CIR vs.

SEAGATE TECHNOLOGY
Facts:

Seagate Technology (Seagate) is registered with the Philippine export Zone

Authority (PEZA) and has been issued a PEZA certificate
It is also a VAT registered entity
An administrative claim for refund of VAT input taxes in the amount of PHP
28,369.88 was filed on October 4, 1999
No final action as been received by Seagate from the CIR on its claim for
VAT refund
Seagate thus elevated the case to the CTA by way of petition for review in
order to toll the running of the two year prescriptive period

ISSUE: W/N Segeate is entitled to the refund or issuance of Tax Credit Certificate
YES

Zero Rated and Effectively Zero Rated Transactions

RATIO:
Seagate is a PEZA registered enterprise

As a PEZA registered enterprise within a special economic zone, Seagate is

entitled in the fiscal incentives and benefits, provided for in either PD66 or
EO 226. It shall moreover enjoy all privileges, benefits, advantages, or
exemptions under both RA 7227 and RA 7844
Seagate enjoys preferential tax treatment. It is not subject to internal
revenue laws and regulations and is even entitled to tax credits.
The VAT on capital goods is an internal revenue from which Seagate as an
entity is exempt. Although the transactions involving such tax is are not
exempt, Seagate as a VAT registered person however is entitled to their
credits
VAT is a uniform tax ranging at present from 0-10% levied on every
importation of goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or properties, or on
each rendition of services in the course of trade or business as they pass
along the production and distribution chain, the tax being limited only to the
value added to such goods, properties or services by the seller, transferor or
lessor
It is an indirect tax that may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties, or services
The law that originally impose the VAT in the country, as well as
subsequently amendments of that law, has been drawn from the tax credit
method. Under the present method that relied on invoices, and entity can
credit against or subtract from the VAT charged on its sales or outputs the
Vat paid on its purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a seller are
equal to the input taxes passed on by the suppliers, no payment is required.
It is when the output taxes exceed the input taxes tha the excess has to be
paid. If, however, the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. Should the input taxes
result from zero rated or effectively zero rated transactions or from the
acquisition of capital goods, any excess over the output taxes shall instead
be refunded to the taxpayer or credited against other internal revenue taxes

Although both are taxable and similar in effect, zero rated transactions
differ from effectively zero rated transactions as to their source
Zero rated transactions generally refer to the export sale of goods and
supply of services. The tax rate is set at zero. When applied to the tax base,
such rate obviously results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax, but can claim a refund of
or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero rated transactions, however, refer to the sale of goods or
supply of services to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects such transaction to a zero rate. Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser.
The seller who chares zero output tax on such transactions can also claim a
refund of or a tax credit certificate fir the VAT previously charged by
suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zer rating and exemption are the same,
but the extend of relief that results from either one of them is not
Applying the destination principle to the exportation of goods, automatic
zero rating is primarily intended to be enjoys by the seller who is directly
and legally liable for the VAT, making such seller internationally
competitive by allowing the refund or credit of input taxes that are
attributable to export sales. Effective zero rating on the contrary is intended
to benefit the purchaser who not being directly and legally liable for the
payment of the VAT, will ultimately bear the burden of the tax shifted by the
suppliers.
In both instances of zero rating, there is a TOTAL relief for the purchaser
from the burden of the tax. But in an exemption there is only partial relief
because the purchaser is not allowed any tax refund of or credit for input
taxes paid.

Exempt Transaction and Exempt Party

the object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction
An exempt transaction on the one hand., involved goods or services which,
by their nature are specifically listed in and expressly exempted from the
VAT under the Tax Code, without regard to the tax status VAT exempt or
not of the party to the transaction. Such transaction is not subject to the
VAT, but the seller is not allowed any tax refund of or credit for any input
taxes paid.
An exempt party, on the other hand is a person or entity granted VAT
exemption under the TAX Code, a special law or an international agreement
to which the Philippines is a signatory, and by virtue of which, its taxable
transactions become exempt from the VAT. Such party is also not subject to
the VAT but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT r non-VAT taxpayer.
Special laws may certainly exempt transactions from the VAT. However, the
Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 the special law under which Seagate was registered.
The purchase transactions it entered into are therefore not VAT exempt.
These are subject to the Vat. Seagate is required to register.
Its sales transactions however will either be zero rated or taxed at the
standard rate of 10 percent. Depending again on the application of the
destination principle
If Seagate enters into such sales transactions with a purchaser --- usually in
a foreign country for use or consumption outside the Philippines, these
shall be subject to a 0 percent. If entered into which a purchase for use or
consumption in the Philippine, then these shall be subject to 10 percent,
unless the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero rated.
Since the purchases of Seagate are not exempt from the VAT, the rate to be
applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate because the ecozone within which it
is registered is managed and operated by the PEZA as a separate customs
territory. This means that such zone has created the legal fiction of a foreign
territory. Under the cross border principle of the VAT system being enforced
by the BIR, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the Philippines to a foreign
country are free of the VAT, then the same rule holds for such exports from
the national territory except specifically declared areas --- to an ecozone.
Sales made by a VAT registered person in the customs territory to a PEZA
registered entity are considered exports to a foreign country, conversely,
sales by a PEZA registered entity to a VAT registered person in the customs
territory are deemed imports from a foreign country. This legal fiction is
necessary to give meaningful effect to the policies of the special law
creating the zone. If Seagate is located in an export processing zone within

that ecozone, sales to the export processing zone , even without being
actually exported, shall in fact be viewed as constructively exported under
EO 226. Considered as export sales, such purchase transactions by Seagate
would indeed be subject to a zero rate
The Exemptions Broad and Express
Applying the special laws we have earlier discussed, Seagate as an entity is
exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the
very nature of the VAT as a tax on consumption, for which the direct
liability is imposed on one person but the indirectly made to bear, as added
cost to such sales, the equivalent VAT n its purchases.
First, RA 7916 states that no taxes, local, and national, shall be imposed on
the business establishments operating within the ecozone Since this law
does not exclude the VAT from the prohibition, it is deemed included
Second, when RA 8748 was enacted to amend RA 7916, the same
prohibition applied, except for real property taxes that presently are
imposed on land owned by developers
Third, foreign and domestic merchandise, raw materials, equipment and the
like shall not be subject to internal revenue laws and regulations under
PD 66 the original charter provisions on the latter law modify such
exemption
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise except those prohibited by law shall not be subject to
internal revenue laws and regulations if brought to the ecozones restricted
area for manufacturing by registered export enterprises of which Seagate is
one. These rules also apply to all enterprises registered with the PEZA prior
to the effectivity of such ruled
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority
Tax refunds are in the nature of such exemptions. Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of
them claims and of showing by words to plain to be mistaken, that the
legislature intended to exempt them. In the present case, all the cited legal
provisions with respect to the grant of the tax exemptions are too vivid to
pass unnoticed.
Seagate which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. The non taxability of transactions that are otherwise taxable is merely
a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves. Nonetheless, its exemption as
an entity and the non exemption of its transactions lead to the same result.

