G.R. No.

L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA,

MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, 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 Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña 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. Oña 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 Oña, were still
minors when the project of partition was approved, Lorenzo T. Oña, 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.).

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
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 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.).
The project of partition also shows that the estate shares equally with
Lorenzo T. Oña, 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.).

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. Oña who used said
properties in business by leasing or selling them and investing the 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:

Year

Investment

Land

Building

Account
Account

Account

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31
120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37
99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(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. Oña 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. Oña 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 Buñales 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. Oña, 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. Oña
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. Oña 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. Oña.

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. Oña, 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. Oña 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
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
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 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.

Petitioners insist that it was error for the Tax Court to so rule that whatever
excess they might have paid as individual income tax cannot be credited as
part payment of the taxes herein in question. It is argued that to sanction the
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
paid their individual income taxes, they may already be barred by prescription
from recovering their overpayments in a separate action. We do not agree. As
We see it, the case of petitioners as regards the point under discussion is
simply that of a taxpayer who has paid the wrong tax, assuming 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 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.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals
appealed from is affirm with costs against petitioners.
G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA

EVANGELISTA, petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,
respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General
Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.

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:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the
income tax, real estate dealer's tax and the residence tax for the years 1945
to 1949, inclusive, in accordance with the respondent's assessment for the
same in the total amount of P6,878.34, which is hereby affirmed and the
petition for review filed by petitioner is hereby dismissed with costs against
petitioners.
It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00
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 from 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 P130,000.00; this property has an assessed value of P82,255.00 as
of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc.,
a lot of 4,353 sq. m. including improvements thereon for P108,825.00. This
property has an assessed value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of
8,371 sq. m. including improvements thereon for P237,234.34. This property
has an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother
Simeon Evangelista to 'manage their properties with full power to lease; to
collect and receive rents; to issue receipts therefor; in default of such
payment, to bring suits against the defaulting tenants; to sign all letters,
contracts, etc., for and in their behalf, and to endorse and deposit all notes
and checks for them;

7. That after having bought the above-mentioned real properties the

petitioners had the same rented or leases to various tenants;

8. That from the month of March, 1945 up to an including December,

1945, 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 income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of

P24,786.30, out of which amount was deducted in the sum of P16,288.27 for
expenses thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of
the which amount was deducted the sum of P4,837.65 as expenses, thereby
leaving them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of

Internal Revenue demanded the payment of income tax on corporations, real
estate dealer's fixed tax and corporation residence tax for the years 1945-
1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES
1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09
REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75
TOTAL TAXES DUE

P6,878.34.

Said letter of demand and 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 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 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 section 24 and 84 of said
Code, the pertinent parts of which read:

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
(compañias colectivas), 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
participacion), associations or insurance companies, but does not include duly
registered general copartnerships. (compañias 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, properly, or industry to a common fund, with the intention
of dividing the profits among themselves.

Pursuant to the 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 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 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 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 the petitioners in February, 1943. In
other words, one cannot but perceive a character of habitually peculiar to
business transactions engaged in the purpose 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 and 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 participation)" 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
copartnerships" — 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 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 provisions 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 designed 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
'investment' trust (whether of the fixed or the management type), an
interinsuarance 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; emphasis
supplied.).

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 organizations
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 supplied.)

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 supplied.) .
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 of tax for corporations, section 2 of Commonwealth

Act No. 465 provides in part:

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 insurance
company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of

section 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 June 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:

'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. . . (emphasis
supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby

affirmed with costs against the petitioners herein. It is so ordered.

Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ.,
concur.

BAUTISTA ANGELO, J., concurring:

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 the decision:
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 purchase 21 lots for P18,000. This was soon followed on April 23,
1944, by the acquisition of another real state 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 aforementioned common fund or even of the property
acquired by the petitioner in February, 1943, In other words, we cannot but
perceive a character of habitually peculiar to business transactions engaged in
for purposes of gain.

I wish however to make 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 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 partnership,
whether or not the person 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 shared or do not share any profits made by the use of 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 judicial 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 venture purchase of land, by two, does not constitute a copartnership

in respect thereto; nor does not agreement to share the profits and loses on
the sale of land create a partnership; the parties are only tenants in common.
(Clark vs. 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 reality, 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
plaintiff's commissions, no partnership existed as between the parties,
whatever relation may have been as to third parties. (Magee vs. Magee, 123
N. E. 6763, 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. vs 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 vs. 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."

SECOND DIVISION
 [G.R. Nos. L-27856-57. February 28, 1979.]

RUSTICO PASCUAL, ALBERTO JOSE, ELADIO GREGORIO, REDENTOR V.

SOTTO, RODRIGO V. SOTTO, MARIANO HERRANZ, MARINA DAVILA,
EDUARDO OCAMPO, PEDRO ASENSI, FRANCISCO PADUA, JUANITO
SAN MIGUEL, RAFAEL FRANCISCO, ELISEO LIZADA; FEDERICO DE
LANGE, CESAR VICTORIANO, ALCIBIADES JOSE, FLORITA DEL
ROSARIO, et al., petitioners, vs. COURT OF INDUSTRIAL RELATIONS;
JOSE C ESPINAS and PAN AMERICAN WORLD AIRWAYS,
INC., respondents.

Mario R. Silva for petitioners.

Benjamin C. Espinas for respondent Jose C. Espinas.
Salcedo, Del Rosario, Bito, Misa & Lozada for respondent Pan
American World Airways, Inc.

SYNOPSIS

Respondent counsel represented the PANAMEA, a union of rank and file

employees, and obtained a 15% increase in the salary of the union members.
When the management extended this benefit to petitioners who were not rank
and file union members as they occupy supervisory, junior executive and
confidential positions, respondent counsel moved for the approval of
attorney's lien of 20% against petitioners on the ground that they benefited
from the result of his work. The labor court granted the motion. Hence this
petition.
The Supreme Court held that the benefits that accrue to non-union members
by reason of collective bargaining agreement cannot be termed as "unjust
enrichment"; that attorney's fees cannot be granted where there is no lawyer-
client relationship; that counsel for the rank and file union cannot demand
attorney's fees against supervisors, junior executives and confidential
employees who are ineligible to join such union; and that the powers of the
Court of Industrial Relations under Section 17 of Com. Act 103 are not unlimited
and are confined only to matters incidental or related to the original or main
case and not where the new controversy has absolutely no relation or is alien
to the original case.

SYLLABUS

1. LABOR RELATIONS; COLLECTIVE BARGAINING AGREEMENT; QUASI-

CONTRACT; BENEFITS DUE NON-UNION MEMBERS BY REASON OF A
BARGAINING AGREEMENT NOT UNJUST ENRICHMENT. — Respondent counsel
based his claim for attorney's fees against petitioners on the allegation that his
work benefited not only members of the union represented by him but also
petitioners who were not members of the rank and file union. In effect, he
claims that petitioners should be made to pay on the principle of quasi-contract
as defined in Article 2142 of the Civil Code, thus: "Certain lawful, voluntary and
unilateral acts give rise to the judicial relation of quasi-contract to the end that
no one shall be unjustly enriched or benefited at the expense of another."
However, benefits that accrue to non-members by reason of a collective
bargaining agreement can hardly be termed 'unjust enrichment' because the
same are extended to them to avoid discrimination among employees.
2. ID.; ATTORNEY AND CLIENT; ATTORNEY'S FEES; COLLECTION OF. — Where
the company extended to the supervisory employees similar wage increased
obtain by the rank and file union members in order to maintain equilibrium in
the company, not because of the efforts exerted by counsel for the rank and
file union, said counsel cannot collect attorney's fees from the supervisory
employees who were not his clients in the absence of a lawyer-client
relationship or special efforts or services rendered which resulted in special
benefits to supervisory employees or any circumstance that would imply that
they encouraged or supported his efforts.
3. ID.; ID.; ID.; COUNSEL FOR THE RANK AND FILE UNION CANNOT COLLECT
ATTORNEY'S FEES FROM EMPLOYEES INELIGIBLE TO JOIN THE UNION. —
Exemption of non-union members who benefited from the award obtained by
the union members from sharing in the payment of the attorney's fees would
run counter to the general policy of the law to encourage unionism to enable
the employees to bargain with the employer upon a more or less equal footing
because it would tend to encourage a substantial portion of the employee force
of any corporation not to affiliate with the union that has a collective
bargaining agreement with the company and sit idly while the union members
are fighting to secure benefits that are later extended not only to them but also
to all other employees of the company. But this rationale does not apply to a
case where the employees sought to be taxed with attorney's fees are all
supervisors, junior executives and confidential employees who are ineligible to
become members of the rank and file union that originally obtained the
benefits.
4. ID.; COURT OF INDUSTRIAL RELATIONS; POWERS UNDER SECTION 17 OF
COM. ACT NO. 103. — The power of the Court of Industrial Relations under
Section 17 of Com. Act 103 to alter, modify in whole or in part, or set aside any
award, order or decision or reopen any question involved therein during the
effectiveness of an award is not unlimited. It must be confined to matters
involved in the award which resolved the labor dispute. Such power applies
only where the subsequent matter is incidental or related to the original or
main case and not where the new controversy has absolutely no relation or is
alien to the original or main case. To hold otherwise would be to grant to the
labor court excessive or broad powers, not conferred or contemplated by the
statute.

DECISION

ABAD SANTOS, J p:
The question in this case is whether or not a lawyer may collect attorney's fees
from non-union members who were not his clients but were extended by the
employer salary increases similar to those given to union members in
settlement of a labor dispute prosecuted by said lawyer.
The petitioners, namely: Rustico Pascual, Alberto Jose, Eladio Gregorio,
Redentor V. Sotto, Rodrigo V. Sotto, Mariano Herranz, Marina Davila, Eduardo
Ocampo, Pedro Asensi, Francisco Padua, Juanito San Miguel, Rafael Francisco,
Eliseo Lizada, Federico de Lange, Cesar Victoriano, Alcibiades Jose, Florita del
Rosario, et al., were supervisors, junior executives or confidential employees
of Pan American World Airways, Inc. (respondent Company) at the time this
special civil action was commenced in July, 1967, and were, therefore,
ineligible to join the union of the rank and file employees, the Pan American
Employees Association PANAMEA. cdll
Respondent Atty. Jose C. Espinas represented PANAMEA in a labor dispute with
respondent Company which arose connection with a provision, Art. 6(d), in the
collective bargaining contract between PANAMEA and respondent Company
concluded on March 17, 1960, which stipulated that if "a law diminishing the
value of Philippine currency is enacted and as result thereof the company is
granted the necessary authority to increase its rates, either party may, upon
written notice to the other, re-open this agreement for negotiation of wage
rates . . ." PANAMEA made a demand on July 8, 1960, for negotiation of wage
increases pursuant to the above-quoted provision and negotiations were had
but when no agreement was reached a strike was called by PANAMEA on
August 1, 1960.
On August 3, 1960, the dispute was certified by the President of the Philippines
to respondent Court of Industrial Relations,CIR, are the case was docketed
therein as Case No. 30-IPA. On August 4, 1960, respondent Atty. Espinas
entered the case as lawyer for the union. A Return to Work Agreement was
made with the submission of the case to respondent CIR. On November 22,
1960, respondent CIR ordered the parties to negotiate on wages. An appeal
from this order was made to this Court and docketed as G.R. No. L-18345,
entitled PanAm World Airways vs. PAA Employees Association and CIR. This
Court affirmed the order of the CIR.
While Case No. 30-IPA was pending resolution, another labor dispute resulting
in a strike arose between PANAMEA and respondent Company. This second
case was also certified by the respondent CIR on September 4, 1963, and
docketed as Case No. 44-IPA.
On July 14, 1964, PANAMEA, for the third time, went on strike.
A solution was finally reached on July 24, 1964, when PANAMEA and
respondent Company framed a new agreement which was embodied in an
Order of the CIR dated July 27, 1964, wherein respondent Company agreed to
"increase the present salary of each employee, member of the Petitioner Union
by fifteen per cent (15%)" effective March 1, 1963. This ended the strike and
terminated the two cases, except the wage adjustment issue for the period
covered by the old contract, which the parties agreed to submit to arbitration.
They did so in September, 1964.
On June 21, 1965, Judge Arsenio I. Martinez of the CIR, Acting as Arbitrator,
rendered an award the dispositive portion of which states as follows:
"After a careful consideration of the arguments and the evidence
of both parties, we believe and so hold that a sum equivalent to
four (4) months salary of the employees concerned based on the
pay rates as of February 28, 1963, payable in two installments,
would be a fair and reasonable settlement of the claim for wage
adjustment for a period covering the effectivity of the collective
contract executed on March 17, 1960."
It appears that respondent Company extended all the wage increase benefits
awarded to PANAMEA in the two CIR cases to all its employees, including
petitioners who, as aforesaid, occupy supervisory, junior executive, and
confidential positions. LLpr
In a motion dated June 30, 1965, Atty. Espinas asked for the approval of
attorney's lien of 20% against the benefits that were extended to employees
who were not members of the union. This was opposed by respondent
Company in an Answer dated July 2, 1965.
On November 16, 1965, a "Clarification of Arbitration Award" was issued by
Judge Arsenio R. Martinez, again acting as Arbitrator, where the question of
attorney's lien was passed upon in the following manner:
"Incidentally, several actions have been filed regarding the
question of attorney's fees. As shown by the records, it is with
respect to the benefits to be received by the supervisors of the
respondent company that attorney's lien are being sought to be
 imposed, as well as upon certain non-union members of the rank
and file. Nevertheless, the Arbitrator can not see its way clear on
these issues. The terms are the Agreement is for the Presiding
Judge to act as Arbitrator on the question of the wage adjustment.
Whatever action has been made so far is on account and solely
because of this designation. However, to solve the issue once and
for all on the assumption that matter is interrelated to all others,
considering that just as the workers are entitled to the benefits,
their lawyers too, by all standard of fairness, are equally entitled,
this arbitrator feels that it can take cognizance of. Consequently, all
those who stand to profit by the award must pay attorney's fees
based on the agreement as to the amount."

