8/31/2016 G.R.No.

137377

TodayisWednesday,August31,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

FIRSTDIVISION

G.R.No.137377December18,2001

COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
MARUBENICORPORATION,respondent.

PUNO,J.:

Inthispetitionforreview,theCommissionerofInternalRevenueassailsthedecisiondatedJanuary15,1999of
the Court of Appeals in CAG.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of the Court of
TaxAppealsinCTACaseNo.4109.ThetaxcourtorderedtheCommissionerofInternalRevenuetodesistfrom
collectingthe1985deficiencyincome,branchprofitremittanceandcontractor'staxesfromMarubeniCorporation
after finding the latter to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as
amended.

RespondentMarubeniCorporationisaforeigncorporationorganizedandexistingunderthelawsofJapan.Itis
engaged in general import and export trading, financing and the construction business. It is duly registered to
engageinsuchbusinessinthePhilippinesandmaintainsabranchofficeinManila.

SometimeinNovember1985,petitionerCommissionerofInternalRevenueissuedaletterofauthoritytoexamine
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
DevelopmentCompany(NDC)inconnectionwiththeconstructionandinstallationofawharf/portcomplexatthe
LeyteIndustrialDevelopmentEstateinthemunicipalityofIsabel,provinceofLeyte.Theothercontractwaswith
the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex
alsoattheLeyteIndustrialDevelopmentEstate.

OnMarch1,1986,petitioner'srevenueexaminersrecommendedanassessmentfordeficiencyincome,branch
profitremittance,contractor'sandcommercialbroker'staxes.Respondentquestionedthisassessmentinaletter
datedJune5,1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing
respondentseveraldeficiencytaxes.Theassesseddeficiencyinternalrevenuetaxes,inclusiveofsurchargeand
interest,wereasfollows:

I.DEFICIENCYINCOMETAX
FYendedMarch31,1985
Undeclared gross income (Philphos and
NDCconstructionprojects) P967,269,811.14
Less:Costandexpenses(50%) 483,634,905.57
Netundeclaredincome 483,634,905.57
Incometaxduethereon 169,272,217.00
Add: 50%surcharge 84,636,108.50
20% int. p.a.fr. 71585 to 815
86 36,675,646.90
TOTALAMOUNTDUE P290,583,972.40
II.DEFICIENCYBRANCHPROFITREMITTANCETAX
FYendedMarch31,1985
Undeclared gross income from Philphos
andNDCconstructionprojects P483,634,905.57
Less:Incometaxthereon 169,272,217.00
AmountsubjecttoTax 314,362,688.57
Taxduethereon 47,154,403.00
Add: 50%surcharge 23,577,201.50
20% int. p.a.fr. 42685 to 815
86 12,305,360.66
TOTALAMOUNTDUE P83,036,965.16
III.DEFICIENCYCONTRACTOR'STAX
FYendedMarch31,1985
Undeclared gross receipts/gross income
from Philphos and NDC construction
projects P967,269,811.14
Contractor'staxduethereon(4%) 38,690,792.00
50% surcharge for non
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50% surcharge for non
Add: declaration 19,345,396.00
20%surchargeforlatepayment 9,672,698.00
Subtotal 67,708,886.00
20% int. p.a.fr. 42185 to 815
Add: 86 17,854,739.46
TOTALAMOUNTDUE P85,563,625.46
IV.DEFICIENCYCOMMERCIALBROKER'STAX
FYendedMarch31,1985
Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Taxduethereon 1,628,569.00
50% surcharge for non
Add: declaration 814,284.50
20%surchargeforlatepayment 407,142.25
Subtotal 2,849,995.75
20% int. p.a.fr. 42185 to 815
Add: 86 751,539.98

TOTALAMOUNTDUE P3,600,535.68

The50%surchargewasimposedforyourclient'sfailuretoreportfortaxpurposestheaforesaidtaxablerevenues
while the 25% surcharge was imposed because of your client's failure to pay on time the above deficiency
percentagetaxes.

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PetitionerfoundthattheNDCandPhilphoscontractsweremadeona"turnkey"basisandthatthegrossincome
fromthetwoprojectsamountedtoP967,269,811.14.Eachcontractwasforapieceofworkandsincetheprojects
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 petitioner's final decision and that if respondent disagreed with it, respondent may file an
appealwiththeCourtofTaxAppealswithinthirty(30)daysfromreceiptoftheassessment.

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 contractor's tax
assessments in petitioner's assessment letter. The second, CTA Case No. 4110, questioned the deficiency
commercialbroker'sassessmentinthesameletter.

Earlier,onAugust2,1986,ExecutiveOrder(E.O.)No.412declaringaonetimeamnestycoveringunpaidincome
taxesfortheyears1981to1985wasissued.UnderthisE.O.,ataxpayerwhowishedtoavailoftheincometax
amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his net worth as of
December31,1985(b)fileacertifiedtruecopyofhisstatementdeclaringhisnetworthasofDecember31,1980
onrecordwiththeBureauofInternalRevenue(BIR),orifnosuchrecordexists,fileastatementofsaidnetworth
subject to verification by the BIR and (c) file a return and pay a tax equivalent to ten per cent (10%) of the
increaseinnetworthfromDecember31,1980toDecember31,1985.

