacture, they were rolled on to a barge and transported to Isabel, Leyte.
[59]
Upon reaching Isabel, the unloader and loader were rolled off the barge and
The sub-contractors of the materials and equipment under Japanese Yen Portion I
were all paid by respondent in Japan. In his deposition upon oral examination,
Kenjiro Yamakawa, formerly the Assistant General Manager and Manager of the
Steel Plant Marketing Department, Engineering & Construction Division, Kawasaki
Steel Corporation, testified that the equipment and supplies for the two projects
provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan.
Receipts for such payments were duly issued by Kawasaki in Japanese and English.
[69]
Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. [70]
Between Marubeni and the two Philippine corporations, payments for all materials
and equipment under Japanese Yen Portion I were made to Marubeni by NDC and
Philphos also in Japan. The NDC, through the Philippine National Bank, established
letters of credit in favor of respondent through the Bank of Tokyo. The letters of
credit were financed by letters of commitment issued by the OECF with the Bank of
Tokyo. The Bank of Tokyo, upon respondents submission of pertinent documents,
released the amount in the letters of credit in favor of respondent and credited the
amount therein to respondents account within the same bank. [71]
Clearly, the service of design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing and
commissioning, coordination[72]of the two projects involved two taxing
jurisdictions. These acts occurred in two countries Japan and the Philippines. While
the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets of ship unloader and loader, the
boats and mobile equipment for the NDC project and the ammonia storage tanks
and refrigeration units were made and completed in Japan. They were already
finished products when shipped to the Philippines. The other construction supplies
listed under the Offshore Portion such as the steel sheets, pipes and structures,
electrical and instrumental apparatus, these were not finished products when
shipped to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines and are therefore not
subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co[73]is not in point. In that case, the Court found
that Engineering Equipment, although an independent contractor, was not engaged
in the manufacture of air conditioning units in the Philippines. Engineering
Equipment designed, supplied and installed centralized air-conditioning systems for
clients who contracted its services. Engineering, however, did not manufacture all
the materials for the air-conditioning system. It imported some items for the system
it designed and installed.[74] The issues in that case dealt with services performed
within the local taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by
the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.: withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the
Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc.
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
withholding tax on the ceded reinsurance premiums, thus:
reinsurance contracts, on various dates, with foreign insurance companies not doing
business in the Philippines namely: Imperio Compaia de Seguros, La Union y El 1953
Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Gross premium per investigation . . . . . . . . . . P768,580.00
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a portion of the premiums on
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
insurance it has originally underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the risks insured.
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila
and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland. Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
The reinsurance contracts made the commencement of the reinsurers' liability
simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance.
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
risks ceded to the foreign reinsurers where entered, and entry therein was binding
upon the reinsurers. A proportionate amount of taxes on insurance premiums not ==========
recovered from the original assured were to be paid for by the foreign reinsurers.
The foreign reinsurers further agreed, in consideration for managing or 1954
administering their affairs in the Philippines, to compensate the Philippine Guaranty
Co., Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts and/or Gross premium per investigation . . . . . . . . . . P780.880.68
differences between the parties under the reinsurance contracts were to be
arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company Withholding tax due thereon at 24% . . . . . . . . P184,411.00
stipulated that their contract shall be construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
to the foreign reinsurers the following premiums:
Compromise for non-filing of withholding
100.00
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71 income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85 TOTAL AMOUNT DUE & COLLECTIBLE . . . .

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income P234,364.00
when it file its income tax returns for 1953 and 1954. Furthermore, it did not
 ==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that
reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines are not subject to withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive
portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the
respective sums of P202,192.00 and P173,153.00 or the total sum of P375,345.00 as
withholding income taxes for the years 1953 and 1954, plus the statutory
delinquency penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
Commissioner of Internal Revenue's assessment for withholding tax on the
reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute
income from sources within the Philippines because the foreign reinsurers did not
engage in business in the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines were performed in the
Philippines. The liability of the foreign reinsurers commenced simultaneously with
the liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the foreign resinsurers, localizing in
the Philippines the actual cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by
Section 259 of the Tax Code for the privilege of doing insurance business in the
Philippines were payable by the foreign reinsurers when the same were not
recoverable from the original assured. The foreign reinsurers paid Philippine
Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of the affairs of the
former in the Philippines in regard to their reinsurance activities here. Disputes and
differences between the parties were subject to arbitration in the City of Manila. All
the reinsurance contracts, except that with Swiss Reinsurance Company, were
signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the
foreign reinsurers abroad. Although the contract between Philippine Guaranty Co.,
Inc. and Swiss Reinsurance Company was signed by both parties in Switzerland, the
same specifically provided that its provision shall be construed according to the laws
of the Philippines, thereby manifesting a clear intention of the parties to subject
themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the
activity, property or service giving rise to the income. 1 The reinsurance premiums
were income created from the undertaking of the foreign reinsurance companies to
reinsure Philippine Guaranty Co., Inc., against liability for loss under original
insurances. Such undertaking, as explained above, took place in the Philippines.
These insurance premiums, therefore, came from sources within the Philippines
and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while
activity may consist of only a single transaction. An activity may occur outside the
place of business. Section 24 of the Tax Code does not require a foreign corporation
to engage in business in the Philippines in subjecting its income to tax. It suffices
that the activity creating the income is performed or done in the Philippines. What
is controlling, therefore, is not the place of business but the place of activity that
created an income.
Petitioner further contends that the reinsurance premiums are not income from
sources within the Philippines because they are not specifically mentioned in
Section 37 of the Tax Code. Section 37 is not an all-inclusive enumeration, for it
merely directs that the kinds of income mentioned therein should be treated as
income from sources within the Philippines but it does not require that other kinds
of income should not be considered likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve the State's sovereignty and a means
to give the citizenry an army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's territory, and
facilities and protection which a government is supposed to provide. Considering
that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges
guaranteed by our laws, such reinsurance premiums and reinsurers should share the
burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding
tax, but it certainly would not exculpate if from liability to pay such withholding tax
The Government is not estopped from collecting taxes by the mistakes or errors of
its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that this question has already
been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of
Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the
amount actually remitted to the foreign reinsurers instead of from the total amount
ceded. And since it did not remit any amount to its foreign insurers in 1953 and
1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein, there
shall be deducted and withheld at the source in the same manner and upon the
same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships
(compaias colectivas), in what ever capacity acting, including lessees or mortgagors
of real or personal property, trustees acting in any trust capacity, executors,
administrators, receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having the control, receipt,
custody, disposal, or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensation, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income of any nonresident
alien individual, not engaged in trade or business within the Philippines and not
having any office or place of business therein, shall (except in the case provided for
in subsection [a] of this section) deduct and withhold from such annual or periodical
gains, profits, and income a tax equal to twelve per centum thereof: Provided That
no deductions or withholding shall be required in the case of dividends paid by a
foreign corporation unless (1) such corporation is engaged in trade or business
within the Philippines or has an office or place of business therein, and (2) more
than eighty-five per centum of the gross income of such corporation for the three-
year period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in
existence)was derived from sources within the Philippines as determined under the
provisions of section thirty-seven: Provided, further, That the Collector of Internal
Revenue may authorize such tax to be deducted and withheld from the interest
upon any securities the owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein
enumerated in determining the amount to be withheld. According, in computing the
withholding tax due on the reinsurance premium in question, no deduction shall be
recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax
for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid
within 30 days from the date this judgement becomes final, there shall be collected
a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum
amount that may be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. With costs againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon
and Regala, JJ., concur.
Makalintal and Zaldivar, JJ., took no part.
Republic of the Philippines
SUPREME COURT
Manila
G.R. No. L-46029 June 23, 1988
N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
GANCAYCO, J.:
The issue posed in this petition is the income tax liability of a foreign shipping
corporation which called on Philippine ports to load cargoes for foreign destination
on two occasions in 1963 and 1964, respectively, and which collected freight fees on
these transactions.
From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to
October 28, 1964, MV "Amstelkroon, " both of which are vessels of petitioner N.B.
Reederij "AMSTERDAM," called on Philippine ports to load cargoes for foreign
destination. The freight fees for these transactions were paid abroad in the amount
of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances,
petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission
on said vessels. No income tax appears to have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the
corresponding income tax returns for and in behalf of the former under Section 15
of the National Internal Revenue Code. Applying the then prevailing market
conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V.
Reederij "Amsterdam" for 1963 and 1964 amounted to P382,882.50 and
P535,052.00, respectively. On June 30, 1967, respondent Commissioner assessed
said petitioner in the amounts of P193,973.20 and P262,904.94 as deficiency
income tax for 1963 and 1964, respectively, as "a non-resident foreign corporation
not engaged in trade or business in the Philippines under Section 24 (b) (1) of the
Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade
or business in the Philippines, on August 28, 1967, petitioner Royal Interocean Lines
filed an income tax return of the aforementioned vessels computed at the exchange
rate of P2.00 to USs1.00 1 and paid the tax thereon in the amount of P1,835.52 and
P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B)
(e) of the National Internal Revenue Code and Section 163 of Revenue Regulations
No. 2. On the same two dates, petitioner Royal Interocean Lines as the husbanding
agent of petitioner N.V. Reederij "AMSTERDAM" filed a written protest against the
abovementioned assessment made by the respondent Commissioner which protest
was denied by said respondent in a letter dated March 3, 1969: On March 31, 1969,
petitioners filed a petition for review with the respondent Court of Tax Appeals
praying for the cancellation of the subject assessment. After due hearing, the
respondent court, on December 1, 1976, rendered a decision modifying said
assessments by eliminating the 50% fraud compromise penalties imposed upon
petitioners. Petitioners filed a motion for reconsideration of said decision but this
was denied by the respondent court.
Hence, this petition for review where petitioners raised the following issues:
A. WHETHER N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY OFFICE OR PLACE OF
BUSINESS IN THE PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS
FOR THE PURPOSE OF LOADING CARGOES ONLY TWICE-ONE IN 1963 AND ANOTHER
IN 1964 SHOULD BE TAXED AS A FOREIGN CORPORATION NOT ENGAGED IN
TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (1) OF THE TAX
CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADE OR
BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION TO SECTION
37 (e) OF THE SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ "AMSTERDAM"
SHOULD BE CONVERTED INTO PHILI PINE PESOS AT THE OFFICIAL RATE OF P2.00 TO
US $1.00, OR AT P3.90 TO US $1.00.
Petitioners contend that respondent court erred in holding that petitioner N.V.
Reederij "AMSTERDAM" is a non-resident foreign corporation because it allegedly
disregarded Section 163 of Revenue Regulations No. 2 (providing for the
determination of the net income of foreign corporations doing business in the
Philippines) and in holding that the foreign exchange ang e receipts of said
petitioner for purposes of computing its income tax should be converted into
Philippine pesos at the rate of P3.90 to US $1.00 instead of P2.00 to US $1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or
licensed to do business in the Philippines. It does not have a branch office in the
Philippines and it made only two calls in Philippine ports, one in 1963 and the other
in 1964. In order that a foreign corporation may be considered engaged in trade or
business, its business transactions must be continuous. A casual business activity in
the Philippines by a foreign corporation, as in the present case, does not amount to
engaging in trade or business in the Philippines for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent
court
A corporation is itself a taxpaying entity and speaking generally, for purposes of
income tax, corporations are classified into (a) domestic corporations and (b) foreign
corporations. (Sec. 24(a) and (b), Tax Code.) Foreign corporations are further
classified into (1) resident foreign corporations and (2) non-resident foreign
corporations. (Sec. 24(b) (1) and (2). Tax Code.) A resident foreign corporation is a
foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein (Sec. 84(g), Tax Code) while a non- resident
foreign corporation is a foreign corporation not engaged in trade or business within
the Philippines and not having any office or place of business therein. (Sec. 84(h),
Tax Code.)
A domestic corporation is taxed on its income from sources within and without the
Philippines, but a foreign corporation is taxed only on its income from sources
within the Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However,
while a foreign corporation doing business in the Philippines is taxable on income
solely from sources within the Philippines, it is permitted to deductions from gross
income but only to the extent connected with income earned in the Philippines.
(Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreign corporations not
doing business in the Philippines are taxable on income from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities
Compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical or casual gains, profits and income and capital gains" The tax is 30%
(now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.)
At the time material to this case, certain corporations were given special treatment,
namely, building and loan associations operating as such in accordance with Section
171 of the Corporation Law, educational institutions, domestic life insurance
companies and for" foreign life insurance companies doing business in the
Philippines. (Sec. 24(a) & (c), Tax Code.) It bears emphasis, however, that foreign life
insurance companies which were not doing business in the Philippines were taxable
as other foreign corporations not authorized to do business in the Philippines. (Sec.
24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a non-resident
foreign corporation, organized and existing under the laws of The Netherlands with
principal office in Amsterdam and not licensed to do business in the Philippines. (pp.
8-81, CTA records.) As a non-resident foreign corporation, it is thus a foreign
corporation, not engaged in trade or business within the Philippines and not having
any office or place of business therein. (Sec. 84(h), Tax Code.) As stated above, it is
therefore taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical or
casual gains, profits and income and capital gains, and the tax is equal to thirty per
centum of such amount, under Section 24(b) (1) of the Tax Code. The accent is on
the words of--`such amount." Accordingly, petitioner N. V. Reederij "Amsterdam" "the net income of a foreign steamship co company doing business in or from this
being a non-resident foreign corporation, its taxable income for purposes of our country is ascertained," under the formula contained therein, "for the purpose of
income tax law consists of its gross income from all sources within the Philippines. the income tax.! The reason is easily discernible. As stated above, the taxable
income of non-resident foreign corporations consists of its gross income from all
The law seems clear and specific. It thus calls for its application as worded as it
sources within the Philippines. Accordingly, a foreign steamgship corporation
leaves no leeway for interpretation. The applicable provision imposes a tax on
derives income partly from sources within and partly from sources without the
foreign corporations falling under the classification of non-resident corporations
Philippines if it is carrying on a business of transportation service between points in
without any exceptions or conditions, unlike in the case of foreign corporations
the Philippines and points outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par.
engaged in trade or business within the Philippines which contained (at the time
16389.) Only then does Section 37 (e) of the Tax Code, are implemented by Section
material to this case) an exception with respect to foreign life insurance companies.
163 of the Regulations, apply in computing net income subject to tax. There is no
Adherence to the provision of the law, which specifies and determines the taxable
basis therefore for an assertion "that Section 37 (e) does not distinguish between a
income of, and the rate of income tax applicable to, non-resident foreign
foreign corporation engaged in business in the Philippines and a foreign corporation
corporations, without mentioning any exceptions, would therefore lead to the
not engaged in business in the Philippines."" (p. 84, CTA records.) (Decision, pp. 11-
conclusion that petitioner N.V. Reederij "Amsterdam" is subject to income tax on
12.)
gross income from all sources within the Philippines.
The conversion rate of P2.00 to US $1.00 which petitioners claim should be
A foreign corporation engaged in trade or business within the Philippines, or which
applicable to the income of petitioners for income tax purposes instead of P3.90 to
has an office or place of business therein, is taxed on its total net income received
s1.00 is likewise untenable. The transactions involved in this case are for the taxable
from all sources within the Philippines at the rate of 25% upon the amount but
years 1963 and 1964. Under Rep. Act No. 2609, the monetary board was authorized
which taxable net income does not exceed P100,000.00, and 35% upon the amount
to fix the legal conversion rate for foreign exchange. The free market conversion rate
but which taxable net income exceeds P100,000.00. 2 On the other hand, a foreign
during those years was P3.90 to US $1.00.
corporation not engaged in trade or business within the Philippmes and which does
not have any office or place of business therein is taxed on income received from all This conversion rate issue was definitely settled by this Court in the case
sources within the Philippines at the rate of 35% of the gross income. 3 of Commissioner of Internal Revenue vs. Royal Interocean Lines and the Court of Tax
Appeals 4 to wit:
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and
implementing Section 163 of the Income Tax Regulations but these provisions refer It should be noted that on July 1 6, 1959, the policy incorporated in Circular No. 20
to a foreign corporation engaged in trade or business in the Philippines and not to a and implemented in subsequent circulars was relaxed with the enactment of
foreign corporation not engaged in trade or business in the Philippines like Republic Act No. 2609 which directed the monetary authorities to take steps for the
petitioner-ship-owner herein. Thus, the respondent court aptly ruled: adoption of a four-year program of gradual decontrol, during which the Monetary
Board, with the approval of the President, could and did fix the conversion rate of
It must be stressed, however, that Section 37 (e) of the Code, as implemented by
the Philippine peso to the US dollar at a ratio other than that prescribed in Section
Section 163 of the Regulations, provides the rule of the determination of the net
48 of Republic Act 265. During the period involved in the case at bar, the free
income taxable in the Philippines of a foreign steamship company doing business in
market conversion rate ranged from P3.47 to P3.65 to a US dollar at which rate the
the Philippines. To assure that non-resident foreign steamship companies not
freight fees in question were computed in the contested assessment. Inasmuch said
engaged in business in the Philippines and not having any office or place of business
frees were revenues derived from foreign exchange transactions, it follows
herein are not covered therein, the regulations explicitly and clearly provide that
necessarily that the petitioner was fully justified in computing the taxpayer's
receipts at Id free market rates.
xxx xxx xxx
The case of the United States Lines, on which the appealed decision of the Court of
Tax Appeals is anchored, refers to transactions that took place before the approval
of Republic Act 2609 on July 16, 1959 when the only legal rate of exchange
obtaining in the Philippines was P2 to US $1, and all foreign exchange had to be
surrendered to the Central Bank subject to its disposition pursuant to its own rules
and regulations. Upon the other hand, the present case refers to transactions that
took place during the effectivity of Republic Act 2609 when there was, apart from
the parity rate, a legal free market conversion rate for foreign exchange
transactions, which rate had been fixed in open trading, such as those involved in
the case at bar.
