VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue,
defendants-appellees.
This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil Code, a law of Spanish
origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions
of law concerning conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on
the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of
P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914,
but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing
and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal
should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana
Paterno. The general question had in the meantime been submitted to the Attorney-General of the Philippine Islands who in an
opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence
together with this opinion was forwarded to Washington for a decision by the United States Treasury Department. The United States
Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal Revenue,
action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector
of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress
known as the Income Tax Law. The burden of the complaint was that if the income tax for the year 1914 had been correctly and
lawfully computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts
of a total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result
that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation, sets forth the basis
of defendants' stand in the following way: The income of Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up
of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the profits
made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop company.
The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914. General
deductions were claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of
assessing the normal tax of one per cent on the net income there were allowed as specific deductions the following: (1) P16,687.80,
the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno,
husband and wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The normal
tax thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. The trial court
in an exhausted decision found in favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that is should be divided into two
equal parts, because of the conjugal partnership existing between them. The learned argument of counsel is mostly based upon the
provisions of the Civil Code establishing the sociedad de gananciales. The counter contentions of appellees are that the taxes
imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that
Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on
income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the
conjugal partnership of spouses resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given the course of history. The final stage
has been the selection of income as the norm of taxation. (See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the
United States, extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form this
canon of taxation and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive
scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public considerations have demanded
an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the income tax is supposed to reach the
earnings of the entire non-governmental property of the country. Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by
the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is
the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax

on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (London County Council vs. AttorneyGeneral [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income
Tax, second edition [1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136
U.S., 549; and Towne vs. Eisner, decided by the United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart, contains the
following:
The husband, as the head and legal representative of the household and general custodian of its income, should make and render the
return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain
the total amount of said income. If a wife has a separate estate managed by herself as her own separate property, and receives an
income of more than $3,000, she may make return of her own income, and if the husband has other net income, making the
aggregate of both incomes more than $4,000, the wife's return should be attached to the return of her husband, or his income should
be included in her return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case,
however, will be imposed only upon so much of the aggregate income of both shall exceed $4,000. If either husband or wife
separately has an income equal to or in excess of $3,000, a return of annual net income is required under the law, and such return
must include the income of both, and in such case the return must be made even though the combined income of both be less than
$4,000. If the aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made in the
manner stated, although neither one separately has an income of $3,000 per annum. They are jointly and separately liable for such
return and for the payment of the tax. The single or married status of the person claiming the specific exemption shall be determined
as one of the time of claiming such exemption which return is made, otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a moment to consider
the provisions of the Civil Code dealing with the conjugal partnership. Recently in two elaborate decisions in which a long line of
Spanish authorities were cited, this court in speaking of the conjugal partnership, decided that "prior to the liquidation the interest of
the wife and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until there appears that there are assets in the community as a result of the liquidation
and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income
after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not
being seized of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption
which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely
distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of
the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The
husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional
tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the
conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given
effect.
The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United States
Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as follows:
TREASURY DEPARTMENT, Washington.
Income Tax.
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence "from the Philippine authorities
relative to the method of submission of income tax returns by marred person."
You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that the Insular Auditor has been authorized
to suspend action on the warrants in question until an authoritative decision on the points raised can be secured from the Treasury
Department."
From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income of an amount sufficient to
require the imposition of the net income was properly computed and then both income and deductions and the specific exemption
were divided in half and two returns made, one return for each half in the names respectively of the husband and wife, so that under
the returns as filed there would be an escape from the additional tax; that Araneta claims the returns are correct on the ground under
the Philippine law his wife is entitled to half of his earnings; that Araneta has dominion over the income and under the Philippine law,
the right to determine its use and disposition; that in this case the wife has no "separate estate" within the contemplation of the Act
of October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the foregoing explanation, tax was assessed against the entire net income
against Gregorio Araneta; that the tax was paid and an application for refund made, and that the application for refund was rejected,
whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns were correctly rendered, and

that the refund should be allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and
Bureau of Insular Affairs for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in the United States but by
the appropriate internal-revenue officers of the Philippine Government. You are therefore advised that upon the facts as stated, this
office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case was taxable to Gregorio
Araneta, both for the normal and additional tax, and that the application for refund was properly rejected.
The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to her solely and
separate and apart from her husband, and over which her husband has no right in equity. It may consist of lands or chattels.
The statute and the regulations promulgated in accordance therewith provide that each person of lawful age (not excused from so
doing) having a net income of $3,000 or over for the taxable year shall make a return showing the facts; that from the net income so
shown there shall be deducted $3,000 where the person making the return is a single person, or married and not living with consort,
and $1,000 additional where the person making the return is married and living with consort; but that where the husband and wife
both make returns (they living together), the amount of deduction from the aggregate of their several incomes shall not exceed
$4,000.
The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3,000, but
together they have an income in excess of $4,000, in which the latter event either the husband or wife may make the return but not
both. In all instances the income of husband and wife whether from separate estates or not, is taken as a whole for the purpose of the
normal tax. Where the wife has income from a separate estate makes return made by her husband, while the incomes are added
together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this case, however, the
wife has no separate income within the contemplation of the Income Tax Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was drafted by the Congress
of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue law,
whose meaning is doubtful, by the department charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338;
In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of
Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is hereby affirmed with costs against appellants.
So ordered.
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau
of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of
Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance,
respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of Batas
Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the
National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income,
(b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net
profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly
discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis
those which are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary
amounting to class legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the
equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer,
after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982. 8 The facts as alleged were admitted
but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for
them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a
valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support
petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1.
It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired
Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was