InaccordancewiththetermsofE.O.No.41,respondentfileditstaxamnestyreturndatedOctober30,1986and
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
P2,891,273.00equivalenttotenpercent(10%)ofitsnetworthincreasebetween1981and1986.

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.54datedNovember4,1986.

OnNovember17,1986,thescopeandcoverageofE.O.No.41wasexpandedbyExecutiveOrder(E.O.)No.64.
InadditiontotheincometaxamnestygrantedbyE.O.No.41fortheyears1981to1985,E.O.No.643included
estateanddonor'staxesunderTitleIIIandthetaxonbusinessunderChapterII,TitleVoftheNationalInternal
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
taxpayercouldavailoftheamnestywasextendedtoDecember15,1986.Thosetaxpayerswhoalreadyfiledtheir
amnestyreturnunderE.O.No.41,asamended,couldavailthemselvesofthebenefits,immunitiesandprivileges
underthenewE.O.byfilinganamendedreturnandpayinganadditional5%ontheincreaseinnetworthtocover
business,estateanddonor'staxliabilities.

TheperiodofamnestyunderE.O.No.64wasextendedtoJanuary31,1987byE.ONo.95datedDecember17,
1986.

OnDecember15,1986,respondentfiledasupplementaltaxamnestyreturnunderthebenefitofE.O.No.64and
paidafurtheramountofP1,445,637.00totheBIRequivalenttofivepercent(5%)oftheincreaseofitsnetworth
between1981and1986.

OnJuly29,1996,almostten(10)yearsafterfilingofthecase,theCourtofTaxAppealsrenderedadecisionin
CTA Case No. 4109. The tax court found that respondent had properly availed of the tax amnesty under E.O.
Nos.41and64anddeclaredthedeficiencytaxessubjectofsaidcaseasdeemedcancelledandwithdrawn.The
CourtofTaxAppealsdisposedofasfollows:

"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

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considered [sic] CANCELLED and WITHDRAWN by reason of the proper availment by petitioner of the
amnestyunderExecutiveOrderNo.41,asamended."4

PetitionerchallengedthedecisionofthetaxcourtbyfilingCAG.R.SPNo.42518withtheCourtofAppeals.

OnJanuary15,1999,theCourtofAppealsdismissedthepetitionandaffirmedthedecisionoftheCourtofTax
Appeals.Hence,thisrecourse.

Beforeus,petitionerraisesthefollowingissues:

"(1)WhetherornottheCourtofAppealserredinaffirmingtheDecisionoftheCourtofTaxAppealswhich
ruled that herein respondent's deficiency tax liabilities were extinguished upon respondent's availment of
taxamnestyunderExecutiveOrdersNos.41and64.

(2)Whetherornotrespondentisliabletopaytheincome,branchprofitremittance,andcontractor'staxes
assessedbypetitioner."5

ThemaincontroversyinthiscaseliesintheinterpretationoftheexceptiontotheamnestycoverageofE.O.Nos.
41 and 64. There are three (3) types of taxes involved herein income tax, branch profit remittance tax and
contractor's 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
exceptioninSection4(b)ofE.O.No.41.

Section4ofE.O.No.41enumerateswhichtaxpayerscannotavailoftheamnestygrantedthereunder,viz:

"Sec.4.Exceptions.Thefollowingtaxpayersmaynotavailthemselvesoftheamnestyhereingranted:

a)ThosefallingundertheprovisionsofExecutiveOrderNos.1,2and14

b)ThosewithincometaxcasesalreadyfiledinCourtasoftheeffectivityhereof

c) Those with criminal cases involving violations of the income tax law already filed in court as of the
effectivityhereof

d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended,
insofarasthesaidliabilitiesareconcerned

e)ThosewithtaxcasespendinginvestigationbytheBureauofInternalRevenueasoftheeffectivityhereof
asaresultofinformationfurnishedunderSection316oftheNationalInternalRevenueCode,asamended

f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan

g)ThoseliableunderTitleSeven,ChapterThree(Frauds,IllegalExactionsandTransactions)andChapter
Four(MalversationofPublicFundsandProperty)oftheRevisedPenalCode,asamended."

PetitionerarguesthatatthetimerespondentfiledforincometaxamnestyonOctober30,1986,CTACaseNo.
4109hadalreadybeenfiledandwaspendingbeforetheCourtofTaxAppeals.Respondentthereforefellunder
theexceptioninSection4(b)ofE.O.No.41.

Petitioner's 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."ThepointofreferenceisthedateofeffectivityofE.O.No.41.Thefilingofincometaxcasesincourtmust
havebeenmadebeforeandasofthedateofeffectivityofE.O.No.41.Thus,forataxpayernottobedisqualified
underSection4(b)theremusthavebeennoincometaxcasesfiledincourtagainsthimwhenE.O.No.41took
effect.Thisisregardlessofwhenthetaxpayerfiledforincometaxamnesty,providedofcoursehefilesitonor
beforethedeadlineforfiling.

E.O.No.41tookeffectonAugust22,1986.CTACaseNo.4109questioningthe1985deficiencyincome,branch
profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax Appeals on
September26,1986.WhenE.O.No.41becameeffectiveonAugust22,1986,CTACaseNo.4109hadnotyet
been filed in court. Respondent corporation did not fall under the said exception in Section 4 (b), hence,
respondentwasnotdisqualifiedfromavailingoftheamnestyforincometaxunderE.O.No.41.

