G.R. No.

109289 October 3, 1994

RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.

Article III, Section 1 No person shall be deprived of . . . property without

due process of law, nor shall any person be denied the equal protection of the
laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.

G.R. No. 109446 October 3, 1994

The Solicitor General espouses the position taken by public respondents.
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,
MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,
JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG,
in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme
for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:

VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code
and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.

An Act Adopting the Simplified Net Income Taxation Scheme For The SelfEmployed and Professionals Engaged In The Practice of Their Profession,
Amending Sections 21 and 29 of the National Internal Revenue Code, as
Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Code, as now amended, provide:
Sec. 21. Tax on citizens or residents.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the

amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace
only one subject which shall be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation.
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xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals
Engaged in the Practice of Profession. A tax is hereby imposed upon the
taxable net income as determined in Section 27 received during each taxable
year from all sources, other than income covered by paragraphs (b), (c), (d)
and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is selfemployed or practices his profession herein, determined in accordance with
the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. In computing taxable income
subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there
shall be allowed as deductions the items specified in paragraphs (a) to (i) of
this section: Provided, however, That in computing taxable income subject to
tax under Section 21 (f) in the case of individuals engaged in business or
practice of profession, only the following direct costs shall be allowed as
deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or
pursuant to the business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations
for the rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from
accredited financial institutions which must be proven to have been incurred in
connection with the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to
determine, a maximum of forty per cent (40%) of their gross receipts shall be
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allowed as deductions to answer for business or professional expenses as the

case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that
the amendatory law should be considered as having now adopted a gross income, instead of as
having still retained the netincome, taxation scheme. The allowance for deductible items, it is true,
may have significantly been reduced by the questioned law in comparison with that which has
prevailed prior to the amendment; limiting, however, allowable deductions from gross income is
neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still
that various deductions, which are by no means inconsequential, continue to be well provided
under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
legislation intended to unite the members of the legislature who favor any one of unrelated subjects
in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to
fairly apprise the people, through such publications of its proceedings as are usually made, of the
subjects of legislation. 1 The above objectives of the fundamental law appear to us to have been
sufficiently met. Anything else would be to require a virtual compendium of the law which could not
have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that
taxation "shall be uniform and equitable" in that the law would now attempt to tax single
proprietorships and professionals differently from the manner it imposes the tax on corporations
and partnerships. The contention clearly forgets, however, that such a system of income taxation
has long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities
(Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as
long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose, (3) the law applies, all things being
equal, to both present and future conditions, and (4) the classification applies equally well to all
those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR,
197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach 2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable
corporations. We certainly do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the amendatory
law and those who are not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court

cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for
being violative of due process must perforce fail. The due process clause may correctly be invoked
only when there is a clear contravention of inherent or constitutional limitations in the exercise of
the tax power. No such transgression is so evident to us.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis

ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the
Gentleman from Batangas say that this bill is intended to
increase collections as far as individuals are concerned
and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.

G.R. No. 109446

(Id. at 6:40 P.M.; Emphasis ours).
The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional
partnership (GPP) and the partners comprising the GPP are covered by R. A.
No. 7496. Thus, in determining the net profit of the partnership, only the direct
costs mentioned in said law are to be deducted from partnership income. Also,
the expenses paid or incurred by partners in their individual capacities in the
practice of their profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not deductible from his
gross income.
The real objection of petitioners is focused on the administrative interpretation of public
respondents that would apply SNIT to partners in general professional partnerships. Petitioners cite
the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, also quoted
by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the
latter's privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the
correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an income
tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not
apply to corporations. It applies only to individuals.
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In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate

version of the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business
corporations or to partnerships; it is only with respect to
individuals and professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax
treatment between individuals engaged in business or in the practice of their respective
professions and partners in general professional partnerships. The fact of the matter is that a
general professional partnership, unlike an ordinary business partnership (which is treated as a
corporation for income tax purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional partnership, which is tax
exempt, but on the partners themselves in their individual capacity computed on their distributive
shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by
Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a)
Persons exercising a common profession in general partnership shall be liable
for income tax only in their individual capacity, and the share in the net profits
of the general professional partnership to which any taxable partner would be
entitled whether distributed or otherwise, shall be returned for taxation and the
tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership,
each partner

(1) Shall take into account separately his distributive

share of the partnership's income, gain, loss, deduction,
or credit to the extent provided by the pertinent
provisions of this Code, and
(2) Shall be deemed to have elected the itemized
deductions, unless he declares his distributive share of
the gross income undiminished by his share of the
deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or
not) with others in the exercise of a common profession. Indeed, outside of the gross
compensation income tax and the final tax on passive investment income, under the present
income tax system all individuals deriving income from any source whatsoever are treated in
almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic
Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The
view can easily become myopic, however, when the law is understood, as it should be, as only
forming part of, and subject to, the whole income tax concept and precepts long obtaining under
the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all
embracing term used in the Tax Code, and it practically covers all persons who derive taxable
income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and
residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens
subject to income tax liability on their income from all sources) and of the generally accepted and
internationally recognized income taxable base (that can subject non-resident aliens and foreign
corporations to income tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates
under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpusand as
to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt
partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income
tax (and thus alluded to as "taxable partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the context of, and so legally contemplated as,
corporations. Except for few variances, such as in the application of the "constructive receipt rule"
in the derivation of income, the income tax approach is alike to both juridical persons. Obviously,
SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress
during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships
which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
4|Page

general professional partnership is such an example. 4Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration and
data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does
so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or
a flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either before
or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.