Indeed, in the course of the investigation conducted by the Commissioner on the
accounting records of petitioner Royal Interocean Lines, it was verified that when
said petitioner paid its agency fees for services rendered as husbanding agent of the
said vessels, it used the conversion rate of P3.90 to US $1.00. 5 It is now estopped
from claiming otherwise in this case. WHEREFORE, the petition is DENIED with costs
against petitioners. This decision is immediately executory and no extension of time
to file motion for reconsideration shall be entertained.
SO ORDERED.
Narvasa, Cruz, Grio-Aquio and Medialdea JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 60714 March 6, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner
vs.
JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.
The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for respondents
PARAS, J.:
This petition for review seeks the reversal of the decision* of the Court of Tax
Appeals in CTA Case No. 2480 promulgated on January 15, 1982 which set aside
petitioner's assessment of deficiency income tax inclusive of interest and surcharge
as well as compromise penalty for violation of bookkeeping regulations charged
against respondent.
The antecedental facts of the case are as follows:
Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a
foreign corporation engaged in the business of international air carriage. From 1959
to 1963, JAL did not have planes that lifted or landed passengers and cargo in the
Philippines as it had not been granted then by the Civil Aeronautics Board (CAB) a
certificate of public convenience and necessity to operate here. However, since mid-
July, 1957, JAL had maintained an officeat the Filipinas Hotel, Roxas Boulevard,
Manila. Said office did not sell tickets but was maintained merely for the promotion
of the company's public relations and to hand out brochures, literature and other
information playing up the attractions of Japan as a tourist spot and the services
enjoyed in JAL planes.
On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales
agent in the Philippines. As an agent, PAL, among other things, sold for and in behalf
of JAL, plane tickets and reservations for cargo spaces which were used by the
passengers or customers on the facilities of JAL.
On June 2, 1972, JAL received deficiency income tax assessment notices and a
demand letter from petitioner Commissioner of Internal Revenue (hereinafter
referred to as Commissioner for brevity), all dated February 28, 1972, for a total
amount of P2,099,687.52 inclusive of 50% surcharge and interest, for years 1959 On June 19, 1972, JAL protested said assessments alleging that as a non-resident
through 1963, computed as follows: foreign corporation, it was taxable only on income from Philippine sources as
determined under Section 37 of the Tax Code, and there being no such income
1959 1960 1961
during the period in question, it was not liable for the deficiency income tax
Net income per P472,025.16 P476,671.48 P734,812.77 liabilities assessed (Rollo, pp. 53-55). The Commissioner resolved otherwise and in a
investigation letter-decision dated December 21, 1972, denied JAL's request for cancellaton of the
assessment (Ibid., p. 29).
Tax due thereon 133,608.00 135,001.00 212,444.00
JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed
Add: 50% surch. 66,804.00 67,500.50 106,222.00 the decision (Ibid., pp. 51-76) and thereafter denied the motion for reconsideration
1/2% mo. int. filed by the Commissioner (Ibid., p. 77). Hence, this petition.
(3 yrs.) 24,049.44 24,300.18 38,239.92 Petitioner raises two issues in this wise:
Total due P224,461.44 P226,801.68 P356,905.92 1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN
THE PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE
=========== =========== ===========
PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN

1962 1963 S U M M AR Y TRADE OR BUSINESS IN THE PHILIPPINES.

Net income per P1,065,641.63 P1,550,230.48 P224,461.44 The petition is impressed with merit.

investigation The issues in the case at bar have already been laid to rest in no less than three
cases resolved by this Court. Anent the first issue, the landmark case of
Tax due thereon 311,692.00 457,069.00 226,801.68 Commissioner of Internal Revenue vs. British Overseas Airways Corporation (G.R.
Add:50% surch. 155,846.00 228,534.50 356,905.92 No.L-65773-74, April 30, 1987, 149 SCRA 395) has categorically ruled:

1/2% mo. int. 523,642.56 "The Tax Code defines `gross income' thus:

(3 yrs.) `Gross income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or
56,104.56 82,272.42 767,875.92 from profession, vocations, trades, business, commerce, sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or
Total due P 523,642.56 P 767,875.92 P2,099,687.52
interest in such property; also from interests, rents, dividends, securities, or the
============= ============ ============= transaction of any business carried on for gain or profit, or gains, profits and income
derived from any source whatever" (Sec. 29(3);Emphasis supplied)
Compromise Penalty P 1,500.00
"The definition is broad and comprehensive to include proceeds from sales of "x x x x x x
transport documents. The words `income from any source whatever' disclose a
"The absence of flight operations to and from the Philippines is not determinative of
legislative policy to include all income not expressly exempted within the class of
the source of income or the situs of income taxation. x x x The test of taxability is
taxable income under our laws. Income means `cash received or its equivalent'; it is
the `source'; and the source of an income is that activity x x x which produced the
the amount of money coming to a person within a specific time x x x; it means
income (Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 [1965]).
something distinct from principal or capital. For, while capital is a fund, income is a
Unquestionably, the passage documentations in these cases were sold in the
flow. As used in our income tax law, `income' refers to the flow of wealth (Madrigal
Philippines and the revenue therefrom was derived from a business activity
and Paternol vs. Rafferty and Concepcion, 38 Phil. 414 [1918]).
regularly pursued within the Philippines. x x x The word `source' conveys one
"x x x x x x essential Idea, that of origin, and the origin of the income herein is the Philippines
(Manila Gas Corporation vs. Collector of Internal Revenue, 62 Phil. 895 [1935])."
"x x x x x x
The above ruling was adopted en toto in the subsequent case of Commissioner of
"The source of an income is the property, activity or service that produced the
Internal Revenue vs. Air India and the Court of Tax Appeals (G.R. No. L-72443,
income. For the source of income to be considered as coming from the Philippines,
January 29, 1988, 157 SCRA 648) holding that the revenue derived from the sales of
it is sufficient that the income is derived from activity within the Philippines. In
airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines,
BOAC's case, the sale of tickets in the Philippines is the activity that produces the
must be considered taxable income, and more recently, in the case of Commissioner
income. The tickets exchanged hands here and payments for fares were also made
of Internal Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No.
here in Philippine currency. The situs of the source of payments is the Philippines.
67938, December 19, 1989, 180 SCRA 274), it was likewise declared that for the
The flow of wealth proceeded from, and occurred within, Philippine territory,
source of income to be considered as coming from the Philippines, it is sufficient
enjoying the protection accorded by the Philippine government. In consideration of
that the income is derived from activities within this country regardless of the
such protection, the flow of wealth should share the burden of supporting the
absence of flight operations within Philippine territory.
government.
Verily, JAL is a residentforeigncorporation under Section 84 (g) of the
"x x x x x x
NationalInternalRevenue Code of1939. Definitionofwhata resident foreign corpora-
"True, Section 37(a) of the Tax Code, which enumerates items of gross income from tion is was likewise reproduced under Section 20 of the 1977 Tax Code.
sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4)
The BOAC Doctrine has expressed in unqualified terms:
rentals and royalties, (5) sale of real property, and (6) sale of personal property, does
not mention income from the sale of tickets for international transportation. "Under Section 20 of the 1977 Tax Code:
However, that does not render it less an income from sources within the Philippines.
"(h) the term `resident foreign corporation' applies to a foreign corporation engaged
Section 37, by its language does not intend the enumeration to be exclusive. It in trade or business within the Philippines or having an office or place of business
merely directs that the types of income listed therein be treated as income from therein.
sources within the Philippines. A cursory reading of the section will show that it
"(i) the term `non-resident foreign corporation' applies to a foreign corporation not
does not state that it is an all-inclusive enumeration, and that no other kind of
engaged in trade or business within the Philippines and not having any office or
income may be so considered (British Traders Insurance Co., Ltd. vs. Commissioner
place of business therein."
of Internal Revenue, 13 SCRA 719 [1965]).
"x x x. There is no specific criterion as to what constitutes `doing' or `engaging in' or
`transacting' business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization (The Mentholatum Co., Inc., et al. vs. Anacleto Mangaliman,
et al., 72 Phil. 524 (1941); Section 1, R.A. No. 5455). In order that a foreign
corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character (Pacific
Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing Thompson
on Corporations, Vol. 8, 3rd ed., pp. 844-847 and Fisher's Philippine Law of Stock
Corporation, p. 415).
There being no dispute that JAL constituted PAL as local agent to sell its airline
tickets, there can be no conclusion other than that JAL is a resident foreign
corporation, doing business in the Philippines. Indeed, the sale of tickets is the very
lifeblood of the airline business, the generation of sales being the paramount
objective (Commissioner of Internal Revenue vs. British Overseas Airways
Corporation, supra). The case of CIR vs. American Airlines, Inc. (supra) sums it up as
follows:
"x x x, foreign airline companies which sold tickets in the Philippines through their
local agents, whether called liaison offices, agencies or branches, were considered
resident foreign corporations engaged in trade or business in the country. Such
activities show continuity of commercial dealings or arrangements and performance
of acts or works or the exercise of some functions normally incident to and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization."
Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National
Internal Revenue Code of 1939", the applicable law in the case at bar, resident
foreign corporations are taxed thirty percentum (30%) upon the amount by which
their total net income exceed one hundred thousand pesos. JAL is liable to pay 30%
of its total net income for the years 1959 through 1963 as contradistinguished from
the computation arrived at by the Commissioner as shown in the assessment.
Apparently, the Commissioner failed to specify the tax base on the total net income
of JAL in figuring out the total income due, i.e., whether 25% or 30% level.
Having established the tax liability of respondent JAL, the only thing left to
determine is the propriety of the 50% surcharge imposed by petitioner. It appears
that this must be answered in the negative. As held in the case of CIR vs. Air India
(supra):
"The 50% surcharge or fraud penalty provided in Section 72 of the National Internal
Revenue Code is imposed on a delinquent taxpayer who willfully neglects to file the
required tax return within the period prescribed by the law, or who willfully files a
false or fraudulent tax return, x x x.
"x x x x x x
"On the other hand, the same Section provides that if the failure to file the required
tax return is not due to willful neglect, a penalty of 25% is to be added to the
amount of the tax due from the taxpayer."
Nowhere in the records of the case can be found that JAL deliberately failed to file
its income tax returns for the years covered by the assessment. There was not even
an attempt by petitioner to prove the same or justify the imposition of the 50%
surcharge. All that petitioner did was to cite the provision of law upon which the
surcharge was based without explaining why it was applicable to respondent's case.
Such cannot be countenanced for mere allegations are definitely not acceptable.
The willful neglect to file the required tax return or the fraudulent intent to evade
the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed (CIR vs. Air India, supra). The fraud
contemplated by law is actual and constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to
induce another to give up some legal right. Negligence, whether slight or gross, is
not equivalent to the fraud with intent to evade the tax contemplated by the law. It
must amount to intentional wrongdoing with the sole object of evading the tax
(Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58 SCRA 519).
This was not proven to be so in the case of JAL as it believed in good faith that it
need not file the tax return for it had no taxable income then. The element of fraud
is lacking. At most, only negligence may be imputed to JAL for not ascertaining the
dispensability of filing the tax returns. As such, JAL may be subjected only to the
25% surcharge prescribed by the aforequoted law.
As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax
Code then in force which states:
(d) Interest on deficiency. Interest upon the amount determined as a deficiency shall
be assessed at the same time as the deficiency and shall be paid upon notice and
demand from the Commissioner of Internal Revenue; and shall be collected as a
part of the tax, at the rate of six per centum per annum from the date prescribed for
the payment of the tax x x x; PROVIDED, That the maximum amount that may be
collected as interest on deficiency shall in no case exceed the amount corresponding
to a period of three years, the present provisions regarding prescription to the
contrary notwithstanding.
The 6% interest per annum is the same as 1/2% interest per month and petitioner
correctly computed such interest equivalent to three years which is the maximum
set by the law.
On the other hand, the compromise penalty amounting to P1,500.00 for violation of
bookkeeping regulations appears to be without support. The particular provision in
the said regulations allegedly violated was not even specified. Furthermore, the
term "compromise penalty" itself is not found among the penal provisions of the
Bookkeeping Regulations (Revenue Regulations No. V-1, as amended, March 17,
1947, pp. 836-837, Revenue Regulations Updated by Prof. Eustaquio Ordono, 1984).
The compromise penalty is therefore, improperly imposed.
In sum, the following schedule as recomputed illustrates the total tax liability of the
private respondent for the years 1959 through 1963 -
Net Income 30% of Net Income as Add 25% surcharge Add 6% interest per Summary
of Total Income Tax Due under under Sec. 72 NIRC annum for a maximum Tax Due
from the
Secs. 24(a) and (b) of 1939 of 3 years under Private Respondent
(2) NIRC of 1939 Sec. 51(d) NIRC of
1939
1959 P 472,025.16 P 141,607.54 P 35,401.88 P 25,489.35 P 202,498.77
1960 476,671.48 143,001.44 35,750.36 25,740.25 204,492.05
1961 734,812.77 220,443.83 55,110.95 39,679.88 315,234.66
1962 1,065,641.63 319,692.48 79,923.12 399,615.60
1963 1,550,230.48 465,069.14 116,267.28 581,336.42
P1,703,177.40
Accordingly, private respondent is liable for unpaid taxes and charges in the total
amount of ONE MILLION SEVEN HUNDRED THREE THOUSAND ONE HUNDRED
SEVENTY SEVENAND FORTY CENTAVOS (P1,703,177.40) The dismissal for lack of
merit by this Court of the appeal in JAL v. Commissioner of Internal Revenue (G.R.
No. L-30041) on February 3, 1969 is not res judicata to the present case. The Tax
Court ruled in that case that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein
subject to the common carrier's tax. The common carrier's tax is an excise tax, being
a tax on the activity of transporting, conveying or removing passengers and cargo
from one place to another. It purports to tax the business of transportation. Being
an excise tax, the same can be levied by the State only when the acts, privileges or
businesses are done or performed within the jurisdiction of the Philippines
(Commissioner of Internal Revenue v. British Overseas Airways Corporation, supra).
The subject matter of the case underconsideration is income tax, a direct tax on the
income of persons and other entities "of whatever kind and in whatever form
derived from any source." Since the two cases treat of a different subject matter, the
decision in G.R. No. L-30041 cannot be res judicata with respect to this case.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of
Tax Appeals in CTA Case No. 2480 is SET ASIDE; and (c) private respondent JAL is
ordered to pay the amount of P1,703,177.40 as deficiency taxes for the fiscal years
1959 to 1963 inclusive of interest andsurcharges.
SO ORDERED.
Fernan,C.J., Narvasas, Melencio-Herrera, Gutierrez,Jr.,Cruz, Paras, Feliciano,
Gancayco, Padilla, Bidin, Sarmiento, Aquino, Medialdea, Regalado,and Davide,Jr.,JJ.,
concur
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 79926-27 October 17, 1991
STATE INVESTMENT HOUSE, INC. and STATE FINANCING CENTER, INC., petitioners,
vs.
CITIBANK, N.A., BANK OF AMERICA, NT & SA, HONGKONG & SHANGHAI BANKING
CORPORATION, and the COURT OF APPEALS, respondents.
Roco, Bunag, Kapunan & Migallos for petitioners.
Agcaoili & Associates for Citibank, N.A, and Bank of America NT & SA.
Belo, Abiera & Associates for Hongkong & Shanghai Banking Corp.
NARVASA, J.:p
The chief question in the appeal at bar is whether or not foreign banks licensed to
do business in the Philippines, may be considered "residents of the Philippine
Islands" within the meaning of Section 20 of the Insolvency Law (Act No. 1956, as
amended, eff. May 20, 1909) reading in part as follows: 1
An adjudication of insolvency may be made on the petition of three or more
creditors, residents of the Philippine Islands, whose credits or demands accrued in
the Philippine Islands, and the amount of which credits or demands are in the
aggregate not less than one thousand pesos: Provided, that none of said creditors
has become a creditor by assignment, however made, within thirty days prior to the
filing of said petition. Such petition must be filed in the Court of First Instance of the
province or city in which the debtor resides or has his principal place of business,
and must be verified by at least three (3) of the petitioners. . . .