Thesamerulingalsoappliestothedeficiencybranchprofitremittancetaxassessment.Abranchprofitremittance
taxisdefinedandimposedinSection24(b)(2)(ii),TitleII,ChapterIIIoftheNationalInternalRevenueCode.6In
thetaxcode,thistaxfallsunderTitleIIonIncomeTax.Itisataxonincome.Respondentthereforedidnotfall
under the exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit remittance tax
assessment.

Thedifficultyhereiniswithrespecttothecontractor'staxassessmentandrespondent'savailmentoftheamnesty
underE.O.No.64.E.O.No.64expandedthecoverageofE.O.No.41byincludingestateanddonor'staxesand
tax on business. Estate and donor's taxes fall under Title III of the Tax Code while business taxes fall under
ChapterII,TitleVofthesame.Thecontractor'staxisprovidedinSection205,ChapterII,TitleVoftheTaxCode
itisdefinedandimposedunderthetitleonbusinesstaxes,andisthereforeataxonbusiness.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of the
amnestyforbusiness,estateanddonor'staxes.Instead,Section8ofE.O.No.64providedthat:

"Section8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent
withthisamendatoryExecutiveOrdershallremaininfullforceandeffect."

By virtue of Section 8 as aforequoted, 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
coveragealsoappliedtoE.O.No.64.WithrespecttoSection4(b)inparticular,thisprovisionexceptsfromtax
amnestycoverageataxpayerwhohas"incometaxcasesalreadyfiledincourtasoftheeffectivityhereof."Asto

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what Executive Order the exception refers to, respondent argues that because of the words "income" and
"hereof,"theyrefertoExecutiveOrderNo.41.8

InviewoftheamendmentintroducedbyE.O.No.64,Section4(b)cannotbeconstruedtorefertoE.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
andnovestedrightorobligationsofcontractaretherebyimpaired.11

ThereisnothinginE.O.No.64thatprovidesthatitshouldretroacttothedateofeffectivityofE.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
provisionsinE.O.No.41.Itsupplementstheoriginalactbyaddingothertaxesnotcoveredinthefirst.12 It has
beenheldthatwhereastatuteamendingataxlawissilentastowhetheritoperatesretroactively,theamendment
willnotbegivenaretroactiveeffectsoastosubjecttotaxpasttransactionsnotsubjecttotaxundertheoriginal
act.13Inanamendatoryact,everycaseofdoubtmustberesolvedagainstitsretroactiveeffect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional
overlookingbytheStateofitsauthoritytoimposepenaltiesonpersonsotherwiseguiltyofevasionorviolationofa
revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the government of its right to collect
whatisdueitandtogivetaxevaderswhowishtorelentachancetostartwithacleanslate.16 A tax amnesty,
muchlikeataxexemption,isneverfavorednorpresumedinlaw.17Ifgranted,thetermsoftheamnesty,likethat
ofataxexemption,mustbeconstruedstrictlyagainstthetaxpayerandliberallyinfavorofthetaxingauthority.18
For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of
taxationbydoubtfulwords.Hewhoclaimsanexemption(oranamnesty)fromthecommonburdenmustjustify
hisclaimbytheclearestgrantoforganicorstatelaw.Itcannotbeallowedtoexistuponavagueimplication.Ifa
doubtarisesastotheintentofthelegislature,thatdoubtmustberesolvedinfavorofthestate.19

Intheinstantcase,thevaguenessinSection4(b)broughtaboutbyE.O.No.64shouldthereforebeconstrued
strictlyagainstthetaxpayer.Theterm"incometaxcases"shouldbereadastorefertoestateanddonor'staxes
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
referredtoinSection4(b)ofE.O.No.41shouldbeNovember17,1986.

RespondentfiledCTACaseNo.4109onSeptember26,1986.WhenE.O.No.64tookeffectonNovember17,
1986,CTACaseNo.4109wasalreadyfiledandpendingincourt.Bythetimerespondentfileditssupplementary
taxamnestyreturnonDecember15,1986,respondentalreadyfellundertheexceptioninSection4(b)ofE.O.
Nos.41and64andwasdisqualifiedfromavailingofthebusinesstaxamnestygrantedtherein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under the two Executive
Orders,itisstillnotliableforthedeficiencycontractor'staxbecausetheincomefromtheprojectscamefromthe
"OffshorePortion"ofthecontracts.Thetwocontractsweredividedintotwoparts,i.e.,theOnshorePortionand
theOffshorePortion.Allmaterialsandequipmentinthecontractunderthe"OffshorePortion"weremanufactured
andcompletedinJapan,notinthePhilippines,andarethereforenotsubjecttoPhilippinetaxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two contracts,
examinetheirpertinentprovisionsandimplementation.