VAT registration, not application for effective zone rating indispensable to Vat refund

Registration is an indispensable requirement under our Vat law

By the VATs very nature as a tax on consumption, the capital goods and
services Seagate has purchased are subject to VAT, although at zero rate.
Registration does not determine taxability under the VAT law.
The BIR regulations additionally requiring an approved prior application for
effective zero rating cannot prevail over the clear VAT nature of Seagates
transactions. The scope of such regulations is not within the statutory
authority granted by the legislature.
Other than the general registration of a taxpayer, the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayers transactions to be considered
effectively zero rated. An effectively zero rated transaction does not and
cannot become exempt simply because an application therefore was not
made or if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who without fluid
consideration, are bent on denying a valid application

Tax Refund or credit in order

Having determined that Seagates purchase transactions are subject to a zero

VAT rate, the tax refund or credit is in order.
As correctly held by the lower courts, Seagate had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the
income tax holiday regime instead of the 5 percent preferential tax regime,
These two regimes are incompatible and cannot be availed of
simultaneously by the same entity. While EO 226 merely exempts it from
income taxes, the PEZA law exempts it from all taxes.
Therefore Seagate can be considered exempt not from the VAT but only
from the payment of income tax for certain number of years depending on
its registration.

CIR VS. AMERICAN EXPRESS

Facts:
Respondent, a VAT taxpayer, is the Philippine Branch of AMEX USA and was
tasked with servicing a unit of AMEX-Hongkong Branch and facilitating the
collections of AMEX-HK receivables from card members situated in the
Philippines and payment to service establishments in the Philippines.

It filed with BIR a letter-request for the refund of its 1997 excess input taxes,
citing as basis Section 110B of the 1997 Tax Code, which held that xxx Any
input tax attributable to the purchase of capital goods or to zero-rated sales
by a VAT-registered person may at his option be refunded or credited against
other internal revenue taxes, subject to the provisions of Section 112.
In addition, respondent relied on VAT Ruling No. 080-89, which read, In
Reply, please be informed that, as a VAT registered entity whose service is
paid for in acceptable foreign currency which is remitted inwardly to the
Philippine and accounted for in accordance with the rules and regulations of
the Central Bank of the Philippines, your service income is automatically zero
rated xxx
Petitioner claimed, among others, that the claim for refund should be
construed strictly against the claimant as they partake of the nature of tax
exemption.
CTA rendered a decision in favor of respondent, holding that its services are
subject to zero-rate. CA affirmed this decision and further held that
respondents services were services other than the processing,
manufacturing or repackaging of goods for persons doing business outside
the Philippines and paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of BSP.
Issue:
W/N AMEX Phils is entitled to refund
Held:
Yes. Section 102 of the Tax Code provides for the VAT on sale of services and
use or lease of properties. Section 102B particularly provides for the services
or transactions subject to 0% rate:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP;

(2) Services other than those mentioned in the preceding subparagraph, e.g.

(3) It be paid in acceptable foreign currency accounted for in accordance

those rendered by hotels and other service establishments, the consideration

with BSP R&R.

for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP

COMMISSIONER OF INTERNAL REVENUE V. MIRANT PAGBILAO

CORP.

Under subparagraph 2, services performed by VAT-registered persons in the

September 12, 2008

Philippines (other than the processing, manufacturing or repackaging of

goods for persons doing business outside the Philippines), when paid in
acceptable foreign currency and accounted for in accordance with the R&R of
BSP, are zero-rated. Respondent renders service falling under the category of
zero rating.
As a general rule, the VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax. Goods and services are taxed only
in the country where they are consumed. Thus, exports are zero-rated, while
imports are taxed.
In the present case, the facilitation of the collection of receivables is different
from the utilization of consumption of the outcome of such service. While the
facilitation is done in the Philippines, the consumption is not. The services
rendered by respondent are performed upon its sending to its foreign client
the drafts and bulls it has gathered from service establishments here, and are
therefore, services also consumed in the Philippines. Under the destination
principle, such service is subject to 10% VAT.
However, the law clearly provides for an exception to the destination

Facts:
Mirant Pagbilao Corporation ( hereinafter MPC ) is a domestic firm
engaged in the generation of power which it sells to the National Power
Corporation ( hereinafter NPC ). For the construction of the electrical and
mechanical equipment portion of its Pagbilao, Quezon Plant, which appears
to have been undertaken from 1993 to 1996, MPC secured the services of
Mitsubishi Corporation ( hereinafter Mitsubishi ) of Japan. It was only on
April 14, 1998 that MPC paid Mitsubishi the VAT component for the progress
billings from April 1993 to September 1996, and for which Mitsubishi issued
Official Receipt No. 0189 ( hereinafter Official Receipt ). In accordance with
a VAT Ruling No. 052-99 issued on May 13, 1999, the supply of electricity by
MPC to the NPC, shall be subject to zero percent VAT.
MPC filed on December 20, 1999 an administrative claim for refund of
unutilized input VAT. It is the allegation of MPC that since its sales to NPC is
subject to zero percent VAT, then the input VAT must be refunded.

principle; that is 0% VAT rate for services that are performed in the
Philippines, paid for in acceptable foreign currency and accounted for in
accordance with the R&R of BSP. The respondent meets the following
requirements for exemption, and thus should be zero-rated:

Issues:

(1) Service be performed in the Philippines

(2) The service fall under any of the categories in Section 102B of the Tax
Code

1. Whether or not the 1998 Official Receipt can evidence payment of input
VAT corresponding to a 1993 to 1996 transaction?
2. Whether or not the claim for VAT refund of MPC was filed within the
reglementary period?

Ruling:
1. The Supreme Court ruled that the Official Receipt constituted sufficient
proof of payment of creditable input VAT for the progress billings from
Mitsubishi for the period covering April 7, 1993 to September 6, 1996. As the
Court distinctly notes, the law considers a duly- vexecuted VAT invoice or
Official Receipt as sufficient evidence to support a claim for input tax credit.
2. The claim for refund or tax credit for the creditable input VAT payment
made by MPC embodied in the Official Receipt was filed beyond the period
provided by law for such claim.
The unutilized input VAT payments not otherwise used for any internal
revenue tax due the taxpayer must be claimed within two years reckoned
from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not.
Given that the last creditable input VAT due for the period covering the
progress billing of September 6, 1996 is the third quarter of 1996 ending on
September 30, 1996, any claim for unutilized creditable input VAT refund or
tax credit for said quarter prescribed two years after September 30, 1996 or,
to be precise, on September 30, 1998. Consequently, MPCs claim for refund
or tax credit filed on December 10, 1999 had already prescribed.
Atlas Consolidated vs. CIR
ATLAS
CONSOLIDATED
MINING
DEVT
524
SCRA
73,
GR Nos. 141104 & 148763, June 8, 2007

CORP

vs.