The foreign banks involved in the controversy are Bank of America NT and SA,
Citibank N.A. and Hongkong and Shanghai Banking Corporation. On December 11,
1981, they jointly filed with the Court of First Instance of Rizal a petition for
involuntary insolvency of Consolidated Mines, Inc. (CMI), which they amended four
days later. 2 The case was docketed as Sp. Proc. No. 9263 and assigned to Branch 28
of the Court.
The petition for involuntary insolvency alleged:
1) that CMI had obtained loans from the three petitioning banks, and that as of
November/December, 1981, its outstanding obligations were as follows:
a) In favor of Bank of America (BA) P15,297,367.67
(as of December 10, 1981) US$ 4,175,831.88
(b) In favor of Citibank US$ 4,920,548.85
(as of December 10, 1981)
c) In favor of Hongkong & Shanghai Bank US$ 5,389,434.12
(as of November 30, 1981); P6,233,969.24
2) that in November, 1981, State Investment House, Inc. (SIHI) and State Financing
Center, Inc. (SFCI) had separately instituted actions for collection of sums of money
and damages in the Court of First Instance of Rizal against CMI, docketed
respectively as Civil Cases Numbered 43588 and 43677; and that on application of
said plaintiffs, writs of preliminary attachment had been issued which were
executed on "the royalty/profit sharing payments due CMI from Benguet
Consolidated Mining, Inc;" and
3) that CMI had "committed specific acts of insolvency as provided in Section 20 of
the Insolvency Law, to wit:
xxx xxx xxx
5. that he (CMI) has suffered his (CMI's) property to remain under attachment or
legal process for three days for the purpose of hindering or delaying or defrauding
his (CMI's) creditors;
xxx xxx xxx
11. that being a merchant or tradesman he (CMI) has generally defaulted in the
payment of his (CMI's) current obligations for a period of thirty days; . . .
The petition was opposed by State Investment House, Inc. (SIHI) and State Financing
Center, Inc. (SFCI). 3 It claimed that:
1) the three petitioner banks had come to court with unclean hands in that they
filed the petition for insolvency alleging the CMI was defrauding its creditors, and
they wished all creditors to share in its assets although a few days earlier, they
had "received for the account of CMI substantial payments aggregating
P10,800,000.00;"
2) the Court had no jurisdiction because the alleged acts of insolvency were false:
the writs of attachment against CMI had remained in force because there were
"just, valid and lawful grounds for the(ir) issuance," and CMI was not a "merchant or
tradesman" nor had it "generally defaulted in the payment of (its) obligations for a
period of thirty days . . . ;"
3) the Court had no jurisdiction to take cognizance of the petition for insolvency
because petitioners are not resident creditors of CMI in contemplation of the
Insolvency Law; and
4) the Court has no power to set aside the attachment issued in favor of
intervenors-oppositors SIHI and SFCI.
CMI filed its Answer to the petition for insolvency, asserting in the main that it was
not insolvent, 4 and later filed a "Motion to Dismiss Based on Affirmative Defense of
Petitioner's Lack of Capacity to Sue," echoing the theory of SIHI and SFCI that the
petitioner banks are not "Philippine residents." 5 Resolution on the motion was
"deferred until after hearing of the case on the merits" it appearing to the Court
that the grounds therefor did not appear to be indubitable. 6
SIHI and SFCI filed their own Answer-in-Intervention, 7 and served on the three
petitioner banks requests for admission of certain facts in accordance with Rule 26
of the Rules of Court, 8 receiving a response only from Hongkong & Shanghai
Bank. 9
SIHI and SFCI then filed a Motion for Summary Judgment dated May 23, 1983 "on
the ground that, based on the pleadings and admissions on record, the trial court
had no jurisdiction to adjudicate CMI insolvent since the petitioners (respondent
foreign banks) are not "resident creditors" of CMI as required under the Insolvency
Law." 10 Oppositions to the motion were filed, 11 to which a reply was
submitted. 12
The Regional Trial Court 13 found merit in the motion for summary judgment. By
Order dated October 10, 1983, it rendered "summary judgment dismissing the . . .
petition for lack of jurisdiction over the subject matter, with costs against
petitioners." 14 It ruled that on the basis of the "facts on record, as shown in the
pleadings, motions and admissions of the parties, an insolvency court could "not
acquire jurisdiction to adjudicate the debtor as insolvent if the creditors petitioning
for adjudication of insolvency are not "residents" of the Philippines" citing a
decision of the California Supreme Court which it declared "squarely applicable
especially considering that one of the sources of our Insolvency Law is the
Insolvency Act of California of 1895 . . . " And it declared that since petitioners had
been merely licensed to do business in the Philippines, they could not be deemed
residents thereof.
The three foreign banks sought to take an appeal from the Order of October 10,
1983. They filed a notice of appeal and a record on appeal. 15 SIHI and SFCI moved
to dismiss their appeal claiming it was attempted out of time. The Trial Court denied
the motion.
SIHI and SFCI filed with this Court a petition for certiorari and prohibition (G.R. NO.
66449), impugning that denial. The Court dismissed the petition and instead
required the three banks to file a petition for review in accordance with Rule 45 of
the Rules of Court. 16 This the banks did (their petition was docketed as G.R. No.
66804). However, by Resolution dated May 16, 1984, the court referred the petition
for review to the Intermediate Appellate Court, where it was docketed as AC SP-
03674. 17
In the meantime, the Trial Court approved on May 3, 1985 the banks' record on
appeal and transmitted it to this Court, where it was recorded as UDK-6866. As
might have been expected, this Court required the banks to file a petition for review
under Rule 45, but they asked to be excused from doing so since they had already
filed such a petition, which had been referred to the Intermediate Appellate Court
and was there pending as AC-G.R. No. SP 03674, supra. This Court then also referred
UDK-6866 to the Intermediate Appellate Court where it was docketed as AC-G.R.
No. CV 07830.
Both referred cases, AC-G.R. No. SP 03674 and AC-G.R. No. CV 07830, were
consolidated by Resolution of the Court of Appeals dated April 9, 1986, and Decision
thereon was promulgated on July 14, 1987 by the Fifteenth Division of said
Court. 18
The Appellate Court reversed the Trial Court's Order of October 10, 1983 and
remanded the case to it for further proceedings. It ruled:
1) that the purpose of the Insolvency Law was "to convert the assets of the
bankrupt in cash for distribution among creditors, and then to relieve the honest
debtor from the weight of oppressive indebtedness and permit him to start life
anew, free from the obligations and responsibilities consequent upon business
misfortunes;" 19 and that it was "crystal clear" that the law was "designed not only
for the benefit of the creditors but more importantly for the benefit of the debtor
himself," the object being "to provide not only for the suspension of payments and
the protection of creditors but also the discharge of insolvent honest debtors to
enable them to have a fresh start;"
2) that the Trial Court had placed "a very strained and restrictive interpretation of
the term "resident," as to exclude foreign banks which have been operating in this
country since the early part of the century," and "the better approach . . . would
have been to harmonize the provisions . . . (of the Insolvency Law) with similar
provisions of other succeeding laws, like the Corporation Code of the Philippines,
the General Banking Act, the Offshore Banking Law and the National Internal
Revenue Code in connection with or related to their doing business in the
Philippines;"
3) that in light of said statutes, the three banks "are in truth and in fact considered
as "residents" of the Philippines for purposes of doing business in the Philippines
and even for taxation matters;"
4) that the banks had "complied with all the laws, rules and regulations (for doing
business in the country) and have been doing business in the Philippines for many
years now;" that the authority granted to them by the Securities and Exchange
Commission upon orders of the Monetary Board "covers not only transacting
banking business . . . but likewise maintaining suits "for recovery of any debt, claims
or demand whatsoever," and that their petition for involuntary insolvency was
"nothing more than a suit aimed at recovering a debt granted by them to
Consolidated Mines, Inc., or at least a portion thereof;"
4) that to deprive the foreign banks of their right to proceed against their debtors
through insolvency proceedings would "contravene the basic standards of equity
and fair play, . . . would discourage their operations in economic development
projects that create not only jobs for our people but also opportunities for
advancement as a nation;" and
5) that the terms "residence" and "domicile" do not mean the same thing, and that
as regards a corporation, it is generally deemed an "inhabitant" of the state under
whose law it is incorporated, and has a "residence" wherever it conducts its
ordinary business, and may have its legal "domicile" in one place and "residence" in
another.
SIHI and SFCI moved for reconsideration and then, when rebuffed, took an appeal to
this Court. Here, they argue that the Appellate Court's judgment should be reversed
because it failed to declare that
1) the failure of the three foreign banks to allege under oath in their petition for
involuntary insolvency that they are Philippine residents, wishing only to "be
considered Philippine residents," is fatal to their cause;
2) also fatal to their cause is their failure to prove, much less allege, that under the
domiciliary laws of the foreign banks, a Philippine corporation is allowed the
reciprocal right to petition for a debtor's involuntary insolvency;
3) in fact and in law, the three banks are not Philippine residents because:
a) corporations have domicile and residence only in the state of their incorporation
or in the place designated by law, although for limited and exclusive purposes, other
states may consider them as residents;
b) juridical persons may not have residence separate from their domicile;
4) actually, the non-resident status of the banks within the context of the Insolvency
Law is confirmed by other laws;
5) the license granted to the banks to do business in the Philippines does not make
them residents;
6) no substantive law explicitly grants foreign banks the power to petition for the
adjudication of the Philippine corporation as a bankrupt;
7) the Monetary Board can not appoint a conservator or receiver for a foreign bank
or orders its liquidation having only the power to revoke its license, subject to such
proceedings as the Solicitor General may thereafter deem proper to protect its
creditors;
8) the foreign banks are not denied the right to collect their credits against
Philippine debtors, only the right to "petition for the harsh remedy of involuntary
insolvency" not being conceded to them;
9) said banks have come to court with unclean hands, their filing of the petition for
involuntary insolvency being an attempt to defeat validly acquired rights of domestic
corporations.
The concept of a foreign corporation under Section 123 of the Corporation Code is
of "one formed, organized or existing under laws other than those of the Philippines
and . . . (which) laws allow Filipino citizens and corporations to do business . . . ."
There is no question that the three banks are foreign corporations in this sence,
with principal offices situated outside of the Philippines. There is no question either
that said banks have been licensed to do business in this country and have in fact
been doing business here for many years, through branch offices or agencies,
including "foreign currency deposit units;" in fact, one of them, Hongkong &
Shanghai Bank has been doing business in the Philippines since as early as 1875.
The issue is whether these Philippine branches or units may be considered
"residents of the Philippine Islands" as that term is used in Section 20 of the
Insolvency Law, supra, 20 or residents of the state under the laws of which they
were respectively incorporated. The answer cannot be found in the Insolvency Law
itself, which contains no definition of the term, resident, or any clear indication of its
meaning. There are however other statutes, albeit of subsequent enactment and
effectivity, from which enlightening notions of the term may be derived.
The National Internal Revenue Code declares that the term "'resident foreign
corporation' applies to a foreign corporation engaged in trade or business within the
Philippines," as distinguished from a " "non-resident foreign corporation" . . . (which
is one) not engaged in trade or business within the Philippines." 21
The Offshore Banking Law, Presidential Decree No. 1034, states "that branches,
subsidiaries, affiliation, extension offices or any other units of corporation or
juridical person organized under the laws of any foreign country operating in the
Philippines shall be considered residents of the Philippines." 22
The General Banking Act, Republic Act No. 337, places "branches and agencies in
the Philippines of foreign banks . . . (which are) called Philippine branches," in the
same category as "commercial banks, savings associations, mortgage banks,
development banks, rural banks, stock savings and loan associations" (which have
been formed and organized under Philippine laws), making no distinction between
the former and the later in so far, as the terms "banking institutions" and "bank" are
used in the Act, 23 declaring on the contrary that in "all matters not specifically
covered by special provisions applicable only to foreign banks, or their branches and
agencies in the Philippines, said foreign banks or their branches and agencies
lawfully doing business in the Philippines "shall be bound by all laws, rules, and
regulations applicable to domestic banking corporations of the same class, except
such laws, rules and regulations as provided for the creation, formation,
organization, or dissolution of corporations or as fix the relation, liabilities,
responsibilities, or duties of members, stockholders or officers or corporations." 24
This Court itself has already had occasion to hold 25 that a foreign corporation licitly
doing business in the Philippines, which is a defendant in a civil suit, may not be
considered a non-resident within the scope of the legal provision authorizing
attachment against a defendant not residing in the Philippine Islands;" 26 in other
words, a preliminary attachment may not be applied for and granted solely on the impediment to its residence in a real and practical sense in the state of its business
asserted fact that the defendant is a foreign corporation authorized to do business activities." 29
in the Philippines and is consequently and necessarily, "a party who resides out
The foregoing propositions are in accord with the dictionary concept of residence as
of the Philippines." Parenthetically, if it may not be considered as a party not
applied to juridical persons, a term which appears to comprehend permanent as
residing in the Philippines, or as a party who resides out of the country, then,
well as temporary residence.
logically, it must be considered a party who does reside in the Philippines, who is a
resident of the country. Be this as it may, this Court pointed out that: The Court cannot thus accept the petitioners' theory that corporations may not
have a residence (i.e., the place where they operate and transact business) separate
. . . Our laws and jurisprudence indicate a purpose to assimilate foreign
from their domicile (i.e., the state of their formation or organization), and that they
corporations, duly licensed to do business here, to the status of domestic
may be considered by other states as residents only for limited and exclusive
corporations. (Cf. Section 73, Act No. 1459, and Marshall Wells Co. vs. Henry W.
purposes. Of course, as petitioners correctly aver, it is not really the grant of a
Elser & Co., 46 Phil. 70, 76; Yu; Cong Eng vs. Trinidad, 47 Phil. 385, 411) We think it
license to a foreign corporation to do business in this country that makes it a
would be entirely out of line with this policy should we make a discrimination
resident; the license merely gives legitimacy to its doing business here. What
against a foreign corporation, like the petitioner, and subject its property to the
effectively makes such a foreign corporation a resident corporation in the
harsh writ of seizure by attachment when it has complied not only with every
Philippines is its actually being in the Philippines and licitly doing business here,
requirement of law made specially of foreign corporations, but in addition with
"locality of existence" being, to repeat, the "necessary element in . . . (the)
every requirement of law made of domestic corporations. . . . .
signification" of the term, resident corporation.
Obviously, the assimilation of foreign corporations authorized to do business in the
Neither can the Court accept the theory that the omission by the banks in their
Philippines "to the status of domestic corporations," subsumes their being found
petition for involuntary insolvency of an explicit and categorical statement that they
and operating as corporations, hence, residing, in the country.
are "residents of the Philippine Islands," is fatal to their cause. In truth, in light of
The same principle is recognized in American law: that the "residence of a the concept of resident foreign corporations just expounded, when they alleged in
corporation, if it can be said to have a residence, is necessarily where it exercises that petition that they are foreign banking corporations, licensed to do business in
corporate functions . . . ;" that it is .considered as dwelling "in the place where its the Philippines, and actually doing business in this Country through branch offices
business is done . . . ," as being "located where its franchises are exercised . . . ," and or agencies, they were in effect stating that they are resident foreign corporations in
as being "present where it is engaged in the prosecution of the corporate the Philippines.
enterprise;" that a "foreign corporation licensed to do business in a state is a
There is, of course, as petitioners argue, no substantive law explicitly
resident of any country where it maintains an office or agent for transaction of its
granting foreign banks the power to petition for the adjudication of a Philippine
usual and customary business for venue purposes;" and that the "necessary
corporation as a bankrupt. This is inconsequential, for neither is there any legal
element in its signification is locality of existence." 27 Courts have held that "a
provision expressly giving domestic banks the same power, although their capacity
domestic corporation is regarded as having a residence within the state at any place
to petition for insolvency can scarcely be disputed and is not in truth disputed by
where it is engaged in the particulars of the corporate enterprise, and not only at its
petitioners. The law plainly grants to a juridical person, whether it be a bank or not
chief place or home office;" 28 that "a corporation may be domiciled in one state
or it be a foreign or domestic corporation, as to natural persons as well, such a
and resident in another; its legal domicil in the state of its creation presents no
power to petition for the adjudication of bankruptcy of any person, natural or
juridical, provided that it is a resident corporation and joins at least two other
residents in presenting the petition to the Bankruptcy Court.
The petitioners next argue that "Philippine law is emphatic that only foreign
corporations whose own laws give Philippine nationals reciprocal rights may do
business in the Philippines." As basis for the argument they invoke Section 123 of
the Corporation Code which, however, does not formulate the proposition in the
same way. Section 123 does not say, as petitioners assert, that it is required that the
laws under which foreign corporations are formed "give Philippine nationals,
reciprocal rights." What it does say is that the laws of the country or state under
which a foreign corporation is "formed, organized or existing . . . allow Filipino
citizens and corporations to do business in its own country or state," which is not
quite the same thing. Now, it seems to the Court that there can be no serious
debate about the fact that the laws of the countries under which the three (3)
respondent banks were formed or organized (Hongkong and the United States) do
"allow Filipino citizens and corporations to do business" in their own territory and
jurisdiction. It also seems to the Court quite apparent that the Insolvency Law
contains no requirement that the laws of the state under which a foreign
corporation has been formed or organized should grant reciprocal rights to
Philippine citizens to apply for involuntary insolvency of a resident or citizen thereof.