called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the need
for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions.
It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt
and certain availability is of the essence. 12
2.
The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the
powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were
otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14
In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as
"a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to
emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of
unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not
the power to destroy while this Court sits." 17 So it is in the Philippines.
3.
This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that
runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as petitioner here
alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the
question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4,
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice.
There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as
void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and
equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18
5.
It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in
the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse
of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it
is subject to attack on due process grounds. 19
6.
Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate
whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the
governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or
at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all
persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both
in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that
equal protection and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked
upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on
some in the group equally binding on the rest." 20 That same formulation applies as well to taxation measures. The equal protection
clause is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs
of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however,
wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a
disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the
attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of the view that classification if
rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes,
went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'" 23
7.
Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be
uniform and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in
1940, when the tax "operates with the same force and effect in every place where the subject may be found. " 26 He likewise added:
"The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The
taxing power has the authority to make reasonable and natural classifications for purposes of taxation, ... . 28 As clarified by Justice
Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory
within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the standard of equal protection for
all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar situation." 30
8.
Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax
rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the

same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in
Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized
rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them.
Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the
other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction
and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the
Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net
income taxation as regards professional and business income.
9.
Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to
show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on due process, equal protection, and
uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals
and businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for private respondent.

GUTIERREZ, JR., J.:

This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the money entrusted to private
respondent Tours Specialists, Inc., earmarked and paid for hotel room charges of tourists, travelers and/or foreign travel agencies
does not form part of its gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of
1977.
We adopt the findings of facts of the Court of Tax Appeals as follows:
For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its activities as a travel agency by servicing
the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Some of the services extended
to the tourists consist of booking said tourists and travelers in local hotels for their lodging and board needs; transporting these
foreign tourists from the airport to their respective hotels, and from the latter to the airport upon their departure from the Philippines,
transporting them from their hotels to various embarkation points for local tours, visits and excursions; securing permits for them to
visit places of interest; and arranging their cultural entertainment, shopping and recreational activities.
In order to ably supply these services to the foreign tourists, petitioner and its correspondent counterpart tourist agencies abroad
have agreed to offer a package fee for the tourists. Although the fee to be paid by said tourists is quoted by the petitioner, the
payments of the hotel room accommodations, food and other personal expenses of said tourists, as a rule, are paid directly either by
tourists themselves, or by their foreign travel agencies to the local hotels (pp. 77, t.s.n., February 2, 1981; Exhs. O & O-1, p. 29, CTA
rec.; pp. 2425, t.s.n., ibid) and restaurants or shops, as the case may be.
It is also the case that some tour agencies abroad request the local tour agencies, such as the petitioner in the case, that the hotel
room charges, in some specific cases, be paid through them. (Exh. Q, Q-1, p. 29 CTA rec., p. 25, T.s.n., ibid, pp. 5-6, 17-18, t.s.n., Aug.
20, 1981.; See also Exh. "U", pp. 22-23, t.s.n., Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this arrangement, the foreign tour
agency entrusts to the petitioner Tours Specialists, Inc., the fund for hotel room accommodation, which in turn is paid by petitioner
tour agency to the local hotel when billed. The procedure observed is that the billing hotel sends the bill to the petitioner. The local
hotel identifies the individual tourist, or the particular groups of tourists by code name or group designation and also the duration of
their stay for purposes of payment. Upon receipt of the bill, the petitioner then pays the local hotel with the funds entrusted to it by
the foreign tour correspondent agency.
Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as
independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976.
Consequently, on December 6, 1979, petitioner received from respondent the 3% deficiency independent contractor's tax assessment
in the amount of P122,946.93 for the years 1974 to 1976, inclusive, computed as follows:

Total amount due P

=========

122,946.93

In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise penalty of P500.00.

Subsequently on December 11, 1979, petitioner formally protested the assessment made by respondent on the ground that the
money received and entrusted to it by the tourists, earmarked to pay hotel room charges, were not considered and have never been
considered by it as part of its taxable gross receipts for purposes of computing and paying its constractor's tax.
During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the Accounting
Department of petitioner, had testified, her credibility not having been destroyed on cross examination, categorically stated that the
amounts entrusted to it by the foreign tourist agencies intended for payment of hotel room charges, were paid entirely to the hotel
concerned, without any portion thereof being diverted to its own funds. (t.s.n., Feb. 2, 1981, pp. 7, 25; t.s.n., Aug. 20, 1981, pp. 5-9,
17-18). The testimony of Serafina Sazon was corroborated by Gerardo Isada, General Manager of petitioner, declaring to the effect
that payments of hotel accommodation are made through petitioner without any increase in the room charged (t.s.n., Oct. 9, 1981,
pp. 21-25) and that the reason why tourists pay their room charge, or through their foreign tourists agencies, is the fact that the room
charge is exempt from hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated, on cross-examination, that if their
payment is made, thru petitioner's tour agency, the hotel cost or charges "is only an act of accomodation on our (its) part" or that the
"agent abroad instead of sending several telexes and saving on bank charges they take the option to send money to us to be held in
trust to be endorsed to the hotel." (pp. 3-4, t.s.n. Aug. 10, 1982.)
Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's written protest, caused the issuance of a warrant of
distraint and levy. (p. 51, BIR Rec.) And later, respondent had petitioner's bank deposits garnished. (pp. 49-50, BIR Rec.)
Taking this action of respondent as the adverse and final decision on the disputed assessment, petitioner appealed to this Court.
(Rollo, pp. 40-45)
The petitioner raises the lone issue in this petition as follows:
WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE FEE FROM TOURISTS OR
FOREIGN TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO
3% CONTRACTOR'S TAX. (Rollo, p. 23)
The petitioner premises the issue raised on the following assumptions:
Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room accommodations, were received as part of
the package fee and, therefore, form part of "gross receipts" as defined by law.
Secondly, there is no showing and is not established by the evidence. that the amounts received and "earmarked" are actually what
had been paid out as hotel room charges. The mere possibility that the amounts actually paid could be less than the amounts
received is sufficient to destroy the validity of the ruling. (Rollo, pp. 26-27)
In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent court.
The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court and absent strong reasons
for this Court to delve into facts, only questions of law are open for determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43
[1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of
Appeals, (164 SCRA 524 [1988]), we ruled that the factual findings of the Court of Tax Appeals are binding upon this court and can
only be disturbed on appeal if not supported by substantial evidence.
In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of Tax Appeals.
As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency, like the herein private
respondent, rendered to foreign customers. The respondent differentiated between the package fee offered by both the local travel
agency and its correspondent counterpart tourist agencies abroad and the requests made by some tour agencies abroad to local tour
agencies wherein the hotel room charges in some specific cases, would be paid to the local hotels through them. In the latter case,
the correspondent court found as a fact ". . . that the foreign tour agency entrusts to the petitioner Tours Specialists, Inc. the fund for
hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed." (Rollo, p. 42) The following
procedure is followed: The billing hotel sends the bill to the respondent; the local hotel then identifies the individual tourist, or the
particular group of tourist by code name or group designation plus the duration of their stay for purposes of payment; upon receipt of
the bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency.
Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the foreign tourist agencies to
pay the room charges of foreign tourists in local hotels were not diverted to its funds; this arrangement was only an act of
accommodation on the part of the private respondent. This evidence was not refuted.
In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were part of the package fee
paid by foreign tourists to the respondent is not correct. The evidence is clear to the effect that the amounts entrusted to the private
respondent were exclusively for payment of hotel room charges of foreign tourists entrusted to it by foreign travel agencies.
As regards the petitioner's second assumption, the respondent court stated:
. . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners' Worksheet (Exh. T, p. 22, BIR Rec.), that
from July to December 1976 alone, the following sums made up the hotel room accommodations:

It is not true therefore, as stated by respondent, that there is no evidence proving the amounts earmarked for hotel room charges.
Since the BIR examiners could not have manufactured the above figures representing "advances for hotel room accommodations,"
these payments must have certainly been taken from the records of petitioner, such as the invoices, hotel bills, official receipts and
other pertinent documents. (Rollo, pp. 48-49)
The factual findings of the respondent court are supported by substantial evidence, hence binding upon this Court.
With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:
. . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and/or correspondent foreign travel
agencies and paid to local host hotels form part of the taxable gross receipts for purposes of the 3% contractor's tax. (Rollo, p. 45)
The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant to Section 191 (Section 205 of the
National Internal Revenue Code of 1977) of the Tax Code include the entire gross receipts of a taxpayer undiminished by any amount.
According to the petitioner, this interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 October, 1968 (implementing
Section 191 of the Tax Code) which states that the 3% contractor's tax prescribed by Section 191 of the Tax Code is imposed of the
gross receipts of the contractor, "no deduction whatever being allowed by said law." The petitioner contends that the only exception
to this rule is when there is a law or regulation which would exempt such gross receipts from being subjected to the 3% contractor's
tax citing the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (108 Phil. 821 [1960]). Thus, the petitioner argues
that since there is no law or regulation that money entrusted, earmarked and paid for hotel room charges should not form part of the
gross receipts, then the said hotel room charges are included in the private respondent's gross receipts for purposes of the 3%
contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the Commissioner appealed two decisions of the
Court of Tax Appeals disapproving his levy of amusement taxes upon the Manila Jockey Club, a duly constituted corporation
authorized to hold horse races in Manila. The facts of the case show that the monies sought to be taxed never really belonged to the
club. The decision shows that during the period November 1946 to 1950, the Manila Jockey Club paid amusement tax on its
commission but without including the 5-1/2% which pursuant to Executive Order 320 and Republic Act 309 went to the Board of
Races, the owner of horses and jockeys. Section 260 of the Internal Revenue Code provides that the amusement tax was payable by
the operator on its "gross receipts". The Manila Jockey Club, however, did not consider as part of its "gross receipts" subject to
amusement tax the amounts which it had to deliver to the Board on Races, the horse owners and the jockeys. This view was fully
sustained by three opinions of the Secretary of Justice, to wit:
There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the Totalizer. This portion represents
its share or commission in the total amount of money it handles and goes to the funds thereof as its own property which it may
legally disburse for its own purposes. The 5% does not belong to the club. It is merely held in trust for distribution as prizes to the
owners of winning horses. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this
portion without incurring liability to the owners of winning horses. It cannot be considered as an item of expense because the sum
used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets especially
earmarked for that purpose.
In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement tax of 10% (now it is 20% of
the "gross receipts", provided for in Section 260 of the National Internal Revenue Code), the 5% of the total bets that is set aside for
prizes to owners of winning horses should not be included by the Manila Jockey Club, Inc.
The Collector of the Internal Revenue, however had a different opinion on the matter and demanded payment of amusement taxes.
The Court of Tax Appeals reversed the Collector.
We affirmed the decision of the Court of Tax Appeals and stated:
The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt of the Manila Jockey Club the 1/2%
which it directs same Club to turn over to the Board on Races. The latter being a Government institution, there would be double
taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the Government could
not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, or knew the Club would
give, to winning horses and jockeys admittedly 5%. It is true that the law says that out of the total wager funds 12-1/2% shall be
set aside as the "commission" of the race track owner, but the law itself takes official notice, and actually approves or directs
payment of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of that 121/2% commission. As it did not at that time contemplate the application of "gross receipts" revenue principle, the law in making a
distribution of the total wager funds, took no trouble of separating one item from the other; and for convenience, grouped three items
under one common denomination.
Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although delivered to
the amusement place has been especially earmarked by law or regulation for some person other than the proprietor. (The situation
thus differs from one in which the owner of the amusement place, by a private contract, with its employees or partners, agrees to
reserve for them a portion of the proceeds of the establishment. (See Wong & Lee v. Coll. 104 Phil. 469; 55 Off. Gaz. [51] 10539; Sy
Chuico v. Coll., 107 Phil., 428; 59 Off. Gaz., [6] 896).
In the second case, the facts of the case are:
The Manila Jockey Club holds once a year a so called "special Novato race", wherein only "novato" horses, (i.e. horses which are
running for the first time in an official [of the club] race), may take part. Owners of these horses must pay to the Club an inscription