CIR
103

"The taxpayer must justify his claim for tax exemption or refund by
the clearest grant of organic or statute law and should not be
permitted to stand on vague implications."
"Export processing zones (EPZA) are effectively considered as
foreign territory for tax purposes."

FACTS: Petitioner corporation, a VAT-registered taxpayer engaged

in mining, production, and sale of various mineral products, filed
claims with the BIR for refund/credit of input VAT on its purchases of
capital goods and on its zero-rated sales in the taxable quarters of
the years 1990 and 1992. BIR did not immediately act on the
matter prompting the petitioner to file a petition for review before
the CTA. The latter denied the claims on the grounds that for zerorating to apply, 70% of the company's sales must consists of
exports, that the same were not filed within the 2-year prescriptive
period (the claim for 1992 quarterly returns were judicially filed
only on April 20, 1994), and that petitioner failed to submit
substantial evidence to support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA failed to
consider the following: sales to PASAR and PHILPOS within the EPZA
as zero-rated export sales; the 2-year prescriptive period should be
counted from the date of filing of the last adjustment return which
was April 15, 1993, and not on every end of the applicable
quarters; and that the certification of the independent CPA
attesting to the correctness of the contents of the summary of
suppliers invoices or receipts examined, evaluated and audited by
said CPA should substantiate its claims.
ISSUE: Did the petitioner corporation sufficiently establish the
factual bases for its applications for refund/credit of input VAT?
HELD: No. Although the Court agreed with the petitioner
corporation that the two-year prescriptive period for the filing of
claims for refund/credit of input VAT must be counted from the date
of filing of the quarterly VAT return, and that sales to PASAR and
PHILPOS inside the EPZA are taxed as exports because these export
processing zones are to be managed as a separate customs
territory from the rest of the Philippines, and thus, for tax purposes,
are effectively considered as foreign territory, it still denies the
claims of petitioner corporation for refund of its input VAT on its
purchases of capital goods and effectively zero-rated sales during
the period claimed for not being established and substantiated by
appropriate
and
sufficient
evidence.
Tax refunds are in the nature of tax exemptions. It is regarded as
in derogation of the sovereign authority, and should be construed
in strictissimi juris against the person or entity claiming the
exemption. The taxpayer who claims for exemption must justify his
claim by the clearest grant of organic or statute law and should not
be permitted to stand on vague implications.
Reyes vs. CIR

ACTS:Petitioners (father and son to each other) purchased a lot and

building(Gibs Building). The payment thereof was shared equally by
petitioners.At the time of the purchase, the building was leased to
various tenants.Petitioners divided equally the income from rentals
of the building as wellas the expenses in the operation and maintenance
thereof.The administration of the building was entrusted to an administrator
whocollected the rents.Believing that petitioners were partners,
respondent Commissioner of Internal Revenue assessed them the
sum of P46,647.00 as income taxdue for the years 1951 to 1954 and a
sum of P25,973.75, covering theyears 1955 and 1956.The basis of the
assessment of said income tax due is the provision of theNational
Internal Revenue Code which imposes an income tax oncorporations and
corporations includes partnerships.

The importance of liability is the purpose behind the accumulation of the

income and not the consequences of the accumulation. Thus, if the failure to
pay dividends were for the purpose of using the undistributed earnings &
profits for the reasonable needs of the business, that purpose would not fall
to overcome the presumption and correctness of CIR.

FACTS:
CTA set aside petitioners revenue commissioners assessment of 1.1 M as
the 25% surtax on private respondents unreasonable accumulation of

ISSUE:Whether or not petitioners are subject to the tax on corporations

providedfor in section 24 of Commonwealth Act No. 466, otherwise known as
theNational Internal Revenue Code.RULING:Petitioners, in acquiring the Gibbs
Building, established a partnership subjectto income tax as a corporation under
the National Internal Revenue Code.There are two essential elements of a
partnership:(a) an agreement to contribute money, property or industry to a
commonfund; and(b) intent to divide the profits among the contracting
parties.
In the case at bar, all elements are undoubtedly present.Admittedly, petitioners
have agreed to and did, contribute moneyand property to a common
fund. Their purpose was to engage inreal estate transactions for
monetary gain and then divide thesame among
themselves.REASONS:1. the common fund being created
purposely not something alreadyfound in existence;2. the lots thus
acquired not being devoted to residential purposesor to other
personal uses of petitioners;3. such properties having been under
the management of oneperson with full power to lease, to collect
rents, to issue receipts,to bring suits, to sign letters and contracts
and to endorse notesand checks;4. petitioners dividing "equally
the income of the building afterdeducting the expenses of operation
and maintenance thereof;"For purposes of the tax on corporations,
our National InternalRevenue Code, include these partnerships

with the exceptiononly of duly registered general co-partnerships

within the purviewof the term "corporation." It is, therefore, clear
to our mind thatpetitioners herein constitute a partnership, insofar
as said Code isconcerned, and are subject to the income tax
for corporations."

surplus for the year 1975-1978.

Private respondent protested the assessment on the ground that the
accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as a real estate broker.
Private res. Filed a petition that pending determination of the case, an order
be issued restraining the commissioner and/or his reps from enforcing the
warrants of distraint and levy. Writ of injunction was issued by tax court.
Due to the reversal of CTA of the commissioners decision, CIR appeals to
the SC.

ISSUES:
1. Whether or not private respondent is a holding company and/or investment
company?
2. Whether or not Antonio accumulated surplus for years 75-78
3. Whether or not Tuason Inc. is liable for the 25% surtax on undue
accumulation of surplus for 75-78

HELD: Yes to all. Antionio is liable for the 25% surtax

assessed.

surplus profits. Antonio claims that he spent the money to build an apartment

Sec. 25. Additional tax on corporation improperly accumulating profits or

alleged investment cost.

in urdaneta but theres a large discrepancy bet. The market value and the

surplus.
(a) Imposition of tax. If any corporation, except banks, insurance

The importance of liability is the purpose behind the accumulation of the

companies, or personal holding companies, whether domestic or foreign, is

income and not the consequences of the accumulation. Thus, if the failure to

formed or availed of for the purpose of preventing the imposition of the tax

pay dividends were for the purpose of using the undistributed earnings &

upon its shareholders or members or the shareholders or members of

profits for the reasonable needs of the business, that purpose would not fall

another corporation, through the medium of permitting its gains and profits to

to overcome the presumption and correctness of CIR.

accumulate instead of being divided or distributed, there is levied and

assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated profits
or surplus which shall be in addition to the tax imposed by section twentyfour,
and shall be computed, collected and paid in the same manner and subject
to the same provisions of law, including penalties, as that tax.