In the dispositive portion of the clarification, Judge Martinez directed "(c) As to

attorney's fees, let the parties be guided accordingly in pursuance thereof."
Nothing happened until April 18, 1967, when Judge Joaquin M. Salvador, acting
as Associate Judge of the respondent CIR, issued an order granting the motion
of Atty. Espinas.
On April 24, 1967, petitioners filed a Special Appearance and Motion to
Dismiss, questioning the award of attorney's fees, claiming that they are
supervisors, junior executives confidential employees of the respondent
Company and are therefore expressly excluded from bring members of
PANAMEA; that they did not derive any benefit from the agreement between
PANAMEA and respondent Company; and that they had not been made parties
directly or indirectly in Cases Nos. 30-IPA And 44-IPA, nor had they come within
the jurisdiction of respondent Company to act in their behalf.
Respondent Company, for its part, also filed a Motion for Reconsideration to
Set Aside the grant of attorney's fees. The respondent Court en banc denied
the motion on May 22, 1967.
Hence, this petition for certiorari and prohibition, with preliminary injunction
to declare the Order of respondent CIR null and void and to prohibit
respondents, particularly the CIR and Atty. Jose C. Espinas, from undertaking
further proceedings against petitioners.
This Court granted the writ of preliminary injunction prayed for.
Respondent Company admits in its Answer all the allegations of fact in the
petition as well as the allegations in support of the petition for preliminary
injunction.
Respondent Espinas, after filing his Answer, entered a Motion before this Court
on September 13, 1967, for deposit of his attorney's fees in the two labor cases
computed by the CIR as amounting to P68,317.36. Cdpr
Respondent Company countered that the amount of P68,317.36 sought as
deposit constitutes the 20% of the benefits received by all of the employees of
the respondents Company, including the rank and file employees who are
members of the Union and from whom respondent Espinas is not claiming a
lien and those who are no longer employed by the Company. It manifested on
September 29, 1967, that 20% of the benefits received by petitioners amounts
only to P25,988.21.
Petitioners opposed the Motion to Deposit on October 2, 1967, on the ground
that claim for attorney's fees is enforceable only by writ of execution. On
December 8, 1967, this Court denied the Motion.
The foregoing recitation of facts shows the following salient points: first,
petitioners were never made parties in Cases Nos. 30-IPA and 44-IPA and had
never come within the jurisdiction of respondent CIR except when they filed a
special appearance to contest the award of attorney's fees against them:
second, Atty. Espinas has no contract for lawyer's services with the petitioners;
third, it does not appear that Atty. Espinas performed any special service for
petitioners in the two cases that were filed with the CIR; and, fourth,
petitioners were at that time supervisors, junior executives, or confidential
employees while Atty. Espinas represented a union composed of the rank and
file.
It is admitted by respondent Espinas that:
 "There is no dispute here that respondent Atty. Espinas has no
contract for legal services with the petitioners. There is also no
dispute that the petitioners were never the clients of respondent
Espinas. Neither is it disputed by the respondent that there is a lack
of attorney and client relationship between the petitioners and
respondent Espinas." (Rollo, p. 171.).
The question, therefore, is whether his claim for attorney's fees can be
supported on other grounds.
Respondent Espinas bases his claim on the allegation that his work benefited
not only the union members but also those not members of the union. In effect
he claims that the latter should be made to pay on the principle of quasi-
contract. Quasi-contracts are defined in Art. 2142 of the Civil Code thus:
"Certain lawful, voluntary and unilateral acts give rise to the juridical relation
of quasi-contract to the end that no one shall be unjustly enriched or benefited
that expense of another."
However, the principle of quasi-contract cannot be applied in this case. For as
pointed out in National Brewery and Allied Industries Labor Union of the
Philippines vs. San Miguel Brewery Inc., L-18170, August 31, 1963, 8 SCRA 806,
where the same principle was invoked: "But the benefits that accrue to
nonmembers by reason of a collective bargaining agreement can hardly be
termed "unjust enrichment' because, as already pointed out, the same are
extended to them precisely to avoid discrimination among employees.
[International Oil Factory Workers' Union (FFW) vs. Martinez, et al., G.R. No. L-
15560, Dec. 31, 1960]." (At pp. 811-812.) See also Philippine Air Lines
Supervisors Assn. vs. Jimenez, L-26622, May 31, 1974, 57 SCRA 260.
In this case, respondent Company extended to the petitioners similar wage
increases that had been won by PANAMEA in order to maintain equilibrium in
the Company — not because of the efforts that respondent Espinas exerted. In
fact, petitioners allege, and this stands uncontradicted, that respondent
Company had in fact offered higher wage increases but because the union and
Espinas decided to go on strike, the resulting award was much less. Petitioners
also allege this they had long been due for merit increases which did not
however, materialize because the respondent Company was to avoid a union
strike and a suit for unfair labor practice. cdrep
The questioned order relies on two cases where the Supreme Court allowed
attorney's fees to be collected against non-union members: Union Empleados
De Trenes vs. Kapisanan ng mga Manggagawa, MRR et al., 110 Phil. 309,
and Martinez et al. vs. Union de Maquinista Fogoneros y Motormen, et al., L-
19455-56, Jan. 30, 1967, 19 SCRA 167.
The ruling in the case of Union de Empleados de Trenes Kapisanan ng mga
Manggagawa sa M.R.R. Co., et al. supra is inapplicable as the factual setting of
that case is different from that of the case at hand. There, the lawyer, Atty.
Gregorio E. Fajardo, had filed a petition for additional compensation night work
in favor of Kapisanan ng mga Manggagawa M.R.R. Co. Subsequently, another
case seeking the same relief was filed by Union de Empleados de Trenes. The
latter allowed to intervene in the first case and even offered to pay Atty.
Fajardo 5% attorney's fees. In February 1950, Atty. Fajardo was able to secure
a 25% additional compensation for night work for Kapisanan and the award
was also made applicable by the Court of Industrial Relations to all employees
and workers of the Manila Railroad Company, whether members of any union
or not. At this point, Atty. Fajardo dismissed by Kapisanan. Thereafter, in June
1950, the Union de Empleados de Trenes agreed to abide by the decision of the
Court Industrial Relations in the first case. As the company was not then in a
financial condition to comply with the award, proceedings for the execution of
the award obtained by Atty. Fajardo were initiated — by another lawyer — only
in 1956, where the issue of attorney's fees also came up. This time the Union
de Empleados de Trenes asked to be excluded from the first case contending
that it derived its benefits in the second case — in order to avoid payment of
attorney's fees. The Court of Industrial Relations did not sustain its stand and
this Court upheld the award of attorney's fees against the Union de Empleados
de Trenes. Clearly, an implied lawyer-client relationship existed between Union
de Empleados de Trenes and the lawyers for Kapisanan, binding the Union to
pay attorney's fees.
Moreover, this Court, in the case of Philippine Air Lines Supervisors' Assn. vs.
Jimenez, supra, observed that in the case ofUnion de Empleados de Trenes "the
benefits obtained for all workers would not have materialized were it not for
thespecial efforts and successful prosecution by the claimant union and its
attorneys of the suit for special benefits and hence the industrial court deemed
it just and equitable that all employees benefited by the hardearned judicial
award share in the fees and expenses." (At p. 272.).
There is nothing in this case that would justify a conclusion that Atty. Espinas
rendered special legal service which resulted in special benefits to petitioners
nor is there even circumstance that would imply that petitioners encourage
and supported the efforts of Atty. Espinas. Petitioners received what they did,
not because of Espinas' efforts, but because of respondent Company's policy
of non-discrimination.
The case of Martinez et al. vs. Union de Maquinistas Fogoneros y Motormen et
al. supra, also involves a different set of facts. In that case, two unions in the
Manila Railroad Company, namely, the Union de Maquinistas Fogoneros
Motormen, designated as the sole representative of Maquinistas, Fogoneros
and Motormen, and the Union de Empleados de Trenes, the sole
representative of all the conductors, route agents and porters, demanded
wage increases. After the unions struck, the case was certified by the President
of the Philippines to the Court of Industrial Relations. The Kapisanan ng mga
Manggagawa sa M.R.R. Co., which was designated as the sole representative
of the rest of the company's personnel, was allowed to intervene in the case.
After several negotiations and hearings, the Court of Industrial Relations
awarded a permanent wage increase and made the same applicable to every
employee of the Manila Railroad Company. In view of this, the attorneys who
represented the three unions filed a motion to have their lien for attorney's
fees extended to the increase received by all other employees who were not
members of the unions. The industrial court granted the motion. cdrep
In affirming the grant of attorney's fees against the non-union members, this
Court considered it pertinent that "the general policy of the law is to encourage
unionism to enable employees to bargain with the employer upon a more or
less equal footing." The Court was of the view that exemption of the non-union
members who benefited from the award would run "counter to this policy
because it tends to encourage a substantial portion of the employee force of
any corporation not to affiliate with the Union that has a collective bargaining
agreement with the Company, and is idly while the union members are fighting
to secure benefits that are later extended not only to them but also to all other
employees of the company." (At p. 171) This rationale does not apply in the
case at hand where the employees sought to be taxes with attorney's fees are
all supervisors, junior executives, and confidential employees, and, therefore,
could never become members of the union that originally obtained benefits.

This Court is mindful of the comprehensive character of the power of

the CIR under Section 17 of C.A. No. 103 to "alter or modify in whole or in part
or set aside any such award, order decision or reopen any question involved
therein" during the effectiveness of an award. As aptly stated by Senior Justice
Fernando in Philippine Association of Free Labor Unions(PAFLU) vs. Salvador, L-
29471, September 28, 1968, 25 SCRA 393: "The power of the Court of Industrial
Relations which as thus phrased, is comprehensive in character, has been given
an interpretation by us consistent with the well-nigh sweeping reach of its
language. It has never been construed in a niggardly sense; the recognition of
such authority has been full and sympathetic, never grudging However, the
power of the CIR under that section is not unlimited; it must be confined to
matters involved in the award which resolves the labor dispute. The jurisdiction
of the CIR in the two labor cases was acquired upon presidential certification
and this covers only the labor dispute between PANAMEA and respondent
Company over the wage adjustment issue under the old collective bargaining
agreement, as well as wage increases that were the subject of a new
agreement. Its authority, therefore, was confined to the parties to the dispute.
The salary increases granted to petitioners by respondent Company were not
related to the labor dispute nor part of the award made in the two cases.
Perforce, a claim for attorney's fees against petitioners is not related to the two
cases certified to the industrial court.
In the case of Northwest Airline vs. Northwest Airline Sales Employees
Association, L-17378, April 20, 1962, 4 SCRA 1265, this Court placed in proper
perspective the power of the CIR under Section 17 to reopen any question
during the effectiveness of an award when it held:
 "But this applies only where the subsequent matter is incidental or
related to the original or main case and not where, as in the instant
case, the new controversy has absolutely no relation or is alien to
the original or main case. To hold otherwise would be to grant to
respondent Court excessive or broad powers, not conferred or
contemplate by the statute." (At p. 1271).
WHEREFORE, the petition for a writ of certiorari and prohibition is hereby
granted and the questioned order dated April 18, 1967, is set aside as null and
void. The writ preliminary injunction issued is hereby made permanent. No
costs.
SO ORDERED.
||| (Pascual v. Court of Industrial Relations, G.R. Nos. L-27856-57, [February
28, 1979], 177 PHIL 596-607)

THIRD DIVISION

[G.R. No. 112675. January 25, 1999.]

AFISCO INSURANCE CORPORATION; CCC INSURANCE

CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO., INC.;
DEVELOPMENT INSURANCE & SURETY CORPORATION; DOMESTIC
INSURANCE COMPANY OF THE PHILIPPINES; EASTERN
ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL
INSURANCE CORPORATION INC.; FGU INSURANCE
CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS.,
INC.; FILIPINO MERCHANTS' INSURANCE CO., INC.; GOVERNMENT
SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.;
MALAYAN ZURICH INSURANCE CO., INC.; MERCANTILE
INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY;
 METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND
INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE
CORPORATION; PARAMOUNT INSURANCE CORPORATION;
PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION; PERLA
COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE
CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY
OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE
SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE
COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-
EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH
SEA SURETY & INSURANCE CO., INC.; STATE BONDING &
INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION;
TABACALERA INSURANCE CO., INC. — all assessed as "POOL OF
MACHINERY INSURERS," petitioners, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

Angara Abello Concepcion Regala for petitioners.

SYNOPSIS

This is a Petition For Review on Certiorari assailing the Decision of the Court of
Appeals dismissing petitioners' appeal of the Decision of the Court of Tax
Appeals which had sustained petitioners' liability for deficiency income tax,
interest and withholding tax. Petitioners contended that the Court of Appeals
erred in finding that the pool or clearing house was an informal partnership,
which was taxable as a corporation under the NIRC. Petitioners further claimed
that the remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insisted that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an
illegal double taxation. Moreover, petitioners argued that since Munich was
not a signatory to the Pool Agreement, the remittances it received from the
pool cannot be deemed dividends. However, even if such remittances were
treated as dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,as well as Article 7 of paragraph 1 and
Article 5 of the RP-West German Tax Treaty. Petitioners likewise contended
that the Internal Revenue Commissioner was already barred by prescription
from making an assessment.
In the present case, the ceding companies entered into a Pool Agreement or
association that would handle all the insurance businesses covered under their
quota-share reinsurance treaty and surplus reinsurance treaty with
Munich. AScHCD
Petitioner's allegation of double taxation is untenable. The pool is a taxable
entity distinct from the individual corporate entities of the ceding companies.
The tax on its income is different from the tax on the dividends received by the
said companies. The tax exemptions claimed by petitioners cannot be granted.
The sections of the 1977 NIRC which petitioners cited are inapplicable, because
these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed. Petitioners' claim that
Munich is tax-exempt based on the RP-West German Tax Treaty is likewise
unpersuasive, because the Internal Revenue Commissioner assessed the pool
for corporate taxes on the basis of the information return it had submitted for
the year ending 1975, a taxable year when said treaty was not yet in effect.
Petitioners likewise failed to comply with the requirement of Section 333 of
the NIRC for the suspension of the prescriptive period. The Resolutions of the
Court of Appeals are affirmed.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF INTERNAL

REVENUE IS ACCORDED WEIGHT AND EVEN FINALITY IN THE ABSENCE OF
SHOWING THAT IT IS PATENTLY WRONG. — The opinion or ruling of the
Commission of Internal Revenue, the agency tasked with the enforcement of
tax laws, is accorded much weight and even finality, when there is no showing
that it is patently wrong, particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently affirmed
by the CTA, a specialized body created for the exclusive purpose of reviewing
tax cases, and the Court of Appeals. Indeed, "[I]t has been the long standing
policy and practice of this Court to respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals which, by the nature of its functions,
is dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an
abuse or improvident exercise of its authority." TIAEac
2. CIVIL LAW; PARTNERSHIP; REQUISITES. — Article 1767 of the Civil Code
recognizes the creation of a contract of partnership when "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."
Its requisites are: "(1) mutual contribution to a common stock, and (2) a joint
interest in the profits." In other words, a partnership is formed when persons
contract "to devote to a common purpose either money, property, or labor
with the intention of dividing the profits between themselves." Meanwhile, an
association implies associates who enter into a "joint enterprise . . . for the
transaction of business."
3. ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION UNDER SECTION 24 OF THE NIRC.
— In the case before us, the ceding companies entered into a Pool Agreement
or an association that would handle all the insurance businesses covered under
their quota-share reinsurance treaty and surplus reinsurance treaty with
Munich. The following unmistakably indicates a partnership or an association
covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting
of money and other valuables that are deposited in the name and credit of the
pool. This common fund pays for the administration and operation expenses of
the pool. (2) The pool functions through an executive board, which resembles
the board of directors of a corporation, composed of one representative for
each of the ceding companies. (3) True, the pool itself is not a reinsurer and
does not issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding companies and
Munich, because without it they would not have received their premiums. The
ceding companies share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to the Pool
Agreement. Profit motive or business is, therefore, the primordial reason for
the pool's formation.
4. TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED PARTNERSHIPS AND
ASSOCIATIONS ARE CONSIDERED AS CORPORATIONS FOR TAX PURPOSES. —
This Court rules that the Court of Appeals, in affirming the CTA which had
previously sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC,as worded in the year ending 1975,
provides: "SEC. 24. Rate of tax on corporations. — (a) Tax on domestic
corporations. — A tax is hereby imposed upon the taxable net income received
during each 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-partnership (compañias
colectivas), general professional partnerships, private educational institutions,
and building and loan associations . . . ." Ineludibly, the Philippine legislature
included in the concept of corporations those entities that resembled them
such as unregistered partnerships and associations. Parenthetically, the NLRC's
inclusion of such entities in the tax on corporations was made even clearer by
the Tax Reform Act of 1997, which amended the Tax Code.The Court of Appeals
did not err in applying Evangelista, which involved a partnership that engaged
in a series of transactions spanning more than ten years, as in the case before
us.
5. ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN CASE AT BAR.
— Double taxation means taxing the same property twice when it should be
taxed only once. That is, ". . . taxing the same person twice by the same
jurisdiction for the same thing." In the instant case, the pool is a taxable entity
distinct from the individual corporate entities of the ceding companies. The tax
on its income is obviously different from the tax on the dividends received by
the said companies. Clearly, there is no double taxation here.
6. ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN CASE AT BAR;
REASONS. — The tax exemptions claimed by petitioners cannot be granted,
since their entitlement thereto remains unproven and unsubstantiated. It is
axiomatic in the law of taxation that taxes are the lifeblood of the nation.
Hence, "exemptions therefrom are highly disfavored in law and he who claims
tax exemption must be able to justify his claim or right." Petitioners have failed
to discharge this burden of proof. The sections of the 1977 NIRC which they
cite are inapplicable, because these were not yet in effect when the income
was earned and when the subject information return for the year ending 1975
was filed. Referring to the 1975 version of the counterpart sections of
the NIRC,the Court still cannot justify the exemptions claimed. Section 255
provides that no tax shall ". . . be paid upon reinsurance by any company that
has already paid the tax . . . ." This cannot be applied to the present case
because, as previously discussed, the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot individually claim the income
tax paid by the former as their own. EDSAac

7. ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN INSURANCE

CORPORATION IN CASE AT BAR; REASONS; TAX EXEMPTION
CONSTRUED STRICTISSIMI JURIS. — Section 24 (b) (1) pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding companies which are
domestic corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code because the same
subsection specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich is
patently an associate of the ceding companies in the entity formed, pursuant
to their reinsurance treaties which required the creation of said pool. Under its
pool arrangement with the ceding companies, Munich shared in their income
and loss. This is manifest from a reading of Articles 3 and 10 of the Quota-Share
Reinsurance Treaty and Articles 3 and 10 of the Surplus Reinsurance Treaty.
The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine
that a tax exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be mistaken.
8. ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT BAR; REASON.
— The petitioners' claim that Munich is tax-exempt based on the RP-West
German Tax Treaty is likewise unpersuasive, because the internal revenue
commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year
when said treaty was not yet in effect. Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice
that it took effect only later, on December 14, 1984.
9. ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION; CHANGE IN THE
ADDRESS OF THE TAXPAYER WILL NOT TOLL THE RUNNING OF THE
PRESCRIPTIVE PERIOD UNLESS THE COMMISSIONER OF INTERNAL REVENUE
HAS BEEN INFORMED OF SAID CHANGE. — The CA and the CTA categorically
found that the prescriptive period was tolled under then Section 333 of
the NIRC,because "the taxpayer cannot be located at the address given in the
information return filed and for which reason there was delay in sending the
assessment." Indeed, whether the government's right to collect and assess the
tax has prescribed involves facts which have been ruled upon by the lower
courts. It is axiomatic that in the absence of a clear showing of palpable error
or grave abuse of discretion, as in this case, this Court must not overturn the
factual findings of the CA and the CTA. Furthermore, petitioners admitted in
their Motion for Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pool's information return filed in
1980 indicated therein its "present address." The Court finds that this falls short
of the requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be
suspended only "if the taxpayer informs the Commissioner of Internal Revenue
of any change in the address."