TheNDCandPhilphosaretwogovernmentcorporations.In1980,theNDC,asthecorporateinvestmentarmof
the Philippine Government, established the Philphos to engage in the largescale manufacture of phosphatic
fertilizerforthelocalandforeignmarkets.20ThePhilphosplantcomplexwhichwasenvisionedtobethelargest
phosphaticfertilizeroperationinAsia,andamongthelargestintheworld,coveredanareaof180hectareswithin
the435hectareLeyteIndustrialDevelopmentEstateinthemunicipalityofIsabel,provinceofLeyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient and
integratedwharf/portcomplexattheLeyteIndustrialDevelopmentEstate.Thewharf/portcomplexwasintended
tobeoneofthemajorfacilitiesfortheindustrialplantsattheLeyteIndustrialDevelopmentEstate.Itwastobe
specifically adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products, liquid
materialsandotherproductsofPhilphos,thePhilippineAssociatedSmeltingandRefiningCorporation(Pasar),21
andotherindustrialplantswithintheEstate.ThebiddingwasparticipatedinbyMarubeniHeadOfficeinJapan.

Marubeni, Japan prequalified and on March 22, 1982, the NDC and respondent entered into an agreement
entitled"TurnKeyContractforLeyteIndustrialEstatePortDevelopmentProjectBetweenNationalDevelopment
Company and Marubeni Corporation."22 The Port Development Project would consist of a wharf, berths,
causeways,mechanicalandliquidsunloadingandloadingsystems,fueloildepot,utilitiessystems,storageand
service buildings, offsite facilities, harbor service vessels, navigational aid system, firefighting system, area
lighting,mobileequipment,sparepartsandotherrelatedfacilities.23Thescopeoftheworksunderthecontract
coveredturnkeysupply,whichincludedgrantsoflicensesandthetransferoftechnologyandknowhow,24and:

". . . the design and engineering, supply and delivery, construction, erection and installation, supervision,
directionandcontroloftestingandcommissioningoftheWharfPortComplexassetforthinAnnexIofthis
Contract,aswellasthecoordinationoftieinsatboundariesandscheduleoftheuseofapartorthewhole
of the Wharf/Port Complex through the Owner, with the design and construction of other facilities around
thesite.Thescopeofworksshallalsoincludeanyactivity,workandsupplynecessaryfor,incidentaltoor
appropriate under present international industrial port practice, for the timely and successful
implementationoftheobjectofthisContract,whetherornotexpresslyreferredtointheabovementioned
AnnexI."25

Thecontractpriceforthewharf/portcomplexwas12,790,389,000.00andP44,327,940.00.Inthecontract,the
priceinJapanesecurrencywasbrokendownintotwoportions:(1)theJapaneseYenPortionI(2)theJapanese
Yen Portion II, while the price in Philippine currency was referred to as the Philippine Pesos Portion. The
JapaneseYenPortionsIandIIwerefinancedintwo(2)ways:(a)byyencreditloanprovidedbytheOverseas
Economic Cooperation Fund (OECF) and (b) by supplier's credit in favor of Marubeni from the ExportImport

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Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese
governmentasassistancetoforeigngovernmentstopromoteeconomicdevelopment.26TheOECFextendedto
thePhilippineGovernmentaloanof7,560,000,000.00fortheLeyteIndustrialEstatePortDevelopmentProject
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 ExportImport Bank of Japan to advance payment to its sub
contractors.28

Underthefinancingschemes,theJapaneseYenPortionsIandIIandthePhilippinePesosPortionwerefurther
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
AnnexIIItothecontract.29

AfewmonthsafterexecutionoftheNDCcontract,Philphosopenedforpublicbiddingaprojecttoconstructand
install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that
participatedinandwonthebidding.Thus,onMay2,1982,Philphosandrespondentcorporationenteredintoan
agreement entitled "TurnKey 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
conditionamodern,reliable,efficientandintegratedammoniastoragecomplexadaptedtothesiteforthereceipt
and storage of liquid anhydrous ammonia31 and for the delivery of ammonia to an integrated fertilizer plant
adjacenttothestoragecomplexandtovesselsatthedock.32Thestoragecomplexwastoconsistofammonia
storagetanks,refrigerationsystem,shipunloadingsystem,transferpumps,ammoniaheatingsystem,firefighting
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
technologyandknowhow,34and:

". . . the design and engineering, supply and delivery, construction, erection and installation, supervision,
directionandcontroloftestingandcommissioningoftheAmmoniaStorageComplexassetforthinAnnexI
ofthisContract,aswellasthecoordinationoftieinsatboundariesandscheduleoftheuseofapartorthe
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
necessaryfor,incidentaltoorappropriateunderpresentinternationalindustrialpractice,forthetimelyand
successful implementation of the object of this Contract, whether or not expressly referred to in the
abovementionedAnnexI."35

Thecontractpricefortheprojectwas3,255,751,000.00andP17,406,000.00.LiketheNDCcontract,theprice
wasdividedintothreeportions.ThepriceinJapanesecurrencywasbrokendownintotheJapaneseYenPortionI
andJapaneseYenPortionIIwhilethepriceinPhilippinecurrencywasclassifiedasthePhilippinePesosPortion.
BothJapaneseYenPortionsIandIIwerefinancedbysupplier'screditfromtheExportImportBankofJapan.The
price stated in the three portions were further broken down into the corresponding materials, equipment and
servicesrequiredfortheprojectandtheirindividualprices.LiketheNDCcontract,thebreakdowninthePhilphos
contractiscontainedinalistattachedtothelatterasAnnexIII.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 classified the 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
OnshorePortion.38