Cynamid vs CA
I n order to determine whether profits are accumulated for the reasonable
needs of the business to avoid the surtax upon the shareholders, it must be

(b) Prima facie evidence. The fact that any corporation is a mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an

shown that the controlling intention of the taxpayer is manifested at the time
of the accumulation, not intentions subsequently, which are mere
afterthoughts.

investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or
indirectly, by one person.

Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly
owned subsidiary of American Cyanamid Co. based in Maine, USA. It is

In this case, Tuason Inc, a mere holding company for the corporation did

engaged in the manufacture of pharmaceutical products and chemicals, a

not involve itself in the development of subdivisions but merely subdivided its

wholesaler of imported finished goods and an imported/indentor. In 1985 the

own lots and sold them for bigger profits. It derived its income mostly from

CIR assessed on petitioner a deficiency income tax of P119,817) for the year

interest, dividends, and rentals realized from the sale of realty.

1981. Cyanamid protested the assessments particularly the 25% surtax for
undue accumulation of earnings. It claimed that said profits were retained to

Tuason Inc is also owned by Antonio himself. While these profits were

increase petitioners working capital and it would be used for reasonable

actually made, the commissioner points out that the corp. did not use up its

business needs of the company. The CIR refused to allow the cancellation of

the assessments, petitioner appealed to the CTA. It claimed that there was

needs of the business to mean the immediate needs of the business, and it

not legal basis for the assessment because 1) it accumulated its earnings

is held that if the corporation did not prove an immediate need for the

and profits for reasonable business requirements to meet working capital

accumulation of earnings and profits such was not for reasonable needs of

needs and retirement of indebtedness 2) it is a wholly owned subsidiary of

the business and the penalty tax would apply. (Law of Federal Income

American Cyanamid Company, a foreign corporation, and its shares are

Taxation Vol 7) The working capital needs of a business depend on the

listed and traded in the NY Stock Exchange. The CTA denied the petition

nature of the business, its credit policies, the amount of inventories, the rate

stating that the law permits corporations to set aside a portion of its retained

of turnover, the amount of accounts receivable, the collection rate, the

earnings for specified purposes under Sec. 43 of the Corporation Code but

availability of credit and other similar factors. The Tax Court opted to

that petitioners purpose did not fall within such purposes. It found that there

determine the working capital sufficiency by using the ration between the

was no need to set aside such retained earnings as working capital as it had

current assets to current liabilities. Unless, rebutted, the presumption is that

considerable liquid funds. Those corporations exempted from the

the assessment is correct. With the petitioners failure to prove the CIR

accumulated earnings tax are found under Sec. 25 of the NIRC, and that the

incorrect, clearly and conclusively, the Tax Courts ruling is upheld.

petitioner is not among those exempted. The CA affirmed the CTAs decision.

AFISCO vs. COMMISSIONER

Issue: Whether or not the accumulation of income was

justified.

Facts: Petitioners are 41 non-life insurance corporatiosn that entered

into a reinsurance treaty with MUNICH a non-resident foreign
insurance corporation. Munich required these 41 companies to form a
pool referred to as CLEARING HOUSE in the case.

Held:
In order to determine whether profits are accumulated for the reasonable
needs of the business to avoid the surtax upon the shareholders, it must be
shown that the controlling intention of the taxpayer is manifested at the time
of the accumulation, not intentions subsequently, which are mere
afterthoughts. The accumulated profits must be used within reasonable time
after the close of the taxable year. In the instant case, petitioner did not
establish by clear and convincing evidence that such accumulated was for

The pool then submitted an income tax return. BIR then assessed
(assessment was made beyond the allowable period of assessment) a
deficiency corporate income tax. This assessment was protested by
petitioners through SGV contending that they are not an unregistered
partnership, that they have tax exemption and that there is double
taxation, and that the assessment made was beyond the period allowed
by law. BIR denied the protest. The case was then elevated to the CA
which ruled that the pool was a partnership taxable as a corporation
and that the collection of the premiums from Munich form part of their
income and thus considered as taxable income.

the immediate needs of the business.

Hence this petition.

To determine the reasonable needs of the business, the United States Courts

Issue: 1. WON pool was a taxable partnership? 2. WON

remittances/premiums received from Munich are taxable income? 3.
WON BIR action to the pool has prescribed?

have invented the Immediacy Test which construed the words reasonable

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.
SEE RULES ON EVIDENCE.

Held:
1.

YES. Philippine legislature included in the concept of corporations those

entities that resembled them such as unregistered partnerships and
associations. 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:
3.
(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.

2.

YES. 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.
Additionally, 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.

Finally, the petitioners' claim that Munich is tax-exempt based on the RPWest German Tax Treaty is likewise unpersuasive, because the internal

NO. 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."

CONSOLIDATED MINES, INC vs. COURT OF TAX APPEALS

FACTS:
The Company, a domestic corporation engaged in mining, had filed its income tax
returns for 1951, 1952, 1953 and 1956. In 1957 BIR investigated the income tax
returns filed by the Company because on August 10, 1954, its auditor, Felipe Ollada
claimed the refund of the sum of P107,472.00 representing alleged overpayments of
income taxes for the year 1951. After the investigation the examiners reported that:
1.

For the years 1951 to 1954

a. the Company had not accrued as an expense the share in the
company profits of Benguet Consolidated Mines as operator
of the Company's mines, although for income tax purposes the

2.

Company had reported income and expenses on the accrual

basis;
b. depletion and depreciation expenses had been overcharged;
and
c. the claims for audit and legal fees and miscellaneous
expenses for 1953 and 1954 had not been properly
substantiated; and that
For the year 1956
a. the Company had overstated its claim for depletion; and
b. certain claims for miscellaneous expenses were not duly
supported by evidence.

In view of said reports the CIR sent the Company a letter of demand requiring it to
pay certain deficiency income taxes for the years 1951 to 1954, inclusive, and for the
year 1956. Deficiency income tax assessment notices for said years were also sent to
the Company. The Company requested a reconsideration of the assessment, but the
Commissioner refused to reconsider, hence the Company appealed to the Court of
Tax Appeals. The assessments for 1951 to 1954 were contested in CTA Case No.
565, while that for 1956 was contested in CTA Case No. 578. Upon agreement of the
parties the two cases were heard and decided jointly.On May 6, 1961 the Tax Court
rendered judgment ordering the Company to pay the amounts of P107,846.56,
P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954
and 1956, respectively. The Tax Court nullified the assessments for the years 1951
and 1952 on the ground that they were issued beyond the five-year period prescribed
by Section 331 of the National Internal Revenue Code.
However, on August 7, 1961, upon motion of the Company, the Tax Court
reconsidered its decision and further reduced the deficiency income tax liabilities of
the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953, 1954
and 1956, respectively. In this amended decision the Tax Court subscribed to the
theory of the Company that Benguet Consolidated Mining Company, hereafter
referred to as Benguet, had no right to share in "Accounts Receivable," hence onehalf thereof may not be accrued as an expense of the Company for a given year.
Both the Company and the Commissioner appealed to this Court.
ISSUE:
1. WON not the accounting system used by the Company
justifies such a treatment of this item; and if not, whether
said method used by the Company, and characterized by
the Commissioner as a "hybrid method," may be allowed
under the aforequoted provisions of our tax code? NO.
Company uses an accrual method not hybrid method.

