Rustum Daniel Waldo H.

Doctora 4-B

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.

JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact)
Respondent.
G.R. No. 153793 August 29, 2006

Facts:

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.
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.
On June 28, 2000, the CTA rendered a decision denying her claim holding 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.
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. 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. Hence petition.

Issues:
Whether respondents sales commission income is taxable in the Philippines.

Law:
SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in Trade
or Business Within the Philippines and B) Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines.
Construing the meaning of "source" in Section 25 of the NIRC.

Argument:

Petitioner Respondent

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
Income 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 was her marketing
activities in Germany, the income she derived
from said activities is not subject to Philippine
income taxation.
 a compensation for a distinct and separate
service as a sales commission agent.

Courts ruling: TAXABLE IN THE PHILIPPINES

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.
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.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually exempt from taxation.
Respondent presented (1) no contracts or orders signed by the customers in Germany to
prove the sale transactions, (2) there is 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, and (3) 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 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

LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA,

MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA, JR.,
petitioners, vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. L-19342 May 25, 1972

Facts:

Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T.
Oa and her five children. Later, Lorenzo T. Oa the surviving spouse was appointed administrator
of the estate of said deceased and submitted the property for partition. As children were still
minors, Lorenzo T. Oa, their father and administrator of the estate, filed a petition to Court of
First Instance of Manila for appointment as guardian of said minors and the Court appointed him
guardian of the persons and property of the same.
Although the project of partition was approved by the Court on May 16, 1949, no attempt
was made to divide the properties and instead, the properties remained under the management
of Lorenzo T. Oa who used said properties in business by leasing or selling them and investing
the income derived and the proceeds from the sales in real properties and securities. From said
investments and properties petitioners derived such incomes as profits from instalment sales of
subdivided lots, profits from sales of stocks, dividends, rentals and interests and every year,
petitioners returned for income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them. However, children did not
actually receive their shares in the yearly income as the income was always left in the hands of
Lorenzo T. Oa
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)
decided that petitioners formed an unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code.
Petitioners protested against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership which the CIR denied.
Court of Tax Appeals, similarly hold that petitioners have constituted an unregistered
partnership and are, therefore, subject to the payment of the deficiency corporate income taxes
assessed against them.

Issues:
I. Whether or Not Petitioners formed an unregistered partnership and Liable for Corporate
Income Taxes for 1955 and 1956 as an unregistered partnership?
II. Assuming they have formed an unregistered partnership, should this not be only in the
sense that they invested as a common fund the profits earned by the properties owned
by them in common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the inheritance are
concerned, the total income thereof should be considered as that of co-owners and not
of the unregistered partnership?
III. Assuming in arguendo that they formed an unregistered partnership, should not the
various amounts already paid by them for the same years 1955 and 1956 as individual
income taxes on their respective shares of the profits accruing from the properties they
owned in common be deducted from the deficiency corporate taxes?

Law:
Section 84(b) of said Code, "the term corporation includes partnerships, no matter how
created or organized."

Argument:
Petitioner Respondent

"The sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which
the returns are derived,"
The taxable income of the partnership should
be limited to the income derived from the
acquisition and sale of real properties and
corporate securities and should not include
the income derived from the inherited
properties.
Petitioners insist that it was error for the Tax
Court to so rule that whatever excess they
might have paid as individual income tax
cannot be credited as part payment of the
taxes as it sanction the view of the Tax Court
is to oblige petitioners to pay double income
tax on the same income, and, worse,
considering the time that has lapsed since
they paid their individual income taxes, they
may already be barred by prescription from
The Tax Court found that instead of actually
distributing the estate of the deceased among
themselves pursuant to the project of partition
approved in 1949, "the properties remained
under the management of Lorenzo T. Oa who
used said properties in business by leasing or
selling them and investing the income derived
and the proceed from the sales thereof in real
properties and securities," as a result of which
said properties and investments steadily
increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in
1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52
in "building account" in 1956.
And all these became possible because,
admittedly, petitioners never actually received
any share of the income or profits from Lorenzo
T. Oa and instead, they allowed him to continue
using said shares as part of the common fund for
their ventures, even as they paid the
corresponding income taxes on the basis of their
 recovering their overpayments in a separate respective shares of the profits of their common
action. business as reported by the said Lorenzo T. Oa