The petitioners' point is thus not well taken and need not be belabored.
That the Monetary Board can not appoint a conservator or receiver for a foreign
bank or order its liquidation having only the power to revoke its license, subject to
such proceedings as the Solicitor General may thereafter deem proper to protect its
creditors, which is another point that petitioners seek to make, is of no moment. It
has no logical connection to the matter of whether or not the foreign bank may
properly ask for a judicial declaration of the involuntary insolvency of a domestic
corporation, which is the issue at hand. The fact is, in any event, that the law is not
lacking in sanctions against foreign banks or powerless to protect the latter's
creditors.
The petitioners contend, too, that the respondent banks have come to court with
unclean hands, their filing of the petition for involuntary insolvency being an
attempt to defeat validly acquired rights of domestic corporations. The Court wishes
to simply point out that the effects of the institution of bankruptcy proceedings on
all the creditors of the alleged bankrupt are clearly spelled out by the law, and will
be observed by the Insolvency Court regardless of whatever motives apart from
the desire to share in the assets of the insolvent in satisfying its credits that the
party instituting the proceedings might have.
Still another argument put forth by the petitioners is that the three banks' failure to
incorporate their branches in the Philippines into new banks in accordance with said
Section 68 of the General Banking Act connotes an intention on their part to
continue as residents of their respective states of incorporation and not to be
regarded as residents of the Philippines. The argument is based on an incomplete
and inaccurate quotation of the cited Section. What Section 68 required of a
"foreign bank presently having branches and agencies in the Philippines, . . . within
one year from the effectivity" of the General Banking Act, was to comply with any of
three (3) options, not merely with one sole requirement. These three (3) options are
the following:
1) (that singled out and quoted by the petitioners, i.e.:) "incorporate its branch or
branches into a new bank in accordance with Philippine laws . . . ; or
2) "assign capital permanently to the local branch with the concurrent maintenance
of a 'net due to' head office account which shall include all net amounts due to
other branches outside the Philippines in an amount which when added to the
assigned capital shall at all times be not less than the minimum amount of capital
accounts required for domestic commercial banks under section twenty-two of this
Act;" or
3) "maintain a "net due to" head office account which shall include all net amounts
due to other branches outside the Philippines, in an amount which shall not be less
than the minimum amount of capital accounts required for domestic commercial
banks under section twenty-two of this Act."
The less said about this argument then, the better.
The petitioners allege that three days before respondent banks filed their petition
for involuntary insolvency against CMI, they received from the latter substantial
payments on account in the aggregate amount of P6,010,800.00, with the result
that they were "preferred in the distribution of CMI's assets thereby defrauding
other creditors of CMI." Non sequitur. It is in any case a circumstance that the
Bankruptcy Court may well take into consideration in determining the manner and
proportion by which the assets of the insolvent company shall be distributed among
its creditors; but it should not be considered a ground for giving the petition for
insolvency short shrift. Moreover, the payment adverted to does not appear to be
all that large. The total liabilities of CMI to the three respondent banks as of
December, 1981 was P21,531,336.91, and US$14,485,814.85. Converted into
Philippine currency at the rate of P7.899 to the dollar, the average rate of exchange
during December, 1981, 30 the dollar account would be P114,423,451.50. Thus, the
aggregate liabilities of CMI to the banks, expressed in Philippine currency, was
P135,954,788.41 as of December, 1981, and therefore the payment to them of
P6,010,800.00 constituted only some 4.42% of the total indebtedness.
WHEREFORE, the petition is DENIED and the challenged Decision of the Court of
Appeals is AFFIRMED in toto, with costs against the petitioners.
SO ORDERED.
Grio-Aquino and Medialdea, JJ., concur.
Cruz, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British
Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of
the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, which set aside petitioner's assessment of deficiency
income taxes against respondent British Overseas Airways Corporation (BOAC) for
the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its
Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing
under the laws of the United Kingdom It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association (IATA).
As such it operates air transportation service and sells transportation tickets over
the routes of the other airline members. During the periods covered by the disputed
assessments, it is admitted that BOAC had no landing rights for traffic purposes in
the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except
for a nine-month period, partly in 1961 and partly in 1962, when it was granted a
temporary landing permit by the CAB. Consequently, it did not carry passengers
and/or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines Wamer Barnes
and Company, Ltd., and later Qantas Airways which was responsible for selling
BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970
for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new
assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79,
which claim was denied by the CIR on 16 February 1972. But before said denial,
BOAC had already filed a petition for review with the Tax Court on 27 January 1972,
assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of Section 46 (requiring the filing of corporation
returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded
and set aside. In a letter, dated 16 February 1972, however, the CIR not only denied
the BOAC request for refund in the First Case but also re-issued in the Second Case
the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71
plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's
request for reconsideration was denied by the CIR on 24 August 1973. This
prompted BOAC to file the Second Case before the Tax Court praying that it be
absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the
CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways,
during the period in question, do not constitute BOAC income from Philippine
sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine
income tax. The CTA position was that income from transportation is income from
services so that the place where services are rendered determines the source. Thus,
in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit
BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-
69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues,
thus:
1. Whether or not the revenue derived by private respondent British Overseas
Airways Corporation (BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC from
Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign
corporation doing business in the Philippines or has an office or place of business in
the Philippines.
3. In the alternative that private respondent may not be considered a resident
foreign corporation but a non-resident foreign corporation, then it is liable to
Philippine income tax at the rate of thirty-five per cent (35%) of its gross income
received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not
engaged in trade or business within the Philippines and not having any office or
place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no
specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works
or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not
one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a
general sales agent in the Philippines, That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into
series of trips each trip in the series corresponding to a different airline company;
(3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the
functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the
regular sale of tickets, its main activity, is the very lifeblood of the airline business,
the generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local agent
during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding
taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under
the laws of any foreign country, except a foreign fife insurance company, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceding taxable year
from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of
tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or
from profession, vocations, trades, business, commerce, sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents, dividends, securities, or
the transactions of any business carried on for gain or profile, or gains, profits,
and income derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of
transport documents. "The words 'income from any source whatever' disclose a
legislative policy to include all income not expressly exempted within the class of
taxable income under our laws." Income means "cash received or its equivalent"; it
is the amount of money coming to a person within a specific time ...; it means
something distinct from principal or capital. For, while capital is a fund, income is a
flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-
69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the
income. 8 For the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The site of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of
such protection, the flow of wealth should share the burden of supporting the
government.
A transportation ticket is not a mere piece of paper. When issued by a common
carrier, it constitutes the contract between the ticket-holder and the carrier. It gives
rise to the obligation of the purchaser of the ticket to pay the fare and the
corresponding obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to members of the
traveling public in general embraces within its terms all the elements to constitute it
a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4)
rentals and royalties, (5) sale of real property, and (6) sale of personal property, does
not mention income from the sale of tickets for international transportation. Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory
However, that does not render it less an income from sources within the Philippines. definition of the term "gross Philippine billings," thus:
Section 37, by its language, does not intend the enumeration to be exclusive. It
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere
merely directs that the types of income listed therein be treated as income from
in the world by any international carrier doing business in the Philippines of passage
sources within the Philippines. A cursory reading of the section will show that it
documents sold therein, whether for passenger, excess baggage or mail provided
does not state that it is an all-inclusive enumeration, and that no other kind of
the cargo or mail originates from the Philippines. ...
income may be so considered. " 10
The foregoing provision ensures that international airlines are taxed on their income
BOAC, however, would impress upon this Court that income derived from
from Philippine sources. The 2- % tax on gross Philippine billings is an income tax.
transportation is income for services, with the result that the place where the
If it had been intended as an excise or percentage tax it would have been place
services are rendered determines the source; and since BOAC's service of
under Title V of the Tax Code covering Taxes on Business.
transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit
laws. The Tax Court upholds that stand in the joint Decision under review. by this Court of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-
30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax
The absence of flight operations to and from the Philippines is not determinative of
Court in that case was to the effect that the mere sale of tickets, unaccompanied by
the source of income or the site of income taxation. Admittedly, BOAC was an off-
the physical act of carriage of transportation, does not render the taxpayer therein
line international airline at the time pertinent to this case. The test of taxability is
subject to the common carrier's tax. As elucidated by the Tax Court, however, the
the "source"; and the source of an income is that activity ... which produced the
common carrier's tax is an excise tax, being a tax on the activity of transporting,
income. 11 Unquestionably, the passage documentations in these cases were sold in
conveying or removing passengers and cargo from one place to another. It purports
the Philippines and the revenue therefrom was derived from a activity regularly
to tax the business of transportation. 14 Being an excise tax, the same can be levied
pursued within the Philippines. business a And even if the BOAC tickets sold covered
by the State only when the acts, privileges or businesses are done or performed
the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter
within the jurisdiction of the Philippines. The subject matter of the case under
the fact that income from the sale of tickets was derived from the Philippines. The
consideration is income tax, a direct tax on the income of persons and other entities
word "source" conveys one essential idea, that of origin, and the origin of the
"of whatever kind and in whatever form derived from any source." Since the two
income herein is the Philippines. 13
cases treat of a different subject matter, the decision in one cannot be res
It should be pointed out, however, that the assessments upheld herein apply only to judicata to the other.
the fiscal years covered by the questioned deficiency income tax assessments in
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is
Presidential Decree No. 69, promulgated on 24 November, 1972, international
hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the
carriers are now taxed as follows:
fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from
... Provided, however, That international carriers shall pay a tax of 2- per cent on April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
their cross Philippine billings. (Sec. 24[b] [21, Tax Code). Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied.
Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of
deficiency income taxes against respondent BOAC for the fiscal years 1959-1969 to
1970-1971 and therefore setting aside the appealed joint decision of respondent
Court of Tax Appeals. I just wish to point out that the conflict between the majority
opinion penned by Mr. Justice Feliciano as to the proper characterization of the
taxable income derived by respondent BOAC from the sales in the Philippines of
tickets foe BOAC form the issued by its general sales agent in the Philippines gas
become moot after November 24, 1972. Booth opinions state that by amendment
through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the
Tax Code providing dor the rate of income tax on foreign corporations, international
carriers such as respondent BOAC, have since then been taxed at a reduced rate of
2-% on their gross Philippine billings. There is, therefore, no longer ant source of
substantial conflict between the two opinions as to the present 2-% tax on their
gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme.
Justice A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint
decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26
January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British
Overseas Airways Corporation (BOAC), a foreign airline company which does not
maintain any flight operations to and from the Philippines, is liable for Philippine
income taxation in respect of "sales of air tickets" in the Philippines through a
general sales agent, relating to the carriage of passengers and cargo between two
points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign
corporation doing business in the Philippines or [had] an office or place of business
in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is
not determinative of the lialibity of the BOAC to Philippine income taxation in
respect of the income here involved. The liability of BOAC to Philippine income
taxation in respect of such income depends, not on BOAC's status as a "resident
foreign corporation" or alternatively, as a "non-resident foreign corporation," but
rather on whether or not such income is derived from "source within the
Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business
in the Philippines or having an office or place of business in the Philippines is subject
to Philippine income taxation only in respect of income derived from sources within
the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax
Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed
up to 3 August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business
with in the Philippines (expect foreign life insurance companies) shall be taxable as
provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax
shall be livied, collected, and paid annually upon the total net income received in the
preceeding taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as
follows:
(2) Resident Corporations. A corporation, organized, authorized or existing under
the laws of any foreign counrty, except foreign life insurance company, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No.
3825 approved 22 June 1963, read as follows:
(b) 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
preceding paragraph upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or determinative
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. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines
and therefore a resident foreign corporation, or not doing business in the
Philippines and therefore a non-resident foreign corporation, it is liable to income
tax only to the extent that it derives income from sources within the Philippines.
The circumtances that a foreign corporation is resident in the Philippines yields no
inference that all or any part of its income is Philippine source income. Similarly, the
non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no
presumption that the recipient foreign corporation is a resident of the Philippines.
The critical issue, for present purposes, is therefore whether of not BOAC is deriving
income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs
of payment but rather to the "property, activity or service which produced the
income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt
with the issue of the applicable source rule relating to reinsurance premiums paid
by a local insurance company to a foreign reinsurance company in respect of risks
located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contract, accordingly, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines.
[T]he reinsurance, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is
properly regarded as the activity giving rise to the income that is sought to be taxed.
In the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in
case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted
Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in
the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act
466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated,
that income may be derived from three possible sources only: (1) capital and/or
(2) labor and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful
guides in any inquiry into whether a particular item is from "source within the
United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor
(services) the place where the labor is done should be decisive; if it is done in this
counrty, the income should be from "source within the United States." If the income
is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the United
States". If the income is from the sale of capital assets, the place where the sale is
made should be likewise decisive. Much confusion will be avoided by regarding the
term "source" in this fundamental light. It is not a place; it is an activity or property.
As such, it has a situs or location; and if that situs or location is within the United
States the resulting income is taxable to nonresident aliens and foreign
corporations. The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the activities
or property which produce the income . . . . Thus, if income is to taxed, the recipient
thereof must be resident within the jurisdiction, or the property or activities out of
which the income issue or is derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in this country. The underlying
theory is that the consideration for taxation is protection of life and propertyand
that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by
this Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b)
the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule
may be simply stated as follows: the income is sourced in the place where the
service contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as
follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in the
Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from
sources without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following items of
gross income shall be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the
Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply
only in respect of services rendered by individual natural persons; they also apply to
services rendered by or through the medium of a juridical person. 6 Further, a
contract of carriage or of transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
as follows:
(e) Income form sources partly within and partly without the Philippines. Items of
gross income, expenses, losses and deductions, other than those specified in
subsections (a) and (c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance. ... Gains, profits, and income from (1) transportation or other
services rendered partly within and partly without the Philippines, or (2) from the
sale of personnel property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from
sources within and partly from sources without the Philippines. ... (Emphasis
supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition
that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of transportation
was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered
entirely outside the Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a consideration of certain
provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as
amended, first promulgated by the Department of Finance on 10 February 1940.
Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax
Code) provides in part as follows:
Section 155. Compensation for labor or personnel services. Gross income from
sources within the Philippines includes compensation for labor or personal services
within the Philippines regardless of the residence of the payer, of the place in which
the contract for services was made, or of the place of payment (Emphasis
supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax
Code) deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship
companies whose vessels touch parts of the Philippines should include as gross
income, the total receipts of all out-going business whether freight or passengers.
With the gross income thus ascertained, the ratio existing between it and the gross
income from all ports, both within and without the Philippines of all vessels,
whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the
business of transmission of telegraph or cable messages between points in the
Philippines and points outside the Philippines derives income partly form source
within and partly from sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services
rendered between points both outside the Philippines give rise to income wholly
from sources outside the Philippines, and therefore not subject to Philippine income
taxation.
We turn to the "source of income" rules relating to the sale of personal property,
upon the one hand, and to the purchase and sale of personal property, upon the
other hand.