G.R. No. L-65773-74 April 30, 1987

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for
the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section
46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal
Revenue Code (NIRC).

Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint
Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January
1983, which set aside petitioner's assessment of deficiency income taxes against respondent
British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 197071, respectively, as well as its Resolution of 18 November, 1983 denying reconsideration.

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In
a letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in
the First Case but also re-issued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section
74 of the Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August 1973.
This prompted BOAC to file the Second Case before the Tax Court praying that it be absolved of
liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.

BOAC is a 100% British Government-owned corporation organized and existing under the laws of
the United Kingdom It is engaged in the international airline business and is a member-signatory of
the Interline Air Transport Association (IATA). As such it operates air transportation service and
sells transportation tickets over the routes of the other airline members. During the periods covered
by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in
the Philippines, and was not granted a Certificate of public convenience and necessity to operate in
the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961
and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it
did not carry passengers and/or cargo to or from the Philippines, although during the period
covered by the assessments, it maintained a general sales agent in the Philippines Wamer
Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC
tickets covering passengers and cargoes. 1

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax
Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes
and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of carriage of passengers or freight was
performed by BOAC within the Philippines" and, therefore, said income is not subject to Philippine
income tax. The CTA position was that income from transportation is income from services so that
the place where services are rendered determines the source. Thus, in the dispositive portion of its
Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to
cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the
fiscal years 1968-69 to 1970-71.

G.R. No. 65773 (CTA Case No. 2373, the First Case)

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC
the aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to
1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new
assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was
denied by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition
for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the
refund of the amount paid.
5|Page

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

1. Whether or not the revenue derived by private respondent British Overseas

Airways Corporation (BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC
from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident
foreign corporation doing business in the Philippines or has an office or place
of business in the Philippines.

3. In the alternative that private respondent may not be considered a resident

foreign corporation but a non-resident foreign corporation, then it is liable to
Philippine income tax at the rate of thirty-five per cent (35%) of its gross
income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within
the Philippines or having an office or place of business therein.

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by
BOAC in the Philippines constitutes income from Philippine sources and, accordingly, taxable
under our income tax laws.

(i) The term "non-resident foreign corporation" applies to a foreign corporation

not engaged in trade or business within the Philippines and not having any
office or place of business therein

The Tax Code defines "gross income" thus:

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific
criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must
be judged in the light of its peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance of acts
or works or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business organization. 2 "In
order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of
a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent
in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series
corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business in the Philippines through a local
agent during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable year from all
sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...

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(2) Resident corporations. A corporation organized, authorized, or existing

under the laws of any foreign country, except a foreign fife insurance
company, engaged in trade or business within the Philippines, shall be taxable
as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the
Philippines. (Emphasis supplied)

"Gross income" includes gains, profits, and income derived from salaries,
wages or compensation for personal service of whatever kind and in whatever
form paid, or from profession, vocations, trades,business, commerce, sales,
or dealings in property, whether real or personal, growing out of the ownership
or use of or interest in such property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or profile, or
gains, profits, and income derived from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents.
"The words 'income from any source whatever' disclose a legislative policy to include all income
not expressly exempted within the class of taxable income under our laws." Income means "cash
received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it
means something distinct from principal or capital. For, while capital is a fund, income is a flow. As
used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 197071 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the
source of income to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is
the activity that produces the income. The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The site of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of wealth
should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of
the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued
to members of the traveling public in general embraces within its terms all the elements to
constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within
the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of
real property, and (6) sale of personal property, does not mention income from the sale of tickets
for international transportation. However, that does not render it less an income from sources within
the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It
merely directs that the types of income listed therein be treated as income from sources within the
Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income
for services, with the result that the place where the services are rendered determines the source;
and since BOAC's service of transportation is performed outside the Philippines, the income
derived is from sources without the Philippines and, therefore, not taxable under our income tax
laws. The Tax Court upholds that stand in the joint Decision under review.
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. 11Unquestionably, the passage documentations in these
cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly
pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport
of passengers and cargo to and from foreign cities", 12it cannot alter the fact that income from the
sale of tickets was derived from the Philippines. The word "source" conveys one essential idea,
that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years
covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to
1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24
November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2- per
cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the
term "gross Philippine billings," thus:

7|Page

... "Gross Philippine billings" includes gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources. The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an
excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on
Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of
the appeal inJAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969,
is res judicata to the present case. The ruling by the Tax Court in that case was to the effect that
the mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not
render the taxpayer therein subject to the common carrier's tax. As elucidated by the Tax Court,
however, the common carrier's tax is an excise tax, being a tax on the activity of transporting,
conveying or removing passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by the State only when
the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines.
The subject matter of the case under consideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever form derived from any source." Since
the two cases treat of a different subject matter, the decision in one cannot be res judicata to the
other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE.
Private respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus
5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three (3)
years in accordance with the Tax Code. The BOAC claim for refund in the amount of P858,307.79
is hereby denied. Without costs.
SO ORDERED.