2. WON the disallowance by the Tax Court of the depreciation

charges claimed by the Company is correct? YES.
3. WON the disallowance by the Tax Court of the miscellaneous
business expenditures by the Company is correct? YES.
HELD:
1. Companys Accounting System: The Company used the
accrual method of accounting in computing its income. One
of its expenses is the amount-paid to Benguet as mine
operator, which amount is computed as 50% of "net
income." The Company deducts as an expense 50% of cash
receipts minus disbursements, but does not deduct at the
end of each calendar year what the Commissioner alleges is
"50% of the share of Benguet" in the "accounts receivable."
However, it deducts Benguet's 50% if and when the
"accounts receivable" are actually paid. It would seem,
therefore, that the Company has been deducting a portion
of this expense (Benguet's share as mine operator) on the
"cash & carry" basis.
Here we have to distinguish between (1) the method of accounting used by
the Company in determining its net income for tax purposes; and (2)
the method of computation agreed upon between the Company and
Benguet in determining the amount of compensation that was to be paid by
the former to the latter. The parties, being free to do so, had contracted that
in the method of computing compensation the basis were "cash receipts"
and "cash payments." Once determined in accordance with the stipulated
bases and procedure, then the amount due Benguet for each
month accrued at the end of that month, whether the Company had made
payment or not (see par. XIV of the agreement). To make the Company
deduct as an expense one-half of the "Accounts Receivable" would, in
effect, be equivalent to giving Benguet a right which it did not have under
the contract, and to substitute for the parties' choice a mode of computation
of compensation not contemplated by them.
Since Benguet had no right to one-half of the "Accounts Receivable," the
Company was correct in not accruing said one-half as a deduction. The
Company was not using a hybrid method of accounting, but was consistent
in its use of the accrual method of accounting. The first issue raised by the
Company is with respect to the rate of mine depletion used by the Court of
Tax Appeals. The Tax Code provides that in computing net income there
shall be allowed as deduction, in the case of mines, a reasonable allowance
for depletion thereof not to exceed the market value in the mine of the

product thereof which has been mined and sold during the year for which
the return is made [Sec. 30(g) (1) (B)].
While taxable income is based on the method of accounting used by the
taxpayer, it will almost always differ from accounting income. This is so
because of a fundamental difference in the ends the two concepts serve.
Accounting attempts to match cost against revenue. Tax law is aimed at
collecting revenue. It is quick to treat an item as income, slow to recognize
deductions or losses. Thus, the tax law will not recognize deductions for
contingent future losses except in very limited situations. Good accounting,
on the other hand, requires their recognition. Once this fundamental
difference in approach is accepted, income tax accounting methods can be
understood more easily.

2. The initial memorandum of the BIR examiner assigned to

verify the income tax liabilities of the Company pursuant to
the latter's claim of having overpaid its income taxes states
the basic reason why the Company's claimed depreciation
should be disallowed or re-adjusted, thus: since "..., up to its
completion has not been and is not capable of use in the
operation, the depreciation claimed could not, in fairness to
the Government and the taxpayer, be considered as proper
deduction for income tax purposes as the said asset is still
under construction." Vis-a-Vis the Commissioner's consistent
position in this regard the company simply repeatedly
requested for time in view of the alleged voluminous
working sheets that had to be re-evaluated and recomputed
to justify its claimed depreciation items within which to
submit a separate memorandum in itemized form detailing
the Company's objections to the items of depreciation
adjustments or disallowances for the years involved.
Strangely enough, despite the period granted, the record is
bare that the Company ever submitted its itemized
objection as proposed. Inasmuch as the taxpayer has the
burden of justifying the deductions claimed for depreciation,
the Company's failure to discharge the burden prevents this
Court, from disturbing the Commissioner's computation. For
taxation purposes the phrase "out of its not being used,"
with reference to depreciation allowable on assets which are
idle or the use of which is temporarily suspended, should be
understood to refer only to property that has once been
used in the trade or business, not to property that has never
been actually devoted to the taxpayer's business,
particularly incomplete assets that have yet to be used.

As an income tax concept, depletion is wholly a creation of the statute

"solely a matter of legislative grace." Hence, the taxpayer has the burden of
justifying the allowance of any deduction claimed. As in connection with all
other tax controversies, the burden of proof to show that a disallowance of
depletion by the Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with respect to the value of
the property constituting the basis of the deduction. This burden-of-proof
rule has been frequently applied and a value claimed has been disallowed
for lack of evidence. Depreciation is a question of fact, and where the
appellant does not claim that the tax court, in applying certain rates and
basis to arrive at the allowed amounts of depreciation, was arbitrary or had
abused its discretion, the findings of the tax court on the depreciation of
assets should not be disturbed.
Both depletion and depreciation are predicated on the same basic premise of
avoiding a tax on capital. The allowance for depletion is based on the theory
that the extraction of minerals gradually exhausts the capital investment in
the mineral deposit. The purpose of the depletion deduction is to permit the
owner of a capital interest in mineral in place to make a tax-free recovery of
that depleting capital asset. A depletion is based upon the concept of the
exhaustion of a natural resource whereas depreciation is based upon the
concept of the exhaustion of the property, not otherwise a natural resource,
used in a trade or business or held for the production of income. Thus,
depletion and depreciation are made applicable to different types of assets.
And a taxpayer may not deduct that which the Code allows as a deduction
of another.
3. The Company's third assigned error assails the Court of Tax
Appeals in not allowing the deduction from its gross income
of certain miscellaneous business expenditures in the course
of its operation for the years 1954 and 1956. For 1954 the
deduction claimed amounted to P38,081.20, of which the
Court allowed P25,600.00 and disallowed P13,481.20, 47 "for
lack of any supporting paper or evidence." For the year
1956 the claim amounted to P20,050.00 of which the Court
allowed P2,460.00, representing the one-month salary
Christmas bonus given to some of the employees, and
upheld the disallowance of P17,590.00 on the ground that
the Company "failed to prove substantially that said
expenses were actually incurred and are legally deductible
expenses."
Regarding the disallowed amount of P13,481.20 the year 1954, the
Company submits that it consisted of expenses supported by "vouchers and
cancelled checks evidencing payments of these amounts," and were
necessary and ordinary expenses of business for that year. On the

disallowance by the Tax Court of the sum of P17,590.00 out of a total

deduction for miscellaneous expenses for 1956 among to P20,050.00, the
Company advances the same argument, namely, that the amount consisted
of normal and regular expenses for that year as evidenced by vouchers and
cancelled checks.
These vouchers and cancelled checks of the Company, however, only show
that the amounts claimed had indeed been spent, and confirm the fact of
disbursement, but do not necessarily prove that the expenses for which they
we're disbursed are deductible items. In the case of Collector of Internal
Revenue vs. Goodrich International Rubber Co. 48 this Court rejected the
taxpayer's similar claim for deduction of alleged representation expenses,
based upon receipts issued not by the entities to which the alleged expenses
but by the officers of taxpayer corporation who allegedly paid them.