fee of P1.00, and a declaration fee of P1.00 per horse. In addition, each of them must contribute to a common fund (P10.00 per
horse). The Club contributes an equal amount P10.00 per horse) to such common fund, the total amount of which is added to the 5%
participation of horse owners already described herein-above in the first case.
Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid amusement tax on the moneys thus
contributed by horse owners (P10.00 each) because it entertained the belief that in accordance with the three opinions of the
Secretary of Justice herein-above described, such contributions never formed part of its gross receipts. On the inscription fee of the
P1.00 per horse, it paid the tax. It did not on the declaration fee of P1.00 because it was imposed by the Municipal Ordinance of
Manila and was turned over to the City officers.
The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such contributed fund P10.00 per horse
in the special novato race, holding they were part of its gross receipts. The Manila Jockey Club protested and resorted to the Court of
Tax Appeals, where it obtained favorable judgment on the same grounds sustained by said Court in connection with the 5% of the
total wager funds in the herein-mentioned first case; they were not receipts of the Club.
We resolved the issue in the following manner:
We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The ten-peso contribution never
belonged to the Club. It was held by it as a trust fund. And then, after all, when it received the ten-peso contribution, it at the same
time contributed ten pesos out of its own pocket, and thereafter distributed both amounts as prizes to horse owners. It would seem
unreasonable to regard the ten-peso contribution of the horse owners as taxable receipt of the Club, since the latter, at the same
moment it received the contribution necessarily lost ten pesos too.
As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that
there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax
Code.
Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross
receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent
never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign
travel agencies.
Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which exempts foreign
tourists from payment of hotel room tax. Section 1 thereof provides:
Sec. 1. Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire period of their stay
in the country.
The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under Section 191 of the Tax Code is in
the nature of an excise tax; that it is a tax on the exercise of the privilege to engage in business as a contractor and that it is imposed
on, and collectible from the person exercising the privilege. He sums his arguments by stating that "while the burden may be shifted
to the person for whom the services are rendered by the contractor, the latter is not relieved from payment of the tax." (Rollo, p. 28)
The same arguments were submitted by the Commissioner of Internal Revenue in the case of Commissioner of Internal Revenue v.
John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to justify his imposition of the 3% contractor's tax under Section 191 of the National
Internal Revenue Code on the gross receipts John Gotamco & Sons, Inc., realized from the construction of the World Health
Organization (WHO) office building in Manila. We rejected the petitioner's arguments and ruled:
We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court:
"In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while
indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the
burden to someone else. (Pollock v. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's tax is of course
payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the
same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on
the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the
WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the
World Health Organization.'"
Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal Revenue, et al., (127
Phil. 461) the 3% contractor's tax falls directly on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however,
held that the said case is not controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect taxes."
We agree. The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the manufacturer or
producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make
the sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer or producer even if the
sale is made to tax-exempt entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice of
America, an agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, although not imposed upon
or paid by the Organization directly, form part of the price paid or to be paid by it.

Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room charges of foreign tourists in
local hotels are subject to the 3% contractor's tax. As the respondent court aptly stated:
. . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what respondent would want to do in
this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be subjected to hotel
room tax. Although, respondent may claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of
petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and
though different, it nonetheless imposes a tax actually on room charges. One way or the other, it would not have the effect of
promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall
expenses of said tourists. (Rollo, pp. 51-52)
WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No pronouncement as to costs.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the Court of Appeals in CA-G.R. SP No.
78426 affirming the February 26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set
aside the Assessment Notices for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR)
against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment Notice No. FAS-1-86-90000680 for deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency
expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security services billed to and paid by ICC in
1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it received a final notice
before seizure demanding payment of the amounts stated in the said notices. Hence, it brought the case to the CTA which held that
the petition is premature because the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts
to a final decision on the protested assessment and may therefore be questioned before the CTA. This conclusion was sustained by
this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued against ICC. It held
that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the
said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional services were rendered to
ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at
that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was the BIR which
made an overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of
Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for security services as
shown by the various payment orders and confirmation receipts it presented as evidence. The dispositive portion of the CTAs
Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision,10 holding that although the
professional services (legal and auditing services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since ICC is using the accrual
method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have been declared as
deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the
taxable year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for professional and
security services from ICCs gross income; and (2) held that ICC did not understate its interest income from the promissory notes of
Realty Investment, Inc; and that ICC withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal
and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable
year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal
Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in which paid or
accrued or paid or incurred, dependent upon the method of accounting upon the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions.12 In
the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to actual receipt
or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become
fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that
the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been
met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly;
it must be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact
or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the
closing of its books for the taxable year.[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of
organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a
deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal
services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the 1960s.19 From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as well