.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DYLIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A.
RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income taxes which they claim to have
been erroneously or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and Gamble,
Philippine Manufacturing Corporation, with offices at Sarmiento Building,
Ayala Avenue, Makati, Rizal. Said corporation is a subsidiary of Procter &
Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the
years 1970 and 1971 petitioners were assigned, for certain periods, to other
subsidiaries of Procter & Gamble, outside of the Philippines, during which
petitioners were paid U.S. dollars as compensation for services in their foreign
assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511
and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511
filed their income tax returns for the year 1970, they computed the tax due by
8|Page

applying the dollar-to-peso conversion on the basis of the floating rate

ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion
rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the
conversion rate of P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate
in converting their dollar income for 1971 to Philippine peso. However, on
February 8, 1973 and October 8, 1973, petitioners in said cases filed with the
office of the respondent Commissioner, amended income tax returns for the
above-mentioned years, this time using the par value of the peso as
prescribed in Section 48 of Republic Act No. 265 in relation to Section 6 of
Commonwealth Act No. 265 in relation to Section 6 of Commonwealth Act No.
699 as the basis for converting their respective dollar income into Philippine
pesos for purposes of computing and paying the corresponding income tax
due from them. The aforesaid computation as shown in the amended income
tax returns resulted in the alleged overpayments, refund and/or tax credit.
Accordingly, claims for refund of said over-payments were filed with
respondent Commissioner. Without awaiting the resolution of the
Commissioner of the Internal Revenue on their claims, petitioners filed their
petitioner for review in the above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review
in C.T.A. Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case
No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve
common question of law and facts, that respondent Court of Tax Appeals
heard the cases jointly. In its decision dated September 26, 1977, the
respondent Court of Tax Appeals held that the proper conversion rate for the
purpose of reporting and paying the Philippine income tax on the dollar
earnings of petitioners are the rates prescribed under Revenue Memorandum
Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund and/or tax
credit of petitioners in the above-entitled cases was denied and the petitions
for review dismissed, with costs against petitioners. Hence, this petition for
review oncertiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the
prevailing free market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes
into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the
rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as
follows:
At the outset, it is submitted that the subject matter of these two cases are
Philippine income tax for the calendar years 1970 (CTA Case No. 2511) and
1971 (CTA Case No. 2594) and, therefore, should be governed by the
provisions of the National Internal Revenue Code and its implementing rules
and regulations, and not by the provisions of Central Bank Circular No. 42
dated May 21, 1953, as contended by petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by
Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973
and January 1, 1974, respectively, imposed a tax upon the taxable net income
received during each taxable year from all sources by a citizen of the
Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue
of their employment. Thus, in their tax returns for the period involved herein,
they gave their legal residence/address as c/o Procter & Gamble PMC, Ayala
Ave., Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition
for Review, CTA Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should
be converted into Philippine pesos in computing the income tax due
therefrom, in accordance with the provisions of Revenue Memorandum
Circular No. 7-71 dated February 11, 1971 for 1970 income and Revenue
Memorandum Circular No. 41-71 dated December 21, 1971 for 1971 income,
which reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of
conversion (Revenue Circulars Nos. 7-71 and 41-71)
should be applied in order to determine the true and
correct value in Philippine pesos of the income of
petitioners. 3

9|Page

After a careful examination of the records, the laws involved and the jurisprudence on the matter,
We are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal
Revenue and thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these cases income may be defined
as an amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment. Unless otherwise specified, it means cash
or its equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from
foreign exchange transactions. For a foreign exchange transaction is simply that a transaction in
foreign exchange, foreign exchange being "the conversion of an amount of money or currency of
one country into an equivalent amount of money or currency of another." 6 When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned
nation's currency and were ALSO spending in said currency. There was no conversion, therefore,
from one currency to another.
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of
petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent of the
foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar
earnings do not fall within the classification of foreign exchange transactions, there occurred no
actual inward remittances, and, therefore, they are not included in the coverage of Central Bank
Circular No. 289 which provides for the specific instances when the par value of the peso
shall not be the conversion rate used. They conclude that their earnings should be converted for
income tax purposes using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products,
receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He
also claims that he had to use the prevailing free market rate of exchange in these cases because
of the need to ascertain the true and correct amount of income in Philippine peso of dollar earners
for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign
borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by
concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso
should be the guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter
& Gamble. It was a definite amount of money which came to them within a specified period of time
of two yeas as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as
follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed
upon the taxable net income received during each taxable year from all
sources by every individual, whether a citizen of the Philippines residing
therein or abroad or an alien residing in the Philippines, determined in
accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal Revenue Code,
Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars
were a valid exercise of the authority given to the Secretary of Finance by the Legislature which
enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said
code until revoked by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their salaries and
wages in US dollars into the Philippines, they are exempt from the coverage of such circulars.
Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook
any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason
for respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum
Circulars, being of long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court
of Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is
AFFIRMED. Costs against petitioners.
10 | P a g e

SO ORDERED.