We consider first sales of personal property. Income from the sale of personal
property by the producer or manufacturer of such personal property will be
regarded as sourced entirely within or entirely without the Philippines or as
sourced partly within and partly without the Philippines, depending upon two
factors: (a) the place where the sale of such personal property occurs; and (b) the
place where such personal property was produced or manufactured. If the personal
property involved was both produced or manufactured and sold outside the
Philippines, the income derived therefrom will be regarded as sourced entirely
outside the Philippines, although the personal property had been produced outside
the Philippines, or if the sale of the property takes place outside the Philippines and
the personal was produced in the Philippines, then, the income derived from the
sale will be deemed partly as income sourced without the Philippines. In other
words, the income (and the related expenses, losses and deductions) will be
allocated between sources within and sources without the Philippines. Thus, Section
37 (e) of the Tax Code, although already quoted above, may be usefully quoted
again:
(e) Income from sources partly within and partly without the Philippines. ... Gains,
profits and income from (1) transportation or other services rendered partly within
and partly without the Philippines; or (2) from the sale of personal property
produced (in whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains,
profits and income derived from the purchase of personal property within and its
sale without the Philippines or from the purchase of personal property without and
its sale within the Philippines, shall be treated as derived entirely from sources
within the country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale
of personal property shall be treated as derived entirely from the country in which
sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily
means the place where the property is marketed. This Section does not apply to
income from the sale personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines or produced (in whole or in part)
by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the
transactions entered into by BOAC in the Philippines. Those transactions may be
characterized either as sales of personal property (i. e., "sales of airline tickets")
or as entering into a lease of services or a contract of service or carriage. The
applicable "source of income" rules differ depending upon which characterization is
given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between
points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from
BOAC, which prestation consists of the carriage of the "purchaser" or passenger
from the one point to another outside the Philippines. The ticket is really
the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But
the passenger does not receive undertaken to be delivered by BOAC. The "purchase
price of the airline ticket" is quite different from the purchase price of a physical
good or commodity such as a pair of shoes of a refrigerator or an automobile; it is
really the compensation paid for the undertaking of BOAC to transport the
passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property
or as purchases and sales of personal property, appear entirely inappropriate from
other viewpoint. Consider first purchases and sales: is BOAC properly regarded as
engaged in trading in the purchase and sale of personal property? Certainly,
BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal
property produced or manufactured by it? In a popular or journalistic sense, BOAC
might be described as "selling" "a product" its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of
service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source
rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more
abstract level, BOAC's income is more appropriately characterized as derived from a
"service", rather than from an "activity" (a broader term than service and including
the activity of selling) or from the here involved is income taxation, and not a
sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of
the Tax Code, as amended by Presidential Decree No. 69, promulgated on 24
November 1972 and by Presidential Decree No. 1355, promulgated on 21 April
1978, in the following manner:
(2) Resident corporations. A corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and
one-half per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail, provide the
cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross
revenues from chartered flights originating from the Philippines shall likewise form
part of "gross Philippine billings" regardless of the place of sale or payment of the
passage documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include flight of
passsengers who stay in the Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to
any other point in the world, are not charged any Philippine income tax on their
Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or
points in the Philippines are treated in exactly the same way as international carriers
not serving any port or point in the Philippines. Thus, the source of income rule
applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has
been set aside. in place of Philippine income taxation, the Tax Code now imposes
this 2 per cent tax computed on the basis of billings in respect of passengers and
cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2- per cent tax is effectively a tax on
gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income
and related expenses, losses and deductions. Because taxes are the very lifeblood of
government, the resulting potential "loss" or "gain" in the amount of taxes
collectible by the state is sometimes, with varying degrees of consciousness,
considered in choosing from among competing possible characterizations under or
interpretation of tax statutes. It is hence perhaps useful to point out that the
determination of the appropriate characterization here that of contracts of air
carriage rather than sales of airline tickets entails no down-the-road loss of
income tax revenues to the Government. In lieu thereof, the Government takes in
revenues generated by the 2- per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of
deficiency income taxes against respondent BOAC for the fiscal years 1959-1969 to
1970-1971 and therefore setting aside the appealed joint decision of respondent
Court of Tax Appeals. I just wish to point out that the conflict between the majority
opinion penned by Mr. Justice Feliciano as to the proper characterization of the
taxable income derived by respondent BOAC from the sales in the Philippines of
tickets foe BOAC form the issued by its general sales agent in the Philippines gas
become moot after November 24, 1972. Booth opinions state that by amendment
through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the
Tax Code providing dor the rate of income tax on foreign corporations, international
carriers such as respondent BOAC, have since then been taxed at a reduced rate of
2-% on their gross Philippine billings. There is, therefore, no longer ant source of
substantial conflict between the two opinions as to the present 2-% tax on their
gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme.
Justice A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint
decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26
January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British
Overseas Airways Corporation (BOAC), a foreign airline company which does not
maintain any flight operations to and from the Philippines, is liable for Philippine
income taxation in respect of "sales of air tickets" in the Philippines through a
general sales agent, relating to the carriage of passengers and cargo between two
points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign
corporation doing business in the Philippines or [had] an office or place of business
in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is
not determinative of the lialibity of the BOAC to Philippine income taxation in
respect of the income here involved. The liability of BOAC to Philippine income
taxation in respect of such income depends, not on BOAC's status as a "resident
foreign corporation" or alternatively, as a "non-resident foreign corporation," but
rather on whether or not such income is derived from "source within the
Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business
in the Philippines or having an office or place of business in the Philippines is subject
to Philippine income taxation only in respect of income derived from sources within
the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax
Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed
up to 3 August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business
with in the Philippines (expect foreign life insurance companies) shall be taxable as
provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax
shall be livied, collected, and paid annually upon the total net income received in the
preceeding taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as
follows:
(2) Resident Corporations. A corporation, organized, authorized or existing under
the laws of any foreign counrty, except foreign life insurance company, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No.
3825 approved 22 June 1963, read as follows:
(b) 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
preceding paragraph upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or determinative
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. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines
and therefore a resident foreign corporation, or not doing business in the
Philippines and therefore a non-resident foreign corporation, it is liable to income
tax only to the extent that it derives income from sources within the Philippines.
The circumtances that a foreign corporation is resident in the Philippines yields no
inference that all or any part of its income is Philippine source income. Similarly, the
non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no
presumption that the recipient foreign corporation is a resident of the Philippines.
The critical issue, for present purposes, is therefore whether of not BOAC is deriving
income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs
of payment but rather to the "property, activity or service which produced the
income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt
with the issue of the applicable source rule relating to reinsurance premiums paid
by a local insurance company to a foreign reinsurance company in respect of risks
located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contract, accordingly, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines.
[T]he reinsurance, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is
properly regarded as the activity giving rise to the income that is sought to be taxed.
In the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in
case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted
Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in
the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act
466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated,
that income may be derived from three possible sources only: (1) capital and/or
(2) labor and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful
guides in any inquiry into whether a particular item is from "source within the
United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor
(services) the place where the labor is done should be decisive; if it is done in this
counrty, the income should be from "source within the United States." If the income
is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the United
States". If the income is from the sale of capital assets, the place where the sale is
made should be likewise decisive. Much confusion will be avoided by regarding the
term "source" in this fundamental light. It is not a place; it is an activity or property.
As such, it has a situs or location; and if that situs or location is within the United
States the resulting income is taxable to nonresident aliens and foreign
corporations. The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the activities
or property which produce the income . . . . Thus, if income is to taxed, the recipient
thereof must be resident within the jurisdiction, or the property or activities out of
which the income issue or is derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in this country. The underlying
theory is that the consideration for taxation is protection of life and propertyand
that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by
this Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b)
the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule
may be simply stated as follows: the income is sourced in the place where the
service contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as
follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in the
Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from
sources without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following items of
gross income shall be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the
Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply
only in respect of services rendered by individual natural persons; they also apply to
services rendered by or through the medium of a juridical person. 6 Further, a
contract of carriage or of transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
as follows:
(e) Income form sources partly within and partly without the Philippines. Items of
gross income, expenses, losses and deductions, other than those specified in
subsections (a) and (c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance. ... Gains, profits, and income from (1) transportation or other
services rendered partly within and partly without the Philippines, or (2) from the
sale of personnel property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from
sources within and partly from sources without the Philippines. ... (Emphasis
supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition
that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of transportation
was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered
entirely outside the Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a consideration of certain
provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as
amended, first promulgated by the Department of Finance on 10 February 1940.
Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax
Code) provides in part as follows:
Section 155. Compensation for labor or personnel services. Gross income from
sources within the Philippines includes compensation for labor or personal services
within the Philippines regardless of the residence of the payer, of the place in which
the contract for services was made, or of the place of payment (Emphasis
supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax
Code) deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship
companies whose vessels touch parts of the Philippines should include as gross
income, the total receipts of all out-going business whether freight or passengers.
With the gross income thus ascertained, the ratio existing between it and the gross
income from all ports, both within and without the Philippines of all vessels,
whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue (e) Income from sources partly within and partly without the Philippines. ... Gains,
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as profits and income from (1) transportation or other services rendered partly within
follows: and partly without the Philippines; or (2) from the sale of personal property
produced (in whole or in part) by the taxpayer within and sold without the
Section 164. Telegraph and cable services. A foreign corporation carrying on the
Philippines, or produced (in whole or in part) by the taxpayer without and sold
business of transmission of telegraph or cable messages between points in the
within the Philippines, shall be treated as derived partly from sources within and
Philippines and points outside the Philippines derives income partly form source
partly from sources without the Philippines. ... (Emphasis supplied)
within and partly from sources without the Philippines.
In contrast, income derived from the purchase and sale of personal property i. e.,
... (Emphasis supplied)
trading is, under the Tax Code, regarded as sourced wholly in the place where the
Once more, a very strong inference arises under Sections 163 and 164 of Revenue personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
Regulations No. 2 that steamship and telegraph and cable services
(e) Income from sources partly within and partly without the Philippines ... Gains,
rendered between points both outside the Philippines give rise to income wholly
profits and income derived from the purchase of personal property within and its
from sources outside the Philippines, and therefore not subject to Philippine income
sale without the Philippines or from the purchase of personal property without and
taxation.
its sale within the Philippines, shall be treated as derived entirely from sources
We turn to the "source of income" rules relating to the sale of personal property, within the country in which sold. (Emphasis supplied)
upon the one hand, and to the purchase and sale of personal property, upon the
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
other hand.
Section 159. Sale of personal property. Income derived from the purchase and sale
We consider first sales of personal property. Income from the sale of personal
of personal property shall be treated as derived entirely from the country in which
property by the producer or manufacturer of such personal property will be
sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily
regarded as sourced entirely within or entirely without the Philippines or as
means the place where the property is marketed. This Section does not apply to
sourced partly within and partly without the Philippines, depending upon two
income from the sale personal property produced (in whole or in part) by the
factors: (a) the place where the sale of such personal property occurs; and (b) the
taxpayer within and sold without the Philippines or produced (in whole or in part)
place where such personal property was produced or manufactured. If the personal
by the taxpayer without and sold within the Philippines. (See Section 162 of these
property involved was both produced or manufactured and sold outside the
regulations). (Emphasis supplied)
Philippines, the income derived therefrom will be regarded as sourced entirely
outside the Philippines, although the personal property had been produced outside 4. It will be seen that the basic problem is one of characterization of the
the Philippines, or if the sale of the property takes place outside the Philippines and transactions entered into by BOAC in the Philippines. Those transactions may be
the personal was produced in the Philippines, then, the income derived from the characterized either as sales of personal property (i. e., "sales of airline tickets")
sale will be deemed partly as income sourced without the Philippines. In other or as entering into a lease of services or a contract of service or carriage. The
words, the income (and the related expenses, losses and deductions) will be applicable "source of income" rules differ depending upon which characterization is
allocated between sources within and sources without the Philippines. Thus, Section given to the BOAC transactions.
37 (e) of the Tax Code, although already quoted above, may be usefully quoted
again:
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between
points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from
BOAC, which prestation consists of the carriage of the "purchaser" or passenger
from the one point to another outside the Philippines. The ticket is really
the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But
the passenger does not receive undertaken to be delivered by BOAC. The "purchase
price of the airline ticket" is quite different from the purchase price of a physical
good or commodity such as a pair of shoes of a refrigerator or an automobile; it is
really the compensation paid for the undertaking of BOAC to transport the
passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property
or as purchases and sales of personal property, appear entirely inappropriate from
other viewpoint. Consider first purchases and sales: is BOAC properly regarded as
engaged in trading in the purchase and sale of personal property? Certainly,
BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal
property produced or manufactured by it? In a popular or journalistic sense, BOAC
might be described as "selling" "a product" its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of
service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source
rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more
abstract level, BOAC's income is more appropriately characterized as derived from a
"service", rather than from an "activity" (a broader term than service and including
the activity of selling) or from the here involved is income taxation, and not a
sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of
the Tax Code, as amended by Presidential Decree No. 69, promulgated on 24
November 1972 and by Presidential Decree No. 1355, promulgated on 21 April
1978, in the following manner:
(2) Resident corporations. A corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and
one-half per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail, provide the
cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross
revenues from chartered flights originating from the Philippines shall likewise form
part of "gross Philippine billings" regardless of the place of sale or payment of the
passage documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include flight of
passsengers who stay in the Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to
any other point in the world, are not charged any Philippine income tax on their
Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or
points in the Philippines are treated in exactly the same way as international carriers
not serving any port or point in the Philippines. Thus, the source of income rule
applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has
been set aside. in place of Philippine income taxation, the Tax Code now imposes
this 2 per cent tax computed on the basis of billings in respect of passengers and
cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2- per cent tax is effectively a tax on
gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income
and related expenses, losses and deductions. Because taxes are the very lifeblood of The Case
government, the resulting potential "loss" or "gain" in the amount of taxes
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules
collectible by the state is sometimes, with varying degrees of consciousness,
of Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals
considered in choosing from among competing possible characterizations under or
(CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court
interpretation of tax statutes. It is hence perhaps useful to point out that the
resolves this case on a pure question of law, which involves the interpretation of
determination of the appropriate characterization here that of contracts of air
Section 27(B) vis--vis Section 30(E) and (G) of the National Internal Revenue Code
carriage rather than sales of airline tickets entails no down-the-road loss of
of the Philippines (NIRC), on the income tax treatment of proprietary non-profit
income tax revenues to the Government. In lieu thereof, the Government takes in
hospitals.
revenues generated by the 2- per cent tax on the gross Philippine billings or
receipts of international carriers. The Facts
I would vote to affirm the decision of the Court of Tax Appeals. St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non-profit corporation. Under its articles of incorporation, among its corporate
Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.
purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,

Republic of the Philippines benevolent, charitable and scientific hospital which shall give curative, rehabilitative
SUPREME COURT and spiritual care to the sick, diseased and disabled persons; provided that purely
Manila medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;
SECOND DIVISION
(b) To provide a career of health science education and provide medical services to
G.R. No. 195909 September 26, 2012 the community through organized clinics in such specialties as the facilities and
resources of the corporation make possible;
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
vs. (c) To carry on educational activities related to the maintenance and promotion of
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT. health as well as provide facilities for scientific and medical researches which, in the
opinion of the Board of Trustees, may be justified by the facilities, personnel, funds,
x-----------------------x
or other requirements that are available;
G.R. No. 195960
(d) To cooperate with organized medical societies, agencies of both government and
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER, private sector; establish rules and regulations consistent with the highest
vs. professional ethics;
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
xxxx3
DECISION
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
CARPIO, J.: deficiency taxes amounting to P76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the
First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against
the deficiency tax assessments. The BIR did not act on the protest within the 180-
day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a
new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations under Section 26 of the
1997 Tax Code x x x." 5 It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because
only 13% of its revenues came from charitable purposes. Moreover, the hospital's
board of trustees, officers and employees directly benefit from its profits and assets.
St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from
patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its
free services to patients was P218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses) of P334,642,615. 8 St. Luke's also
claimed that its income does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable
and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that
the making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments
before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole
issue of whether the enactment of Section 27(B) takes proprietary non-profit
hospitals out of the income tax exemption under Section 30 of the NIRC and
instead, imposes a preferential rate of 10% on their taxable income. The BIR prays
that St. Luke's be ordered to pay P57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment
and withholding of a part of its income, 9 as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to undertake such a factual
review. Under the Constitution 10 and the Rules of Court, 11 this Court's review
power is generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails to invoke a
recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent
against petitioner in the amount of P110,000.00 is hereby CANCELLED and
WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax
and deficiency expanded withholding tax for the taxable year 1998 in the respective
amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency
interest on the total amount of P6,275,370.38 counted from October 15, 2003 until
full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid,
arose from the failure of St. Luke's to prove that part of its income in 1998 (declared
as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the
remainder of the P63,113,952.79 deficiency assessed by the BIR based on the 10%
tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not
applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution
covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income
derived by St. Luke's from services to its patients, whether paying or non-paying.
The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v.
Commissioner of Internal Revenue, 16 which examined the primary purposes of St.
Luke's under its articles of incorporation and various documents 17 identifying St.
Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which
states that "a charitable institution does not lose its charitable character and its
consequent exemption from taxation merely because recipients of its benefits who
are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution x x x." 19 The generation of
income from paying patients does not per se destroy the charitable nature of St.
Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the provision on charitable
institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is
lost whenever there is net income, the Court in Jesus Sacred Heart College declared:
"[E]very responsible organization must be run to at least insure its existence, by
operating within the limits of its own resources, especially its regular income. In
other words, it should always strive, whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St.
Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B)
requires a hospital to be "non-profit." On the other hand, Congress specifically used
the word "non-stock" to qualify a charitable "corporation or association" in Section
30(E) of the NIRC. According to the CTA, this is unique in the present tax code,
indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it
is clear that non-stock, non-profit hospitals operated exclusively for charitable
purpose are exempt from income tax on income received by them as such, applying
the provision of Section 30(E) of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No.
195960 because the petition raises factual issues. Under Section 1, Rule 45 of the
Rules of Court, "[t]he petition shall raise only questions of law which must be
distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits
factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary,
being allegedly self-serving, to show the nature of the 'Other Income-Net' x x
x." 28 This is not a case of overlooking or failing to consider relevant evidence. The
CTA obviously considered the evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case and found no other
evidence aside from the self-serving affidavit executed by [the] witnesses [of St.
Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the
25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the
deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount
of P6,275,370.38 in the dispositive portion of the CTA First Division Decision
includes only deficiency interest under Section 249(A) and (B) of the NIRC and not
delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed
under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in
Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are non-profit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D) hereof: Provided,
That if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational institutions
or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income. For purposes of this Subsection, the term
'unrelated trade, business or other activity' means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to operate from
the Department of Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and
regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends
that it is a charitable institution and an organization promoting social welfare. The
arguments of St. Luke's focus on the wording of Section 30(E) exempting from
income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the
legislative intent of introducing Section 27(B) was only to remove the exemption for
"proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation
of veterans, no part of its net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold
that Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and
non-profit. "Proprietary" means private, following the definition of a "proprietary
educational institution" as "any private school maintained and administered by
private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the
net income or asset devoted to the institution's purposes and all its activities
conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu, 37 this Court considered as non-profit a sports
club organized for recreation and entertainment of its stockholders and members.