Courts ruling: CTA AFFIRMED

I. For tax purposes, the co-ownership of inherited properties is automatically converted into
an unregistered partnership the moment said common properties and/or the incomes
derived are used as a common fund with intent to produce profits for the heirs. For
purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships with the exception only of duly registered general copartnerships within
the purview of the term "corporation." It is, therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said Code is concerned, and are subject to the
income tax for corporations.
II. The income derived from inherited properties may be considered as individual income of
the respective heirs only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part of the
common assets of the heirs to be used in making profits, it is but proper that the income
of such shares should be considered as the part of the taxable income of an unregistered
partnership.
III. Taxpayer has the right to be reimbursed what he has erroneously paid, but the law is very
clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the case
of herein petitioners has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is precisely because the
taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them.

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA EVANGELISTA,

Petitioners, v.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,
Respondents.
G.R. No. L-9996. October 15, 1957

Facts:

Ppetitioners borrowed from their father the sum of P59,140.00 which amount together
with their personal monies was used by them for the purpose of buying real properties. From
1943 to 1948, petitioners purchased and leased multiple properties of which they were able to
collect rental income.
September 24, 1949, respondent Collector of Internal Revenue demanded the payment
of income tax on corporations, real estate dealers fixed tax and corporation residence tax for the
years 1945-1949.
Petitioners on December 3, 1954, whereupon they instituted a case in the Court of Tax
Appeals, with a prayer that "the decision of the respondent contained in his letter of demand
dated September 24, 1954" be reversed, and that they be absolved from the payment of the
taxes in question, Court of Tax Appeals rendered the decision for the CIR making them liable for
Corporate Income Taxes, as well as to the residence tax for corporations and the real estate
dealers fixed tax. A petition for reconsideration and new trial having been subsequently denied,
hence this petition.
Issues:
I. Whether or Not Petitioners formed an unregistered partnership and Liable for Corporate
Income Taxes, as well as to the residence tax for corporations and the real estate dealers
fixed tax.

Law:
Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations
"duly registered general partnership.
Section 84(b) of said Code, "the term corporation includes partnerships, no matter how
created or organized."

Argument:
Petitioner Respondent

Petitioners are mere co-owners, not
copartners, for, in consequence of the acts
performed by them, a legal entity, with a
personality independent of that of its
members, did not come into existence, and
some of the characteristics of partnerships are
lacking in the case at bar.
The said common fund was not something they
found already in existence. It was not a property
inherited by them pro indiviso and was created
purposely.
They invested the same, not merely in one
transaction, but in a series of transactions. The
number of lots (24) acquired and transactions
undertaken is strongly indicative of a pattern or
common design that was not limited to the
conservation and preservation of the
aforementioned common fund or even of the
property acquired by petitioners in February,
1943.

One cannot but perceive a character of

habituality peculiar to business transactions
engaged in for purposes of gain.

Petitioners have not testified or introduced any

evidence, either on their purpose in creating the
set up already adverted to, or on the causes for
its continued existence. They did not even try to
offer an explanation therefor.

Courts ruling: CTA AFFIRMED

I. For purposes of the tax on corporations, our National Internal Revenue Code, includes
these partnerships with the exception only of duly registered general copartnerships
within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.
II. As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465
provides in part:
"Entities liable to residence tax. Every corporation, no matter how created or
organized, whether domestic or resident foreign, engaged in or doing business in the
Philippines shall pay an annual residence tax of five pesos and an annual additional tax
which, in no case, shall exceed one thousand pesos...
Considering that the pertinent part of this provision is analogous to that of sections 24
and 84(b) of our National Internal Revenue Code (Commonwealth Act No. 466), and that
the latter was approved on June 15, 1939, the day immediately after the approval of said
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation"
and "partnership" are used in both statutes with substantially the same meaning.
Consequently, petitioners are subject, also, to the residence tax for corporations.
III. Records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years and that the yearly gross rentals of said
properties from 1945 to 1948 ranged from P9,599.00 to P17,453.00
"Real estate dealer includes any person engaged in the business of buying,
selling, exchanging, leasing, or renting property or his own account as principal and
holding himself out as a full or part- time dealer in real estate or as an owner of rental
property or properties rented or offered to rent for an aggregate amount of three thousand
pesos or more a year. . . . ."
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters, petitioners vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
G.R. No. L-9996. October 15, 1957

Facts:

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots
with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day
he transferred his rights to his four children, the petitioners, to enable them to build their
residences.
In 1974, or after having held the two lots for more than a year, the petitioners resold
them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050
(Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of
them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of
P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the
Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on
the total profit of P134,336.
He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and
P15,547.56 as 42% accumulated interest, or a total of P71,074.56. Not only that., he considered
the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere
capital gain of which is taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on
capital gains already paid by them.
The petitioners contested the assessments. Two Judges of the Tax Court sustained the
same. Judge Roaquin dissented. Hence, the instant appeal

Issues:
Whether or Not Petitioners formed an unregistered partnership and Liable for Corporate
Income Taxes and income tax.

Law:
Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations
"duly registered general partnership.
Section 84(b) of said Code, "the term corporation includes partnerships, no matter how
created or organized."

Argument:
Petitioner Respondent

Their original purpose was to divide the lots The Commissioner acted on the theory that the
for residential purposes. If later on they found four petitioners had formed an unregistered
it not feasible to build their residences on the partnership or joint venture within the meaning
lots because of the high cost of construction, of sections 24(a) and 84(b) of the Tax Code
then they had no choice but to resell the same
to dissolve the co-ownership. The division of
the profit was merely incidental to the
 dissolution of the co-ownership which was in
the nature of things a temporary state

Courts ruling: CTA REVERSED

I. Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of
itself establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived". There must
be an unmistakable intention to form a partnership or joint venture.*

II. All co-ownerships are not deemed unregistered partnership.Co-Ownership who own
properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To
hold otherwise, would be to subject the income of all co-ownerships of inherited properties
to the tax on corporations, inasmuch as if a property does not produce an income at all,
it is not subject to any kind of income tax, whether the income tax on individuals or the
income tax on corporation.

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs.

THE COMMISSIONER OF INTERNAL REVENUE & COURT OF TAX APPEALS,
respondents
G.R. No. 78133 October 18, 1988

Facts:

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino,
et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The
first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation,
while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on
March 19,1970.
The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by
availing of the tax amnesties granted in the said years
BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total
amount of P107, 101.70 as alleged deficiency corporate income taxes for the years 1968 and
1970. Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they
had availed of tax amnesties way back in 1974.
Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-
owners in the real estate transactions formed an unregistered partnership and that the availment
of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed
as CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, affirmed the decision and action taken by respondent commissioner with costs against
petitioners.
Hence, the instant appeal

Issues:
Whether or Not Petitioners formed an unregistered partnership and Liable for Corporate
Income Taxes.

Law:
Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations
"duly registered general partnership.
 Section 84(b) of said Code, "the term corporation includes partnerships, no matter how
created or organized."

Argument:
Petitioner Respondent

Petitioners are not in a partnership and are Petitioners that in the years 1968 and 1970,
mere co-owners. petitioners as co-owners in the real estate
transactions formed an unregistered partnership
or joint venture taxable as a corporation under
Section 20(b) and its income was subject to the
taxes prescribed under Section 24, both of the
National Internal Revenue Code that the
unregistered partnership was subject to
corporate income tax as distinguished from
profits derived from the partnership by them
which is subject to individual income tax; and that
the availment of tax amnesty under P.D. No. 23,
as amended, by petitioners relieved petitioners of
their individual income tax liabilities but did not
relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners
were required to pay the deficiency income tax
assessed.

Courts ruling: CTA REVERSED

I. Petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make
any improvements thereon. In 1966, they bought another three (3) parcels of land from
one seller. It was only 1968 when they sold the two (2) parcels of land after which they
did not make any additional or new purchase. The remaining three (3) parcels were sold
by them in 1970. The transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.

II. In the present case, there is clear evidence of co-ownership between the petitioners.
There is no adequate basis to support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions whereby they purchased
properties and sold the same a few years thereafter did not thereby make them partners.
They shared in the gross profits as co- owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot
be considered to have formed an unregistered partnership which is thereby liable for
corporate income tax, as the respondent commissioner proposes.

III. And even assuming for the sake of argument that such unregistered partnership appears
to have been formed, since there is no such existing unregistered partnership with a
distinct personality nor with assets that can be held liable for said deficiency corporate
income tax, then petitioners can be held individually liable as partners for this unpaid
obligation of the partnership. However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby relieved of any
further tax liability arising therefrom.