G.R. No. 78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.

4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an
Information with the then Circuit Criminal Court (docketed as CCC-VII-3369P.C.) charging the petitioner (private respondent herein) and his wife with the
crime of estafa, alleging that they misappropriated, misapplied, and converted
to their own personal use and benefit the amount of US$999,000.00 which
they received under an implied trust for the benefit of Mellon Bank and as a
result of the mistake in the remittance by the latter.

Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a
footnote in his income tax return that a sum of money that he erroneously received and already
spent is the subject of a pending litigation and there did not declare it as income is liable to pay the
50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the
Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled,
"Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue,"
which orders the deletion of the 50% surcharge from Javier's deficiency income tax assessment on
his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or
imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA
and incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner
(private respondent herein), received from the Prudential Bank and Trust
Company in Pasay City the amount of US$999,973.70 remitted by her sister,
Mrs. Dolores Ventosa, through some banks in the United States, among which
is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with
the Court of First Instance of Rizal (now Regional Trial Court), (docketed as
Civil Case No. 26899), against the petitioner (private respondent herein), his
wife and other defendants, claiming that its remittance of US$1,000,000.00
was a clerical error and should have been US$1,000.00 only, and praying that
11 | P a g e

the excess amount of US$999,000.00 be returned on the ground that the

defendants are trustees of an implied trust for the benefit of Mellon Bank with
the clear, immediate, and continuing duty to return the said amount from the
moment it was received.

5. That on March 15, 1978, the petitioner (private respondent herein) filed his
Income Tax Return for the taxable year 1977 showing a gross income of
P53,053.38 and a net income of P48,053.88 and stating in the footnote of the
return that "Taxpayer was recipient of some money received from abroad
which he presumed to be a gift but turned out to be an error and is now
subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent
herein) received a letter from the acting Commissioner of Internal Revenue
dated November 14, 1980, together with income assessment notices for the
years 1976 and 1977, demanding that petitioner (private respondent herein)
pay on or before December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977
respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein)
wrote the Bureau of Internal Revenue that he was paying the deficiency
income assessment for the year 1976 but denying that he had any undeclared
income for the year 1977 and requested that the assessment for 1977 be
made to await final court decision on the case filed against him for filing an
allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein)
received from Acting Commissioner of Internal Revenue Romulo Villa a letter
dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest
that "the amount of Mellon Bank's erroneous remittance which you were able
to dispose, is definitely taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.

Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10,
1981.

had already disbursed. In any event, an appeal at that time (of the filing of the Comments) would
have been already too late to be seasonable. The petitioner, through the office of the Solicitor
General, stresses that:

The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote
the concluding portion:
We note that in the deficiency income tax assessment under consideration,
respondent (petitioner here) further requested petitioner (private respondent
here) to pay 50% surcharge as provided for in Section 72 of the Tax Code, in
addition to the deficiency income tax of P4,888,615.00 and interest due
thereon. Since petitioner (private respondent) filed his income tax return for
taxable year 1977, the 50% surcharge was imposed, in all probability, by
respondent (petitioner) because he considered the return filed false or
fraudulent. This additional requirement, to our mind, is much less called for
because petitioner (private respondent), as stated earlier, reflected in as 1977
return as footnote that "Taxpayer was recipient of some money received from
abroad which he presumed to be gift but turned out to be an error and is now
subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud,
consisting of deception willfully and deliberately done or resorted to by
petitioner (private respondent) in order to induce the Government to give up
some legal right, or the latter, due to a false return, was placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic)
SCRA 519), because petitioner literally "laid his cards on the table" for
respondent to examine. Error or mistake of fact or law is not fraud. (Insular
Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too
plain and simple to understand. Since the question involved in this case is of
first impression in this jurisdiction, under the circumstances, the 50%
surcharge imposed in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated
the matter to us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the
decision which held him liable for the basic deficiency income tax (excluding the 50% surcharge for
fraud)." However, he submitted in the samememorandum "that the issue may be raised in the case
not for the purpose of correcting or setting aside the decision which held him liable for deficiency
income tax, but only to show that there is no basis for the imposition of the surcharge." This
subsequent disavowal therefore renders moot and academic the posturings articulated in as
Comment10 on the non-taxability of the amount he erroneously received and the bulk of which he
12 | P a g e