DECISION

PANGANIBAN, J p:
Pursuant to "reinsurance treaties," a number of local insurance firms formed
themselves into a "pool" in order to facilitate the handling of business
contracted with a nonresident foreign reinsurance company. May the "clearing
house" or "insurance pool" so formed be deemed a partnership or an
association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pool's remittances to the member
companies and to the said foreign firm be taxable as dividends? Under the facts
of this case, has the government's right to assess and collect said tax
prescribed? cdasia
The Case
These are the main questions raised in the Petition for Review
on Certiorari before us, assailing the October 11, 1993 Decision 1 of the Court
of Appeals 2 in CA-GR SP 29502, which dismissed petitioners' appeal of the
October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had
previously sustained petitioners' liability for deficiency income tax, interest and
withholding tax. The Court of Appeals ruled:
"WHEREFORE, the petition is DISMISSED, with costs against
petitioners." 5
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution 6 denying reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
"The petitioners are 41 non-life insurance corporations, organized
and existing under the laws of the Philippines. Upon issuance by
them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the petitioners on August
1, 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-
resident foreign insurance corporation. The reinsurance treaties
required petitioners to form a [p]ool. Accordingly, a pool composed
of the petitioners was formed on the same day.
"On April 14, 1976, the pool of machinery insurers submitted a
financial statement and filed an "Information Return of
Organization Exempt from Income Tax" for the year ending in 1975,
on the basis of which it was assessed by the Commissioner of
Internal Revenue deficiency corporate taxes in the amount of
P1,843,273.60, and withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on dividends paid to Munich and to
the petitioners, respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres, Velayo and Co.
"On January 27, 1986, the Commissioner of Internal Revenue
denied the protest and ordered the petitioners, assessed as "Pool
of Machinery Insurers," to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
––––––––––––
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise
penalty-non-filing of return 300.00
late payment 300.00
 ––––––––––––
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise
penalty-non-filing of return 300.00
late payment 300.00
––––––––––––
TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE ==========" 8
The CA ruled in the main that the pool of machinery insurers was a partnership
taxable as a corporation, and that the latter's collection of premiums on behalf
of its members, the ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR) from collecting
the taxes due, because "the taxpayer cannot be located at the address given in
the information return filed." Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
"1. Whether or not the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not
insure or assume any risk in its own name, was a partnership or
association subject to tax as a corporation;
 "2. Whether or not the remittances to petitioners and MUNICHRE
of their respective shares of reinsurance premiums, pertaining to
their individual and separate contracts of reinsurance, were
"dividends" subject to tax; and
"3. Whether or not the respondent Commissioner's right to assess
the Clearing House had already prescribed." 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals
that the pool is taxable as a corporation, and that the government's right to
assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool or
clearing house was an informal partnership, which was taxable as a corporation
under the NIRC. They point out that the reinsurance policies were written by
them "individually and separately," and that their liability was limited to the
extent of their allocated share in the original risks thus reinsured. 11 Hence,
the pool did not act or earn income as a reinsurer. 12 Its role was limited to its
principal function of "allocating and distributing the risk(s) arising from the
original insurance among the signatories to the treaty or the members of the
pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection
and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they,
the reinsurers, did not share the same risk or solidary liability; 14 (2) there was
no common fund; 15 (3) the executive board of the pool did not exercise
control and management of its funds, unlike the board of directors of a
corporation; 16 and (4) the pool or clearing house "was not and could not
possibly have engaged in the business of reinsurance from which it could have
derived income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal
Revenue, the agency tasked with the enforcement of tax laws, is accorded
much weight and even finality, when there is no showing that it is patently
wrong, 18particularly in this case where the findings and conclusions of the
internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and
the Court of Appeals.19 Indeed,

"[I]t has been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the Court
of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority." 20
This Court rules that the Court of Appeals, in affirming the CTA which had
previously sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC,as worded in the year ending 1975,
provides:
"SEC. 24. Rate of tax on corporations. — (a) Tax on domestic
corporations. — A tax is hereby imposed upon the taxable net
income received during each 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-partnership (compañias colectivas),
general professional partnerships, private educational institutions,
and building and loan associations . . . ."
Ineludibly, the Philippine legislature included in the concept of corporations
those entities that resembled them such as unregistered partnerships and
associations. Parenthetically, the NLRC's inclusion of such entities in the tax on
corporations was made even clearer by the Tax Reform Act of 1997, 21 which
amended the Tax Code.Pertinent provisions of the new law read as follows:
"SEC. 27. Rates of Income Tax on Domestic Corporations. —
(A) In General. — Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon the
 taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined
in Section 22 (B) of this Code, and taxable under this Title as a
corporation . . . ."
"SEC. 22. Definition. — When used in this Title:
xxx xxx xxx
(B) The term 'corporation' shall include partnerships, no matter
how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), associations, or insurance companies,
but does not include general professional partnerships [or] a joint
venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating or
consortium agreement under a service contract without the
Government. 'General professional partnerships' are partnerships
formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging
in any trade or business. LLphil
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that
Section 24 covered these unregistered partnerships and even associations or
joint accounts, which had no legal personalities apart from their individual
members. 23 The Court of Appeals astutely applied Evangelista: 24
". . . Accordingly, a pool of individual real property owners dealing
in real estate business was considered a corporation for purposes
of the tax in Sec. 24 of the Tax Code in Evangelista v. Collector of
Internal Revenue, supra. The Supreme Court said:
'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)'"
Article 1767 of the Civil Code recognizes the creation of a contract of
partnership when "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." 25 Its requisites are: "(1) mutual contribution to a
common stock, and (2) a joint interest in the profits." 26 In other words, a
partnership is formed when persons contract "to devote to a common purpose
either money, property, or labor with the intention of dividing the profits
between themselves." 27 Meanwhile, an association implies associates who
enter into a "joint enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool
Agreement 29 or an association 30 that would handle all the insurance
businesses covered under their quota-share reinsurance treaty 31 and surplus
reinsurance treaty 32 with Munich. The following unmistakably indicates a
partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that
are deposited in the name and credit of the pool. 33 This common fund pays
for the administration and operation expenses of the pool. 34
(2) The pool functions through an executive board, which resembles the board
of directors of a corporation, composed of one representative for each of the
ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically useful
to the business of the ceding companies and Munich, because without it they
would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of
Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by the
CTA:
". . . The fact that the pool does not retain any profit or income does
not obliterate an antecedent fact, that of the pool being used in the
transaction of business for profit. It is apparent, and petitioners
admit, that their association or coaction was indispensable [to] the
 transaction of the business. . . If together they have conducted
business, profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the members,
this is only a matter of consequence, as it implies that profit
actually resulted." 37
The petitioners' reliance on Pascual v. Commissioner 38 is misplaced, because
the facts obtaining therein are not on all fours with the present case.
In Pascual, there was no unregistered partnership, but merely a co-ownership
which took up only two isolated transactions. 39 The Court of Appeals did not
err in applying Evangelista, which involved a partnership that engaged in a
series of transactions spanning more than ten years, as in the case before us.
Second Issues:
Pool's Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the ceding
companies and Munich are not dividends subject to tax. They insist that taxing
such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and
"would be tantamount to an illegal double taxation, as it would result in taxing
the same premium income twice in the hands of the same
taxpayer." 40 Moreover, petitioners argue that since Munich was not a
signatory to the Pool Agreement, the remittances it received from the pool
cannot be deemed dividends. 41 They add that even if such remittances were
treated as dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,42 as well as Article 7 of paragraph
1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same
property twice when it should be taxed only once. That is, ". . . taxing the same
person twice by the same jurisdiction for the same thing." 46 In the instant
case, the pool is a taxable entity distinct from the individual corporate entities
of the ceding companies. The tax on its income is obviously different from the
tax on the dividends received by the said companies. Clearly, there is no double
taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their
entitlement thereto remains unproven and unsubstantiated. It is axiomatic in
the law of taxation that taxes are the lifeblood of the nation. Hence,
"exemptions therefrom are highly disfavored in law and he who claims tax
exemption must be able to justify his claim or right." 47Petitioners have failed
to discharge this burden of proof. The sections of the 1977 NIRC which they
cite are inapplicable, because these were not yet in effect when the income
was earned and when the subject information return for the year ending 1975
was filed.
Referring to the 1975 version of the counterpart sections of the NIRC,the Court
still cannot justify the exemptions claimed.Section 255 provides that no tax
shall ". . . be paid upon reinsurance by any company that has already paid the
tax . . . ." This cannot be applied to the present case because, as previously
discussed, the pool is a taxable entity distinct from the ceding companies;
therefore, the latter cannot individually claim the income tax paid by the
former as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations;
hence, it cannot be claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code,because the same subsection
specifically taxes dividends, the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to their
reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their
income and loss. This is manifest from a reading of Articles 3 49 and 10 50 of
the Quota-Share Reinsurance Treaty and Articles 3 51 and 10 52 of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line
with the doctrine that a tax exemption must be construed strictissimi juris, and
the statutory exemption claimed must be expressed in a language too plain to
be mistaken. 53
Finally, the petitioners' claim that Munich is tax-exempt based on the RP-West
German Tax Treaty is likewise unpersuasive, because the internal revenue
commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year
when said treaty was not yet in effect. 54 Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice
that it took effect only later, on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the
subject tax had prescribed. They claim that the subject information return was
filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its letter
of assessment dated March 27, 1981. Thus, the petitioners contend that the
five-year statute of limitations then provided in the NIRC had already lapsed,
and that the internal revenue commissioner was already barred by prescription
from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that
the prescriptive period was tolled under then Section 333 of
the NIRC,57 because " the taxpayer cannot be located at the address given in
the information return filed and for which reason there was delay in sending
the assessment." 58 Indeed, whether the government's right to collect and
assess the tax has prescribed involves facts which have been ruled upon by the
lower courts. It is axiomatic that in the absence of a clear showing of palpable
error or grave abuse of discretion, as in this case, this Court must not overturn
the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before
the Court of Appeals that the pool changed its address, for they stated that the
pool's information return filed in 1980 indicated therein its "present address."
The Court finds that this falls short of the requirement of Section 333 of
the NIRC for the suspension of the prescriptive period. The law clearly states
that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals
dated October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs
against petitioners. cdasia
SO ORDERED.
||| (Afisco Insurance Corp. v. Court of Appeals, G.R. No. 112675, [January 25,
1999], 361 PHIL 671-691)

FIRST DIVISION

[G.R. No. L-9692. January 6, 1958.]

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. BATANGAS

TRANSPORTATION COMPANY and LAGUNA - TAYABAS BUS
COMPANY, respondents.

Solicitor General Ambrosio Padilla, Solicitor Conrado T.

Limcaoco and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco & Picazo for respondents.

SYLLABUS

1. TAXATION; WHAT CONSTITUTE CORPORATION WITHIN THE

MEANING OF THE TAX CODE; LIABILITY FOR INCOME TAX; CASE AT BAR. —
The Tax Code defines the term "corporation" as including partnership no
matter how created or organized, thereby indicating a joint venture need
not be undertaken in any of the standards forms, or in conformity with the
usual requirements of the law on partnership, in order that one could be
deemed constituted for the purposes of the tax on corporations. In the case
at bar, while the two respondent companies were registered and operating
separately, they were placed under one sole management called the "Joint
Emergency Operation" for the purpose of economizing in overhead
expenses. Although no legal personality may have been created by the Joint
Emergency Operation, nevertheless, said joint management operated the
business affairs of the two companies as though they constituted a single
entity, company or partnership, thereby obtaining substantial economy and
profits in the operation. The joint venture, therefore, falls under the
provisions of section 84 (b) of the Internal Revenue Code, and consequently,
it is liable to income tax provided for in Section 24 of the same Code.
2. ID.; APPEAL FROM THE DECISION OF COLLECTOR; AUTHORITY TO
INCREASE ASSESSMENT AFTER APPEAL HAS BEEN PERFECTED. — The
Collector of Internal Revenue, after appeal from his decision to the Court of
Tax Appeals has been perfected, and after the Tax Court has acquired
jurisdiction over the appeal, but before the answer is filed with the court,
may still modify his assessment, subject of the appeal, by increasing the
same. If the Collector of Internal Revenue is not allowed to amend his
assessment before the Court of Tax Appeals, and since he may make a
subsequent reassessment to collect additional sums within the same subject
of his original assessment, provided it is done within the prescriptive period,
that would lead to multiplicity of suit which the law does not encourage.
3. ID.; PENALTY; FAILURE TO FILE INCOME TAX RETURN FOR AND IN
BEHALF OF AN ENTITY, WHEN JUSTIFIED. — Where the failure to file an
income tax return for and in behalf of an entity which is later found to be a
corporation within the meaning of Section 84 (b) of the Tax Code was due to
a reasonable cause, such as an honest belief based on the advice of its
attorneys and accountants, a penalty in the form of a surcharge should not
to be imposed and collected.