UnderthePhilippineOnshorePortion,respondentdoesnotdenyitsliabilityforthecontractor'staxontheincome
fromthetwoprojects.Infactrespondentclaims,whichpetitionerhasnotdenied,thattheincomeitderivedfrom
theOnshorePortionofthetwoprojectshadbeendeclaredfortaxpurposesandthetaxesthereonalreadypaidto
thePhilippinegovernment.39ItiswithregardtothegrossreceiptsfromtheForeignOffshorePortionofthetwo
contractsthattheliabilitiesinvolvedintheassessmentssubjectofthiscasearose.Petitionerarguesthatsincethe
two agreements are turnkey,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.41Accordingly,respondent'sentirereceiptsfromthecontracts,includingitsreceiptsfromtheOffshore
Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials
should be subjected to contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v.
EngineeringEquipment&SupplyCo.42

Acontractor'staxisimposedintheNationalInternalRevenueCode(NIRC)asfollows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of four
percent of the gross receipts is hereby imposed on proprietors or operators of the following business
establishmentsand/orpersonsengagedinthebusinessofsellingorrenderingthefollowingservicesfora
feeorcompensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No.
4566

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(q)Otherindependentcontractors.Theterm"independentcontractors"includespersons(juridicalor
natural)notenumeratedabove(butnotincludingindividualssubjecttotheoccupationtaxunderthe
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,andwhichheadquartersdonotearnorderiveincomefromthePhilippinesandwhichact
assupervisory,communicationsandcoordinatingcentersfortheiraffiliates,subsidiariesorbranches
intheAsiaPacificRegion.

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xxxxxxxxx43

Undertheaforequotedprovision,anindependentcontractorisapersonwhoseactivityconsistsessentiallyofthe
sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the
exerciseoruseofthephysicalormentalfacultiesofsuchcontractorsortheiremployees.Theword"contractor"
referstoapersonwho,inthepursuitofindependentbusiness,undertakestodoaspecificjoborpieceofworkfor
otherpersons,usinghisownmeansandmethodswithoutsubmittinghimselftocontrolastothepettydetails.44

Acontractor'staxisataximposedupontheprivilegeofengaginginbusiness.45Itisgenerallyinthenatureofan
excise tax on the exercise of a privilege of selling services or labor rather than a sale on products46 and is
directlycollectiblefromthepersonexercisingtheprivilege.47Beinganexcisetax,itcanbeleviedbythetaxing
authority only when the acts, privileges or business are done or performed within the jurisdiction of said
authority.48Likepropertytaxes,itcannotbeimposedonanoccupationorprivilegeoutsidethetaxingdistrict.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
becausesomeofthemwerecompletedinJapaninaccordancewiththeprovisionsofthecontracts.

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
"BreakdownofJapaneseYenPortionI"provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of
materialsandequipmentwhichwillbeshippedtoLeyteasunitsandlots.Thissubdivisionofpriceistobe
used by owner to verify invoice for Progress Payments under Article 19.2.1 of the Contract. The agreed
subdivisionofJapaneseYenPortionIisasfollows:

xxxxxxxxx50

ThesubdivisionofJapaneseYenPortionIcoversmaterialsandequipmentwhileJapaneseYenPortionIIandthe
PhilippinePesosPortionenumerateothermaterialsandequipmentandtheconstructionandinstallationworkon
theproject.Inotherwords,thesuppliesfortheprojectarelistedunderPortionIwhilelaborandothersuppliesare
listedunderPortionIIandthePhilippinePesosPortion.Mr.TakeshiHojo,thenGeneralManageroftheIndustrial
Plant Section II of the Industrial Plant Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and equipment listed under Japanese Yen
PortionIinAnnexIIIweremanufacturedinJapan.51Themachinesandequipmentweredesigned,engineered
and fabricated by Japanese firms subcontracted by Marubeni from the list of subcontractors in the technical
appendices to each contract.52 Marubeni subcontracted a majority of the equipment and supplies to Kawasaki
SteelCorporationwhichdidthedesign,fabrication,engineeringandmanufacturethereof53Yashima&Co.Ltd.
which manufactured the mobile equipment Bridgestone which provided the rubber fenders of the mobile
equipment54andB.S.Japanforthesupplyofradioequipment.55 The engineering and design works made by
Kawasaki Steel Corporation included the layout of the plant facility and calculation of the design in accordance
withthespecificationsgivenbyrespondent.56AllsubcontractorsandmanufacturersareJapanesecorporations
andarebasedinJapanandallengineeringanddesignworkswereperformedinthatcountry.57