xxx xxx xxx

The record however is not ambivalent, as the record clearly shows that private
respondent is self-convinced, and so acted, that he is the beneficial owner,
and of which reason is liable to tax. Put another way, the studied insinuation
that private respondent may not be the beneficial owner of the money or
income flowing to him as enhanced by the studied claim that the amount is
"subject of litigation" is belied by the record and clearly exposed as a
fraudulent ploy, as witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by
MELLON BANK for the amount of private respondent's wife was $999,000.00
after opening a dollar account with Prudential Bank in the amount of
$999,993.70, private respondent and his wife, with haste and dispatch, within
a span of eleven (11) electric days, specifically from June 3 to June 14, 1977,
effected a total massive withdrawal from the said dollar account in the sum of
$975,000.00 or P7,020,000.00. . . . 11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not
declaring the "mistaken remittance" in his income tax return and by merely
making a footnote thereon which read: "Taxpayer was the recipient of some
money from abroad which he presumed to be a gift but turned out to be an
error and is now subject of litigation." It is respectfully submitted that the said
return was not fraudulent. The footnote was practically an invitation to the
petitioner to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing"
(Griffiths v. Comm., 50 F [2d] 782), that is, it must be stronger than the "mere
preponderance of evidence" which would be sufficient to sustain a judgment
on the issue of correctness of the deficiency itself apart from the fraud penalty.
(Frank A. Neddas, 40 BTA 672). The following circumstances attendant to the
case at bar show that in filing the questioned return, the private respondent
was guided, not by that "willful and deliberate intent to prevent the
Government from making a proper assessment" which constitute fraud, but by

an honest doubt as to whether or not the "mistaken remittance" was subject to

tax.

In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed
in this manner:

First, this Honorable Court will take judicial notice of the fact that so-called
"million dollar case" was given very, very wide publicity by media; and only
one who is not in his right mind would have entertained the idea that the BIR
would not make an assessment if the amount in question was indeed subject
to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is
of first impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition).
Even in the United States, the authorities are not unanimous in holding that
similar receipts are subject to the income tax. It should be noted that the
decision in the Rutkin case is a five-to-four decision; and in the very case
before this Honorable Court, one out of three Judges of the respondent Court
was of the opinion that the amount in question is not taxable. Thus, even
without the footnote, the failure to declare the "mistaken remittance" is not
fraudulent.
Third, when the private respondent filed his income tax return on March 15,
1978 he was being sued by the Mellon Bank for the return of the money, and
was being prosecuted by the Government for estafa committed allegedly by
his failure to return the money and by converting it to his personal benefit. The
basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not
have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax
return that the amount received was still under litigation. If he had paid the tax,
would that not constitute estafa for using the funds for his own personal
benefit? and would the Government refund it to him if the courts ordered him
to refund the money to the Mellon Bank? 12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal
Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the
tax due from him or of the deficiency tax in case payment has been made on the basis of the return
filed before the discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the
filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation
on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money
from abroad which he presumed to be a gift but turned out to be an error and is now subject of
litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had literally "laid his cards on the table." 13
13 | P a g e

. . . The fraud contemplated by law is actual and not constructive. It must be

intentional fraud, consisting of deception willfully and deliberately done or
resorted to in order to induce another to give up some legal right. Negligence,
whether slight or gross, is not equivalent to the fraud with intent to evade the
tax contemplated by law. It must amount to intentional wrong-doing with the
sole object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making
entries in the returns and in the assessment, respectively, under the inventory
method of determining tax liability, it would be unfair to treat the mistakes of
the petitioner as tainted with fraud and those of the respondent as made in
good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at
most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false
return" may not be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the
herein petitioner. The government was not induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because
Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to
collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the
imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of
swindling charges, perhaps even for greed by spending most of the money he received, but the
records lack a clear showing of fraud committed because he did not conceal the fact that he had
received an amount of money although it was a "subject of litigation." As ruled by respondent Court
of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private
respondent in the deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is
AFFIRMED. No costs.
SO ORDERED.

G.R. Nos. 118498 & 124377 October 12, 1999

FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondents.
PURISIMA, J.:
Before the Court are two consolidated Petitions for Review on Certiorari under Rule 45 of the
Revised Rules of Court seeking to set aside the Decisions of the Court of Appeals in CA-GR. SP
Nos. 32922 1 and 32022. 2

On June 28, 1985, petitioner brought a Petition for Review 3 before the Court of Tax Appeals,
docketed as CTA Case No. 3951. On June 15, 1993, the said court came out with its Decision,
ruling thus:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering
petitioner to pay respondent the amount of P306,165.35 as deficiency
withholding tax at source for the fourth quarter of 1974 to the third quarter of
1975 plus 10% surcharge and 14% annual interest from November 29, 1979
to July 31, 1980, plus 20% interest from August 1, 1980 until fully paid but not
to exceed that which corresponds to a period of three (3) years pursuant to
P.D. No. 1705.1wphi1.nt
SO ORDERED.