DECISION

MONTEMAYOR, J p:
This is an appeal from the decision of the Court of Tax Appeals
(C.T.A.), which reversed the assessment and decision of petitioner Collector
of Internal Revenue, later referred to as Collector, assessing and
demanding from the respondents Batangas Transportation Company, later
referred to as Batangas Transportation, and Laguna Tayabas Bus Company,
later referred to as Laguna Bus, the amount of P54,143.54, supposed to
represent the deficiency income tax and compromise for the years 1946 to
1949, inclusive, which amount, pending appeal in the C.T.A., but before the
Collector filed his answer in said court, was increased to P148,890.14.
The following facts are undisputed: Respondent companies are two
distinct and separate corporations engaged in the business of land
transportation by means of motor buses, and operating distinct and
separate lines. Batangas Transportation was organized in 1918, while
Laguna Bus was organized in 1928. Each company now has a fully paid up
capital of P1,000,000. Before the last war, each company maintained
separate head offices, that of Batangas Transportation being in Batangas,
Batangas, while the Laguna Bus had its head office in San Pablo Laguna.
Each company also kept and maintained separate books, fleets of buses,
management, personnel, maintenance and repair shops, and other
facilities. Joseph Benedict managed the Batangas Transportation, while
Martin Olson was the manager of the Laguna Bus. To show the connection
and close relation between the two companies, it should be stated that
Max Blouse was the President of both corporations and owned about 30
per cent of the stock in each company. During the war, the American
officials of these two corporations were interned in Santo Tomas, and said
companies ceased operations. They also lost their respective properties
and equipment. After Liberation, sometime in April, 1945, the two
companies were able to acquire 56 auto buses from the United States
Army, and the two companies divided said equipment equally between
themselves, registering the same separately in their respective names. In
March, 1947, after the resignation of Martin Olson as Manager of the
Laguna Bus, Joseph Benedict, who was then managing the Batangas
Transportation, was appointed Manager of both companies by their
respective Board of Directors. The head office of the Laguna Bus in San
Pablo City was made the main office of both corporations. The placing of
the two companies under one sole management was made by Max Blouse,
President of both companies, by virtue of the authority granted him by
resolution of the Board of Directors of the Laguna Bus on August 10, 1945,
and ratified by the Boards of the two companies in their respective
resolutions of October 27, 1947.
According to the testimony of joint Manager Joseph Benedict, the
purpose of the joint management, which was called "Joint Emergency
Operation", was to economize in overhead expenses; that by means of said
joint operation, both companies had been able to save the salaries of one
manager, one assistant manager, fifteen inspectors, special agents, and
one set of office clerical force, the savings in one year amounting to about
P200,000 or about P100,000 for each company. At the end of each
calendar year, all gross receipts and expenses of both companies were
determined and the net profits were divided fifty-fifty, and transferred to
the books of accounts of each company, and each company "then prepared
its own income tax return from this fifty per centum of the gross receipts
and expenditures, assets and liabilities thus transferred to it from the 'Joint
Emergency Operation' and paid the corresponding income taxes thereon
separately".
Under the theory that the two companies had pooled their resources
in the establishment of the Joint Emergency Operation, thereby forming a
joint venture, the Collector wrote the bus companies that there was due
from them the amount of P422,210.89 as deficiency income tax and
compromise for the years 1946 to 1949, inclusive. Since the Collector
caused to be restrained, seized, and advertised for sale all the rolling stock
of the two corporations, respondent companies had to file a surety bond in
the same amount of P422,210.89 to guarantee the payment of the income
tax assessed by him.
After some exchange of communications between the parties, the
Collector, on January 8, 1955, informed the respondents "that after
crediting the overpayment made by them of their alleged income tax
liabilities for the aforesaid years, pursuant to the doctrine of equitable
recoupment, the income tax due from the 'Joint Emergency Operation' for
the years 1946 to 1949, inclusive, is in the total amount of P54,143.54."
The respondent companies appealed from said assessment of P54,143.54
to the Court of Tax Appeals, but before filing his answer, the Collector set
aside his original assessment of P54,143.54 and reassessed the alleged
income tax liability of respondents of P148,890.14, claiming that he had
later discovered that said companies had been "erroneously credited in the
last assessment with 100 per cent of their income taxes paid when they
should in fact have been credited with only 75 per cent thereof, since
under Section 24 of the Tax Code dividends received by them from the
Joint Emergency Operation as a domestic corporation are returnable to the
extent of 25 per cent". That corrected and increased reassessment was
embodied in the answer filed by the Collector with the Court of Tax
Appeals.
The theory of the Collector is the Joint Emergency Operation was a
corporation distinct from the two respondent companies, as defined in
section 84 (b), and so liable to income tax under section 24, both of the
National Internal Revenue Code. After hearing, the C.T.A. found and held,
citing authorities, that the Joint Emergency Operation or joint management
of the two companies "is not a corporation within the contemplation of
section 84 (b) of the National Internal Revenue Code much less a
partnership, association or insurance company", and therefore was not
subject to the income tax under the provisions of section 24 of the same
Code, separately and independently of respondent companies; so, it
reversed the decision of the Collector assessing and demanding from the
two companies the payment of the amount of P54,143.54 and/or the
amount of P148,890.14. The Tax Court did not pass upon the question of
whether or not in the appeal taken to it by respondent companies, the
Collector could change his original assessment by increasing the same from
P54,143.14 to P148,890.14, to correct an error committed by him in having
credited the Joint Emergency Operation, totally or 100 per cent of the
income taxes paid by the respondent companies for the years 1946 to
1949, inclusive, by reason of the principle of equitable recoupment, instead
of only 75 per cent.
The two main and most important questions involved in the present
appeal are: (1) whether the two transportation companies herein involved
are liable to the payment of income tax as a corporation on the theory that
the Joint Emergency Operation organized and operated by them is a
corporation within the meaning of Section 84 of the Revised Internal
Revenue Code, and (2) whether the Collector of Internal Revenue, after the
appeal from his decision has been perfected, and after the Court of Tax
Appeals has acquired jurisdiction over the same, but before said Collector
has filed his answer with that court, may still modify his assessment subject
of the appeal by increasing the same, on the ground that he had
committed error in good faith in making said appealed assessment.

The first question has already been passed upon and determined by
this Tribunal in the case of Eufemia Evangelista et al., vs. Collector of
Internal Revenue et al., * G. R. No. L-9996, promulgated on October 15,
1957. Considering the views and rulings embodied in our decision in that
case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary
to extensively discuss the point. Briefly, the facts in that case are as
follows: The three Evangelista sisters borrowed from their father about
P59,000 and adding thereto their own personal funds, bought real
properties, such as a lot with improvements thereon for the sum of
P100,000 in 1943, parcels of land with a total area of almost 4,000 square
meters with improvements thereon for P18,000 in 1944, another lot for
P108,000 in the same year, and still another lot for P237,000 in the same
year. The relatively large amounts invested may be explained by the fact
that purchases were made during the Japanese occupation, apparently in
Japanese military notes. In 1945, the sisters appointed their brother to
manage their properties, with full power to lease, to collect and receive
rents, on default of such payment, to bring suits against the defaulting
tenants, to sign all letters and contracts, etc. The properties therein
involved were rented to various tenants, and the sisters, through their
brother as manager, realized a net rental income of P5,948 in 1945, P7,498
in 1946, and P12,615 in 1948. In 1954, the Collector of Internal Revenue
demanded of them among other things, payment of income tax on
corporations from the year 1945 to 1949, in the total amount of P6,157,
including surcharge and compromise. Dissatisfied with the said assessment,
the three sisters appealed to the Court of Tax Appeals, which court decided
in favor of the Collector of Internal Revenue. On appeal to us, we affirmed
the decision of the Tax Court. We found and held that considering all the
facts and circumstances surrounding the case, the three sisters had the
purpose to engage in real estate transactions for monetary gain and then
divide the same among themselves; that they contributed to a common
fund which they invested in a series of transactions; that the properties
bought with this common fund had been under the management of one
person with full power to lease, to collect rents, issue receipts, bring suits,
sign letters and contracts, etc., in such a manner that the affairs relative to
said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit; and that the said
sisters had the intention to constitute a partnership within the meaning of
the tax law. Said sisters in their appeal insisted that they were mere co-
owners, not co-partners, for the reason that their acts did not create a
personality independent of them, and that some of the characteristics of
partnerships were absent, but we held that when the Tax Code includes
"partnerships" among the entities subject to the tax on corporations, it
must refer to organizations which are not necessarily partnerships in the
technical sense of the term, and that furthermore, said law defined the
term "corporation" as including partnerships no matter how created or
organized, thereby indicating 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"; that besides, said section 84 (b)
provides that the term "corporation" includes "joint accounts" (cuentas en
participacion) and "associations", none of which has a legal personality
independent of that of its members. The decision cites 7A Merten's Law of
Federal Income Taxation.
In the present case, the two companies contributed money to a
common fund to pay the sole general manager, the accounts and office
personnel attached to the office of said manager, as well as for the
maintenance and operation of a common maintenance and repair shop.
Said common fund was also used to buy spare parts, and equipment for
both companies, including tires. Said common fund was also used to pay all
the salaries of the personnel of both companies, such as drivers,
conductors, helpers and mechanics, and at the end of each year, the gross
income or receipts of both companies were merged, and after deducting
therefrom the gross expenses of the two companies, also merged, the net
income was determined and divided equally between them, wholly and
utterly disregarding the expenses incurred in the maintenance and
operation of each company and of the individual income of said
companies.
From the standpoint of the income tax law, this procedure and
practice of determining the net income of each company was arbitrary and
unwarranted, disregarding as it did the real facts in the case. There can be
no question that the gross receipts and gross expenses of two, distinct and
separate companies operating different lines and in some cases, different
territories, and different equipment and personnel at least in value and in
the amount of salaries, can at the end of each year be equal or even
approach equality. Those familiar with the operation of the business of
land transportation can readily see that there are many factors that enter
into said operation. Much depends upon the number of lines operated and
the length of each line, including the number of trips made each day. Some
lines are profitable, others break above even, while still others are
operated at a loss, at least for a time, depending, of course, upon the
volume of traffic, both passenger and freight. In some lines, the operator
may enjoy a more or less exclusive operation, while in others, the
competition is intense, sometimes even what they call "cutthroat
competition". Sometimes, the operator is involved in litigation, not only as
the result of money claims based on physical injuries or deaths occasioned
by accidents or collisions, but litigations before the Public Service
Commission, initiated by the operator itself to acquire new lines or
additional service and equipment on the lines already existing, or litigations
forced upon said operator by its competitors. Said litigation naturally
causes expense to the operator. At other times, the operator is denounced
by competitors before the Public Service Commission for violation of its
franchise or franchises, for making unauthorized trips, for temporary
abandonment of said lines or of scheduled trips, etc. In view of this, and
considering that the Batangas Transportation and the Laguna Bus operated
different lines, sometimes in different provinces or territories, under
different franchises, with different equipment and personnel, it cannot
possibly be true and correct to say that at the end of each year, the gross
receipts and income and the gross expenses of two companies are exactly
the same for purposes of the payment of income tax. What was actually
done in this case was that, although no legal personality may have been
created by the Joint Emergency Operation, nevertheless, said Joint
Emergency Operation, joint venture, or joint management operated the
business affairs of the two companies as though they constituted a single
entity, company or partnership, thereby obtaining substantial economy
and profits in the operation.
For the foregoing reasons, and in the light of our ruling in the
Evangelista vs. Collector of Internal Revenue case,supra, we believe and
hold that the Joint Emergency Operation or sole management or joint
venture in this case falls under the provisions of section 84 (b) of the
Internal Revenue Code, and consequently, it is liable to income tax
provided for in section 24 of the same code.
The second important question to determine is whether or not the
Collector of Internal Revenue, after appeal from his decision to the Court of
Tax Appeals has been perfected, and after the Tax Court has acquired
jurisdiction over the appeal, but before the Collector has filed his answer
with the court, may still modify his assessment, subject of the appeal, by
increasing the same. This legal point, interesting and vital to the interests
of both the Government and the taxpayer, provoked considerable
discussion among the members of this Tribunal, a minority of which the
writer of this opinion forms part, maintaining that for the information and
guidance of the taxpayer, there should be a definite and final assessment
on which he can base his decision whether or not to appeal; that when the
assessment is appealed by the taxpayer to the Court of Tax Appeals, the
Collector loses control and jurisdiction over the same, the jurisdiction being
transferred automatically to the Tax Court, which has exclusive appellate
jurisdiction over the same; that the jurisdiction of the Tax Court is not
revisory but only appellate, and therefore, it can act only upon the amount
of assessment subject of the appeal to determine whether it is valid and
correct from the standpoint of the taxpayer- appellant; that the Tax Court
may only correct errors committed by the Collector against the taxpayer,
but not those committed in his favor, unless the Government itself is also
an appellant; and that unless this be the rule, the Collector of Internal
Revenue and his agents may not exercise due care, prudence and pay too
much attention in making tax assessments, knowing that they can at any
time correct any error committed by them even when due to negligence,
carelessness or gross mistake in the interpretation or application of the tax
law, by increasing the assessment, naturally to the prejudice of the
taxpayer who would not know when his tax liability has been completely
and definitely met and complied with, this knowledge being necessary for
the wise and proper conduct and operation of his business; and that lastly,
while in the United States of America, on appeal from the decision of the
Commissioner of Internal Revenue to the Board or Court of Tax Appeals,
the Commissioner may still amend or modify his assessment, even
increasing the same, the law in that jurisdiction expressly authorizes the
Board or Court of Tax Appeals to redetermine and revise the assessment
appealed to it.

The majority, however, holds, not without valid arguments and

reasons, that the Government is not bound by the errors committed by its
agents and tax collectors in making tax assessments, specially when due to
a misinterpretation or application of the tax laws, more so when done in
good faith; that the tax laws provide for a prescriptive period within which
the tax collectors may make assessments and reassessments in order to
collect all the taxes due to the Government, and that if the Collector of
Internal Revenue is not allowed to amend his assessment before the Court
of Tax Appeals, and since he may make a subsequent reassessment to
collect additional sums within the same subject of his original assessment,
provided it is alone within the prescriptive period, that would lead to
multiplicity of suits which the law does not encourage; that since the
Collector of Internal Revenue, in modifying his assessment, may not only
increase the same, but may also reduce it, if he finds that he has
committed an error against the taxpayer, and may even make refunds of
amounts erroneously and illegally collected, the taxpayer is not prejudiced;
that the hearing before the Court of Tax Appeals partakes of a trial de novo
and the Tax Court is authorized to receive evidence, summon witnesses,
and give both parties, the Government and the taxpayer, opportunity to
present and argue their sides, so that the true and correct amount of the
tax to be collected may be determined and decided, whether resulting in
the increase or reduction of the assessment appealed to it. The result is
that the ruling and doctrine now being laid by this Court is, that pending
appeal before the Court of Tax Appeals, the Collector of Internal Revenue
may still amend his appealed assessment, as he has done in the present
case.
There is a third question raised in the appeal before the Tax Court and
before this Tribunal, namely, the liability of the two respondent
transportation companies for 25 per cent surcharge due to their failure to
file an income tax return for the Joint Emergency Operation, which we hold
to be a corporation within the meaning of the Tax Code. We understand
that said 25 per cent surcharge is included in the assessment of
P148,890.14. The surcharge is being imposed by the Collector under the
provisions of Section 72 of the Tax Code, which read as follows:
"The Collector of Internal Revenue shall assess all income
taxes. In case of willful neglect to file the return or list within the
time prescribed by law, or in case a false or fraudulent return or list
is willfully made the collector of internal revenue shall add to the
tax or to the deficiency tax, in case any payment has been made on
the basis of such return before the discovery of the falsity or fraud,
a surcharge of fifty per centum of the amount of such tax or
deficiency tax. In case of any failure to make and file a return or list
within the time prescribed by law or by the Collector or other
internal revenue officer, not due to willful neglect, the Collector,
shall add to the tax twenty-five per centum of its amount, except
that, when the return is voluntarily and without notice from the
Collector or other officer filed after such time, it is shown that the
failure was due to a reasonable cause, no such addition shall be
made to the tax. The amount so added to any tax shall be collected
 at the same time in the same manner and as part of the tax unless
the tax has been paid before the discovery of the neglect, falsity,
or fraud, in which case the amount so added shall be collected in
the same manner as the tax."
We are satisfied that the failure to file an income tax return for the Joint
Emergency Operation was due to a reasonable cause, the honest belief of
respondent companies that there was no such corporation within the
meaning of the Tax Code, and that their separate income tax return was
sufficient compliance with the law. That this belief was not entirely without
foundation and that it was entertained in good faith, is shown by the fact
that the Court of Tax Appeals itself subscribed to the idea that the Joint
Emergency Operation was not a corporation, and so sustained the
contention of respondents. Furthermore, there are authorities to the effect
that belief in good faith, on advice of reputable tax accountants and
attorneys, that a corporation was not a personal holding company taxable
as such constitutes "reasonable cause" for failure to file holding company
surtax returns, and that in such a case, the imposition of penalties for
failure to file return, is not warranted. 1
In view of the foregoing, and with the reversal of the appealed
decision of the Court of Tax Appeals, judgment is hereby rendered, holding
that the Joint Emergency Operation involved in the present case is a
corporation within the meaning of section 84 (b) of the Internal Revenue
Code, and so is liable to income tax under section 24 of the same code;
that pending appeal in the Court of Tax Appeals of an assessment made by
the Collector of Internal Revenue, the Collector, pending hearing before
said court, may amend his appealed assessment and include the
amendment in his answer before the court, and the latter may, on the
basis of the evidence presented before it, redetermine the assessment;
that where the failure to file an income tax return for and in behalf of an
entity which is later found to be a corporation within the meaning of
section 84 (b) of the Tax Code was due to a reasonable cause, such as an
honest belief based or the advice of its attorneys and accountants, a
penalty in the form of a surcharge should not be imposed and collected.
The respondents are therefore ordered to pay the amount of the
 reassessment made by the Collector of Internal Revenue before the Tax
Court, minus the amount of 25 per cent surcharge. No costs.
||| (Collector of Internal Revenue v. Batangas Transportation Co., G.R. No. L-
9692, [January 6, 1958], 102 PHIL 822-835)

EN BANC

[G.R. No. 45425. April 29, 1939.]

JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs.

THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants.

Solicitor-General Tuason for appellee.