ThematerialsandequipmentunderPortionIoftheNDCPortProjectisprimarilycomposedoftwo(2)setsofship
unloader and loader several boats and mobile equipment.58 The ship unloader unloads bags or bulk products
fromtheshiptotheportwhiletheshiploaderloadsproductsfromtheporttotheship.Theunloaderandloader
arebigsteelstructuresontopofeachisalargecraneandacompartmentforoperationofthecrane.Twosetsof
these equipment were completely manufactured in Japan according to the specifications of the project. After
manufacture, they were rolled on to a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the
unloaderandloaderwererolledoffthebargeandpulledtothepiertothespotwheretheywereinstalled.60Their
installationsimplyconsistedofboltingthemontothepier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in Japan.
TheboatssailedtoIsabelontheirownpower.Themobileequipment,consistingofthreetofoursetsoftractors,
cranesanddozers,trailersandforklifts,werealsomanufacturedandcompletedinJapan.Theywereloadedon
to a shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on wheels and self
propelled.Onceunloadedattheport,theywerereadytobedrivenandperformwhattheyweredesignedtodo.62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC
contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a causeway, a
warehouse,atransitshed,anadministrationbuildingandasecuritybuilding.Mostofthematerialsconsistofsteel
sheets,steelpipes,channelsandbeamsandothersteelstructures,navigationalandcommunicationaswellas
electricalequipment.63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the
ammonia storage tanks and refrigeration units.64 The steel plates for the tank were manufactured and cut in
JapanaccordingtodrawingsandspecificationsandthenshippedtoIsabel.Oncethere,respondent'semployees
put the steel plates together to form the storage tank. As to the refrigeration units, they were completed and
assembled in Japan and thereafter shipped to Isabel. The units were simply installed there. 65 Annex III to the
Philphos contract lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidentalequipment,pipingfacilities,electricalandinstrumentalapparatus,foundationmaterialandspareparts.

All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the contracts.66 The inspection was made by representatives of
respondentcorporation,ofNDCandPhilphos.NDC,infact,contractedtheservicesofaprivateconsultancyfirm
to verify the correctness of the tests on the machines and equipment67 while Philphos sent a representative to
Japantoinspectthestorageequipment.68

ThesubcontractorsofthematerialsandequipmentunderJapaneseYenPortionIwereallpaidbyrespondentin
Japan.Inhisdepositionuponoralexamination,KenjiroYamakawa,formerlytheAssistantGeneralManagerand

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Manager of the Steel Plant Marketing Department, Engineering & Construction Division, Kawasaki Steel
Corporation,testifiedthattheequipmentandsuppliesforthetwoprojectsprovidedbyKawasakiunderJapanese
Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in
JapaneseandEnglish.69Yashima&Co.Ltd.andB.S.JapanwerelikewisepaidbyMarubeniinJapan.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
lettersofcreditwerefinancedbylettersofcommitmentissuedbytheOECFwiththeBankofTokyo.TheBankof
Tokyo,uponrespondent'ssubmissionofpertinentdocuments,releasedtheamountinthelettersofcreditinfavor
ofrespondentandcreditedtheamountthereintorespondent'saccountwithinthesamebank.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and installation,
supervision,directionandcontroloftestingandcommissioning,coordination..."72ofthetwoprojectsinvolved
twotaxingjurisdictions.TheseactsoccurredintwocountriesJapanandthePhilippines.Whiletheconstruction
andinstallationworkwerecompletedwithinthePhilippines,theevidenceisclearthatsomepiecesofequipment
andsupplieswerecompletelydesignedandengineeredinJapan.Thetwosetsofshipunloaderandloader,the
boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were
madeandcompletedinJapan.TheywerealreadyfinishedproductswhenshippedtothePhilippines.Theother
constructionsupplieslistedundertheOffshorePortionsuchasthesteelsheets,pipesandstructures,electrical
and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however,
were likewise fabricated and manufactured by the subcontractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
madeandcompletedinJapan.TheseserviceswererenderedoutsidethetaxingjurisdictionofthePhilippinesand
arethereforenotsubjecttocontractor'stax.

Contrarytopetitioner'sclaim,thecaseofCommissionerofInternalRevenuev.EngineeringEquipment&Supply
Co73 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 airconditioning systems for clients who contracted its
services.Engineering,however,didnotmanufactureallthematerialsfortheairconditioningsystem.Itimported
some items for the system it designed and installed.74 The issues in that case dealt with services performed
withinthelocaltaxingjurisdiction.Therewasnoforeignelementinvolvedinthesupplyofmaterialsandservices.

Withtheforegoingdiscussion,itisunnecessarytodiscusstheotherissuesraisedbytheparties.

INVIEWWHEREOF,thepetitionisdenied.ThedecisioninCAG.R.SPNo.42518isaffirmed.

SOORDERED.

Davide,Jr.,C.J.,Kapunan,Pardo,andYnaresSantiago,JJ.,concur.

Footnotes
1AssessmentLetteroftheCommissionerofInternalRevenue,Rollo,pp.7374alsomarkedasExhibit"C"
PetandExhibit"2"Resp,FolderNo.11,BIRRecords,pp.20722076.
2Entitled"DeclaringaOneTimeTaxAmnestyCoveringUnpaidIncomeTaxesfortheYears1981to1985."

3 Entitled "Declaring a OneTime Tax Amnesty Covering Income Taxes, Estate and Donor's Taxes Under
Title III, And The Tax on Business Under Chapter II, Title V, of the National Internal Revenue Code, As
Amended,FortheYears19811985."
4CTADecision,Annex"B"toPetition,Rollo,p.45.

5Petition,p.6Rollo,p.15.

61984and1986NIRC.

7 Title V, 1984 and 1986 NIRC. Business taxes were replaced in 1988 by the ValueAdded Tax under
ExecutiveOrderNo.273.

8Comment,pp.1415Rollo,pp.99100.

9Agpalo,StatutoryConstruction,p.395[1998]Sutherland,StatutoryConstruction,vol.1A(5thed.)Sec.
22.36,p.304[19921994].