In G.R. No. 118498, the Court of Appeals culled the antecedent facts that matter as follows:
The basic operative facts are not in dispute, to wit: Filipinas Synthetic Fiber
Corporation . . ., a domestic corporation received on December 27, 1979 a
letter of demand . . . from the Commissioner of Internal Revenue . . .
assessing it for deficiency withholding tax at source in the total amount of
P829,748.77, inclusive of interest and compromise penalties, for the period
from the fourth quarter of 1974 to the fourth quarter of 1975. The bulk of the
deficiency withholding tax assessment, however, consisted of interest and
compromise penalties for alleged late payment of withholding taxes due on
interest loans, royalties and guarantee fees paid by the petitioner to nonresident corporations. The assessment was seasonably protested by the
petitioner through its auditor, SGV and Company. Respondent denied the
protest in a letter dated 14 May 1985 . . . on the following ground: "For
Philippine internal revenue tax purposes, the liability to withhold and pay
income tax withheld at source from certain payments due to a foreign
corporation is at the time of accrual and not at the time of actual payment or
remittance thereof", citing BIR Ruling No. 71-003 and BIR Ruling No. 24-71003-154-84 dated 12 September 1984 as well as the decision of the Court of
Tax Appeals . . . in CTA Case No. 3307 entitled "Construction Resources of
Asia, Inc., versus Commissioner of Internal Revenue". The aforementioned
case held that "the liability of the taxpayer to withhold and pay the income tax
withheld at source from certain payments due to a non-resident foreign
corporation attaches at the time of accrual payment or remittance thereof" and
"the withholding agent/corporation is obliged to remit the tax to the
government since it already and properly belongs to the government. Since
the taxpayer failed to pay the withholding tax on interest, royalties, and
guarantee fee at the time of their accrual and in the books of the corporation
the aforesaid assessment is therefore legal and proper.

With the denial of its motion for reconsideration, petitioner appealed the CTA disposition to the
Court of Appeals, which affirmed in toto the appealed decision.
Dissatisfied therewith, petitioner found its way to this Court via the present Petition; contending
that:
THE CA ERRED IN HOLDING THAT FILSYN'S LIABILITY TO WITHHOLD
THE INCOME TAX FOR INTEREST, ROYALTIES AND DIVIDENDS, WHICH
WERE PAYABLE TO NON-RESIDENT FOREIGN CORPORATIONS,
ATTACHED UPON "SETTING-UP" OR ACCRUAL OF THESE AMOUNTS
RATHER THAN WHEN SAID AMOUNTS BECOME DUE AND
DEMANDABLE UNDER THE APPLICABLE CONTRACTS.
In G.R. No. 124377, what is being questioned by petitioner is the assessed deficiency withholding
tax at source for the period from the fourth quarter of 1975 to the fourth quarter of 1976 amounting
to P379,700.68.
The pivot of inquiry here is whether the liability to withhold tax at source on income payments to
non-resident foreign corporations arises upon remittance of the amounts due to the foreign
creditors or upon accrual thereof.
It is petitioner's submission that the withholding taxes on the said interest income and royalties
were paid to the government when the subject interest and royalties were actually remitted abroad.
Stated otherwise, whatever amount has accrued in the books, the withholding tax due thereon is
ultimately paid to the government upon remittance abroad of the amount accrued.
Sec. 53 of the National Internal Revenue Code, in force at that time (1975), reads:
Withholding Tax at source . . .