SYLLABUS

1. PARTNERSHIP OF A CIVIL NATURE; COMMUNITY OF PROPERTY;

SWEEPSTAKES; INCOME TAX. — According to the stipulated facts the
plaintiffs organized a partnership of a civil nature because each of them put
up money to buy a sweepstakes ticket for the sole purpose of dividing
equally the prize which they may win, as they did in fact in the amount of
P60,000 (article 166C, Civil Code). The partnership was not only formed, but
upon the organization thereon and the winning of the prize, J. G. personally
appeared in the office of the Philippine Charity Sweepstakes, in his capacity
as co-partner, as such collected the prize, the office issued the check for
P60,000 in favor of J. G. and company, and the said partner, in the same
capacity, collected the check. All these circumstances repel the idea that the
plaintiffs organized and formed a community of property only.
2. ID.; ID.; ID.; ID. — Having organized and constituted a partnership of
a civil nature, the said entity is the one bound to pay the income tax which
the defendant collected under the aforesaid section 10 (a) of Act No. 2833,
 as amended by section 2 of Act No. 3761. There is no merit in plaintiffs'
contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.

DECISION

IMPERIAL, J p:
The plaintiff brought this action to recover from the
defendant Collector of Internal Revenue the sum of P1,863.44, with legal
interest thereon, which they paid under protest by way of income tax. They
appealed from the decision rendered in the case on October 23, 1936 by
the Court of First Instance of the City of Manila, which dismissed the action
with the costs against them.
The case was submitted for decision upon the following stipulation of
facts:
"Come now the parties to the above-mentioned case, through
their respective undersigned attorneys, and hereby agree to
respectfully submit to this Honorable Court the case upon the
following statement of facts:
"1. That plaintiffs are all residents of the municipality of
Pulilan, Bulacan, and that defendant is the Collectorof Internal
Revenue of the Philippines;
"2. That prior to December 15, 1934 plaintiffs, in order to
enable them to purchase one sweepstakes ticket valued at two
pesos (P2), subscribed and paid therefor the amounts as follows:

1. Jose Gatchalian P0.18

2. Gregoria Cristobal .18
3. Saturnina Silva .08
4. Guillermo Tapia .13
5. Jesus Legaspi .15
 6. Jose Silva .07
7. Tomasa Mercado .08
8. Julio Gatchalian .18
9. Emiliana Santiago .18
10. Maria C. Legaspi .16
11. Francisco Cabral .13
12. Gonzalo Javier .14
13. Maria Santiago .17
14. Buenaventura Guzman .13
15. Mariano Santos .14
——
Total 2.00

"3. That immediately thereafter but prior to December 16,

1934, plaintiffs purchased, in the ordinary course of business, from
one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of
two pesos (P2) and that the said ticket was registered in the name
of Jose Gatchalian and Company;
"4. That as a result of the drawing of the sweepstakes on
December 15, 1934, the above-mentioned ticket bearing No.
178637 won one of the third prizes in the amount of P50,000 and
that the corresponding check covering the above-mentioned prize
of P50,000 was drawn by the National Charity Sweepstakes Office
in favor of JoseGatchalian & Company against the Philippine
National Bank, which check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company;
"5 That on December 29, 1934, Jose Gatchalian was required
by income tax examiner Alfredo David to file the corresponding
income tax return covering the prize won by Jose Gatchalian &
Company and that on December 29, 1934, the said return was
signed by Jose Gatchalian, a copy of which return is enclosed as
Exhibit A and made a part hereof;
 "6. That on January 8, 1935, the defendant made an
assessment against Jose Gatchalian & Company requesting the
payment of the sum of P1,499.94 to the deputy provincial treasurer
of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until
January 20, 1935 within which to pay the said amount of P1,499.94,
a copy of which letter marked Exhibit B is inclosed and made a part
hereof;
"7. That on January 20, 1935, the plaintiffs, through their
attorney, sent to defendant a reply, a copy of which marked Exhibit
C is attached and made a part hereof, requesting exemption from
the payment of the income tax to which reply there were enclosed
fifteen (15) separate individual income tax returns filed separately
by each one of the plaintiffs, copies of which returns are attached
and marked Exhibits D-1 to D-15, respectively, in order of their
names listed in the caption of this case and made parts hereof; a
statement of sale signed by Jose Gatchalian showing the amounts
put up by each of the plaintiffs to cover up the cost price of P2 of
said ticket, copy of which statement is attached and marked as
Exhibit E and made a part hereof; and a copy of the affidavit signed
by Jose Gatchalian dated December 29, 1934 is attached and
marked Exhibit F and made part hereof;
"8. That the defendant in his letter dated January 28, 1935, a
copy of which marked Exhibit G is enclosed, denied plaintiffs'
request of January 20, 1935, for exemption from the payment of
tax and reiterated his demand for the payment of the sum of
P1,499.94 as income tax and gave plaintiffs until February 10, 1935
within which to pay the said tax;
"9. That in view of the failure of the plaintiffs to pay the
amount of tax demanded by the defendant, notwithstanding
subsequent demand made by defendant upon the plaintiffs
through their attorney on March 23, 1935, a copy of which marked
Exhibit H is enclosed, defendant on May 13, 1935 issued a warrant
of distraint and levy against the property of the plaintiffs, a copy of
which warrant marked Exhibit I is enclosed and made a part hereof;
"10. That to avoid embarrassment arising from the embargo
of the property of the plaintiffs, the said plaintiffs on June 15, 1935,
through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi,
paid under protest the sum of P601.51 as part of the tax and
penalties to the municipal treasurer of Pulilan, Bulacan, as
evidenced by official receipt No. 7454879 which is attached and
marked Exhibit J and made a part hereof, and requested defendant
that plaintiffs be allowed to pay under protest the balance of the
tax and penalties by monthly installments;
"11. That plaintiffs' request to pay the balance of the tax and
penalties was granted by defendant subject to the condition that
plaintiffs file the usual bond secured by two solvent persons to
guarantee prompt payment of each installments as it becomes due;
"12. That on July 16, 1935, plaintiff filed a bond, a copy of
which marked Exhibit K is inclosed and made a part hereof, to
guarantee the payment of the balance of the alleged tax liability by
monthly installments at the rate of P118.70 a month, the first
payment under protest to be effected on or before July 31, 1935;
"13. That on July 16, 1935 the said plaintiffs formally
protested against the payment of the sum of P602.51, a copy of
which protest is attached and marked Exhibit L but that defendant
in his letter dated August 1, 1936 overruled the protest and denied
the request for refund of the plaintiffs;
"14. That, in view of the failure of the plaintiffs to pay the
monthly installments in accordance with the terms and conditions
of the bond filed by them, the defendant in his letter dated July 23,
1935, copy of which is attached and marked Exhibit M, ordered the
municipal treasurer of Pulilan, Bulacan to execute within five days
the warrant of distraint and levy issued against the plaintiffs on
March 13, 1935;
 "15. That in order to avoid annoyance and embarrassment
arising from the levy of their property, the plaintiffs on August 28,
1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago
and Emiliano Santiago, paid under protest to the municipal
treasurer of Pulilan, Bulacan. the sum of P1,260.93 representing
the unpaid balance of the income tax and penalties demanded by
defendant as evidenced by income tax receipt No. 35811 which is
attached and marked Exhibit N and made a part hereof; and that
on September 3, 1936, the plaintiffs formally protested to the
defendant against the payment of said amount and requested the
refund thereof, copy of which is attached and marked Exhibit O and
made part hereof; but that on September 4, 1936, the defendant
overruled the protest and denied the refund thereof; copy of which
is attached and marked Exhibit P and made a part hereof; and
"16. That plaintiffs demanded upon defendant the refund of
the total sum of one thousand eight hundred and sixty-three pesos
and forty-four centavos (P1,863.44) paid under protest by them but
that defendant refused and still refuses to refund ,the said amount
notwithstanding the plaintiffs' demands.
"17. The parties hereto reserve the right to present other and
additional evidence if necessary."
Exhibit E referred to in the stipulation is of the following tenor:
"To whom it my concern:
"I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of
age, hereby certify, that on the 11th day of August, 1934, I sold
parts of my share on ticket No. 178637 to the persons and for the
amount indicated below and the part of my share remaining is also
shown to wit:

Purchaser Amount Address

1. Mariano Santos P0.14 Pulilan, Bulacan.

 2. Buenaventura Guzman .13 Do.
3. Maria Santiago .17 Do.
4. Gonzalo Javier .14 Do.
5. Francisco Cabral .13 Do.
6. Maria C. Legaspi .16 Do.
7. Emiliana Santiago .13 Do.
8. Julio Gatchalian .13 Do.
9. Jose Silva .07 Do.
10.Tomasa Mercado .08 Do.
11.Jesus Legaspi .16 Do.
12.Guillermo Tapia .18 Do.
13.Saturnina Silva .08 Do.
14.Gregoria Cristobal .18 Do.
15.Jose Gatchalian .18 Do.
——
2.00
Total cost of said ticket; and that, therefore, the persons named
above are entitled to the parts of whatever prize that might be won
by said ticket.
"Pulilan, Bulacan, P. I.
(Sgd.) "JOSE GATCHALIAN"
And a summary of Exhibits D-1 to D-15 inserted in the bill of
exceptions as follows:
"RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR
1934 ALL DATED JANUARY 19, 1935 SUBMITTED TO
THE COLLECTOR OF INTERNAL REVENUE.

ExhibitPurchase Price Net

Name No. Price won Expenses prize

1. Jose Gatchalian D-1 P0.18 P4,425 P480 3,945

2. Gregoria Cristobal D-2 .18 4,575 2,000 2,575
3. Saturnina Silva D-3 .08 1,875 360 1,515
 4. Guillermo Tapia D-4 .13 3,325 360 2,965
5. Jesus Legaspi by Maria
Cristobal D-5 .15 3,825 720 3,105
6. Jose Silva D-6 .08 1,875 360 1,615
7. Tomasa Mercado D-7 .07 1,875 360 1,515
8. Julio Gatchalian by Bea
triz Guzman D-8 .13 3,150 240 2,910
9. Emiliana Santiago D-9 .13 3,325 360 2,966
10.Maria C. Legaspi D-10 .16 4,100 960 3,140
11.Francisco Cabral D-11 .13 3,325 360 2965
12.Gonzalo Javier D-12 .14 3,325 360 2,965
13.Maria Santiago D-13 .17 4,350 360 3,990
14.Buenaventura Guzman D-14 .13 3,325 360 2,965
15.Mariano Santos D-15 .14 3,325 360 2,965
—— ——— —— ——
2.0050,000"

The legal questions raised in plaintiffs-appellants' five assigned errors

may properly be reduced to the two following: (1) Whether the plaintiffs
formed a partnership, or merely a community of property without a
personality of its own; in the first case it is admitted that the partnership
thus formed is liable for the payment of income tax, whereas if there was
merely a community of property, they are exempt from such payment; and
(2) whether they should pay the tax collectively or whether the latter
should be prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10
of Act No. 2833, as last amended by section 2 of Act No. 3761, reading as
follows:
"SEC. 10. (a) There shall be levied, assessed, collected, and
paid annually upon the total net income received in the preceding
calendar year from all sources by every corporation, joint-stock
company, partnership, joint account (cuenta en participacion),
 association or insurance company, organized in the Philippine
Islands, no matter how created or organized, but not including duly
registered general co-partnerships (compañias colectivas), a tax of
three per centum upon such income; and a like tax shall be levied,
assessed, collected, and paid annually upon the total net income
received in the preceding calendar year from all sources within the
Philippine Islands by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association, or
insurance company organized, authorized, or existing under the
laws of any foreign country, including interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or
otherwise: Provided, however, That nothing in this section shall be
construed as permitting the taxation of the income derived from
dividends or net profits on which the normal tax has been paid.
"The gain derived or loss sustained from the sale or other
disposition by a corporation, joint-stock company, partnership,
joint account (cuenta en participacion), association, or insurance
company, or property, real, personal, or mixed, shall be ascertained
in accordance with subsections (c) and (d) of section two of Act
Numbered Two thousand eight hundred and thirty-three, as
amended by Act Numbered Twenty-nine hundred and twenty-six.
"The foregoing tax rate shall apply to the net income received
by every taxable corporation, joint-stock company, partnership,
joint account (cuenta en participacion), associations or insurance
company in the calendar year nineteen hundred and twenty and in
each year thereafter."
There is no doubt that if the plaintiffs merely formed a community of
property the latter is exempt from the payment of income tax under the
law. But according to the stipulated facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to buy a
sweepstakes ticket for the sole purpose of dividing equally the prize which
they may win, as they did in fact in the amount of P50,000 (article 1665,
Civil Code). The partnership was not only formed, but upon the
 organization thereof and the winning of the prize,
Jose Gatchalian personally appeared in the office of the Philippine Charity
Sweepstakes, in his capacity as co-partner, as such collected the prize, the
office issued the check for P50,000 in favor of Jose Gatchalian and
company, and the said partner. in the same capacity, collected the said
check. All these circumstances repel the idea that the plaintiffs organized
and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the
said entity is the one bound to pay the income tax which the defendant
collected under the aforesaid section 10 (a) of Act No. 2833, as amended
by section 2 of Act No. 3761. There is no merit in plaintiffs' contention that
the tax should be prorated among them and paid individually, resulting in
their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the
costs of this instance to the plaintiff. appellants. So ordered.
Avanceña, C.J., Villa-Real, Diaz, Laurel, Concepcionand Moran,
JJ., concur.
||| (Gatchalian v. Collector of Internal Revenue, G.R. No. 45425, [April 29,
1939], 67 PHIL 666-674)

reyes vs. commissioner 24 scra 198

xxxx

THIRD DIVISION

[G.R. No. 148187. April 16, 2008.]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER

OF INTERNAL REVENUE, respondent.
 DECISION

YNARES-SANTIAGO, J p:
This is a petition for review on certiorari of the June 30, 2000 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision 2 of the
Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3, 2001
Resolution 3 denying the motion for reconsideration. ECHSDc
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining),
entered into an agreement 4 with Baguio Gold Mining Company ("Baguio
Gold") for the former to manage and operate the latter's mining claim, known
as the Sto. Niño mine, located in Atok and Tublay, Benguet Province. The
parties' agreement was denominated as "Power of Attorney" and provided for
the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio
Gold) shall make available to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS within the said 3-
year period, for use in the MANAGEMENT of the STO. NINO MINE.
The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owner's account in the
Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from
the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall
be added to such owner's account. HCDAac
5. Whenever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the STO.
NINO MINE, they may transfer their own funds or property to the
Sto. Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash,
shall be carried by the Sto. Nino PROJECT as a special fund to be
known as the MANAGERS' account.
(b) The total of the MANAGERS' account shall not exceed
P11,000,000.00, except with prior approval of the PRINCIPAL;
provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT,
the amount not so paid in cash shall be added to the MANAGERS'
account. ECaTDc
(c) The cash and property shall not thereafter be withdrawn from
the Sto. Nino PROJECT until termination of this Agency.
(d) The MANAGERS' account shall not accrue interest. Since it is the
desire of the PRINCIPAL to extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a projected
termination of this Agency, the ratio which the MANAGERS'
account has to the owner's account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO
MINE, excluding the claims, shall be transferred to the MANAGERS,
except that such transferred assets shall not include mine
development, roads, buildings, and similar property which will be
valueless, or of slight value, to the MANAGERS. The MANAGERS
can, on the other hand, require at their option that property
originally transferred by them to the Sto. Nino PROJECT be re-
transferred to them. Until such assets are transferred to the
MANAGERS, this Agency shall remain subsisting. TAaEIc
xxx xxx xxx
12. The compensation of the MANAGER shall be fifty per cent (50%)
of the net profit of the Sto. Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS' compensation.
xxx xxx xxx
16. The PRINCIPAL has current pecuniary obligation in favor of the
MANAGERS and, in the future, may incur other obligations in favor
 of the MANAGERS. This Power of Attorney has been executed as
security for the payment and satisfaction of all such obligations of
the PRINCIPAL in favor of the MANAGERS and as a means to fulfill
the same. Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS' account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been
paid and satisfied in full, this Agency shall be revocable by the
PRINCIPAL upon 36-month notice to the MANAGERS. CHaDIT
17. Notwithstanding any agreement or understanding between the
PRINCIPAL and the MANAGERS to the contrary, the MANAGERS
may withdraw from this Agency by giving 6-month notice to the
PRINCIPAL. The MANAGERS shall not in any manner be held liable
to the PRINCIPAL by reason alone of such withdrawal. Paragraph
5(d) hereof shall be operative in case of the MANAGERS'
withdrawal.
xxx xxx xxx 5
In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the
agreement. However, the mine suffered continuing losses over the years which
resulted to petitioner's withdrawal as manager of the mine on January 28, 1982
and in the eventual cessation of mine operations on February 20, 1982. 6
Thereafter, on September 27, 1982, the parties executed a "Compromise with
Dation in Payment" 7 wherein Baguio Gold admitted an indebtedness to
petitioner in the amount of P179,394,000.00 and agreed to pay the same in
three segments by first assigning Baguio Gold's tangible assets to petitioner,
transferring to the latter Baguio Gold's equitable title in its Philodrill assets and
finally settling the remaining liability through properties that Baguio Gold may
acquire in the future.TDcAaH
On December 31, 1982, the parties executed an "Amendment to Compromise
with Dation in Payment" 8 where the parties determined that Baguio Gold's
indebtedness to petitioner actually amounted to P259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that petitioner had
assumed as guarantor. These liabilities pertained to long-term loans amounting
to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT
& SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in
two segments by first assigning its tangible assets for P127,838,051.00 and
then transferring its equitable title in its Philodrill assets for P16,302,426.00.
The parties then ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.DEScaT
In its 1982 annual income tax return, petitioner deducted from its gross income
the amount of P112,136,000.00 as "loss on settlement of receivables from
Baguio Gold against reserves and allowances." 9 However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and
assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed
since all requisites for a bad debt deduction were satisfied, to wit: (a) there was
a valid and existing debt; (b) the debt was ascertained to be worthless; and (c)
it was charged off within the taxable year when it was determined to be
worthless.
Petitioner emphasized that the debt arose out of a valid management contract
it entered into with Baguio Gold. The bad debt deduction represented
advances made by petitioner which, pursuant to the management contract,
formed part of Baguio Gold's "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Gold's long-term
loans which legally entitled petitioner to be subrogated to the rights of the
original creditor. IaHDcT
Petitioner also asserted that due to Baguio Gold's irreversible losses, it became
evident that it would not be able to recover the advances and payments it had
made in behalf of Baguio Gold. For a debt to be considered worthless,
petitioner claimed that it was neither required to institute a judicial action for
collection against the debtor nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to
enforce collection and exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioner's protest for lack of legal and
factual basis. It held that the alleged debt was not ascertained to be worthless
since Baguio Gold remained existing and had not filed a petition for bankruptcy;
and that the deduction did not consist of a valid and subsisting debt considering
that, under the management contract, petitioner was to be paid fifty percent
(50%) of the project's net profit. 10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for
Review is hereby DENIED for lack of merit. The assessment in
question, viz: FAS-1-82-88-003067 for deficiency income tax in the
amount of P62,811,161.39 is hereby AFFIRMED. SEcTHA
ACCORDINGLY, petitioner Philex Mining Corporation is hereby
ORDERED to PAY respondent Commissioner of Internal Revenue
the amount of P62,811,161.39, plus 20% delinquency interest due
computed from February 10, 1995, which is the date after the 20-
day grace period given by the respondent within which petitioner
has to pay the deficiency amount . . . up to actual date of payment.
SO ORDERED. 11
The CTA rejected petitioner's assertion that the advances it made for the Sto.
Nino mine were in the nature of a loan. It instead characterized the advances
as petitioner's investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the
"Power of Attorney" executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of
an investment, it could not be deducted as a bad debt from petitioner's gross
income. HcaDIA
The CTA likewise held that the amount paid by petitioner for the long-term loan
obligations of Baguio Gold could not be allowed as a bad debt deduction. At
the time the payments were made, Baguio Gold was not in default since its
loans were not yet due and demandable. What petitioner did was to pre-pay
the loans as evidenced by the notice sent by Bank of America showing that it
was merely demanding payment of the installment and interests due.
Moreover, Citibank imposed and collected a "pre-termination penalty" for the
pre-payment.
The Court of Appeals affirmed the decision of the CTA. 12 Hence, upon denial
of its motion for reconsideration, 13 petitioner took this recourse under Rule
45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made
by Philex in the management of the Sto. Nino Mine pursuant to the
Power of Attorney partook of the nature of an investment rather
than a loan. ICaDHT
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in
the net profits of the Sto. Nino Mine indicates that Philex is a
partner of Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of
Philex and Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney
and in completely disregarding the Compromise Agreement and
the Amended Compromise Agreement when it construed the
nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of
the propriety of the bad debts write-off. 14
Petitioner insists that in determining the nature of its business relationship
with Baguio Gold, we should not only rely on the "Power of Attorney", but also
on the subsequent "Compromise with Dation in Payment" and "Amended
Compromise with Dation in Payment" that the parties executed in 1982. These
documents, allegedly evinced the parties' intent to treat the advances and
payments as a loan and establish a creditor-debtor relationship between
them. AcHCED
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument
that is material in determining the true nature of the business relationship
between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties' contractual intent must first be
discovered from the expressed language of the primary contract under which
the parties' business relations were founded. It should be noted that the
compromise agreements were mere collateral documents executed by the
parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which
established the juridical relation of the parties and defined the parameters of
their dealings with one another.
The execution of the two compromise agreements can hardly be considered as
a subsequent or contemporaneous act that is reflective of the parties' true
intent. The compromise agreements were executed eleven years after the
"Power of Attorney" and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made under the "Power
of Attorney". The parties entered into the compromise agreements as a
consequence of the dissolution of their business relationship. It did not define
that relationship or indicate its real character. AIHECa
An examination of the "Power of Attorney" reveals that a partnership or joint
venture was indeed intended by the parties. Under a 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. 15 While a corporation, like petitioner, cannot generally enter into
a contract of partnership unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin to a particular
partnership:
The legal concept of a joint venture is of common law origin. It has
no precise legal definition, but it has been generally understood to
mean an organization formed for some temporary purpose. . . . It
is in fact hardly distinguishable from the partnership, since their
elements are similar — community of interest in the business,
sharing of profits and losses, and a mutual right of control. . . . The
main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and is thus of a
temporary nature. . . . This observation is not entirely accurate in
this jurisdiction, since under the Civil Code,a partnership may be
particular or universal, and a particular partnership may have for
its object a specific undertaking. . . . It would seem therefore that
under Philippine law, a joint venture is a form of partnership and
should be governed by the law of partnerships. The Supreme Court
has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into
a partnership contract, it may however engage in a joint venture
with others. . . . (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates
that the parties had intended to create a partnership and establish a common
fund for the purpose. They also had a joint interest in the profits of the business
as shown by a 50-50 sharing in the income of the mine. CaESTA
Under the "Power of Attorney", petitioner and Baguio Gold undertook to
contribute money, property and industry to the common fund known as the
Sto. Niño mine. 17 In this regard, we note that there is a substantive
equivalence in the respective contributions of the parties to the development
and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the joint venture
assets under their respective accounts. Baguio Gold would
contribute P11M under its owner's account plus any of its income that is left in
the project, in addition to its actual mining claim. Meanwhile, petitioner's
contribution would consist of its expertise in the management and operation
of mines, as well as the manager's account which is comprised of P11M in
funds and property and petitioner's "compensation" as manager that cannot
be paid in cash.
However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not "bind" itself to contribute
money or property to the project; that under paragraph 5 of the agreement, it
was only optional for petitioner to transfer funds or property to the Sto. Niño
project "(w)henever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NIÑO MINE." 18
The wording of the parties' agreement as to petitioner's contribution to the
common fund does not detract from the fact that petitioner transferred its
funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5 (c)
which prohibits petitioner from withdrawing the advances until termination of
the parties' business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an
obligatory nature as soon as petitioner had chosen to exercise its option under
paragraph 5. cEAaIS
There is no merit to petitioner's claim that the prohibition in paragraph 5 (c)
against withdrawal of advances should not be taken as an indication that it had
entered into a partnership with Baguio Gold; that the stipulation only showed
that what the parties entered into was actually a contract of agency coupled
with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends
upon it, or the mutual interest of both principal and agent. 19 In this case, the
non-revocation or non-withdrawal under paragraph 5 (c) applies to
the advances made by petitioner who is supposedly theagent and not the
principal under the contract. Thus, it cannot be inferred from the stipulation
that the parties' relation under the agreement is one of agency coupled with
an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the
relationship of the parties was one of agency and not a partnership. Although
the said provision states that "this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive
of the MANAGERS' account", it does not necessarily follow that the parties
entered into an agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold. SaCIDT
It should be stressed that the main object of the "Power of Attorney" was not
to confer a power in favor of petitioner to contract with third persons on behalf
of Baguio Gold but to create a business relationship between petitioner and
Baguio Gold, in which the former was to manage and operate the latter's mine
through the parties' mutual contribution of material resources and industry.
The essence of an agency, even one that is coupled with interest, is the agent's
ability to represent his principal and bring about business relations between
the latter and third persons. 20 Where representation for and in behalf of the
principal is merely incidental or necessary for the proper discharge of one's
paramount undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the ultimate
undertaking of the parties. 21
In this case, the totality of the circumstances and the stipulations in the parties'
agreement indubitably lead to the conclusion that a partnership was formed
between petitioner and Baguio Gold. SAcCIH

First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by petitioner under the agreement. Paragraph 5 (d)
thereof provides that upon termination of the parties' business relations, "the
ratio which the MANAGER'S account has to the owner's account will be
determined, and the corresponding proportion of the entire assets of the STO.
NINO MINE, excluding the claims" shall be transferred to petitioner. 22 As
pointed out by the Court of Tax Appeals, petitioner was merely entitled to a
proportionate return of the mine's assets upon dissolution of the parties'
business relations. There was nothing in the agreement that would require
Baguio Gold to make payments of the advances to petitioner as would be
recognized as an item of obligation or "accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Niño mine upon termination, a provision that
is more consistent with a partnership than a creditor-debtor relationship. It
should be pointed out that in a contract of loan, a person who receives a loan
or money or any fungible thing acquires ownership thereof and is bound to pay
the creditor an equal amount of the same kind and quality. 23 In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner
the cash and property that it had advanced, but only the return of an amount
pegged at a ratio which the manager's account had to the owner's
account. EScIAa
In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business
relations over the Sto. Niño mine. The "Power of Attorney" clearly provides
that petitioner would only be entitled to the return of a proportionate share of
the mine assets to be computed at a ratio that the manager's account had to
the owner's account. Except to provide a basis for claiming the advances as a
bad debt deduction, there is no reason for Baguio Gold to hold itself liable to
petitioner under the compromise agreements, for any amount over and above
the proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation with
neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity
date for the advances to become due and demandable, and the manner of
payment was unclear. All these point to the inevitable conclusion that the
advances were not loans but capital contributions to a partnership. EHACcT
The strongest indication that petitioner was a partner in the Sto Niño mine is
the fact that it would receive 50% of the net profits as "compensation" under
paragraph 12 of the agreement. The entirety of the parties' contractual
stipulations simply leads to no other conclusion than that petitioner's
"compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a
person of a share in the profits of a business isprima facie evidence that he is a
partner in the business." Petitioner asserts, however, that no such inference
can be drawn against it since its share in the profits of the Sto Niño project was
in the nature of compensation or "wages of an employee", under the exception
provided in Article 1769 (4) (b). 24
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid "wages" pursuant to an employer-
employee relationship. To begin with, petitioner was the manager of the
project and had put substantial sums into the venture in order to ensure its
viability and profitability. By pegging its compensation to profits, petitioner
also stood not to be remunerated in case the mine had no income. It is hard to
believe that petitioner would take the risk of not being paid at all for its
services, if it were truly just an ordinary employee. ITADaE
Consequently, we find that petitioner's "compensation" under paragraph 12 of
the agreement actually constitutes its share in the net profits of the
partnership. Indeed, petitioner would not be entitled to an equal share in the
income of the mine if it were just an employee of Baguio Gold. 25 It is not
surprising that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an almost equal
contribution of the parties to the St. Niño mine. The "compensation" agreed
upon only serves to reinforce the notion that the parties' relations were indeed
of partners and not employer-employee.
All told, the lower courts did not err in treating petitioner's advances as
investments in a partnership known as the Sto. Niño mine. The advances were
not "debts" of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the "Power of
Attorney". As for the amounts that petitioner paid as guarantor to Baguio
Gold's creditors, we find no reason to depart from the tax court's factual finding
that Baguio Gold's debts were not yet due and demandable at the time that
petitioner paid the same. Verily, petitioner pre-paid Baguio Gold's outstanding
loans to its bank creditors and this conclusion is supported by the evidence on
record. 26
In sum, petitioner cannot claim the advances as a bad debt deduction from its
gross income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed. 27 In this
case, petitioner failed to substantiate its assertion that the advances were
subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt
deduction. IDTSEH
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in
CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of the
Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex
Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income
in the amount of P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the payment of the
deficiency income tax, up to the actual date of payment.
SO ORDERED.
||| (Philex Mining Corp. v. Commissioner of Internal Revenue, G.R. No.
148187, [April 16, 2008], 574 PHIL 571-586)

SECOND DIVISION

[G.R. No. 169507. January 11, 2016.]

AIR CANADA, petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.

DECISION
LEONEN, J p:
An offline international air carrier selling passage tickets in the
Philippines, through a general sales agent, is a resident foreign corporation
doing business in the Philippines. As such, it is taxable under Section 28 (A)
(1), and not Section 28 (A) (3) of the 1997 National Internal Revenue Code,
subject to any applicable tax treaty to which the Philippines is a signatory.
Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty,
Air Canada may only be imposed a maximum tax of 1 1/2 % of its gross
revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review 1 appealing the August 26, 2005
Decision 2 of the Court of Tax Appeals En Banc, which in turn affirmed the
December 22, 2004 Decision 3 and April 8, 2005 Resolution 4 of the Court of
Tax Appeals First Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and existing under the
laws of Canada[.]" 5 On April 24, 2000, it was granted an authority to
operate as an offline carrier by the Civil Aeronautics Board, subject to certain
conditions, which authority would expire on April 24, 2005. 6 "As an off-line
carrier, [Air Canada] does not have flights originating from or coming to the
Philippines [and does not] operate any airplane [in] the Philippines[.]" 7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp.
(Aerotel) as its general sales agent in the Philippines. 8 Aerotel "sells [Air
Canada's] passage documents in the Philippines." 9
For the period ranging from the third quarter of 2000 to the second
quarter of 2002, Air Canada, through Aerotel, filed quarterly and annual
income tax returns and paid the income tax on Gross Philippine Billings in
the total amount of P5,185,676.77, 10 detailed as follows:
Applicable
Date Filed/Paid Amount of Tax
Quarter[/]Year

November 29,
3rd Qtr 2000 P395,165.00
2000
Annual ITR 2000 April 16, 2001 381,893.59
 1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
November 29,
3rd Qtr 2001 765,021.28
2001
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
––––––––––––––
–
TOTAL P5,185,676.77 11
=============