The club was primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course. 38 The club was non-
profit because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not
charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government." 41 A non-profit club for the
benefit of its members fails this test. An organization may be considered as non-
profit if it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive
test of charity in Lung Center. The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for the test of charity in
our jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide
for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes
taxes which should have been spent to address public needs, because certain
private entities already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded
by appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the collection of
taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart
College 46 which says that receiving income from paying patients does not destroy
the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and
its exemption from taxes simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The Constitution provides that
"[c]haritable institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation." 48 The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test
requires that the institution use the property in a certain way, i.e. for a charitable
purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its
charitable character when it used a portion of its lot for commercial purposes. The
effect of failing to meet the use requirement is simply to remove from the tax
exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In
the NIRC, Congress decided to extend the exemption to income taxes. However, the
way Congress crafted Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution,
but requires that the institution "actually, directly and exclusively" use the property
for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be
devoted "exclusively" for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and
other constitutive documents. Section 30(E) of the NIRC specifically requires that
the corporation or association be non-stock, which is defined by the Corporation
Code as "one where no part of its income is distributable as dividends to its
members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized." 50 However, under
Lung Center, any profit by a charitable institution must not only be plowed back
"whenever necessary or proper," but must be "devoted or used altogether to the
charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a
part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit
charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be "organized and operated
exclusively" for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words
"organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts "any" activity for profit, such activity is not tax exempt even as
its not-for-profit activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the "[n]on-stock corporation or association [must
Household and Property 91,797,622.00
be] organized and operated exclusively for x x x charitable x x x purposes x x x." It
likewise qualifies the requirement in Section 30(G) that the civic organization must
be "operated exclusively" for the promotion of social welfare. P1,395,725,350.00

Thus, even if the charitable institution must be "organized and operated exclusively" INCOME FROM OPERATIONS P334,642,615.00 100%
for charitable purposes, it is nevertheless allowed to engage in "activities conducted
for profit" without losing its tax exempt status for its not-for-profit activities. The
Free Services -218,187,498.00 -65.20%
only consequence is that the "income of whatever kind and character" of a
charitable institution "from any of its activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax." Prior to the INCOME FROM OPERATIONS, Net of FREE P116,455,117.00 34.80%
introduction of Section 27(B), the tax rate on such income from for-profit activities SERVICES
was the ordinary corporate rate under Section 27(A). With the introduction of
Section 27(B), the tax rate is now 10%. OTHER INCOME 17,482,304.00

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately P1.73
billion from paying patients is not an institution "operated exclusively" for charitable
purposes. Clearly, revenues from paying patients are income received from
"activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from
Services to Patients" in contrast to its "Free Services" expenditure of P218,187,498.
In its Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to
support its claim that 65.20% of its "income after expenses was allocated to free or
charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00
EXCESS OF REVENUES OVER EXPENSES P133,937,421.00
In Lung Center, this Court declared:
"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant
use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitution and the law. Solely is synonymous with
exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without
OPERATING EXPENSES violating the NIRC. Services to paying patients are activities conducted for profit.
They cannot be considered any other way. There is a "purpose to make profit over
Professional care of patients P1,016,608,394.00 and above the cost" of services. 55 The P1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for
Administrative 287,319,334.00 non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for services
to paying and non-paying patients, then it cannot be said that the income is
"devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the
NIRC expressly qualifies that income from activities for profit is taxable "regardless
of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase "any activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
of Conference for the Senate, which introduced the phrase "or from any activity
conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no
cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa;
pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicin social econmica, lo que se paga por
estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos
tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution
like the College of Medicine of the University of Santo Tomas. Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was
one of the reasons Congress inserted the phrase "or any activity conducted for
profit."
The question in Jesus Sacred Heart College involves an educational
institution. 58 However, it is applicable to charitable institutions because Senator
Cuenco's response shows an intent to focus on the activities of charitable
institutions. Activities for profit should not escape the reach of taxation. Being a
non-stock and non-profit corporation does not, by this reason alone, completely
exempt an institution from tax. An institution cannot use its corporate form to
prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients
are concerned. This ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to income tax, previously
at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an
exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary
non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable
and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J.
Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good faith
and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated
19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are
MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of
the National Internal Revenue Code. However, it is not liable for surcharges and
interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court
of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.
Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 95022 March 23, 1992
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT
PLAN, represented by its Trustee-Director, respondents.
MELENCIO-HERRERA, J.:
This case is said to be precedent setting. While the amount involved is insignificant,
the Solicitor General avers that there are about 85 claims of the same nature
pending in the Court of Tax Appeals and Bureau of Internal Revenue totalling
approximately P120M.
Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of
respondent Court of Appeals, dated August 27, 1990, in CA-G.R. SP No. 20426,
entitled "Commissioner of Internal Revenue vs. GCL Retirement Plan, represented
by its Trustee-Director and the Court of Tax Appeals," which affirmed the Decision of
the latter Court, dated 15 December 1986, in Case No. 3888, ordering a refund, in
the sum of P11,302.19, to the GCL Retirement Plan representing the withholding tax
on income from money market placements and purchase of treasury bills, imposed
pursuant to Presidential Decree No. 1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement
Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc.,
to provide retirement, pension, disability and death benefits to its employees. The
Plan as submitted was approved and qualified as exempt from income tax by
Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No.
4917. 1
In 1984, Respondent GCL made investsments and earned therefrom interest income
from which was witheld the fifteen per centum (15%) final witholding tax imposed
by Pres. Decree No. 1959, 2 which took effect on 15 October 1984, to wit:
Date Kind of Investment Principal Income Earned 15% Tax
ACIC
12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66
10/22/84 234,632.75 9,815.89 1,472.38
11/19/84 225,886.51 10,629.22 1,594.38
11/23/84 344,448.64 17,313.33 2,597.00
12/05/84 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15
P11,302.19
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the
amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and
P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second
claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both (c) Withholding tax on interest on bank deposits. (1) Rate of withholding tax.
letters that it disagreed with the collection of the 15% final withholding tax from the Every bank or banking institution shall deduct and withhold from the interest on
interest income as it is an entity fully exempt from income tax as provided under bank deposits (except interest paid or credited to non-resident alien individuals and
Rep. Act No. 4917 in relation to Section 56 (b) 3 of the Tax Code. foreign corporations), a tax equal to fifteen per cent of the said interest: Provided,
however, That no withholding of tax shall be made if the aggregate amount of the
The refund requested having been denied, Respondent GCL elevated the matter to
interest on all deposit accounts maintained by a depositor alone or together with
respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that
another in any one bank at any time during the taxable period does not exceed
employees' trusts are exempt from the 15% final withholding tax on interest income
three hundred fifty pesos a year or eighty-seven pesos and fifty centavos per
and ordering a refund of the tax withheld. Upon appeal, originally to this Court, but
quarter. For this purpose, interest on a deposit account maintained by two persons
referred to respondent Court of Appeals, the latter upheld the CTA Decision. Before
shall be deemed to be equally owned by them.
us now, Petitioner assails that disposition.
(2) Treatment of bank deposit interest. The interest income shall be included in
It appears that under Rep. Act No. 1983, which took effect on 22 June 1957,
the gross income in computing the depositor's income tax liability in according with
amending Sec. 56 (b) of the National Internal Revenue Code (Tax Code, for brevity),
existing law.
employees' trusts were exempt from income tax. That law provided:
(3) Depositors enjoying tax exemption privileges or preferential tax treatment. In
Sec. 56 Imposition of tax. (a) Application of tax. The taxes imposed by this Title
all cases where the depositor is tax-exempt or is enjoying preferential income tax
upon individuals shall apply to the income of estates or of any kind of property held
treatment under existing laws, the withholding tax imposed in this paragraph shall
in trust, including
be refunded or credited as the case may be upon submission to the Commissioner
xxx xxx xxx of Internal Revenue of proof that the said depositor is a tax-exempt entity or enjoys
a preferential income tax treatment.
(b) Exception. The tax imposed by this Title shall not apply to employees' trust
which forms a part of a pension, stock bonus or profit-sharing plan of an employer xxx xxx xxx
for the benefit of some or all of his employees (1) if contributions are made to trust
This exemption and preferential tax treatment were carried over in Pres. Decree No.
by such employer, or employees, or both, for the purpose of distributing to such
1739, effective on 17 September 1980, which law also subjected interest from bank
employees the earnings and principal of the fund accumulated by the trust in
deposits and yield from deposit substitutes to a final tax of twenty per cent (20%).
accordance with such
The pertinent provisions read:
plan, . . .
Sec. 2. Section 21 of the same Code is hereby amended by adding a new paragraph
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the
to read as follows:
withholding from the interest on bank deposits at the source of a tax of fifteen per
cent (15%) of said interest. However, it also allowed a specific exemption in its Sec. 21. Rates of tax on citizens or residents.
Section 53, as follows:
xxx xxx xxx
Sec. 53. Withholding of tax at source.
Interest from Philippine Currency bank deposits and yield from deposit substitutes
xxx xxx xxx whether received by citizens of the Philippines or by resident alien individuals, shall
be subject to the final tax as follows: (a) 15% of the interest on savings deposits, and
(b) 20% of the interest on time deposits and yield from deposit substitutes, which
shall be collected and paid as provided in Sections 53 and 54 of this Code. Provided,
That no tax shall be imposed if the aggregate amount of the interest on all
Philippine Currency deposit accounts maintained by a depositor alone or together
with another in any one bank at any time during the taxable period does not exceed
Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos (P200.00) per
quarter. Provided, further, That if the recipient of such interest is exempt from
income taxation, no tax shall be imposed and that, if the recipient is enjoying
preferential income tax treatment, then the preferential tax rates so provided shall
be imposed (Emphasis supplied).
Sec. 3. Section 24 of the same Code is hereby amended by adding a new subsection
(cc) between subsections (c) and (d) to read as follows:
(cc) Rates of tax on interest from deposits and yield from deposit substitutes.
Interest on Philippine Currency bank deposits and yield from deposit substitutes
received by domestic or resident foreign corporations shall be subject to a final tax
on the total amount thereof as follows: (a) 15% of the interest on savings deposits;
and (b) 20% of the interest on time deposits and yield from deposit substitutes
which shall be collected and paid as provided in Sections 53 and 54 of this
Code. Provided, That if the recipient of such interest is exempt from income
taxation, no tax shall be imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so provided shall be
imposed (Emphasis supplied).
Sec. 9. Section 53(e) of the same Code is hereby amended to read as follows:
Se. 53(e) Withholding of final tax on interest on bank deposits and yield from
deposit substitutes.
(1) Withholding of final tax. Every bank or non-bank financial intermediary shall
deduct and withhold from the interest on bank deposits or yield from deposit
substitutes a final tax equal to fifteen (15%) per cent of the interest on savings
deposits and twenty (20%) per cent of the interest on time deposits or yield from
deposit substitutes: Provided, however, That no withholding tax shall be made if the
aggregate amount of the interest on all deposit accounts maintained by a depositor
alone or together with another in any one bank at any time during the taxable
period does not exceed Eight Hundred Pesos a year or Two Hundred Pesos per
quarter. For this purpose, interest on a deposit account maintained by two persons
shall be deemed to be equally owned by them.
(2) Depositors or placers/investors enjoying tax exemption privileges or preferential
tax treatment. In all cases where the depositor or placer/investor is tax exempt or
is enjoying preferential income tax treatment under existing laws, the withholding
tax imposed in this paragraph shall be refunded or credited as the case may be upon
submission to the Commissioner of Internal Revenue of proof that the said
depositor, or placer/investor is a tax exempt entity or enjoys a preferential income
tax treatment.
Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was issued,
amending the aforestated provisions to read:
Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended to read
as follows:
(d) On interest from bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements. Interest from
Philippine Currency Bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements whether received
by citizens of the Philippines, or by resident alien individuals, shall be subject to a
15% final tax to be collected and paid as provided in Sections 53 and 54 of this Code.
Sec. 3. Section 24(cc) of this Code, as amended, is hereby further amended to read
as follows:
(cc) Rates of tax on interest from deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements. Interest
on Philippine Currency Bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements received by
domestic or resident foreign corporations shall be subject to a 15% final tax to be
collected and paid as provided in Section 53 and 54 of this Code.
Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as follows:
Sec. 53 (d) (1). Withholding of Final Tax. Every bank or non-bank financial
intermediary or commercial. industrial, finance companies, and other non-financial
companies authorized by the Securities and Exchange Commission to issue deposit
substitutes shall deduct and withhold from the interest on bank deposits or yield or
any other monetary benefit from deposit substitutes a final tax equal to fifteen per
centum (15%) of the interest on deposits or yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements.
It is to be noted that the exemption from withholding tax on interest on bank
deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or
corporation) of the interest income is exempt from income taxation, and the
imposition of the preferential tax rates if the recipient of the income is enjoying
preferential income tax treatment, were both abolished by Pres. Decree No. 1959.
Petitioner thus submits that the deletion of the exempting and preferential tax
treatment provisions under the old law is a clear manifestation that the single 15%
(now 20%) rate is impossible on all interest incomes from deposits, deposit
substitutes, trust funds and similar arrangements, regardless of the tax status or
character of the recipients thereof. In short, petitioner's position is that from 15
October 1984 when Pres. Decree No. 1959 was promulgated, employees' trusts
ceased to be exempt and thereafter became subject to the final withholding tax.
Upon the other hand, GCL contends that the tax exempt status of the employees'
trusts applies to all kinds of taxes, including the final withholding tax on interest
income. That exemption, according to GCL, is derived from Section 56(b) and not
from Section 21 (d) or 24 (cc) of the Tax Code, as argued by Petitioner.
The sole issue for determination is whether or not the GCL Plan is exempt from the
final withholding tax on interest income from money placements and purchase of
treasury bills required by Pres. Decree No. 1959.
We uphold the exemption.
To begin with, it is significant to note that the GCL Plan was qualified as exempt
from income tax by the Commissioner of Internal Revenue in accordance with Rep.
Act No. 4917 approved on 17 June 1967. This law specifically provided:
Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained by the
employer shall be exempt from all taxes and shall not be liable to attachment, levy
or seizure by or under any legal or equitable process whatsoever except to pay a
debt of the official or employee concerned to the private benefit plan or that arising
from liability imposed in a criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision should be
taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by
Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision
specifically exempted employee's trusts from income tax and is repeated hereunder
for emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this
Title upon individuals shall apply to the income of estates or of any kind of property
held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from any other
kind of property held in trust, springs from the foregoing provision. It is
unambiguous. Manifest therefrom is that the tax law has singled out employees'
trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of employees'
trusts. Employees' trusts or benefit plans normally provide economic assistance to
employees upon the occurrence of certain contingencies, particularly, old age
retirement, death, sickness, or disability. It provides security against certain hazards
to which members of the Plan may be exposed. It is an independent and additional
source of protection for the working group. What is more, it is established for their
exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to
encourage the formation and establishment of such private Plans for the benefit of
laborers and employees outside of the Social Security Act. Enlightening is a portion
of the explanatory note to H.B. No. 6503, now R.A. 1983, reading:
Considering that under Section 17 of the social Security Act, all contributions
collected and payments of sickness, unemployment, retirement, disability and death
benefits made thereunder together with the income of the pension trust are exempt
from any tax, assessment, fee, or charge, it is proposed that a similar system
providing for retirement, etc. benefits for employees outside the Social Security Act
be exempted from income taxes. (Congressional Record, House of Representatives,
Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in Commissioner of Internal
Revenue v. Visayan Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715);
emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed by the income of the
pension trust. Otherwise, taxation of those earnings would result in a diminution
accumulated income and reduce whatever the trust beneficiaries would receive out
of the trust fund. This would run afoul of the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and
preferential tax rates under the old law, therefore, can not be deemed to extent to
employees' trusts. Said Decree, being a general law, can not repeal by implication a
specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting
exemption from income tax to employees' trusts. Rep. Act 1983, which excepted
employees' trusts in its Section 56 (b) was effective on 22 June 1957 while Rep. Act
No. 4917 was enacted on 17 June 1967, long before the issuance of Pres. Decree
No. 1959 on 15 October 1984. A subsequent statute, general in character as to its
terms and application, is not to be construed as repealing a special or specific
enactment, unless the legislative purpose to do so is manifested. This is so even if
the provisions of the latter are sufficiently comprehensive to include what was set
forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41
SCRA 190).
Notably, too, all the tax provisions herein treated of come under Title II of the Tax
Code on "Income Tax." Section 21 (d), as amended by Rep. Act No. 1959, refers to
the final tax on individuals and falls under Chapter II; Section 24 (cc) to the final tax
on corporations under Chapter III; Section 53 on withholding of final tax to Returns
and Payment of Tax under Chapter VI; and Section 56 (b) to tax on Estates and Trusts
covered by Chapter VII, Section 56 (b), taken in conjunction with Section 56
(a), supra, explicitly excepts employees' trusts from "the taxes imposed by this
Title." Since the final tax and the withholding thereof are embraced within the title
on "Income Tax," it follows that said trust must be deemed exempt therefrom.