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xxx xxx xxx

(b) Non-resident aliens and foreign corporations Every individual,
corporation, partnership, or association, in whatever capacity acting, including
a lessee or mortgagor of real or personal property, trustee acting in any trust
capacity, executor, administrator, receiver, conservator, fiduciary, employer,
and every officer or employee of the Government of the Republic of the
Philippines having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, royalties, salaries, wages, premiums, annuities,
compensation, remunerations, emoluments, or other fixed or determinable
annual, periodical, or casual gains, profits, and income, and capital gains, of
any non-resident alien not engaged in trade or business within the Philippines,
shall (except in the case provided in sub-section (a) (1) of this Section) deduct
and withhold from the annual, periodical, or casual gains, profits, and income,
and capital gains, a tax equal to 30 per cent thereof.
xxx xxx xxx
(2) Non-resident foreign corporations In the case of foreign corporations
subject to tax under this Title, not engaged in trade or business within the
Philippines, there shall be deducted and withheld at the source in the same
manner and upon the same items as is provided in subsection (b) (1) of this
section, as well as on remunerations for technical services or otherwise, a tax
equal to thirty-five (35) per cent thereof. This tax shall be returned and paid in
and subject to the same conditions as provided in Section 54.
On the other hand, Section 54 of the same law, provides:
Returns and payments of taxes withheld at source
(a) Quarterly return and payment of taxes withheld Taxes deducted and
withheld under Section 53 shall be covered by a return and paid to the
Commissioner of Internal Revenue or his collection agent in the province, city,
or municipality where the withholding agent has his legal residence or
principal place of business, or where the withholding agent is a corporation,
where the principal office is located. The taxes deducted and withheld by the
withholding agent shall be held as a special fund in trust for the Government
until paid to the collecting officers. The Commissioner of Internal Revenue
may, with the approval of the Secretary of Finance, require these withholding
agents to pay or deposit the taxes deducted and withheld at more frequent
intervals when necessary to protect the interest of the Government. The return
shall be filed and the payment made within 25 days from the close of each
calendar quarter . . .
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The aforecited provisions of law are silent as to when does the duty to withhold the taxes arise.
And to determine the same, an inquiry as to the nature of accrual method of accounting, the
procedure used by the herein petitioner, and to the modus vivendi of withholding tax at source
come to the fore.
The method of withholding tax at source is a procedure of collecting income tax sanctioned by the
National Internal Revenue Code. Section 53 (c) of which, provides:
Return and Payment Every person required to deduct and withhold any tax
under this section shall make return thereof, . . . for the payment of the tax,
shall pay the amount withheld to the officer of the Government of the
Philippines authorized to receive it. Every such person is made personally
liable for such tax, and is indemnified against the claims and demands of any
person for the amount of any payments made in accordance with the
provision of this section.
In the aforecited provision of law, the withholding agent is explicitly made personally liable for the
income tax withheld under Section 54. In Phil. Guaranty Co., Inc. vs. Commissioner of Internal
Revenue, 4 the Court, has ratiocinated:
The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax
under all circumstances. In effect, the responsibility for the collection of the tax
as well as the payment thereof is concentrated upon the person over whom
the Government has jurisdiction. Thus, the withholding agent is constituted the
agent both the government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government's agent. In regard to the
filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore,
is no ordinary government agent especially because under Section 53 (c) he
is held personally liable for the tax he is duty bound to withhold; whereas, the
Commissioner of Internal Revenue and his deputies are not made liable to
law.
On the other hand, "under the accrual basis method of accounting, income is reportable when all
the events have occurred that fix the taxpayer's right to receive the income, and the amount can be
determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual
receipt, that determines when to include the amount in gross income." 5 Gleanable from this notion
are the following requisites of accrual method of accounting, to wit: "(1) that the right to receive the
amount must be valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the
amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable
expectation that the amount will be paid in due course." 6

In the case at bar, after a careful examination of pertinent records, the Court concurred in the
finding by the Court of Appeals in CA GR. SP No. 32922 "that there was a definite liability, a clear
and imminent certainty that at the maturity of the loan contracts, the foreign corporation was going
to earn income in an ascertained amount, so much so that petitioner already deducted as business
expense the said amount as interests due to the foreign corporation. This is allowed under the law,
petitioner having adopted the "accrual method" of accounting in reporting its incomes."
All things studiedly considered, the Court is of the opinion, and holds, that the Court of Appeals
erred not in ruling that:
. . . Petitioner cannot now claim that there is no duty to withhold and remit
income taxes as yet because the loan contract was not yet due and
demandable. Having "written-off" the amounts as business expense in its
books, it had taken advantage of the benefit provided in the law allowing for
deductions from gross income. Moreover, it had represented to the BIR that
the amounts so deducted were incurred as a business expense in the form of
interest and royalties paid to the foreign corporations. It is estopped from
claiming otherwise now. 7
WHEREFORE, the decisions of the Court of Appeals in CA GR. SP Nos. 32922 and 32022 are
hereby AFFIRMEDin toto. No pronouncement as to costs.
SO ORDERED.

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G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.

REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated
from the same factual antecedents generating the claims for tax credit of private respondents, the
same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided
herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation
(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines,
for purposes of the projected expansion of the productive capacity of the former's mines in Toledo,
Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of
$20,000,000.00, United States currency, for the installation of a new concentrator for copper
production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from
said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan
was to be used for the purchase of the concentrator machinery from Japan. 1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on
May 26, 1970 in the sum of 4,320,000,000.00, at about the same time as the approval of its loan
for 2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is
equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The
records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to
Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and
as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay
back the total amount of loan by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former
to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax
thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53
(b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and
duly remitted to the Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later
noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi
executed a waiver and disclaimer of its interest in the claim for tax credit in favor of
Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents
filed a petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The
petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a
financing institution owned, controlled and financed by the Japanese Government. Such
governmental status of Eximbank, if it may be so called, is the basis for private repondents' claim
for exemption from paying the tax on the interest payments on the loan as earlier stated. It was
further claimed that the interest payments on the loan from the consortium of Japanese banks were
likewise exempt because said loan supposedly came from or were financed by Eximbank. The
provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), 6 which
excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on their deposits in banks
in the Philippines by (1) foreign governments, (2) financing institutions owned,
controlled, or enjoying refinancing from them, and (3) international or regional
financing institutions established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was
later reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous
payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The
records show that on November 16, 1976, the said division recommended to petitioner the
approval of private respondent's claim. However, before action could be taken thereon, respondent

17 | P a g e

court scheduled the case for hearing on September 30, 1977, during which trial private
respondents presented their evidence while petitioner submitted his case on the basis of the
records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax
credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that
petitioner admitted the material averments of private respondents when he supposedly prayed "for
judgment on the pleadings without off-spring proof as to the truth of his allegations." 8 Furthermore,
the court declared that all papers and documents pertaining to the loan of 4,320,000,000.00
obtained by Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also
observed that the money for the loans from the consortium of private Japanese banks in the sum of
2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that the
ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit
through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an
appeal to this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was
withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner,
repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a
letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of
factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated
September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with
respondent court and a petition for review was filed with this Court on December 19, 1987. Said
later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended
to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of
the tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is
whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the
creditor whose investments in the Philippines on loans are exempt from taxes under the code.