as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when
they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For
one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is
using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer fees
owing to its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing
the accrual of an expense or income. However, ICC failed to discharge this burden. As to when the firms performance of its services
in connection with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute the amount of said liability with
reasonable accuracy, are questions of fact which ICC never established. It simply relied on the defense of delayed billing by the firm
and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable
amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be validly
claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing that even with only "reasonable
accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable
deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted
from its gross income for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC in 198620 and could therefore be
properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc., we sustain the findings
of the CTA and the Court of Appeals that no such understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the application of
compounded interest.21 Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not
further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR is supported by payment order and confirmation receipts.22 Hence,
the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax should be cancelled and
set aside but only insofar as the claimed deductions of ICC for security services. Said Assessment is valid as to the BIRs disallowance
of ICCs expenses for professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-000681 in the
amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426,
is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only insofar as the expenses for the professional
fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is
affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under Assessment Notice No. FAS-1-8690-000680.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15, 1999 of the Court of Appeals
in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax
court ordered the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch profit remittance
and contractors taxes from Marubeni Corporation after finding the latter to have properly availed of the tax amnesty under Executive
Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general
import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines
and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of
accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the
examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were
completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and
installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The
other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex
also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency income, branch profit remittance,
contractors and commercial brokers taxes. Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing respondent several
deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of surcharge and interest, were as follows:

The 50% surcharge was imposed for your clients failure to report for tax purposes the aforesaid taxable revenues while the 25%
surcharge was imposed because of your clients failure to pay on time the above deficiency percentage taxes.

Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the gross income from the two projects
amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the construction and
installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to
internal revenue taxes. The assessment letter further stated that the same was petitioners final decision and that if respondent
disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The first petition, CTA Case No.
4109, questioned the deficiency income, branch profit remittance and contractors tax assessments in petitioners assessment letter.
The second, CTA Case No. 4110, questioned the deficiency commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring a one-time amnesty covering unpaid income taxes for the years
1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of
the increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30, 1986 and attached thereto its
sworn statement of assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase
between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In addition to the
income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64[3] included estate and donors taxes under Title III
and the tax on business under Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O.
No. 64 further provided that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the
period within which the taxpayer could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed
their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the new
E.O. by filing an amended return and paying an additional 5% on the increase in net worth to cover business, estate and donors tax
liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No. 64 and paid a further
amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a decision in CTA Case No. 4109.
The tax court found that respondent had properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency
taxes subject of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:
WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST from collecting the 1985 deficiency
taxes it had assessed against petitioner and the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order No. 41, as amended.[4]
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court of Tax Appeals. Hence, this
recourse.
Before us, petitioner raises the following issues:
(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals which ruled that herein
respondents deficiency tax liabilities were extinguished upon respondents availment of tax amnesty under Executive Orders Nos. 41
and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractors taxes assessed by petitioner.[5]

The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of E.O. Nos. 41 and 64. There
are three (3) types of taxes involved herein income tax, branch profit remittance tax and contractors tax. These taxes are covered by
the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder, viz:
Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as the said liabilities are
concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof as a result of information
furnished under Section 316 of the National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter Four (Malversation of Public
Funds and Property) of the Revised Penal Code, as amended.
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case No. 4109 had already been
filed and was pending before the Court of Tax Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty
those taxpayers with income tax cases already filed in court as of the effectivity hereof. The point of reference is the date of
effectivity of E.O. No. 41. The filing of income tax cases in court must have been made before and as of the date of effectivity of E.O.
No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in court against
him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files it
on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch profit remittance and
contractors tax assessments was filed by respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall under
the said exception in Section 4 (b), hence, respondent was not disqualified from availing of the amnesty for income tax under E.O. No.
41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit remittance tax is defined and
imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue Code.[6] In the tax code, this tax falls under Title
II on Income Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty
of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractors tax assessment and respondents availment of the amnesty under E.O. No. 64.
E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate and donors taxes and tax on business. Estate and donors taxes
fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The contractors tax is provided in
Section 205, Chapter II, Title V of the Tax Code; it is defined and imposed under the title on business taxes, and is therefore a tax on
business.[7]
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of the amnesty for business,
estate and donors taxes. Instead, Section 8 of E.O. No. 64 provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this amendatory Executive
Order shall remain in full force and effect.
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has income tax cases already
filed in court as of the effectivity hereof. As to what Executive Order the exception refers to, respondent argues that because of the
words income and hereof, they refer to Executive Order No. 41.[8]
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O. No. 41 and its date of
effectivity. The general rule is that an amendatory act operates prospectively.[9] While an amendment is generally construed as
becoming a part of the original act as if it had always been contained therein,[10] it may not be given a retroactive effect unless it is
so provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.[11]