On November 28, 2002, Air Canada filed a written claim for refund of
alleged erroneously paid income taxes amounting to P5,185,676.77 before
the Bureau of Internal Revenue, 12 Revenue District Office No. 47-East
Makati. 13 It found basis from the revised definition 14 of Gross Philippine
Billings under Section 28 (A) (3) (a) of the 1997 National Internal Revenue
Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. —
(A) Tax on Resident Foreign Corporations. —
xxx xxx xxx
(3) International Carrier. — An international carrier
doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its 'Gross Philippine
Billings' as defined hereunder:
(a) International Air Carrier. — 'Gross Philippine
Billings' refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated,
 exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of
passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion
of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis
supplied) TIADCc
To prevent the running of the prescriptive period, Air Canada filed a
Petition for Review before the Court of Tax Appeals on November 29,
2002. 15 The case was docketed as C.T.A. Case No. 6572. 16
On December 22, 2004, the Court of Tax Appeals First Division
rendered its Decision denying the Petition for Review and, hence, the claim
for refund. 17 It found that Air Canada was engaged in business in the
Philippines through a local agent that sells airline tickets on its behalf. As
such, it should be taxed as a resident foreign corporation at the regular rate
of 32%. 18 Further, according to the Court of Tax Appeals First Division, Air
Canada was deemed to have established a "permanent establishment" 19 in
the Philippines under Article V (2) (i) of the Republic of the Philippines-
Canada Tax Treaty 20 by the appointment of the local sales agent, "in which
[the] petitioner uses its premises as an outlet where sales of [airline] tickets
are made[.]" 21
Air Canada seasonably filed a Motion for Reconsideration, but the
Motion was denied in the Court of Tax Appeals First Division's Resolution
dated April 8, 2005 for lack of merit. 22 The First Division held that while Air
Canada was not liable for tax on its Gross Philippine Billings under Section
28 (A) (3), it was nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the Philippines
pursuant to Section 28 (A) (1). 23
 On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En
Banc. 24 The appeal was docketed as CTA EB No. 86. 25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc
affirmed the findings of the First Division.26 The En Banc ruled that Air
Canada is subject to tax as a resident foreign corporation doing business in
the Philippines since it sold airline tickets in the Philippines. 27 The Court of
Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is
hereby DENIED DUE COURSE, and accordingly,DISMISSED for lack
of merit. 28
Hence, this Petition for Review 29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier
selling passage documents through a general sales agent in the Philippines,
is a resident foreign corporation within the meaning of Section 28 (A) (1) of
the1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 2 1/2% tax on
Gross Philippine Billings pursuant to Section 28 (A) (3). If not, whether an
offline international carrier selling passage documents through a general
sales agent can be subject to the regular corporate income tax of 32% 30 on
taxable income pursuant to Section 28 (A) (1);
Third, whether the Republic of the Philippines-Canada Tax
Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is
enforceable;
b. Whether the appointment of a local general sales agent in the
Philippines falls under the definition of "permanent
establishment" under Article V (2) (i) of the Republic of the
Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of
P5,185,676.77 pertaining allegedly to erroneously paid tax on Gross
Philippine Billings from the third quarter of 2000 to the second quarter of
2002.
Petitioner claims that the general provision imposing the regular
corporate income tax on resident foreign corporations provided under
Section 28 (A) (1) of the 1997 National Internal Revenue Code does not apply
to "international carriers," 31 which are especially classified and taxed under
Section 28 (A) (3). 32 It adds that the fact that it is no longer subject to Gross
Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision
"does not render it ipso facto subject to 32% income tax on taxable income
as a resident foreign corporation." 33 Petitioner argues that to impose the
32% regular corporate income tax on its income would violate the Philippine
government's covenant under Article VIII of the Republic of the Philippines-
Canada Tax Treaty not to impose a tax higher than 1 1/2% of the carrier's
gross revenue derived from sources within the Philippines. 34 It would also
allegedly result in "inequitable tax treatment of on-line and off-line
international air carriers[.]" 35
Also, petitioner states that the income it derived from the sale of airline
tickets in the Philippines was income from services and not income from
sales of personal property. 36 Petitioner cites the deliberations of the
Bicameral Conference Committee on House Bill No. 9077 (which eventually
became the 1997 National Internal Revenue Code), particularly Senator Juan
Ponce Enrile's statement, 37 to reveal the "legislative intent to treat the
revenue derived from air carriage as income from services, and that the
carriage of passenger or cargo as the activity that generates the
income." 38 Accordingly, applying the principle on the situs of taxation in
taxation of services, petitioner claims that its income derived "from services
rendered outside the Philippines [was] not subject to Philippine income
taxation." 39 AIDSTE
Petitioner further contends that by the appointment of Aerotel as its
general sales agent, petitioner cannot be considered to have a "permanent
establishment" 40 in the Philippines pursuant to Article V (6) of the Republic
of the Philippines-Canada Tax Treaty. 41 It points out that Aerotel is an
"independent general sales agent that acts as such for. . . other international
airline companies in the ordinary course of its business." 42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission for its
services. 43 Petitioner states that even the Bureau of Internal Revenue —
through VAT Ruling No. 003-04 dated February 14, 2004 — has conceded
that an offline international air carrier, having no flight operations to and
from the Philippines, is not deemed engaged in business in the Philippines
by merely appointing a general sales agent. 44 Finally, petitioner maintains
that its "claim for refund of erroneously paid Gross Philippine Billings cannot
be denied on the ground that [it] is subject to income tax under Section 28
(A) (1)" 45 since it has not been assessed at all by the Bureau of Internal
Revenue for any income tax liability. 46
On the other hand, respondent maintains that petitioner is subject to
the 32% corporate income tax as a resident foreign corporation doing
business in the Philippines. Petitioner's total payment of P5,185,676.77
allegedly shows that petitioner was earning a sizable income from the sale
of its plane tickets within the Philippines during the relevant
period. 47 Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc., 48which in turn cited the cases
involving the British Overseas Airways Corporation and Air India, had already
settled that "foreign airline companies which sold tickets in the Philippines
through their local agents. . . [are] considered resident foreign corporations
engaged in trade or business in the country." 49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing
business in the Philippines" as including "regular sale of tickets in the
Philippines by off-line international airlines either by themselves or through
their agents." 50
Respondent further contends that petitioner is not entitled to its claim
for refund because the amount of P5,185,676.77 it paid as tax from the third
quarter of 2000 to the second quarter of 2001 was still short of the 32%
income tax due for the period. 51 Petitioner cannot allegedly claim good
faith in its failure to pay the right amount of tax since the National Internal
Revenue Code became operative on January 1, 1998 and by 2000, petitioner
should have already been aware of the implications of Section 28 (A) (3) and
the decided cases of this court's ruling on the taxability of offline
international carriers selling passage tickets in the Philippines. 52
I
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner,
as an offline international carrier with no landing rights in the Philippines, is
not liable to tax on Gross Philippine Billings under Section 28 (A) (3) of
the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. —
(A) Tax on Resident Foreign Corporations. —
xxx xxx xxx
(3) International Carrier. — An international carrier
doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its 'Gross Philippine
Billings' as defined hereunder:
(a) International Air Carrier. — 'Gross Philippine
Billings' refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of
passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion
of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis
supplied)
 Under the foregoing provision, the tax attaches only when the carriage
of persons, excess baggage, cargo, and mail originated from the Philippines
in a continuous and uninterrupted flight, regardless of where the passage
documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not
liable for the Gross Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for
income tax purposes. Petitioner falls within the definition of resident foreign
corporation under Section 28 (A) (1) of the 1997 National Internal Revenue
Code, thus, it may be subject to 32% 53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. —
(A) Tax on Resident Foreign Corporations. —
(1) In General. — Except as otherwise provided in this
Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be
subject to an income tax equivalent to thirty-five
percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the
Philippines: Provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two
percent (32%). 54 (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially
changed throughout the amendments of theNational Internal Revenue
Code. All versions refer to "a foreign corporation engaged in trade or
business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue
Code and approved on June 15, 1939, defined "resident foreign corporation"
as applying to "a foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein." 55
Section 24 (b) (2) of the National Internal Revenue Code, as amended
by Republic Act No. 6110, approved on August 4, 1969, reads:
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 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. 56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending
certain sections of the 1939 National Internal Revenue Code. Section 24 (b)
(2) on foreign resident corporations was amended, but it still provides that
"[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 preceding taxable year from all sources within the
Philippines[.]" 57
As early as 1987, this court in Commissioner of Internal Revenue v.
British Overseas Airways Corporation 58declared British Overseas Airways
Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the
airline company. 59 This court discussed that: acEHCD
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. "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.["]
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.
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. 60 (Emphasis supplied,
citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also
provides guidance with its definition of "doing business" with regard to
foreign corporations. Section 3 (d) of the law enumerates the activities that
constitute doing business:
 d. the phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison"
offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay
in the country for a period or periods totalling one hundred
eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or
arrangements, and contemplate 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 of the purpose and object
of the business organization: Provided, however, That the
phrase "doing business" shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such
corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its
own name and for its own account[.] 61 (Emphasis supplied)
While Section 3 (d) above states that "appointing a representative or
distributor domiciled in the Philippines which transacts business in its own
name and for its own account" is not considered as "doing business," the
Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or
distributors, operating under full control of the foreign corporation,
domiciled in the Philippines or who in any calendar year stay in the country
for a period or periods totaling one hundred eighty (180) days or more[.]" 62
An offline carrier is "any foreign air carrier not certificated by the [Civil
Aeronautics] Board, but who maintains office or who has designated or
appointed agents or employees in the Philippines, who sells or offers for sale
any air transportation in behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such transportation." 63
"Anyone desiring to engage in the activities of an off-line carrier [must]
apply to the [Civil Aeronautics] Board for such authority." 64 Each offline
carrier must file with the Civil Aeronautics Board a monthly report containing
information on the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received. 65
Petitioner is undoubtedly "doing business" or "engaged in trade or
business" in the Philippines.
Aerotel performs acts or works or exercises functions that are
incidental and beneficial to the purpose of petitioner's business. The
activities of Aerotel bring direct receipts or profits to petitioner. 66 There is
nothing on record to show that Aerotel solicited orders alone and for its own
account and without interference from, let alone direction of, petitioner. On
the contrary, Aerotel cannot "enter into any contract on behalf of [petitioner
Air Canada] without the express written consent of [the latter,]" 67 and it
must perform its functions according to the standards required by
petitioner. 68 Through Aerotel, petitioner is able to engage in an economic
activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an
authority to operate as an offline carrier in the Philippines for a period of
five years, or from April 24, 2000 until April 24, 2005. 69
Petitioner is, therefore, a resident foreign corporation that is taxable
on its income derived from sources within the Philippines. Petitioner's
income from sale of airline tickets, through Aerotel, is income realized from
the pursuit of its business activities in the Philippines. SDHTEC
III
However, the application of the regular 32% tax rate under Section 28
(A) (1) of the 1997 National Internal Revenue Code must consider the
existence of an effective tax treaty between the Philippines and the home
country of the foreign air carrier.
 In the earlier case of South African Airways v. Commissioner of Internal
Revenue, 70 this court held that Section 28 (A) (3) (a) does not categorically
exempt all international air carriers from the coverage of Section 28 (A) (1).
Thus, if Section 28 (A) (3) (a) is applicable to a taxpayer, then the general rule
under Section 28 (A) (1) does not apply. If, however, Section 28 (A) (3) (a)
does not apply, an international air carrier would be liable for the tax under
Section 28 (A) (1). 71
This court in South African Airways declared that the correct
interpretation of these provisions is that: "international air carrier[s]
maintain[ing] flights to and from the Philippines. . . shall be taxed at the rate
of 2 1/2% of its Gross Philippine Billings[;] while international air carriers that
do not have flights to and from the Philippines but nonetheless earn income
from other activities in the country [like sale of airline tickets] will be taxed
at the rate of 32% of such [taxable] income." 72
In this case, there is a tax treaty that must be taken into consideration
to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states
"for purposes of eliminating double taxation on income and capital,
preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or
nationals." 73 Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc. 74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the
national fiscal legislation of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with
a view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions
 deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against
double taxation is crucial in creating such a climate. 75 (Emphasis
in the original, citations omitted)
Observance of any treaty obligation binding upon the government of
the Philippines is anchored on the constitutional provision that the
Philippines "adopts the generally accepted principles of international law as
part of the law of the land[.]" 76 Pacta sunt servanda is a fundamental
international law principle that requires agreeing parties to comply with
their treaty obligations in good faith. 77
Hence, the application of the provisions of the National Internal
Revenue Code must be subject to the provisions of tax treaties entered into
by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal
Revenue, 78 this court stressed the binding effects of tax treaties. It dealt
with the issue of "whether the failure to strictly comply with [Revenue
Memorandum Order] RMO No. 1-2000 79 will deprive persons or
corporations of the benefit of a tax treaty." 80 Upholding the tax treaty over
the administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general
principles of international law as part of the law of the land. The
time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on
the part of the states that enter into the agreement. Every treaty
in force is binding upon the parties, and obligations under the
treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this
jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son, Inc.further clarifies that
"tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and
the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and
the protection against double taxation is crucial in creating such a
climate." Simply put, tax treaties are entered into to minimize, if
not eliminate the harshness of international juridical double
taxation, which is why they are also known as double tax treaty or
double tax agreements. AScHCD
"A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may be
necessary to ensure the fulfillment of the obligations undertaken."
Thus, laws and issuances must ensure that the reliefs granted
under tax treaties are accorded to the parties entitled thereto. The
BIR must not impose additional requirements that would negate
the availment of the reliefs provided for under international
agreements. More so, when the RP-Germany Tax Treaty does not
provide for any pre-requisite for the availment of the benefits
under said agreement.
xxx xxx xxx
Bearing in mind the rationale of tax treaties, the period of
application for the availment of tax treaty relief as required
by RMO No. 1-2000 should not operate to divest entitlement to
the relief as it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would
 impair the value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take
precedence over the objective of RMO No. 1-2000. Logically,
noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign investors.
While the consequences sought to be prevented by RMO No. 1-
2000 involve an administrative procedure, these may be
remedied through other system management processes, e.g., the
imposition of a fine or penalty. But we cannot totally deprive
those who are entitled to the benefit of a treaty for failure to
strictly comply with an administrative issuance requiring prior
application for tax treaty relief. 81 (Emphasis supplied, citations
omitted)
On March 11, 1976, the representatives 82 for the government of the
Republic of the Philippines and for the government of Canada signed the
Convention between the Philippines and Canada for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income (Republic of the Philippines-Canada Tax Treaty). This treaty
entered into force on December 21, 1977.
Article V 83 of the Republic of the Philippines-Canada Tax
Treaty defines "permanent establishment" as a "fixed place of business in
which the business of the enterprise is wholly or partly carried on." 84
Even though there is no fixed place of business, an enterprise of a
Contracting State is deemed to have a permanent establishment in the other
Contracting State if under certain conditions there is a person acting for it.
Specifically, Article V (4) of the Republic of the Philippines-Canada Tax
Treaty states that "[a] person acting in a Contracting State on behalf of an
enterprise of the other Contracting State (other than an agent of
independent status to whom paragraph 6 applies) shall be deemed to be a
permanent establishment in the first-mentioned State if . . . he has and
habitually exercises in that State an authority to conclude contracts on
behalf of the enterprise, unless his activities are limited to the purchase of
goods or merchandise for that enterprise[.]" The provision seems to refer to
one who would be considered an agent under Article 1868 85 of the Civil
Code of the Philippines.
On the other hand, Article V (6) provides that "[a]n enterprise of a
Contracting State shall not be deemed to have a permanent establishment
in the other Contracting State merely because it carries on business in that
other State through a broker, general commission agent or any other agent
of an independent status, where such persons are acting in the ordinary
course of their business."
Considering Article XV 86 of the same Treaty, which covers dependent
personal services, the term "dependent" would imply a relationship
between the principal and the agent that is akin to an employer-employee
relationship.
Thus, an agent may be considered to be dependent on the principal
where the latter exercises comprehensive control and detailed instructions
over the means and results of the activities of the agent. 87 AcICHD
Section 3 of Republic Act No. 776, as amended, also known as The Civil
Aeronautics Act of the Philippines, defines a general sales agent as "a
person, not a bonafide employee of an air carrier, who pursuant to an
authority from an airline, by itself or through an agent, sells or offers for sale
any air transportation, or negotiates for, or holds himself out by solicitation,
advertisement or otherwise as one who sells, provides, furnishes, contracts
or arranges for, such air transportation." 88 General sales agents and their
property, property rights, equipment, facilities, and franchise are subject to
the regulation and control of the Civil Aeronautics Board. 89 A permit or
authorization issued by the Civil Aeronautics Board is required before a
general sales agent may engage in such an activity. 90
Through the appointment of Aerotel as its local sales agent, petitioner
is deemed to have created a "permanent establishment" in the Philippines
as defined under the Republic of the Philippines-Canada Tax Treaty.