15% profit remittance tax imposed by Section 24 (b) (2) of the Tax
Code.
Petitioner claimed for the refund or issuance of a tax credit of
P229,424.40 "representing profit tax remittance erroneously paid on
the dividends remitted by AG&P. This was however denied stating that
while it is true that said dividends remitted were not subject to the 15%
profit remittance tax and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-resident
stockholder, nevertheless, said dividend income is subject to the 25 %
tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13,
1980 between the Philippines and Japan.

WHEREFORE, the appealed decision is hereby modified by ordering

Consolidated Mines, Inc. to pay the Commissioner of Internal
Revenue the amounts of P76,254.92, P48,511.56 and P66,881.14
as deficiency income taxes for the years 1953, 1954 and 1956,
respectively, or the total sum of P191,647.62 under the terms
specified by the Tax Court, without pronouncement as to costs.

Petitioner appealed to the CTA which affirmed the denial of the

refund. Hence this petition.

MARUBENI vs. COMMISSIONER

Held:

Tags: digest, tax

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Issue: 1. WON Marubeni is a resident foreign corporation following

the principal-agent relationship? 2. Can it claim a lower tax rate of
10%? 3. WON it is correct to assess a 25% tax Marubeni dividends? 4.
Is petitioner entitled to a refund?

Facts: Marubeni is duly organized under Japan with licence to engage

in business in the Philippines. It has equity investments in AG&P of
Manila. It received dividends from AG&P which were all declared and
taxes paid by AG&P as its withholding agent. BIR then made tax
assessments from the dividends of Marubeni. In a letter dated January
29, 1981, petitioner, through SGV, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received
from AG&P are effectively connected with its conduct or business in
the Philippines as to be considered branch profits subject to the 15%
profit remittance tax imposed under Section 24 (b) (2) of the National
Internal Revenue Code.

1.

Acting Commissioner Ancheta ruled that the dividends received by

Marubeni from AG&P are not income arising from the business
activity in which Marubeni is engaged. Accordingly, said dividends if
remitted abroad are not considered branch profits for purposes of the

2.

YES. Under the Tax Code, a resident foreign corporation is one that
is "engaged in trade or business" within the Philippines. Petitioner
contends that precisely because it is engaged in business in the
Philippines through its Philippine branch that it must be considered
as a resident foreign corporation. Petitioner reasons that since the
Philippine branch and the Tokyo head office are one and the same
entity, whoever made the investment in AG&P, Manila does not
matter at all. A single corporate entity cannot be both a resident
and a non-resident corporation depending on the nature of the
particular transaction involved. Accordingly, whether the dividends
are paid directly to the head office or coursed through its local
branch is of no moment for after all, the head office and the office
branch constitute but one corporate entity, the Marubeni
Corporation, which, under both Philippine tax and corporate laws,
is a resident foreign corporation because it is transacting business
in the Philippines.
NO. The alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and
distinct income taxpayer from the branch in the Philippines. There
can be no other logical conclusion considering the undisputed fact
that the investment (totalling 283.260 shares including that of

3.

4.

nominee) was made for purposes peculiarly germane to the

conduct of the corporate affairs of Marubeni Japan, but certainly
not of the branch in the Philippines. It is thus clear that petitioner,
having made this independent investment attributable only to the
head office, cannot now claim the increments as ordinary
consequences of its trade or business in the Philippines and avail
itself of the lower tax rate of 10 %.
NO. while public respondents correctly concluded that the
dividends in dispute were neither subject to the 15 % profit
remittance tax nor to the 10 % intercorporate dividend tax, the
recipient being a non-resident stockholder, they grossly erred in
holding that no refund was forthcoming to the petitioner because
the taxes thus withheld totalled the 25 % rate imposed by the
Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). To
simply add the two taxes to arrive at the 25 % tax rate is to
disregard a basic rule in taxation that each tax has a different tax
basis. While the tax on dividends is directly levied on the dividends
received, "the tax base upon which the 15 % branch profit
remittance tax is imposed is the profit actually remitted abroad."
YES. Petitioner, being a non-resident foreign corporation, as a
general rule, is taxed 35 % of its gross income from all sources
within the Philippines. [Section 24 (b) (1)]. However, a discounted
rate of 15% is given to petitioner on dividends received from a
domestic corporation (AG&P) on the condition that its domicile
state (Japan) extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 % represents the
difference between the regular tax of 35 % on non-resident foreign
corporations which petitioner would have ordinarily paid, and the
15 % special rate on dividends received from a domestic
corporation.

2.

Cases are not tried jointly in the CTA. CTA reversed the decision of
CIR and held that the proceeds of BOAC passage ticket in the
Philippines do not constitute income from Philippine sources since no
service of air carriage of passengers or goods was performed within
the Philippines.
Hence this petition.
NOTE: At the time the assessments were made, BOAC had
no landing rights and not CPC except party in the years 1961 and
1962.
Issue: 1. WON revenue of BOAC from sales of ticket in the
Philippines is taxable? 2. WON BOAC is a resident foreign
corporation? 3. WON BOAC is a non-resident foreign corporation and
is subject only to 35% gross income tax?
Held:
1.

YES. For the source of income to be considered as coming from the

Philippines, it is sufficient that the income is derived from activity within
the Philippines. In BOAC's case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The site of
the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the
government.

2.

YES. 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

Consequently, petitioner is entitled to a refund on the transaction in

question.
Tags: tax, digest
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CIR vs. BOAC

Facts: BOAC a British government owned corporation engaged in

international airline business and a member of IATA. This case
involves two other cases tried jointly. The cases are as follows:
1.

CIR assessed BOAC with deficiency income taxes from 1959 to 1963. BOAC
protested said assessment. CIR released new assessment which claims for
taxes until 1967. The second assessment was also protested, but the claim
for refund was denied. Hence review with CTA.

CIR assessed BOAC with deficiency income tax, interest and penalty for
the years 1968-1969 and 1970-1971 with penalties for violation of Sec. 46
filing of return. Filed for request to set aside payment but was denied.

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. The absence of flight operations to and from the
Philippines is not determinative of the source of income or the site of
income taxation. Admittedly, BOAC was an off-line international airline at
the time pertinent to this case. The test of taxability is the "source"; and
the source of an income is that activity ... which produced the income.
Hence a resident foreign corporation, which now answers issues #3.