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the original issuance.
Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64 is a
substantive amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original act by adding
other taxes not covered in the first.[12] It has been held that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under
the original act.[13] In an amendatory act, every case of doubt must be resolved against its retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional overlooking by the State
of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law.[15] It partakes of an
absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate.[16] A tax amnesty, much like a tax exemption, is never favored nor presumed in law.[17] If
granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor
of the taxing authority.[18] For the right of taxation is inherent in government. The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by
the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the state.[19]
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term income tax cases should be read as to refer to estate and donors taxes and taxes on business while the word
hereof, to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No.
64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on November 17, 1986, CTA Case No.
4109 was already filed and pending in court. By the time respondent filed its supplementary tax amnesty return on December 15,
1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the
business tax amnesty granted therein.
It is respondents other argument that assuming it did not validly avail of the amnesty under the two Executive Orders, it is still not
liable for the deficiency contractors tax because the income from the projects came from the Offshore Portion of the contracts. The
two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the
contract under the Offshore Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not subject
to Philippine taxes.
Before going into respondents arguments, it is necessary to discuss the background of the two contracts, examine their pertinent
provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment arm of the Philippine
Government, established the Philphos to engage in the large-scale manufacture of phosphatic fertilizer for the local and foreign
markets.[20] The Philphos plant complex which was envisioned to be the largest phosphatic fertilizer operation in Asia, and among
the largest in the world, covered an area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient and integrated wharf/port
complex at the Leyte Industrial Development Estate. The wharf/ port complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling of phosphate
rock, bagged or bulk fertilizer products, liquid materials and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar),[21] and other industrial plants within the Estate. The bidding was participated in by Marubeni Head
Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an agreement entitled Turn-Key Contract
for Leyte Industrial Estate Port Development Project Between National Development Company and Marubeni Corporation.[22] The
Port Development Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel oil
depot, utilities systems, storage and service buildings, offsite facilities, harbor service vessels, navigational aid system, fire-fighting
system, area lighting, mobile equipment, spare parts and other related facilities.[23] The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and know-how,[24] and:
x x x the design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of
testing and commissioning of the Wharf-Port Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex through the Owner, with the design and
construction of other facilities around the site. The scope of works shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial port practice, for the timely and successful implementation of the
object of this Contract, whether or not expressly referred to in the abovementioned Annex I.[25]
The contract price for the wharf/ port complex was Y12,790,389,000.00 and P44,327,940.00. In the contract, the price in Japanese
currency was broken down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in
Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways:
(a) by yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by suppliers credit in favor of Marubeni
from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote economic development.[26] The OECF extended to the Philippine
Government a loan of Y7,560,000,000.00 for the Leyte Industrial Estate Port Development Project and authorized the NDC to

implement the same.[27] The other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from the
Export-Import Bank of Japan to advance payment to its sub-contractors.[28]
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were further broken down and
subdivided according to the materials, equipment and services rendered on the project. The price breakdown and the corresponding
materials, equipment and services were contained in a list attached as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened for public bidding a project to construct and install two ammonia
storage tanks in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that participated in and won the bidding. Thus, on
May 2, 1982, Philphos and respondent corporation entered into an agreement entitled Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation.[30] The object of the contract was to
establish and place in operating condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the site
for the receipt and storage of liquid anhydrous ammonia[31]and for the delivery of ammonia to an integrated fertilizer plant adjacent
to the storage complex and to vessels at the dock.[32] The storage complex was to consist of ammonia storage tanks, refrigeration
system, ship unloading system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and other
related facilities.[33] The scope of the works required for the completion of the ammonia storage complex covered the supply,
including grants of licenses and transfer of technology and know-how,[34] and:
x x x the design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of
testing and commissioning of the Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the coordination of tieins at boundaries and schedule of the use of a part or the whole of the Ammonia Storage Complex through the Owner with the design
and construction of other facilities at and around the Site. The scope of works shall also include any activity, work and supply
necessary for, incidental to or appropriate under present international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to in the abovementioned Annex I.[35]
The contract price for the project was Y3,255,751,000.00 and P17,406,000.00. Like the NDC contract, the price was divided into three
portions. The price in Japanese currency was broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in
Philippine currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by suppliers credit
from the Export-Import Bank of Japan. The price stated in the three portions were further broken down into the corresponding
materials, equipment and services required for the project and their individual prices. Like the NDC contract, the breakdown in the
Philphos contract is contained in a list attached to the latter as Annex III.[36]
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the two contracts corresponds to
the two parts into which the contracts were classifiedthe Foreign Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore Portion.[37] Japanese Yen Portion II and the Philippine Pesos
Portion correspond to the Philippine Onshore Portion.[38]
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractors tax on the income from the two
projects. In fact respondent claims, which petitioner has not denied, that the income it derived from the Onshore Portion of the two
projects had been declared for tax purposes and the taxes thereon already paid to the Philippine government.[39] It is with regard to
the gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments subject of this
case arose. Petitioner argues that since the two agreements are turn-key,[40] they call for the supply of both materials and services
to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the
materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines.[41]
Accordingly, respondents entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractors tax in accordance
with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:
Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors tax of four percent of the gross receipts is
hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of
selling or rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;
xxxxxxxxx
(q) Other independent contractors. The term independent contractors includes persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under the Local Tax Code) whose activity consists essentially of the sale of
all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical
or mental faculties of such contractors or their employees. It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
x x x x x x x x x.[43]
Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the sale of all kinds of
services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word contractor refers to a person who, in the pursuit of independent business,

undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to
control as to the petty details.[44]
A contractors tax is a tax imposed upon the privilege of engaging in business.[45] It is generally in the nature of an excise tax on the
exercise of a privilege of selling services or labor rather than a sale on products;[46] and is directly collectible from the person
exercising the privilege.[47] Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business
are done or performed within the jurisdiction of said authority.[48] Like property taxes, it cannot be imposed on an occupation or
privilege outside the taxing district.[49]
In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts.
Respondent, however, argues that the work therein were not all performed in the Philippines because some of them were completed
in Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be made and the works and services to
be performed by respondent are indeed classified into two. The first part, entitled Breakdown of Japanese Yen Portion I provides:
Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of materials and equipment which will
be shipped to Leyte as units and lots. This subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as follows:
x x x x x x x x x. [50]
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II and the Philippine Pesos
Portion enumerate other materials and equipment and the construction and installation work on the project. In other words, the
supplies for the project are listed under Portion I while labor and other supplies are listed under Portion II and the Philippine Pesos
Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of the two projects, testified that all the machines and equipment listed
under Japanese Yen Portion I in Annex III were manufactured in Japan.[51] The machines and equipment were designed, engineered
and fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-contractors in the technical appendices to each
contract.[52] Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel Corporation which did the design,
fabrication, engineering and manufacture thereof;[53] Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone
which provided the rubber fenders of the mobile equipment;[54] and B.S. Japan for the supply of radio equipment.[55] The
engineering and design works made by Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of the
design in accordance with the specifications given by respondent.[56] All sub-contractors and manufacturers are Japanese
corporations and are based in Japan and all engineering and design works were performed in that country.[57]
The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2) sets of ship unloader and
loader; several boats and mobile equipment.[58] The ship unloader unloads bags or bulk products from the ship to the port while the
ship loader loads products from the port to the ship. The unloader and loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of these equipment were completely manufactured in Japan according to the
specifications of the project. After manufacture, they were rolled on to a barge and transported to Isabel, Leyte.[59] Upon reaching
Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where they were installed.[60] Their
installation simply consisted of bolting them onto the pier.[61]
Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in Japan. The boats sailed to
Isabel on their own power. The mobile equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts,
were also manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port. These
pieces of equipment were all on wheels and self-propelled. Once unloaded at the port, they were ready to be driven and perform what
they were designed to do.[62]
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC contract. These other items
consist of supplies and materials for five (5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration
building and a security building. Most of the materials consist of steel sheets, steel pipes, channels and beams and other steel
structures, navigational and communication as well as electrical equipment. [63]
In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the ammonia storage tanks and
refrigeration units.[64] The steel plates for the tank were manufactured and cut in Japan according to drawings and specifications and
then shipped to Isabel. Once there, respondents employees put the steel plates together to form the storage tank. As to the
refrigeration units, they were completed and assembled in Japan and thereafter shipped to Isabel. The units were simply installed
there.[65] Annex III to the Philphos contract lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to shipment in accordance
with the terms of the contracts.[66] The inspection was made by representatives of respondent corporation, of NDC and Philphos.
NDC, in fact, contracted the services of a private consultancy firm to verify the correctness of the tests on the machines and
equipment[67]while Philphos sent a representative to Japan to inspect the storage equipment.[68]
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by respondent in Japan. In his
deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant General Manager and Manager of the Steel Plant
Marketing Department, Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies for

the two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were
duly issued by Kawasaki in Japanese and English.[69] Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.[70]
Between Marubeni and the two Philippine corporations, payments for all materials and equipment under Japanese Yen Portion I were
made to Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine National Bank, established letters of credit in
favor of respondent through the Bank of Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with
the Bank of Tokyo. The Bank of Tokyo, upon respondents submission of pertinent documents, released the amount in the letters of
credit in favor of respondent and credited the amount therein to respondents account within the same bank.[71]
Clearly, the service of design and engineering, supply and delivery, construction, erection and installation, supervision, direction and
control of testing and commissioning, coordination[72]of the two projects involved two taxing jurisdictions. These acts occurred in two
countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence
is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units
were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these
were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the subcontractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal Revenue v. Engineering Equipment & Supply Co[73]is not in point.
In that case, the Court found that Engineering Equipment, although an independent contractor, was not engaged in the manufacture
of air conditioning units in the Philippines. Engineering Equipment designed, supplied and installed centralized air-conditioning
systems for clients who contracted its services. Engineering, however, did not manufacture all the materials for the air-conditioning
system. It imported some items for the system it designed and installed.[74] The issues in that case dealt with services performed
within the local taxing jurisdiction. There was no foreign element involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.
SO ORDERED.
COMMISSIONER OF G.R. No. 153793
INTERNAL REVENUE,
Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman Promulgated:
(Attorney-in-fact)
Respondent. August 29, 2006
DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision[1] of the Court of Appeals in CA-G.R.
SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision[2] of the
Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002 Resolution[3] of the Court of Appeals
denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic
corporation engaged in [m]anufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile products.[4] Through JUBANITEXs General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent as commission agent. It was agreed that respondent will receive 10%
sales commission on all sales actually concluded and collected through her efforts.[5]
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which JUBANITEX
withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue
(BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64 and a tax due
of P170,777.26.[6]
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and
remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not taxable in the Philippines because
the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the
Philippines.

The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by the BIR on her claim
for refund.[7] On June 28, 2000, the CTA rendered a decision denying her claim. It held that the commissions received by respondent
were actually her remuneration in the performance of her duties as President of JUBANITEX and not as a mere sales agent thereof.
The income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent received the commissions
as sales agent of JUBANITEX and not as President thereof. And since the source of income means the activity or service that produce
the income, the sales commission received by respondent is not taxable in the Philippines because it arose from the marketing
activities performed by respondent in Germany. The dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and
SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.[8]
Petitioner filed a motion for reconsideration but was denied.[9] Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source thereof is JUBANITEX, a
domestic corporation located in the City of Makati. It thus implied that source of income means the physical source where the income
came from. It further argued that since respondent is the President of JUBANITEX, any remuneration she received from said
corporation should be construed as payment of her overall managerial services to the company and should not be interpreted as a
compensation for a distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her marketing services. She contended that
income of nonresident aliens like her is subject to tax only if the source of the income is within the Philippines. Source, according to
respondent is the situs of the activity which produced the income. And since the source of her income were her marketing activities in
Germany, the income she derived from said activities is not subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines,
Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for
each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the
taxability of non-resident aliens is the incomes source. In construing the meaning of source in Section 25 of the NIRC, resort must be
had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833,[10] which took effect on January 1, 1920.
[11] Under Section 1 thereof, nonresident aliens are likewise subject to tax on income from all sources within the Philippine Islands,
thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding
calendar year from all sources by every individual, a citizen or resident of the Philippine Islands, a tax of two per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding
calendar year from all sources within the Philippine Islands by every individual, a nonresident alien, including interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise.

Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law of 1917.[12]
Being a law of American origin, the authoritative decisions of the official charged with enforcing it in the U.S. have peculiar persuasive
force in the Philippines.[13]
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within the U.S. and
specifies when similar types of income are to be treated as from sources outside the U.S.[14] Under the said Code, compensation for
labor and personal services performed in the U.S., is generally treated as income from U.S. sources; while compensation for said
services performed outside the U.S., is treated as income from sources outside the U.S.[15] A similar provision is found in Section 42
of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not
be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from sources within the
United States and suggest an investigation into the nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be
from sources within the United States. If the income is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from sources within the United States. If the income is from the sale of capital assets,
the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term source in this fundamental light. It is not a place, it is an activity or property. As
such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident
aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens
and foreign corporations and to make the test of taxability the source, or situs of the activities or property which produce the income.
The result is that, on the one hand, nonresident aliens and nonresident foreign corporations are prevented from deriving income from
the United States free from tax, and, on the other hand, there is no undue imposition of a tax when the activities do not take place in,
and the property producing income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated within the
jurisdiction so that the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied
upon to defray the burdens of the United States Government is that income which is created by activities and property protected by
this Government or obtained by persons enjoying that protection. [16]
The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the
place where the contract for service is entered into, or the place of payment, but the place where the services were actually
rendered.[17]
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,[18] the Court addressed the issue on the applicable source rule
relating to reinsurance premiums paid by a local insurance company to a foreign insurance company in respect of risks located in the
Philippines. It was held therein that the undertaking of the foreign insurance company to indemnify the local insurance company is
the activity that produced the income. Since the activity took place in the Philippines, the income derived therefrom is taxable in our
jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the Court emphasized that the technical meaning of source of
income is the property, activity or service that produced the same. Thus:

The source of an income is the property, activity or service that produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in
the Philippines. x x x the reinsured, the liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon
which the reinsurance premiums and indemnity were based, were all situated in the Philippines. x x x[19]

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),[20] the issue was whether BOAC, a foreign
airline company which does not maintain any flight to and from the Philippines is liable for Philippine income taxation in respect of
sales of air tickets in the Philippines, through a general sales agent relating to the carriage of passengers and cargo between two
points both outside the Philippines. Ruling in the affirmative, the Court applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue, and reiterated the rule that the source of income is that activity which produced the income. It was held that the
sale of tickets in the Philippines is the activity that produced the income and therefore BOAC should pay income tax in the Philippines
because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways Corporation in
support of their arguments, but the correct interpretation of the said case favors the theory of respondent that it is the situs of the
activity that determines whether such income is taxable in the Philippines. The conflict between the majority and the dissenting
opinion in the said case has nothing to do with the underlying principle of the law on sourcing of income. In fact, both applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of
tickets in the Philippines is to be construed as the activity that produced the income, as viewed by the majority, or merely the
physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina
Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner
cannot therefore invoke said case to support its view that source of income is the physical source of the money earned. If such was
the interpretation of the majority, the Court would have simply stated that source of income is not the business activity of BOAC but
the place where the person or entity disbursing the income is located or where BOAC physically received the same. But such was not
the import of the ruling of the Court. It even explained in detail the business activity undertaken by BOAC in the Philippines to
pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines. That general sales
agent, from 1959 to 1971, was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip
in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating
to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement. Those activities were in exercise of the functions which
are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In
fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was engaged in business in the Philippines through a local agent
during the period covered by the assessments. x x x[21]
xxxx
The source of an income is the property, activity or service that produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of
tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticketholder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of
the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the
traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship.[22]
The Court reiterates the rule that source of income relates to the property, activity or service that produced the income. With respect
to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that
determines the source of the income. There is therefore no merit in petitioners interpretation which equates source of income in labor
or personal service with the residence of the payor or the place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence
to prove that the services she rendered were performed in Germany. Though not raised as an issue, the Court is clothed with
authority to address the same because the resolution thereof will settle the vital question posed in this controversy.[23]

The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer.
[24] To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from
taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which
would entitle her to 10% commission income, are sales actually concluded and collected through [her] efforts.[25] What she
presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly
faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or
orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while
respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to
consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did
she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have
transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners counsel at the hearing before the Court of
Tax Appeals. She pointed out that respondent presented no contracts or orders signed by the customers in Germany to prove the sale
transactions therein.[26] Likewise, in her Comment to the Formal Offer of respondents evidence, she objected to the admission of the
faxed documents bearing instruction/orders marked as Exhibits R,[27] V, W, and X,[28] for being self serving.[29] The concern raised
by petitioners counsel as to the absence of substantial evidence that would constitute proof that the sale transactions for which
respondent was paid commission actually transpired outside the Philippines, is relevant because respondent stayed in the Philippines
for 89 days in 1995. Except for the months of July and September 1995, respondent was in the Philippines in the months of March,
May, June, and August 1995,[30] the same months when she earned commission income for services allegedly performed abroad.
Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and
that her appointment as commission agent is exclusively for Germany and other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence
that a reasonable mind might accept as adequate to support the conclusion[31] that it was in Germany where she performed the
income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She
thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a previous case for refund of income withheld from
respondents remunerations for services rendered abroad, the Court in a Minute Resolution dated February 17, 2003,[33] sustained
the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld from her sales commission income for the
year 1994. This ruling has no bearing in the instant controversy because the subject matter thereof is the income of respondent for
the year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has no application here. Its
elements are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must have jurisdiction over the
subject matter and the parties; (3) it must be a judgment on the merits; (4) there must be between the two cases identity of parties,
of subject matter, and of causes of action. [34] The instant case, however, did not satisfy the fourth requisite because there is no
identity as to the subject matter of the previous and present case of respondent which deals with income earned and activities
performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the Court of Appeals in CAG.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondents claim for refund of income tax paid for the year 1995 is REINSTATED.