10Peoplev.Garcia,85Phil.651,655[1951]Sutherland,supra,Sec.22.35.

11Buycov.PhilippineNationalBank,112Phil.588,592[1961]Paciav.KapisananngmgaManggagawa
saMRRCo.,99Phil.45,48[1956]Agpalo,supra,pp.370,395[1998].
12Asupplementaryactisanamendatoryactthatsuppliesadeficiency,addsto,completesorextendsthat
whichisalreadyinexistencewithoutchangingormodifyingtheoriginalSutherland,supra,Secs.22.24
and22.01.

13CollectorofInternalRevenuev.LaTondea,Inc.,115Phil.841,846847[1962].

14Montillav.AgustinianCorp.,24Phil.220,222[1913]Agpalo,supra,at370,395.

15 Republic v. Intermediate Appellate Court, 196 SCRA 335, 340 [1991] citing Commissioner of Internal
Revenuev.BotelhoCorporation&ShippingCo.,Inc.,20SCRA487[1967].

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16Ibid.

17 Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152, 171172 [1999] People v.
Castaeda,165SCRA327,341[1988].
18Peoplev.Castaeda,supra,at341E.RodriguezInc.v.CollectorofInternalRevenue,28SCRA1119,
11271128 [1969] Commissioner of Internal Revenue v. A.D. Guerrero, 21 SCRA 180, 183185 [1967]
AsiaticPetroleumv.Llanes,49Phil.466,471[1926].
19AsiaticPetroleumv.Llanes,supra,at471472.

20Exh."AA,"ProjectBackground,PhilippinePhosphaticFertilizerCorporation,FolderNo.5,CTACaseNo.
4109.
21 Pasar is a copper smelter plant whose sulfuric acid byproduct is used in manufacturing fertilizers
Exhibit"AA1"Pet,FolderNo.5,CTACaseNo.4109
22Exhibit"J"Pet,"Wharf/PortComplex,"TurnKeyContractforLeyteIndustrialEstatePortProjectBetween
the National Development Company [sic] and Marubeni Corporation (hereinafter to be referred to as the
"NDCContract"),FolderNo.2,CTACaseNo.4109andCTACaseNo.4110.
23Exhibit"J"Pet,NDCContract,Article1,supra.

24Exhibit"J"Pet,NDCContract,Article2.1,supra.

25"ScopeofWork,"Exhibit"J"Pet,NDCContract,Article2.2,supra.

26Exhibit"JJJ"Pet,ExchangeofNotesdatedJune9,1981byandbetweentheJapaneseandPhilippine
Governments,FolderNo.8,CTACaseNo.4109andCTACaseNo.4110.

27Exhibit"JJJ1"Pet,"LoanAgreementfortheLeyteIndustrialEstatePortDevelopmentProject,"Folder
No.8,CTACaseNo.4109andCTACaseNo.4110.

28TakeshiHojo,TSNofMarch23,1990,pp.1720.

29 Exhibit "J2" Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract
Price,AnnexIIItoNDCContract,FolderNo.2,CTACaseNo.4109andCTACaseNo.4110.

30Exhibit"I"Pet,FolderNo.4,CTACaseNo.4109andCTACaseNo.4110.

31AmmoniaisoneoftherawmaterialsforfertilizerproductionHojo,TSNofMarch21,1990,pp.2021.

32 Exhibit "I" Pet, Article 2.1, Turnkey Contract for Ammonia Storage Complex Between Philippine
PhosphateFertilizerCorporationandMarubeniCorporation,"(hereinafterreferredtoasPhilphosContract),
supra.
33Exhibit"I"Pet,ArticleI,"AmmoniaStorageComplex,"PhilphosContract,supra.

34Exhibit"I"Pet,Article2.1,PhilphosContract,supra.

35"ScopeofWork,"Exhibit"I"Pet,"Article2.2,PhilphosContract,supra.

36 Exhibit "I2 Pet," Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract
Price,AnnexIIItoPhilphosContract,FolderNo.4,CTACaseNo.4109andCTACaseNo.4110.
37Hojo,TSNofMarch22,1990,pp.67.

38Id.

39FootnoteNo.2,Comment,p.16Rollo,p.19.

40 A "turnkey job" is defined as a job or contract in which the contractor agrees to complete the work of
building and installation to the point of readiness for operation or occupancy Webster's Third New
InternationalDictionaryoftheEnglishLanguage,Unabridged[1993].

41Exhibit"4"Resp,MemorandumofHeadRevenueExaminertotheCommissionerofInternalRevenue,
BIR Records, Folder No. 11, CTA Case No. 4109 and CTA Case No. 4110 Exhibit "2" Resp, Letter
AssessmentofCommissionerTan,Rollo,pp.7377.

4264SCRA590[1975].

43 1984 NIRC Sec. 170, 1986 NIRC. The contractor's tax was replaced in 1988 by the ValueAdded Tax
pursuanttoExecutiveOrderNo.273.

44 Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590, 597598
[1975].

45 Section 205 in relation to Section 188, 1984 NIRC Aranas, National Internal Revenue Code, vol. 2, p.
134[1983].

46CommissionerofInternalRevenuev.CourtofTaxAppealsandAvecillaBuildingCorp.,134SCRA49,54
[1985]Celestino & Co. v. Collector, 99 Phil. 841, 843 [1956] E. Gonzales and C. Gonzales, National
InternalRevenueCode,p.527[1984].