Bachrach v. Seifert [G.R. No. L2659. October 12, 1950.]

admit that a cash dividend is an income, they contend that a stock

dividend is not, but merely represents an addition to the invested
capital.
Issue:
Whether or not a dividend is an income and whether it should go to
the usufructuary.
Held:
The usufructuary shall be entitled to receive all the natural,
industrial, and civil fruits of the property in usufruct. The 108,000

Jul
Facts:

shares of stock are part of the property in usufruct. The 54,000

shares of stock dividend are civil fruits of the original investment.
They represent profits, and the delivery of the certificate of stock
covering said dividend is equivalent to the payment of said profits.

The deceased E. M. Bachrach, who left no forced heir except his

Said shares may be sold independently of the original shares, just

widow Mary McDonald Bachrach, in his last will and testament

as the offspring of a domestic animal may be sold independently of

made various legacies in cash and willed the remainder of his

its mother. If the dividend be in fact a profit, although declared in

estate. The estate of E. M. Bachrach, as owner of 108,000 shares of

stock, it should be held to be income. A dividend, whether in the

stock of the Atok-Big Wedge Mining Co., Inc., received from the

form of cash or stock, is income and, consequently, should go to

latter 54,000 shares representing 50 per cent stock dividend on the

the usufructuary, taking into consideration that a stock dividend as

said 108,000 shares. On June 10, 1948, Mary McDonald Bachrach,

well as a cash dividend can be declared only out of profits of the

as usufructuary or life tenant of the estate, petitioned the lower

corporation, for if it were declared out of the capital it would be a

court to authorize the Peoples Bank and Trust Company, as

serious violation of the law.

administrator of the estate of E. M. Bachrach, to transfer to her the

said 54,000 shares of stock dividend by indorsing and delivering to
her the corresponding certificate of stock, claiming that said
dividend, although paid out in the form of stock, is fruit or income
and therefore belonged to her as usufructuary or life tenant. Sophie
Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said
petition on the ground that the stock dividend in question was not

Under the Massachusetts rule, a stock dividend is considered part

of the capital and belongs to the remainderman; while under the
Pennsylvania rule, all earnings of a corporation, when declared as
dividends in whatever form, made during the lifetime of the
usufructuary, belong to the latter. The Pennsylvania rule is more in
accord with our statutory laws than the Massachusetts rule.

income but formed part of the capital and therefore belonged not

Case Digest on Bank of America, NT v. Court of Appeals

to the usufructuary but to the remainderman. While appellants

228 SCRA 357

Bank of America received by registered mail an irrevocable letter of credit purportedly

issued by Bank of Ayudhya Samyek Branch, for the account of General Chemicals,
Ltd., of Thailand in the amount of $2,782,000.00 to cover the sale of plastic ropes and
agricultural files, with Bank of America as the advising bank and Inter-Resin Industrial
Corporation as beneficiary.
Bank of America notified Inter-Resin of the letter of credit. Upon request by InterResin for Bank of America to confirm the letter of credit, latter refused although one of
its employee explained to Inter-Resin that there was no need for confirmation
because the letter of credit is genuine.
Inter-Resin therefore twice sought availment under the letter of credit. Bank of
America issued P10,219,093 in the first availment upon being satisfied of the
documents submitted by Inter-Resin.
However, Bank of America stopped the processing of the second availment upon
being informed by Bank of Ayudhya that the letter of credit was fraudulent. Further,
upon conducting an examination of the vans sent by Inter-Resin, it found out that they
contain not ropes but plastic strips, wrappers, rags and waste materials.
Bank of America sued Inter-Resin for recovery of the money it gave under the first
availment, considering the letter of credit has been disowned by Bank of Ayudhya.
However, the trial court ruled in favor of Inter-Resin which was affirmed by the Court
of Appeals.
Supreme Court reversed the decision of the lower courts. It ruled that the crucial point
of dispute in this case is whether, under the letter of credit, Bank of America has
incurred any liability to the beneficiary thereof, an issue that largely is dependent on
the banks participation in that transaction: as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it could be
considered as having incurred that liability.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact,
only been an advising, not confirming, bank, and this much is clearly evident, among
other things, by the provisions of the letter of credit itself, the petitioner banks letter of
advice, its request for payment of advising fee, and the admission of Inter-Resin that
it has paid the same. That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually has paid the proceeds
thereof, did not obviously make it a confirming bank.
As an advising or notifying bank, Bank of America did not incur any obligation more
than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation of
an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to Inter-Resin finds no real
support in the UCP.

As advising bank, Bank of America is bound only to check the apparent authenticity
of the letter of credit, which it did. Websters explains that the word apparent
suggests appearance to unaided senses that is not or may not be borne out by more
rigorous examination or greater knowledge.
May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft for partial availment thereunder and the required documents
therefore were later negotiated with it by Inter-Resin? The answer is yes.
This kind of transaction is what is commonly referred to as a discounting
arrangement. This time, Bank of America, has acted independently as a negotiating
bank, thus saving Inter-Resin from the hardship of presenting the documents directly
to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has
a right of recourse against the issuer bank and until reimbursement is obtained, InterResin, as the drawer of the draft, continues to assume a contingent liability thereon.
SC noted that the additional ground raised by Bank of America, i.e. that Inter-Resin
sent waste instead of its products, is really of no consequence. In the operation of a
letter of credit, the involved banks deal only with documents and not on goods
described in those documents.

Compania General de Tobacos de Filipinas vs. ManilaGR L-16619, 29 June

1963
En Banc, Dizon (J): 8 concur, 2 took no part
Facts:
Compania General de Tabacos de Filipinas (Tabacalera) paid the City of Manila the
fixed license feesprescribed by Ordinance 3358 for the years 1954 to 1957.
In 1954, City Ordinance 3634 and 3816 were passed; where the term general
merchandise found therein included all articles in Sections 123 to 148 of theTax
Code (thus, also liquor under Sedctions 133 to 135). The Tabacalera paid its
wholesalers and retailerstaxes. In 1954, the City Treasurer addressed a letter to an
accounting firm, expressing the view that liquord e a l e r s p a y i n g t h e a n n u a l
wholesale and retail fixed tax under Ordinance 3358 are not
s u b j e c t t o t h e wholesale aand retail deaklers taxes prescribed by City
Ordinances 3634, 3301, and 3816. The Tabacalera,upon learning of said stopped
including quarterly sworn declaratons required by the latter ordinances, and in1957,
demanded refunde of the alleged overpayment. The claim was disallowed.
Issue:
Whether there is a distinction between Ordinance 3358 and Ordinances
3634, 3301 and 3816, to prevent refund to the company.
Held:
Generally, the term tax applies to all kinds of exactions which
become public funds. Legally,however, a license fee is a legal concept
quite distinct from tax: the former is imposed in the exercise of police
power for purposes of regulation, while the latter is imposed under the taxing power

for the purpose ofraising revenues. Ordinance 3358 prescribes municipal license fees
for the privilege to engage in the businessof selling liquor or alcohol beverages;
considering that the sale of intoxicating liquor is (potentially) harmfulto public health
and morals, and must be subject to supervision or regulation by the State and by
cities andmunicipalities authorized to act in the premises. On the other
hand, Ordinances 3634 , 3301 and 3816 imposed taxes on the sales of general
merchandise, wholesale or retail, and are revenue measures enacted bythe Municipal
Board of Manila.Both a license fee and a tax may be imposed on the same
business or occupation, or for selling the same article, without it being in
violation of the rule against double taxation. The contrary view of the Treasurer inits
letter is of no consequence as the government is not bound by the errors
or mistakes committed by its officers, specially on matters of law.The company, thus, is
not entitled to refund.