Otherwise, the exception becomes meaningless.
There can be no denying either that the final withholding tax is collected
from income in respect of which employees' trusts are declared exempt (Sec. 56 [b],
now 53 [b], Tax Code). The application of the withholdings system to interest on
bank deposits or yield from deposit substitutes is essentially to maximize and
expedite the collection of income taxes by requiring its payment at the source. If an
employees' trust like the GCL enjoys a tax-exempt status from income, we see no
logic in withholding a certain percentage of that income which it is not supposed to
pay in the first place.
Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October
1984, and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85, dated 14
January 1985, as authorities for the argument that Pres. Decree No. 1959 withdrew
the exemption of employees' trusts from the withholding of the final tax on interest
income. Said Circular and Ruling pronounced that the deletion of the exempting and
preferential tax treatment provisions by Pres. Decree No. 1959 is a clear
manifestation that the single 15% tax rate is imposable on all interest income
regardless of the tax status or character of the recipient thereof. But since we herein
rule that Pres. Decree No. 1959 did not have the effect of revoking the tax
exemption enjoyed by employees' trusts, reliance on those authorities is now
misplaced.
WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of
respondent Court of Appeals, affirming that of the Court of Tax Appeals is UPHELD.
No costs.
SO ORDERED.
Narvasa, C.J., Gutierrez, Jr., Cruz, Paras, Feliciano, Padilla, Bidin, Grio-Aquino,
Medialdea, Regalado, Davide, Jr., Romero and Nocon, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 106611 July 21, 1994
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX
APPEALS, respondents.
The Solicitor General for petitioner.
Palaez, Adriano & Gregorio for private respondent.
REGALADO, J.:
The judicial proceedings over the present controversy commenced with CTA Case
No. 4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner
of Internal Revenue to grant a refund to herein private respondent Citytrust Banking
Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable
amount reflected in its 1983 income tax return on the ground of prescription. 1 That
judgment of the tax court was affirmed by respondent Court of Appeals in its
judgment in CA-G.R. SP
No. 26839. 2 The case was then elevated to us in the present petition for review
on certiorari wherein the latter judgment is impugned and sought to be nullified
and/or set aside.
It appears that in a letter dated August 26, 1986, herein private respondent
corporation filed a claim for refund with the Bureau of Internal Revenue (BIR) in the
amount of P19,971,745.00 representing the alleged aggregate of the excess of its
carried-over total quarterly payments over the actual income tax due, plus carried-
over withholding tax payments on government securities and rental income, as
computed in its final income tax return for the calendar year ending December 31,
1985. 3
Two days later, or on August 28, 1986, in order to interrupt the running of the
prescriptive period, Citytrust filed a petition with the Court of Tax Appeals, docketed
therein as CTA Case No. 4099, claiming the refund of its income tax overpayments
for the years 1983, 1984 and 1985 in the total amount of P19,971,745.00. 4
In the answer filed by the Office of the Solicitor General, for and in behalf of therein
respondent commissioner, it was asserted that the mere averment that Citytrust
incurred a net loss in 1985 does not ipso facto merit a refund; that the amounts of
P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income
tax overpayment, taxes withheld on proceeds of government securities investments,
as well as on rental income, respectively, are not properly documented; that
assuming arguendo that petitioner is entitled to refund, the right to claim the same
has prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections
292 and 295 of the National Internal Revenue Code of 1977, as amended, since the
petition was filed only on August 28, 1986. 5
On February 20, 1991, the case was submitted for decision based solely on the
pleadings and evidence submitted by herein private respondent Citytrust. Herein
petitioner could not present any evidence by reason of the repeated failure of the
Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as
the investigation report thereon, to the Solicitor General. 6
However, on June 24, 1991, herein petitioner filed with the tax court a
manifestation and motion praying for the suspension of the proceedings in the said
case on the ground that the claim of Citytrust for tax refund in the amount of
P19,971,745.00 was already being processed by the Tax Credit/Refund Division of
the BIR, and that said bureau was only awaiting the submission by Citytrust of the
required confirmation receipts which would show whether or not the aforestated
amount was actually paid and remitted to the BIR. 7
Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals
already acquired jurisdiction over the case, it could no longer be divested of the
same; and, further, that the proceedings therein could not be suspended by the Less: FCDU payable 18,874.00
mere fact that the claim for refund was being administratively processed, especially
where the case had already been submitted for decision. Amount Refundable for 1985 P (17,842.47)
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y,
* Note:
Y-1, Y-2 and Y-3 adduced in the case, which clearly showed that there was an
overpayment of income taxes and for which a tax credit or refund was due to These credits are smaller than the claimed amount because only the above figures
Citytrust. The Foregoing exhibits are allegedly conclusive proof of and an admission are well supported by the various exhibits presented during the hearing.
by herein petitioner that there had been an overpayment of income taxes. 8
No pronouncement as to costs.
The tax court denied the motion to suspend proceedings on the ground that the
case had already been submitted for decision since February 20, 1991. 9 SO ORDERED. 10

Thereafter, said court rendered its decision in the case, the decretal portion of The order for refund was based on the following findings of the Court of Tax
which declares: Appeals: (1) the fact of withholding has been established by the statements and
certificates of withholding taxes accomplished by herein private respondent's
WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only for withholding agents, the authenticity of which were neither disputed nor
the overpaid taxes incurred in 1984 and 1985. The refundable amount as shown in controverted by herein petitioner; (2) no evidence was presented which could
its 1983 income tax return is hereby denied on the ground of prescription. effectively dispute the correctness of the income tax return filed by herein
Respondent is hereby ordered to grant a refund to petitioner Citytrust Banking Corp. respondent corporation and other material facts stated therein; (3) no deficiency
in the amount of P13,314,506.14 representing the overpaid income taxes for 1984 assessment was issued by herein petitioner; and (4) there was an audit report
and 1985, recomputed as follows: submitted by the BIR Assessment Branch, recommending the refund of overpaid
taxes for the years concerned (Exhibits Y to Y-3), which enjoys the presumption of
1984 Income tax due P 4,715,533.00
regularity in the performance of official duty. 11
Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits A motion for the reconsideration of said decision was initially filed by the Solicitor
W/T on int. on gov't. sec. 1,921,245.37* General on the sole ground that the statements and certificates of taxes allegedly
W/T on rental inc. 26,604.30* 18,162,448.67 withheld are not conclusive evidence of actual payment and remittance of the taxes
withheld to the BIR. 12 A supplemental motion for reconsideration was thereafter
Tax Overpayment (13,446,915.67) filed, wherein it was contended for the first time that herein private respondent had
Less: FCDU payable 150,252.00 outstanding unpaid deficiency income taxes. Petitioner alleged that through an
inter-office memorandum of the Tax Credit/Refund Division, dated August 8, 1991,
Amount refundable for 1984 P (13,296,663.67) he came to know only lately that Citytrust had outstanding tax liabilities for 1984 in
the amount of P56,588,740.91 representing deficiency income and business taxes
1985 Income tax due (loss) P 0 covered by Demand/Assessment Notice No. FAS-1-84-003291-003296. 13
Less: W/T on rentals 36,716.47*
Oppositions to both the basic and supplemental motions for reconsideration were
Tax Overpayment (36,716.47)* filed by private respondent Citytrust. 14 Thereafter, the Court of Tax Appeals issued a
resolution denying both motions for the reason that Section 52 (b) of the Tax Code, constrained to submit the case for decision on February 20, 1991 without
as implemented by Revenue Regulation presenting any evidence.
6-85, only requires that the claim for tax credit or refund must show that the
For that matter, the BIR officials and/or employees concerned also failed to heed the
income received was declared as part of the gross income, and that the fact of
order of the Court of Tax Appeals to remand the records to it pursuant to Section 2,
withholding was duly established. Moreover, with regard to the argument raised in
Rule 7 of the Rules of the Court of Tax Appeals which provides that the
the supplemental motion for reconsideration anent the deficiency tax assessment
Commissioner of Internal Revenue and the Commissioner of Customs shall certify
against herein petitioner, the tax court ruled that since that matter was not raised in
and forward to the Court of Tax Appeals, within ten days after filing his answer, all
the pleadings, the same cannot be considered, invoking therefor the salutary
the records of the case in his possession, with the pages duly numbered, and if the
purpose of the omnibus motion rule which is to obviate multiplicity of motions and
records are in separate folders, then the folders shall also be numbered.
to discourage dilatory pleadings. 15
The aforestated impass came about due to the fact that, despite the filing of the
As indicated at the outset, a petition for review was filed by herein petitioner with
aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax
respondent Court of Appeals which in due course promulgated its decision affirming
Appeals, the Tax Refund Division of the BIR still continued to act administratively on
the judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to
the claim for refund previously filed therein, instead of forwarding the records of
this Court, maintaining that said respondent court erred in affirming the grant of the
the case to the Court of Tax Appeals as ordered. 18
claim for refund of Citytrust, considering that, firstly, said private respondent failed
to prove and substantiate its claim for such refund; and, secondly, the bureau's It is a long and firmly settled rule of law that the Government is not bound by the
findings of deficiency income and business tax liabilities against private respondent errors committed by its agents. 19In the performance of its governmental functions,
for the year 1984 bars such payment. 16 the State cannot be estopped by the neglect of its agent and officers. Although the
Government may generally be estopped through the affirmative acts of public
After a careful review of the records, we find that under the peculiar circumstances
officers acting within their authority, their neglect or omission of public duties as
of this case, the ends of substantial justice and public interest would be better
exemplified in this case will not and should not produce that effect.
subserved by the remand of this case to the Court of Tax Appeals for further
proceedings. Nowhere is the aforestated rule more true than in the field of taxation. 20 It is
axiomatic that the Government cannot and must not be estopped particularly in
It is the sense of this Court that the BIR, represented herein by petitioner
matters involving taxes. Taxes are the lifeblood of the nation through which the
Commissioner of Internal Revenue, was denied its day in court by reason of the
government agencies continue to operate and with which the State effects its
mistakes and/or negligence of its officials and employees. It can readily be gleaned
functions for the welfare of its constituents. 21The errors of certain administrative
from the records that when it was herein petitioner's turn to present evidence,
officers should never be allowed to jeopardize the Government's financial
several postponements were sought by its counsel, the Solicitor General, due to the
position, 22especially in the case at bar where the amount involves millions of pesos
unavailability of the necessary records which were not transmitted by the Refund
the collection whereof, if justified, stands to be prejudiced just because of
Audit Division of the BIR to said counsel, as well as the investigation report made by
bureaucratic lethargy.
the Banks/Financing and Insurance Division of the said bureau/ despite repeated
requests. 17 It was under such a predicament and in deference to the tax court that Further, it is also worth nothing that the Court of Tax Appeals erred in denying
ultimately, said records being still unavailable, herein petitioner's counsel was petitioner's supplemental motion for reconsideration alleging bringing to said
court's attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately
related to and inextricably intertwined with the right of respondent bank to claim
for a tax refund for the same year. To award such refund despite the existence of
that deficiency assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at the same time be
liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that
is, the facts stated therein are true and correct. The deficiency assessment, although
not yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was
the applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of
the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was
not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and
the tax due would inevitably result in multiplicity of proceedings or suits. If the
deficiency assessment should subsequently be upheld, the Government will be
forced to institute anew a proceeding for the recovery of erroneously refunded
taxes which recourse must be filed within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the false or fraudulent return
involved. 23 This would necessarily require and entail additional efforts and expenses
on the part of the Government, impose a burden on and a drain of government
funds, and impede or delay the collection of much-needed revenue for
governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax
due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be
only just and fair that the taxpayer and the Government alike be given equal
opportunities to avail of remedies under the law to defeat each other's claim and to
determine all matters of dispute between them in one single case. It is important to
note that in determining whether or not petitioner is entitled to the refund of the
amount paid, it would necessary to determine how much the Government is
entitled to collect as taxes. This would necessarily include the determination of the
correct liability of the taxpayer and, certainly, a determination of this case would
constitute res judicata on both parties as to all the matters subject thereof or
necessarily involved therein.
The Court cannot end this adjudication without observing that what caused the
Government to lose its case in the tax court may hopefully be ascribed merely to the
ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The
evidential cul-de-sac in which the Solicitor General found himself once again gives
substance to the public perception and suspicion that it is another proverbial tip in
the iceberg of venality in a government bureau which is pejoratively rated over the
years. What is so distressing, aside from the financial losses to the Government, is
the erosion of trust in a vital institution wherein the reputations of so many honest
and dedicated workers are besmirched by the acts or omissions of a few. Hence, the
liberal view we have here taken pro hac vice, which may give some degree of
assurance that this Court will unhesitatingly react to any bane in the government
service, with a replication of such response being likewise expected by the people
from the executive authorities.
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839
is hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals
for further proceedings and appropriate action, more particularly, the reception of
evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not
otherwise inconsistent with our adjudgment herein.
SO ORDERED.
Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5896 August 31, 1955
A. SORIANO Y CIA., petitioner-appellant,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
Modesto Formilleza for petitioner.
Office of the Solicitor General Juan R. Liwag and Solicitor Jose P. Alejandro for
respondent.
REYES, J.B.L., J.:
This is a petition for review of the decision of the Board of Tax Appeals affirming the
decision of the respondent-appellee Collector of Internal Revenue holding the
petitioner A. Soriano y Cia. liable for the payment of P47,002.52 as sales tax and
surcharge (as required by Sec. 182 of the National Internal Revenue Code, as
amended) on its gross sales to the United Africa Co., Ltd. of 57 tractors acquired
from the Foreign Liquidation Commission.
It appears that in the year 1947, petitioner was engaged in the business of selling
surplus goods acquired from the Foreign Liquidation Commission pursuant to an
agreement with the United States Government whereby petitioner undertook to
rehabilitate the Veterans Administration Building (formerly Heacock Building) for
and in consideration of over a million pesos worth of surplus goods. Part of the
surplus goods consisted of tractors which were then in the various U. S. military
bases or depots in the Philippines. The petitioner had yards known as "Sta. Mesa
Yard" and "Pieco Yard" located in Manila, where some of the surplus goods were
stored, and those which were defective reconditioned.
In January, 1947, the United Africa Co., Ltd. sent its representative, Hugh Watson
Gibson, to the Philippines to look into the availability of tractors for sale in the
Philippines. Gibson learned of the petitioner's business and contracted to buy
tractors from the latter, to be delivered f.a.s. (free alongside ship), Manila, in good
working condition and capable of running off lighters under their own power. A
tractor expert, Mr. Tex Taylor, was employed by the foreign company to select,
inspect and test the tractors before delivery.
Tex Taylor went to the different military bases, took the serial numbers of the
tractors which he wanted, and gave the list thereof to the petitioner, who then
secured from the Foreign Liquidation Commission the purchase invoices and other
documents for the immediate release of the tractors. The tractors were then
removed by petitioner to its Pieco Yard, where they were tested by Tex Taylor. Those
found to be in good condition were approved by Taylor, wherefore petitioner
presented to him the sales invoices for his signature, stamping his approval thereon.
Twenty-four of the tractors were found defective and so were brought to
petitioner's Sta. Mesa Yard for reconditioning. Upon approval of each invoice, the
same was presented by petitioner to the Philippine Refining Company, Inc., an
affiliate of the foreign buyer, for payment of the purchase price. The Philippine
Refining Co. would in turn notify the National City Bank of New York and the
Hongkong and Shanghai Banking Corporation, Manila, where the United Africa Co.
had dollar deposits, to make payment of petitioner's invoices. The tractors were
delivered by petitioner to the pier in Manila by means of barges as soon as notice
was received from the representative of its foreign buyer that a carrying vessel was
ready. On June 24 and August 26, 1947, the Philippine Refining Co., Inc. shipped the
57 tractors acquired from petitioner from the port of Manila to United Africa Co.,
Ltd. at Dares Salaem, East Africa. The total value of the tractors was P757,000.
However, due to certain defects of some of them upon reaching Africa, the sum of
P4,959.19 was reimbursed by petitioner to its foreign buyer by credit memo.
The question at issue is whether or not petitioner is liable for the payment of
percentage or sales tax on its gross sales of the 57 tractors in question to the United
Africa Co., Ltd. under the provisions of Sec. 186 of the National Internal Revenue
Code.
Section 186. Percentage tax on sales of other articles.There is levied, assessed and
collected once only on every original sale, barter, exchange, and similar transaction
intended to transfer ownership of, or title to, the articles not enumerated in sections
184 and 185, a tax equivalent to five per centum of the gross selling price or gross
value in money of the articles so sold, bartered, exchanged, or transferred, such tax
to be paid by the manufacturer, producer, or importer; . . .. (Emphasis supplied)
Under the above provisions, petitioner's liability would thus depend on first,
whether or not it was an importer of the 57 tractors in question, and second,
whether it made an original sale thereof in the Philippines.