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47GonzalesandGonzales,NationalInternalRevenueCode,p.456[1986].

48 Iloilo Bottlers, Inc. v. City of Iloilo, 164 SCRA 607, 615 [1988] Commissioner of Internal Revenue v.
BritishOverseasAirwaysCorp.,149SCRA395,410[1987].
49GulfRefiningCo.v.CityofKnoxville,136Tenn23,188SW798,799[1916]Robinsonv.CityofNorfolk,
108Va.14,60SE762,763764,15LRA(N.S.)294[1908]alicensetaxforrevenuecannotbeimposed
byacityuponacircusexhibitingbeyonditsterritoriallimitsseealsoCooley,TheLawofTaxation,vol.4,
Secs.1675,1683Cooley,vol.1,Secs.46,9495[1924].

50 Exhibit "J2" Pet, Annex III to NDC Contract, supra Exhibit "I2" Pet, Annex III to Philphos Contract,
supra.

51Hojo,TSNofMarch22,1990,pp.11,15.

52 Exhibits "J8a" to "J8d" Pet ,Vendor's List, Chapter 1.14, Leyte Industrial Estate Port Development
Project, Technical Appendices to the Contract, pp. 1127 to 1131, Folder No. 2, CTA Case No. 4109
Exhibits "I13a" to "I13i" Pet, Vendor's List for Main Items, Chapter II, Technical Appendices for Leyte
FertilizerProject,AmmoniaStorageComplex,pp.II5.71toII5.79,FolderNo.1,CTACaseNo.4109.

53 Hojo, TSN of March 22, 1990, p. 34 Kenjiro Yamakawa, TSN of Deposition Upon Oral Examination,
January 31, 1992, p. 6 Exhibit "OO" Pet, Plant Supply Contract between Marubeni and Kawasaki Steel
CorporationforNDCProject,FolderNo.6,CTACaseNo.4109Exhibit"BBB1"Pet,PlantSupplyContract
betweenMarubeniandKawasakiSteelCorporationforPhilphosProject,FolderNo.7,CTACaseNo.4109.
BothcontractsallowMarubenitoprocurematerialsandequipmentfromanapprovedlistofsubcontractors
withoutneedoffurtherapprovalfromtheownerArticle8.4,PhilphoscontractArticle8.4,NDCcontract,
supra.
54Hojo,TSNofMarch22,1990,p.34.

55Exhibit"AAA1"to"AAA1b"Pet,FolderNo.7,CTACaseNo.4109.

56Hojo,TSNofMarch21,1990,p.32.

57Hojo,TSNofMarch21,1990,pp.3334.

58Exhibit"J2"Pet,AnnexIIItoNDCContract,pp.356363,supra.

59Exhibit"FF"Pet,Photographofshipunloaderandloaderonabarge,FolderNo.5,CTACaseNo.4109.

60 Hojo, TSN of March 22, 1990, pp. 1112 Exhibit "FF1" Pet, Photograph of roll off works for ship
unloader,FolderNo.5,CTACaseNo.4109.
61Hojo,TSNofMarch22,1990,pp.1112TSNofMarch23,1990,pp.3940.

62 Hojo, TSN of March 23, 1990, pp. 3839 Exhibits "II" and "JJ" Pet, Photographs of mobile equipment,
FolderNo.5,supra.
63 Annex III to NDC Contract pp. 357363, Exhibit "J2" Pet, Folder No. 2, CTA Case No. 4109 and CTA
CaseNo.4110.
64Hojo,TSNofMarch23,1990,pp.4243.

65Hojo,TSNofMarch23,1990,pp.4243.

66 Exhibit "J" Pet, Article 11, pp. 4547, NDC Contract, supra Exhibit "I" Pet, Article 11.5, pp. 4344,
PhilphosContract,supra.
67 Exhibit "KK" Pet, NDC Board Resolution appointing Pacific Consultants, Int'l., Folder No. 3, CTA Case
No.4109.
68Exhibit"LL"Pet,letterofPhilphosVPappointingarepresentativetoinspectstorageequipment,Folder
No.5,CTACaseNo.4109.
69Exhibits"VV,""VV1"to"VV50a"Pet,FolderNo.7,CTACaseNo.4109Exhibits"CCC1"to"CCC27
a"Pet,FolderNo.6,CTACaseNo.4109.
70HisatsuguYoshida,TSNofSeptember20,1991,pp.1533Exhibits"VV"Pet,"ZZ,""ZZ2d,""AAA"Pet,
FolderNo.6,CTACaseNo.4109.
71Yoshida,TSNofDepositionUponOralInterrogatories,January27,1993,pp.1112Exhibits"JJJ3"to
"JJJ17c"Pet,FolderNo.10,CTACaseNo.4109.
72"ScopeofWork,"Exhibit"J"Pet,Article2.1,NDCContractExhibit"I"Pet,Article2.1PhilphosContract.

7364SCRA590[1975].

74Suchasrefrigerationcompressorsincompleteset,heatexchangersorcoilsId.,at598.

TheLawphilProjectArellanoLawFoundation

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