 Petitioner appointed Aerotel as its passenger general sales agent to
perform the sale of transportation on petitioner and handle reservations,
appointment, and supervision of International Air Transport Association-
approved and petitioner-approved sales agents, including the following
services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air
Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and
entirely for the benefit of AC in every matter relating to this
Agreement;
xxx xxx xxx
c) Promotion of passenger transportation on AC;
xxx xxx xxx
e) Without the need for endorsement by AC, arrange for the
reissuance, in the Territory of the GSA [Philippines], of traffic
documents issued by AC outside the said territory of the GSA
[Philippines], as required by the passenger(s);
xxx xxx xxx
h) Distribution among passenger sales agents and display of
timetables, fare sheets, tariffs and publicity material provided by
AC in accordance with the reasonable requirements of AC;
xxx xxx xxx
j) Distribution of official press releases provided by AC to media
and reference of any press or public relations inquiries to AC;
xxx xxx xxx
o) Submission for AC's approval, of an annual written sales plan
on or before a date to be determined by AC and in a form
acceptable to AC;
 xxx xxx xxx
q) Submission of proposals for AC's approval of passenger sales
agent incentive plans at a reasonable time in advance of proposed
implementation.
r) Provision of assistance on request, in its relations with
Governmental and other authorities, offices and agencies in the
Territory [Philippines].
xxx xxx xxx
u) Follow AC guidelines for the handling of baggage claims and
customer complaints and, unless otherwise stated in the
guidelines, refer all such claims and complaints to AC. 91
Under the terms of the Passenger General Sales Agency Agreement,
Aerotel will "provide at its own expense and acceptable to [petitioner Air
Canada], adequate and suitable premises, qualified staff, equipment,
documentation, facilities and supervision and in consideration of the
remuneration and expenses payable[,] [will] defray all costs and expenses of
and incidental to the Agency." 92 "[I]t is the sole employer of its employees
and . . . is responsible for [their] actions . . . or those of any
subcontractor." 93 In remuneration for its services, Aerotel would be paid
by petitioner a commission on sales of transportation plus override
commission on flown revenues. 94 Aerotel would also be reimbursed "for all
authorized expenses supported by original supplier invoices." 95
Aerotel is required to keep "separate books and records of account,
including supporting documents, regarding all transactions at, through or in
any way connected with [petitioner Air Canada] business." 96
"If representing more than one carrier, [Aerotel must] represent all
carriers in an unbiased way." 97 Aerotel cannot "accept additional
appointments as General Sales Agent of any other carrier without the prior
written consent of [petitioner Air Canada]." 98
The Passenger General Sales Agency Agreement "may be terminated
by either party without cause upon [no] less than 60 days' prior notice in
writing[.]" 99 In case of breach of any provisions of the Agreement,
petitioner may require Aerotel "to cure the breach in 30 days failing which
[petitioner Air Canada] may terminate [the] Agreement[.]" 100 TAIaHE
The following terms are indicative of Aerotel's dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the
date [it] acquires or takes control of another entity or merges with or is
acquired or controlled by another person or entity[.]" 101 Except with the
written consent of petitioner, Aerotel must not acquire a substantial interest
in the ownership, management, or profits of a passenger sales agent
affiliated with the International Air Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated passenger sales agent acquire a
substantial interest in Aerotel as to influence its commercial policy and/or
management decisions. 102 Aerotel must also provide petitioner "with a
report on any interests held by [it], its owners, directors, officers, employees
and their immediate families in companies and other entities in the aviation
industry or . . . industries related to it[.]" 103 Petitioner may require that any
interest be divested within a set period of time. 104
Second, in carrying out the services, Aerotel cannot enter into any
contract on behalf of petitioner without the express written consent of the
latter; 105 it must act according to the standards required by
petitioner; 106 "follow the terms and provisions of the [petitioner Air
Canada] GSA Manual [and all] written instructions of [petitioner Air
Canada;]"107 and "[i]n the absence of an applicable provision in the Manual
or instructions, [Aerotel must] carry out its functions in accordance with [its
own] standard practices and procedures[.]" 108
Third, Aerotel must only "issue traffic documents approved by
[petitioner Air Canada] for all transportation over [its] services[.]" 109 All
use of petitioner's name, logo, and marks must be with the written consent
of petitioner and according to petitioner's corporate standards and
guidelines set out in the Manual. 110
Fourth, all claims, liabilities, fines, and expenses arising from or in
connection with the transportation sold by Aerotel are for the account of
petitioner, except in the case of negligence of Aerotel. 111
 Aerotel is a dependent agent of petitioner pursuant to the terms of the
Passenger General Sales Agency Agreement executed between the parties.
It has the authority or power to conclude contracts or bind petitioner to
contracts entered into in the Philippines. A third-party liability on contracts
of Aerotel is to petitioner as the principal, and not to Aerotel, and liability to
such third party is enforceable against petitioner. While Aerotel maintains a
certain independence and its activities may not be devoted wholly to
petitioner, nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the benefit of petitioner
and according to the latter's Manual and written instructions. Aerotel is
required to submit its annual sales plan for petitioner's approval. ICHDca
In essence, Aerotel extends to the Philippines the transportation
business of petitioner. It is a conduit or outlet through which petitioner's
airline tickets are sold. 112
Under Article VII (Business Profits) of the Republic of the Philippines-
Canada Tax Treaty, the "business profits" of an enterprise of a Contracting
State is "taxable only in that State[,] unless the enterprise carries on business
in the other Contracting State through a permanent
establishment[.]" 113 Thus, income attributable to Aerotel or from business
activities effected by petitioner through Aerotel may be taxed in the
Philippines. However, pursuant to the last paragraph 114 of Article VII in
relation to Article VIII 115 (Shipping and Air Transport) of the same Treaty,
the tax imposed on income derived from the operation of ships or aircraft in
international traffic should not exceed 1 1/2% of gross revenues derived
from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under
Section 28 (A) (1) of the 1997 National Internal Revenue Code on its taxable
income 116 from sale of airline tickets in the Philippines, it could only be
taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of
the Republic of the Philippines-Canada Tax Treaty that applies to petitioner
as a "foreign corporation organized and existing under the laws of
Canada[.]" 117
 Tax treaties form part of the law of the land, 118 and jurisprudence has
applied the statutory construction principle that specific laws prevail over
general ones. 119
The Republic of the Philippines-Canada Tax Treaty was ratified on
December 21, 1977 and became valid and effective on that date. On the
other hand, the applicable provisions 120 relating to the taxability of
resident foreign corporations and the rate of such tax found in the National
Internal Revenue Code became effective on January 1, 1998.121 Ordinarily,
the later provision governs over the earlier one. 122 In this case, however,
the provisions of the Republic of the Philippines-Canada Tax Treaty are more
specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a
treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid
and effective unless concurred in by at least two-thirds of all the
Members of the Senate.
This provision states the second of two ways through which
international obligations become binding. Article II, Section 2 of the
Constitution deals with international obligations that are incorporated,
while Article VII, Section 21 deals with international obligations that become
binding through ratification.
"Valid and effective" means that treaty provisions that define rights
and duties as well as definite prestations have effects equivalent to a statute.
Thus, these specific treaty provisions may amend statutory provisions.
Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not
international obligations erga omnes. We are also not required to rule in this
case on the effect of international customary norms especially those with jus
cogenscharacter.
The second paragraph of Article VIII states that "profits from sources
within a Contracting State derived by an enterprise of the other Contracting
State from the operation of ships or aircraft in international traffic may be
taxed in the first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the gross revenues
derived from sources in that State; and b) the lowest rate of Philippine tax
imposed on such profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the
Philippines and the government of Canada on Air Transport, entered into on
January 14, 1997, reiterates the effectivity of Article VIII of the Republic of
the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions
of Article VIII of the Convention between the Philippines and
Canada for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income, signed at
Manila on March 31, 1976 and entered into force on December
21, 1977, and any amendments thereto, in respect of the
operation of aircraft in international traffic. 123 TCAScE
Petitioner's income from sale of ticket for international carriage of
passenger is income derived from international operation of aircraft. The
sale of tickets is closely related to the international operation of aircraft that
it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have
agreed to have our right to tax limited to a certain extent[.]" 124 Thus, we
are bound to extend to a Canadian air carrier doing business in the
Philippines through a local sales agent the benefit of a lower tax equivalent
to 1 1/2% on business profits derived from sale of international air
transportation.
V
Finally, we reject petitioner's contention that the Court of Tax Appeals
erred in denying its claim for refund of erroneously paid Gross Philippine
Billings tax on the ground that it is subject to income tax under Section 28
(A) (1) of the National Internal Revenue Code because (a) it has not been
assessed at all by the Bureau of Internal Revenue for any income tax
liability; 125 and (b) internal revenue taxes cannot be the subject of set-off
or compensation, 126 citingRepublic v. Mambulao Lumber Co., et
al. 127 and Francia v. Intermediate Appellate Court. 128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal
Revenue, 129 we have ruled that "[i]n an action for the refund of taxes
allegedly erroneously paid, the Court of Tax Appeals may determine whether
there are taxes that should have been paid in lieu of the taxes paid." 130 The
determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be
granted. 131 Thus:
Petitioner argued that the Court of Tax Appeals had no
jurisdiction to subject it to 6% capital gains tax or other taxes at
the first instance. The Court of Tax Appeals has no power to make
an assessment.
As earlier established, the Court of Tax Appeals has no
assessment powers. In stating that petitioner's transactions are
subject to capital gains tax, however, the Court of Tax Appeals was
not making an assessment. It was merely determining the proper
category of tax that petitioner should have paid, in view of its
claim that it erroneously imposed upon itself and paid the 5% final
tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that
petitioner should have paid is an incidental matter necessary for
the resolution of the principal issue, which is whether petitioner
was entitled to a refund.
The issue of petitioner's claim for tax refund is intertwined
with the issue of the proper taxes that are due from petitioner. A
claim for tax refund carries the assumption that the tax returns
filed were correct. If the tax return filed was not proper, the
correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must
determine if a taxpayer claiming refund of erroneously paid taxes
is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal
Revenue, South African Airways claimed for refund of its
erroneously paid 2 1/2% taxes on its gross Philippine billings. This
court did not immediately grant South African's claim for refund.
This is because although this court found that South African
Airways was not subject to the 2 1/2% tax on its gross Philippine
billings, this court also found that it was subject to 32% tax on its
taxable income.
In this case, petitioner's claim that it erroneously paid the 5%
final tax is an admission that the quarterly tax return it filed in
2000 was improper. Hence, to determine if petitioner was
entitled to the refund being claimed, the Court of Tax Appeals has
the duty to determine if petitioner was indeed not liable for the
5% final tax and, instead, liable for taxes other than the 5% final
tax. As in South African Airways, petitioner's request for refund
can neither be granted nor denied outright without such
determination.
If the taxpayer is found liable for taxes other than the
erroneously paid 5% final tax, the amount of the taxpayer's
liability should be computed and deducted from the refundable
amount.
Any liability in excess of the refundable amount, however,
may not be collected in a case involving solely the issue of the
taxpayer's entitlement to refund. The question of tax deficiency is
distinct and unrelated to the question of petitioner's entitlement
to refund. Tax deficiencies should be subject to assessment
procedures and the rules of prescription. The court cannot be
expected to perform the BIR's duties whenever it fails to do so
either through neglect or oversight. Neither can court processes
be used as a tool to circumvent laws protecting the rights of
taxpayers. 132
 Hence, the Court of Tax Appeals properly denied petitioner's claim for
refund of allegedly erroneously paid tax on its Gross Philippine Billings, on
the ground that it was liable instead for the regular 32% tax on its taxable
income received from sources within the Philippines. Its determination of
petitioner's liability for the 32% regular income tax was made merely for the
purpose of ascertaining petitioner's entitlement to a tax refund and not for
imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue.
Besides, the cases cited are based on different circumstances. In both cited
cases, 133 the taxpayer claimed that his (its) tax liability was off-set by his
(its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao
Lumber contended that the amounts it paid to the government as
reforestation charges from 1947 to 1956, not having been used in the
reforestation of the area covered by its license, may be set off or applied to
the payment of forest charges still due and owing from it. 134Rejecting
Mambulao's claim of legal compensation, this court ruled: cTDaEH
[A]ppellant and appellee are not mutually creditors and debtors
of each other. Consequently, the law on compensation is
inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should
take place when two persons in their own right are
creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber
Company has paid to the government, they are in the
coffers of the government as taxes collected, and the
government does not owe anything to defendant
Mambulao Lumber Company. So, it is crystal clear that
the Republic of the Philippines and the Mambulao
Lumber Company are not creditors and debtors of each
other, because compensation refers to mutual debts. . .
..
 And the weight of authority is to the effect that internal revenue
taxes, such as the forest charges in question, can not be the
subject of set-off or compensation.
A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly,
in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality
to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or
transaction sued on. . . . . (80 C.J.S. 73-74.)
The general rule, based on grounds of public
policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local
governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature
of contracts between the party and party but grow out
of a duty to, and are the positive acts of the
government, to the making and enforcing of which, the
personal consent of individual taxpayers is not
required. . . . If the taxpayer can properly refuse to pay
his tax when called upon by the Collector, because he
has a claim against the governmental body which is not
included in the tax levy, it is plain that some legitimate
and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax
must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will
be thrown into great confusion. (47 Am. Jur. 766-
767.) 135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all
requisites of legal compensation provided under Article 1279 were
present. 136 In that case, a portion of Francia's property in Pasay was
expropriated by the national government, 137 which did not immediately
pay Francia. In the meantime, he failed to pay the real property tax due on
his remaining property to the local government of Pasay, which later on
would auction the property on account of such delinquency. 138 He then
moved to set aside the auction sale and argued, among others, that his real
property tax delinquency was extinguished by legal compensation on
account of his unpaid claim against the national government. 139 This court
ruled against Francia: ITAaHc
There is no legal basis for the contention. By legal
compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished
(Art. 1278, Civil Code). The circumstances of the case do not
satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound
principally and that he be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We
have consistently ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
xxx xxx xxx
There are other factors which compel us to rule against the
petitioner. The tax was due to the city government while the
expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the
 national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the
sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner
on September 30, 1977. The petitioner admitted in his testimony
that he knew about the P4,116.00 deposited with the bank but he
did not withdraw it. It would have been an easy matter to
withdraw P2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction. 140
The ruling in Francia was applied to the subsequent cases of Caltex
Philippines, Inc. v. Commission on Audit 141and Philex Mining Corporation v.
Commissioner of Internal Revenue. 142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may
have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to
be set-off. 143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax
and debt. Debts are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity." 144 Rejecting
Philex Mining's assertion that the imposition of surcharge and interest was
unjustified because it had no obligation to pay the excise tax liabilities within
the prescribed period since, after all, it still had pending claims for VAT input
credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of
its tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is
that it is compulsory rather than a matter of bargain. Hence, a tax
does not depend upon the consent of the taxpayer. If any tax
payer can defer the payment of taxes by raising the defense that
it still has a pending claim for refund or credit, this would
 adversely affect the government revenue system. A taxpayer
cannot refuse to pay his taxes when they fall due simply because
he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the
government. Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can
easily give rise to confusion and abuse, depriving the government
of authority over the manner by which taxpayers credit and offset
their tax liabilities. 145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer
cannot simply refuse to pay tax on the ground that the tax liabilities were
off-set against any alleged claim the taxpayer may have against the
government. Such would merely be in keeping with the basic policy on
prompt collection of taxes as the lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund claim on
account of the Court of Tax Appeals' finding of its liability for another tax in
lieu of the Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected
similar arguments on the denial of claim for tax refund: CHTAIc
Commissioner of Internal Revenue v. Court of Tax Appeals,
however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of
Tax Appeals erred in denying 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. 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. cHDAIS
In fact, as the Court of Tax Appeals itself has
heretofore conceded, 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 [be] 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.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72,
Chapter XI of the 1997 NIRC. The above pronouncements are,
therefore, still applicable today.
 Here, petitioner's similar tax refund claim assumes that the
tax return that it filed was correct. Given, however, the finding of
the CTA that petitioner, although not liable under Sec. 28(A)(3)(a)
of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of
the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund. 146 (Emphasis supplied,
citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of
Internal Revenue, 147 this court upheld the denial of the claim for refund
based on the Court of Tax Appeals' finding that the taxpayer had, through
erroneous deductions on its gross income, underpaid its Gross Philippine
Billing tax on cargo revenues for 1999, and the amount of underpayment
was even greater than the refund sought for erroneously paid Gross
Philippine Billings tax on passenger revenues for the same taxable
period. 148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by
petitioner was computed at the rate of 1 1/2% of its gross revenues
amounting to P345,711,806.08 149 from the third quarter of 2000 to the
second quarter of 2002. It is quite apparent that the tax imposable under
Section 28 (A) (1) of the 1997 National Internal Revenue Code [32% of
taxable income, that is, gross income less deductions] will exceed the
maximum ceiling of 1 1/2% of gross revenues as decreed in Article VIII of
the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is
forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26,
2005 and Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc
are AFFIRMED.
SO ORDERED.
||| (Air Canada v. Commissioner of Internal Revenue, G.R. No. 169507,
[January 11, 2016])