The theory of the Bureau of Internal Revenue, affirmed by the defunct Board of Tax
Appeals, is that petitioner imported the tractors from the army bases; that they
were subsequently sold to its foreign buyer within the Philippines; and that title
passed upon delivery to the carrier f.a.s. Manila.
In the cases of Go Chen Tee vs. Meer,1 L-2825 ( July 7, 1950) and Saura Import and
Export Co. vs. Meer,2 L-2927 (February 26, 1951), this Court has already held that
one who acquires title to surplus equipment found in U. S. army bases or
installations within the Philippines by purchase, and then brings them out of those
bases or depots, is an importer, and sales made by him by such surplus goods to the
general public are taxable under sections 185 and 186 of the Tax Code.
Petitioner insists, however, that it did not import the 57 tractors in question for the
Foreign Liquidation Commission because title to the same passed to its foreign
buyer while the goods were still at the foreign bases, and that they passed
Philippine territory merely in transit to pier, Manila, where they were delivered
f.a.s.; hence its sale of the tractors was not domestic and therefore not liable for the
payment of sales tax.
Petitioner's theory is not supported by the records. It admits that delivery of the
tractors was made by it to the carrier f.a.s. Manila (letter to Secretary of Finance of
August 18, 1950, I Records, p. 192; also letter of October 17, 1949, p. 132). The rule
is that where the contract is to deliver goods f.a.s, the property passes on delivery at
the wharf or the dock (II Williston on Sales, pp. 120-121; 46 Am. Jur. 608-609).
Otherwise stated, delivery to the carrier is delivery to the buyer, (Behn, Meyer &
Co., Ltd. vs. Yangco, 38 Phil., 602; 46 Am. Jur. 605). True that this rule yields to
evidence of a contrary intent between the parties, but there is here no proof to
show that petitioner and its foreign buyer intended otherwise, that is, that delivery
and the passing of title to its buyer should take place right in the army bases where
the tractors were located. On the contrary, petitioner itself has admitted that Tex
Taylor (who is no alleged to have accepted delivery of the tractors in behalf of the
United Africa Co., Ltd.) has no power or authority whatever to do so.
In its letter to the Collector of Internal Revenue on July 16, 1949 (Records, Vol. I, p.
119), petitioner stated:
(2) Prices and terms having been agreed upon, Mr. Gibson secured the services of a
tractor expert from United States thru United Africa Co. offices in New York. Tractor
expert Mr. Tex Taylor came over to the Philippines to inspect and "accept" the
tractors.
We wish to state here that the so-called acceptance by Mr. Taylor of these tractors
was simply an acceptance as to condition and did not constitute an acceptance of
delivery. The tractors in question were U. S. Army and Navy Surplus equipment.
They were second hand and needed reconditioning. Mr. Tex Taylor saw to it that
they were properly reconditioned. Neither Mr. Gibson nor Mr. Taylor had authority
to accept delivery of these tractors.
And in a subsequent letter addressed to the Secretary of Finance on October 17,
1949 (Records, p. 131), petitioner further stated:
(b) Mr. Tex Taylor, who is alleged to have inspected and accepted in the Philippines
the tractors subject of this sale was a mere technician, employee of the United
Africa Co. with specific and limited functions consisting of examining and approving
the condition of the tractors for purchase and could not have been considered the
general and legal representative of our purchaser for he had no authority to enter
into any sort of business transaction in the Philippines.
These letters show that Tex Taylor had not authority to accept delivery of the
tractors for the buyer United Africa Co., Ltd., his duty being merely to inspect and
approve their condition. The designation by Taylor of the tractors he selected at the
bases, therefore, was merely a preliminary step for their removal from the bases to
petitioner's service and storage yards in Manila, where Taylor actually inspected and
tested them, and those found defective (23 tractors) were brought to the Sta. Mesa
Yard where they were reconditioned (t.s.n. pp. 14-15). Then petitioner made
delivery of the tractors at the pier in Manila whenever there was an available boat
for transportation to Africa, and it was so informed by the representatives of the
United Africa Co. Hence, it was only at Manila that the goods were delivered, and
title passed to the buyer; and from their removal from the bases until their delivery
at shipside, title to the tractors was in the seller.
Other undisputed facts in the record also force the conclusion that title to the
tractors in question passed to petitioner's buyer not at the bases, but only at pier,
Manila. First, it was petitioner who paid for the delivery charges from the different
bases to the pier, pursuant to the tax in "fob" or "f.a.s." sales that "the seller pays all
charges and is subject to risk until the goods are placed alongside the 'vessel'
(Williston, supra). Second, the tractors were described in petitioner's invoices (Vol. I,
Records, pp. 65-70) as bearing certain numbers followed by the phrase "Our Unit
Sta. Mesa" or "Our Unit Pieco", showing that the tractors were first brought to
petitioner's yards and numbered accordingly, in the same way that all goods found
and stored in these yards were numbered, and it was only after they had passed
petitioner's yards that they were delivered to the buyer. Third, two of petitioner's
invoices (Records, I, pp. 70-71) stated that the tractors were inspected and accepted
at Pieco Yard and/or Sta. Mesa Yard, which disproves petitioner's contention that
Tex Taylor tested and approved of them right in the bases. Fourth, petitioner's own
witness Epimaco Gonzales admitted that it was only at Pieco Yard that Taylor
inspected and tested that tractors (t.s.n. 9-10).
Petitioner argues that the goods in question did not acquire a taxable situs in the
Philippines because they merely passed Philippine territory in transit and that they
were not intended for local use but for exportation to a foreign country. We find this
argument irrelevant, since the tax in dispute is one on transaction (sales) and not a
tax on the property sold. The sale of the tractors was consummated in the
Philippines, for title was transferred to the foreign buyer at the pier in Manila;
hence, the situs of the sale is Philippines and it is taxable in this country.
Finally, petitioner urges that the repeal of the consignment or "export tax" under
Sec. 187 of the Internal Revenue Code shows the intention of the legislature to
exempt all exports from tax.
It should not be forgotten that the consignment tax formerly imposed on exports by
section 187 of the Tax Code (now repealed by R. A. 41) is different from the sales tax
imposed by Art. 186, which has not been repealed. The distinction between the two
kinds of tax was pointed out by this Court in the case of Vegetable Oil Corp. vs.
Trinidad, 45 Phil., 834-835, where we held:
That the consignment tax is not a sales tax is, however, too obvious for argument,
the fact that it is provided for in the same section as the sales tax does not
necessarily make it so. There is all the difference in the word between a
consignment and a sale. As stated by counsel for the appellee, the tax on
consignment is a privilege tax pure and simple; it is a tax on the business of
consigning commodities abroad from these Islands. . . . If the tax were one on sales
we would readily agree that the sales, in order to be taxable in the Philippines must
be consummated there.
When the above case decided, the sales tax and the consignment tax were both
provided for in section 1459 of the Administrative Code. Later, obviously to avoid
confusion, the legislature separated the two taxes, the sales tax having been
provided under sections 184, 185 and 186 of the Internal Revenue Code, while the
consignment tax was placed under Sec. 187. The latter section was subsequently
repealed by Republic Act No. 41, so that the consignment tax on exports no longer
exists, while the sales tax remains.
Petitioner contends that to tax one who sells goods intended for export would be to
nullify the legislative intent behind the repeal of the tax on consignments abroad,
which is to encourage exports. The argument is fallacious. The law subjects to the
payment of the sales tax not to the buyer who intends to export what he buys, but
the seller, because such sale is domestic and therefore liable for the payment of
sales tax in this country.
Domestic and foreign sale distinguished.The sales tax liability of a person
consigning his timber abroad depends upon where the title to the timber consigned
passes from the seller to the buyer. If the title to the timber consigned abroad
passes to the buyer within the jurisdiction of the Philippines, the transaction is
domestic and is subject to the sales tax; otherwise, the transaction will be
considered a foreign sale and is exempt from the sales tax prescribed in section 186
of the Tax Code. (Formilleza, Commentaries on the N. I. R. C., Vol. II, pp. 729-730)
As for the legislative policy to exempt consignments abroad from tax in order to
encourage exports, the Solicitor General has pointed out that it is only the
exportation of locally produced or manufactured products, and not every kind of
exportation, that Congress wanted to encourage and promote. Hence, section 189
of the Code exempts from percentage tax coconut oil and by-products of copra
produced or manufactured in the Philippines; section 190, idem, exempts from CRUZ, J.:
compensating tax imported articles to be used in the manufacture or preparation of We are asked to reverse the decision of the Court of Tax Appeals on the ground that
articles in this country for consignments abroad; section 3 of R. A. 601 exempts from it is erroneous. We have carefully studied it and find it is not; on the contrary, it is
the foreign exchange tax amounts used for the payment of transportation charges supported by law and doctrine. So finding, we affirm.
on articles or containers imported into the Philippines intended for use in the
manufacture or preparation of local products for consignment abroad; and R. A. 822 Reduced to simplest terms, the background facts are as follows.
exempts from the processing tax imposed by Sec. 189 of the Code dessicated
The national Development Company entered into contracts in Tokyo with several
coconut manufactured in this country if removed for exportation. Clearly enough,
Japanese shipbuilding companies for the construction of twelve ocean-going
the exportation of the tractors in question does not come under the declared policy
vessels. 1 The purchase price was to come from the proceeds of bonds issued by the
of the legislature to encourage exportation of products locally manufactured and
Central Bank. 2 Initial payments were made in cash and through irrevocable letters
produced. On the other hand, as correctly observed by the Solicitor General, our
of credit. 3Fourteen promissory notes were signed for the balance by the NDC and,
country needed then, and still needs now, tractors for the development of our own
as required by the shipbuilders, guaranteed by the Republic of the
agriculture, so that the sale of such tractors to foreign buyers for a profit, thereby
Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon
depriving our own countrymen of their use in the development of our own
were remitted in due time by the NDC to Tokyo. The vessels were eventually
agriculture and increase of our production, hardly justifies the tax exemption that
completed and delivered to the NDC in Tokyo. 5
petitioner claims.
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70
Wherefore, the decision appealed from is affirmed, with costs against petitioner. So
as interest on the balance of the purchase price. No tax was withheld. The
ordered.
Commissioner then held the NDC liable on such tax in the total sum of
Bengzon, Acting C. J., Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo, P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the
Labrador and Concepcion, JJ.,concur. NDC a warrant of distraint and levy to enforce collection of the claimed
amount. 6 The NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency
EN BANC in the sum of P900.00, representing the compromise penalty. 7 The NDC then came
to this Court in a petition for certiorari.
June 30, 1987
The petition must fail for the following reasons.
G.R. No. L-53961
The Japanese shipbuilders were liable to tax on the interest remitted to them under
NATIONAL DEVELOPMENT COMPANY, petitioner,
Section 37 of the Tax Code, thus:
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
SEC. 37. Income from sources within the Philippines. (a) Gross income from
sources within the Philippines. The following items of gross income shall be
treated as gross income from sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under
the above provision because all the related activities the signing of the contract,
the construction of the vessels, the payment of the stipulated price, and their
delivery to the NDC were done in Tokyo. 8 The law, however, does not speak of
activity but of "source," which in this case is the NDC. This is a domestic and
resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy
and collect income tax on interest received by foreign corporations not engaged in
trade or business within the Philippines is not planted upon the condition that 'the
activity or labor and the sale from which the (interest) income flowed had its
situs' in the Philippines. The law specifies: 'Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of
non-resident corporations in the Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest rather than the physical location
of the securities, bonds or notes or the place of payment, is the determining factor
of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8,
p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480;
Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853;
Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the
Philippines the interest payment paid by him can have no other source than within
the Philippines. The interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development Company, a corporation
duly organized and existing under the laws of the Republic of the Philippines, with
address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines
unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen
(14) promissory notes for each vessel, the balance of the contract price of the
twelve (12) ocean-going vessels purchased and acquired by it from the Japanese
corporations, including the interest on the principal sum at the rate of five per cent
(5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11,
Partial Stipulation of Facts.) And pursuant to the terms and conditions of these
promisory notes, which are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the years 1960,
1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00,
respectively, as interest on the unpaid balance of the purchase price of the aforesaid
vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor
which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta.
Mesa, Manila, Philippines; and as a corporation duly organized and existing under
the laws of the Philippines, it is a domestic corporation, resident of the Philippines.
(Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which
is admittedly a resident of the Philippines, is on the promissory notes issued by it.
Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in
1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels
acquired by petitioner is interest derived from sources within the Philippines subject
to income tax under the then Section 24(b)(1) of the National Internal Revenue
Code. 9
There is no basis for saying that the interest payments were obligations of the
Republic of the Philippines and that the promissory notes of the NDC were
government securities exempt from taxation under Section 29(b)[4] of the Tax Code,
reading as follows:
SEC. 29. Gross Income. xxxx xxx xxx xxx
(b) Exclusion from gross income. The following items shall not be included in
gross income and shall be exempt from taxation under this Title:
xxx xxx xxx remunerations, emoluments, or other fixed or determinable annual or categorical
gains, profits and income of any nonresident alien individual, not engaged in trade
(4) Interest on Government Securities. Interest upon the obligations of the
or business within the Philippines and not having any office or place of business
Government of the Republic of the Philippines or any political subdivision thereof,
therein, shall (except in the cases provided for in subsection (a) of this section)
but in the case of such obligations issued after approval of this Code, only to the
deduct and withhold from such annual or periodical gains, profits and income a tax
extent provided in the act authorizing the issue thereof. (As amended by Section 6,
to twenty (now 30%) per centum thereof: ...
R.A. No. 82; emphasis supplied)
Sec. 54. Payment of corporation income tax at source. In the case of foreign
The law invoked by the petitioner as authorizing the issuance of securities is R.A.
corporations subject to taxation under this Title not engaged in trade or business
No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No.
within the Philippines and not having any office or place of business therein, there
311 does carry such authorization but, like R.A. No. 1407, does not exempt from
shall be deducted and withheld at the source in the same manner and upon the
taxes the interests on such securities.
same items as is provided in section fifty-three a tax equal to thirty (now 35%) per
It is also incorrect to suggest that the Republic of the Philippines could not collect centum thereof, and such tax shall be returned and paid in the same manner and
taxes on the interest remitted because of the undertaking signed by the Secretary of subject to the same conditions as provided in that section:....
Finance in each of the promissory notes that:
Manifestly, the said undertaking of the Republic of the Philippines merely
Upon authority of the President of the Republic of the Philippines, the undersigned, guaranteed the obligations of the NDC but without diminution of its taxing power
for value received, hereby absolutely and unconditionally guarantee (sic), on behalf under existing laws.
of the Republic of the Philippines, the due and punctual payment of both principal
In suggesting that the NDC is merely an administrator of the funds of the Republic of
and interest of the above note.10
the Philippines, the petitioner closes its eyes to the nature of this entity as a
There is nothing in the above undertaking exempting the interests from taxes. corporation. As such, it is governed in its proprietary activities not only by its charter
Petitioner has not established a clear waiver therein of the right to tax interests. Tax but also by the Corporation Code and other pertinent laws.
exemptions cannot be merely implied but must be categorically and unmistakably
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due
expressed. 11 Any doubt concerning this question must be resolved in favor of the
on the interests earned by the Japanese shipbuilders. It was the income of these
taxing power. 12
companies and not the Republic of the Philippines that was subject to the tax the
Nowhere in the said undertaking do we find any inhibition against the collection of NDC did not withhold.
the disputed taxes. In fact, such undertaking was made by the government in
In effect, therefore, the imposition of the deficiency taxes on the NDC is
consonance with and certainly not against the following provisions of the Tax Code:
a penalty for its failure to withhold the same from the Japanese shipbuilders. Such
Sec. 53(b). Nonresident aliens. All persons, corporations and general co- liability is imposed by Section 53(c) of the Tax Code, thus:
partnership (companies colectivas), in whatever capacity acting, including lessees or
Section 53(c). Return and Payment. Every person required to deduct and
mortgagors of real or personal capacity, executors, administrators, receivers,
withhold any tax under this section shall make return thereof, in duplicate, on or
conservators, fiduciaries, employers, and all officers and employees of the
before the fifteenth day of April of each year, and, on or before the time fixed by law
Government of the Philippines having control, receipt, custody; disposal or payment
for the payment of the tax, shall pay the amount withheld to the officer of the
of interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
Government of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and demands of
any person for the amount of any payments made in accordance with the provisions
of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of
Tax Appeals, 13 the Court quoted with approval the following regulation of the BIR
on the responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the
tax due, and promptly causing a query to be addressed to the Commissioner of
Internal Revenue for the determination whether or not the income paid to an
individual is not subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not subject to withholding,
the withholding agent may thereupon remit the amount of a tax withheld. (2nd par.,
Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could

be released from liability," so said Justice Jose P. Bengson, who wrote the decision.
"Generally, the law frowns upon exemption from taxation; hence, an exempting
provision should be construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent
of the government an so should be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to

costs. It is so ordered.

Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras,

Feliciano, Gancayno, Padilla, Bidin, Sarmiento and Cortez, JJ., concur