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Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
petitioner should be deemed to have admitted the allegations of the private respondents when it
submitted the case on the basis of the pleadings and records of the bureau. There is nothing to
indicate such admission on the part of petitioner nor can we accept respondent court's
pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the
Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's
supporting evidence. Additionally, a hearing was conducted, with presentation of evidence, and the
findings of respondent court were based not only on the pleadings but on the evidence adduced by
the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial
evidence or if there is a showing of gross error or abuse on the part of the tax court. 11 Thus,
ordinarily, we could give due consideration to the holding of respondent court that Mitsubishi is a
mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases,
however, warrant a departure from said general rule since we are convinced that there is a
misapprehension of facts on the part of the tax court to the extent that its conclusions are
speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the
contract of loan and Atlas as the seller of the copper concentrates. From the categorical language
used in the document, one prestation was in consideration of the other. The specific terms and the
reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier
assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that
Mitsubishi stated in its loan application with the former was that the amount being procured would
be used as a loan to and in consideration for importing copper concentrates from Atlas. 12 Such an
innocuous statement of purpose could not have been intended for, nor could it legally constitute, a
contract of agency. If that had been the purpose as respondent court believes, said corporations
would have specifically so stated, especially considering their experience and expertise in financial
transactions, not to speak of the amount involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to
the following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple
contract of loan. It is not a mere creditor-debtor relationship. It is more of a
reciprocal obligation between ATLAS and MITSUBISHI where the latter shall
provide the funds in the installation of a new concentrator at the former's
Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to

MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be
produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within
the specified term was the consideration of the granting of the amount of $20
million to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to
obtain funds. Hence, it had to secure a loan or loans from other sources. And
from what sources, it is immaterial as far as ATLAS in concerned. In this case,
MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan and the
consortium of Japanese banks financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own
independent capacity as a private entity and not as a conduit of the
consortium of Japanese banks or the EXIMBANK of Japan. While the loans
were secured by MITSUBISHI primarily "as a loan to and in consideration for
importing copper concentrates from ATLAS," the fact remains that it was a
loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a
distinct and separate contract from that entered into by MITSUBISHI and
ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was intended to
be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and
Sales Contract cannot be any clearer. The only signatories to the same were
MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that
MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity,
private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the
rule that when a contract of loan is completed, the money ceases to be the
property of the former owner and becomes the sole property of the obligor
(Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from
EXIMBANK, of Japan, said amount ceased to be the property of the bank and
became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole
creditor of ATLAS, the former being the owner of the $20 million upon
completion of its loan contract with EXIMBANK of Japan.

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The interest income of the loan paid by ATLAS to MITSUBISHI is therefore

entirely different from the interest income paid by MITSUBISHI to EXIMBANK,
of Japan. What was the subject of the 15% withholding tax is not the interest
income paid by MITSUBISHI to EXIMBANK, but the interest income earned
by MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be
distorted by other considerations aliunde. The application for the loan was approved on May 20,
1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on
April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the
amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that
this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice
for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the
parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting
the disbursement of the amount borrowed to a certain person or to a certain purpose is not
unusual, especially in the case of Eximbank which, aside from protecting its financial exposure,
must see to it that the same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it
from making loans except to Japanese individuals and corporations. We are not impressed. Not
only is there a failure to establish such submission by adequate evidence but it posits the unfair
and unexplained imputation that, for reasons subject only of surmise, said financing institution
would deliberately circumvent its own charter to accommodate an alien borrower through a
manipulated subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,
assuming the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi
is a mere conduit. Furthermore, the remittance of the interest payments may also be logically
viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement
was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of
the latter's obligation is their own concern. It should also be noted that Eximbank's loan to
Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract with Atlas
merely states that the "interest on the amount of the loan shall be the actual cost beginning from
and including other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws
granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof
rests upon the party claiming exemption to prove that it is in fact covered by the exemption so
claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not
even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to
exemption and which should indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed
"broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental
operations suffer due to diminution of much needed funds. Nor can we close this discussion
without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while
international comity is invoked in this case on the nebulous representation that the funds involved
in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the
floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic securities with private foreign entities,

20 | P a g e

which in turn will negotiate independently with their governments, could be availed of to take
advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated
April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
SO ORDERED.