Petitioner Antonio Porta Ferrer sold his bakery La Suiza Bakery

to Juan Pons for the summer of P100,000.00. Petitioner was the sole
proprietor of the said bakery from October 16, 1951 up to September 15,
1955. The assets of the bakery consisted of accounts receivable raw
materials, wrapping supplies, firewood, unexpired insurance, good-will,
machinery and equipment, and furniture and fixtures, with a total book
value of P74,321.91. In selling the bakery, petitioner spent a total of
P6,000.00.

vs. (Collector) now

Commissioner Of Internal
Revenue

Petitioner later requested the respondent, Commissioner of

Internal Revenue, to refund the sum of P2,030.00, claiming that the
bakery was a capital asset which he had held for more than twelve
months, so that only 50 per cent of it was taxable under the National
Internal Revenue Code considering that the profit from its sale was a long
term capital gain. When no action was taken by respondent on his
request, petitioner filed a petition for refund in the Court of Tax
Appeals. The said Court denied petitioners claim for refund on the
ground that the sale of the bakery constitute sale of individual assets,
some of which were capital assets while the others were ordinary
assets. But since petitioner failed to show what portion of the selling
price of the bakery was fairly attributable to each asset, the Tax Court
held that it could not ascertain the capital and/or ordinary gains taxes
properly payable upon the sale of the business.

Antonio Porta Ferrer

5 SCRA 102
G.R. No. L-16021 August 31, 1962

Regala, J.

Doctrine:
In order to ascertain the capital and/or ordinary gains taxes
properly payable on the sale of a business, including its tangible assets, it
is incumbent upon the taxpayer to show not only the cost basis of each
asset, but also what portion of the selling price is fairly attributable to
each asset.

Facts:

After deducting the total book value of the assets and the
incidental expenses from the gross selling price, petitioner filed his
income tax return, showing a net profit of P19,678.09 as having been
realized from the sale of the bakery. On the basis of this amount, he paid
P2,439.00 as income tax.

Hence, this petition.

Issues:
1.

Whether the Tax Court had jurisdiction over this case; and

2.

Whether or not the sale of the bakery was a sale of capital

asset or of individual assets comprising the business

Held:

1. The Supreme Court ruled in the negative. The rule is well

settled that no question will be considered by the appellate court which
has not been raised in the court below. When a party deliberately adopts a
certain theory, and the case is tried and decided upon the theory in the
court below, he will not be permitted to change his theory on appeal,
cause to permit him to do so would be unfair to the adverse party.
2. The Supreme Court ruled that the sale of the La Suiza Bakery
was a sale of individual assets comprising the business. Parenthetically, it
may be noted that tax rates are graduated upwards as the total amount of
income increases. But capital assets are generally held for a period in
excess of a year. When held for more than a year, the profit or loss
realized is reported for tax purposes only in the year that the asset was
sold or exchanged even though the increment might have developed over
several years or was the result of years of effort. Since the gain is taxed
all in one year, a higher rate of tax would necessarily be paid be included;
similarly, only a limited amount of any loss than if a part of the gain were
reported each year the asset was held. In an attempt to compensate for
this, only a percentage of the gain on such sales is required to can be
deducted in the year in which realized.
We find that Section 34 (a) (1) of our Tax Code is patterned after
Section 117 (a) (1) of the U.S. Internal Revenue Code. In interpreting this
latter provision, the United States Circuit Court of Appeals held in the
leading case ofWilliams v. McGowan, where it was held that Congress
plainly did mean to comminute the elements of a business; plainly it did
not regard the whole as "capital assets."
In line with this ruling, We hold that the sale of the "La Suiza
Bakery" was a sale not of a single asset but of individual assets that made
up the business. And since petitioner failed to point out what part of the
price he had received could be fairly attributed to each asset, the Tax
Court correctly denied his claim.
In order to ascertain the capital and/or ordinary gains taxes
properly payable on the sale of a business, including its tangible assets, it
is incumbent upon the taxpayer to show not only the cost basis of each
asset, but also what portion of the selling price is fairly attributable to
each asset.
WHEREFORE, the decision of the Court of Tax Appeals is hereby
affirmed, with costs against the petitioner.

WISE VS. MEER "ISSUES

and RULINGS:

1.

) Appellants contend that the amounts received by

them and on which the taxes in question were
assessed and collected were ordinary dividends; CIR
contends that they were liquidating
dividends. SC: The distributions under consideration
were not ordinary dividends. Therefore, they are
taxable as liquidating dividends. It was stipulated in
the deed of sale that the sale and transfer of the HK
Co. shall take effect on June 1, 1937. Distribution took
place on June 8. They could not consistently deem all
the business and assets of the corporation sold as of
June 1, 1937, and still say that said corporation, as a
going concern, distributed ordinary dividends to them
thereafter.
2.
Are such liquidating dividends taxable
income? SC: Income tax law states that Where a
corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in
complete liquidation or dissolution, the gain realized
or loss sustained by the stockholder, whether
individual or corporation, is a taxable income or a
deductible loss as the case may be. Appellants
received the distributions in question in exchange for
the surrender and relinquishment by them of their
stock in the HK Co. which was dissolved and in
process of complete liquidation. That money in the
hands of the corporation formed a part of its income
and was properly taxable to it under the Income Tax

Law. When the corporation was dissolved and in

process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in
question to them in exchange, a transaction took place.
The shareholder who received the consideration for
the stock earned that much money as income of his
own, which again was properly taxable to him under
the Income Tax Law.
3.
Non-resident alien individual appellants contend
that if the distributions received by them were to be
considered as a sale of their stock to the HK Co., the
profit realized by them does not constitute income
from Philippine sources and is not subject to
Philippine taxes, "since all steps in the carrying out of
this so-called sale took place outside the
Philippines." SC: This contention is untenable. The HK
Co. was at the time of the sale of its business in the
Philippines, and the PH Co. was a domestic
corporation domiciled and doing business also in the
Philippines. The HK Co. was incorporated for the
purpose of carrying on in the Philippine Islands the
business of wine, beer, and spirit merchants and the
other objects set out in its memorandum of
association. Hence, its earnings, profits, and assets,
including those from whose proceeds the distributions
in question were made, the major part of which
consisted in the purchase price of the business, had
been earned and acquired in the Philippines. As such,

it is clear that said distributions were income "from

Philippine sources."