RUFINO R. TAN, petitioner, vs.

RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
 CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,
MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR.,
petitioners, vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U.
ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109289 October 3, 1994

Facts:

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

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

the amendatory legislation as it violates the following:

G.R. No. 109446 G.R. No. 109289

Article VI, Section 26(1) Every bill passed Public respondents have exceeded their rule-
by the Congress shall embrace only one making authority in applying SNIT to general
subject which shall be expressed in the title professional partnerships.
thereof.

Article VI, Section 28(1) The rule of taxation

shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.

Article III, Section 1 No person shall be did

not deprive of . . . property without due
process of law, nor shall any person be denied
the equal protection of the laws.

Issues:
Whether or Not RA 7946 is unconstitutional.

Law:
Sec. 21. Tax on citizens or residents.

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

Sec. 29. Deductions from gross income. In computing taxable income subject to
tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions
the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing
taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business
or practice of profession, only the following direct costs shall be allowed as deductions...

Argument:
Petitioner Respondent
The amendatory law should be considered as
having now adopted a gross income, instead
of as having still retained the net income,
taxation scheme.
Petitioner intimates that Republic Act No.
7496 desecrates the constitutional
requirement that taxation "shall be uniform
and equitable" in that the law would now
attempt to tax single proprietorships and
professionals differently from the manner it
imposes the tax on corporations and
partnerships.
General professional partnerships are subject
to the payment of income tax or that there is
a difference in the tax treatment between
individuals engaged in business or in the
practice of their respective professions and
partners in general professional partnerships.
Petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate
transactions formed an unregistered partnership
or joint venture taxable as a corporation under
Section 20(b) and its income was subject to the
taxes prescribed under Section 24, both of the
National Internal Revenue Code that the
unregistered partnership was subject to
corporate income tax as distinguished from
profits derived from the partnership by them
which is subject to individual income tax; and that
the availment of tax amnesty under P.D. No. 23,
as amended, by petitioners relieved petitioners of
their individual income tax liabilities but did not
relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners
were required to pay the deficiency income tax
assessed.

Courts ruling: DISMISSED

I. The allowance for deductible items (Sec. 29. Deductions from gross income), it is true,
may have significantly been reduced by the questioned law in comparison with that which
has prevailed prior to the amendment; limiting, however, allowable deductions from gross
income is neither discordant with, nor opposed to, the net income tax concept. The fact
of the matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.

II. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-
rolling legislation intended to unite the members of the legislature who favor any one of
unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon
the legislature, and (c) to fairly apprise the people, through such publications of its
proceedings as are usually made, of the subjects of legislation. The above objectives of
the fundamental law appear to us to have been sufficiently met. Anything else would be
to require a virtual compendium of the law which could not have been the intendment of
the constitutional mandate.

III. Uniformity of taxation, like the kindred concept of equal protection, merely requires that
all subjects or objects of taxation, similarly situated, are to be treated alike both in
privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity
does not avert classification as long as: (1) the standards that are used therefor are
substantial and not arbitrary, (2) the categorization is germane to achieve the legislative
purpose, (3) the law applies, all things being equal, to both present and future conditions,
and (4) the classification applies equally well to all those belonging to the same class.

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

VI. The fact of the matter is that a general professional partnership, unlike an ordinary
business partnership (which is treated as a corporation for income tax purposes and so
subject to the corporate income tax), is not itself an income taxpayer. The income tax is
imposed not on the professional partnership, which is tax exempt, but on the partners
themselves in their individual capacity computed on their distributive shares of partnership
profits.

VII. There is, then and now, no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through partnership
(whether registered or not) with others in the exercise of a common profession. Indeed,
outside of the gross compensation income tax and the final tax on passive investment
income, under the present income tax system all individuals deriving income from any
source whatsoever are treated in almost invariably the same manner and under a common
set of rules.

VIII. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above
standing rule as now so modified by Republic Act No. 7496 on basically the extent of
allowable deductions applicable to all individual income taxpayers on their non-
compensation income. There is no evident intention of the law, either before or after the
amendatory legislation, to place in an unequal footing or in significant variance the income
tax treatment of professionals who practice their respective professions individually and
of those who do it through a general professional partnership.

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.

FERNAN, C.J.:

Facts:

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws
seeks the reversal of the decision of the Court of Tax Appeals1 denying its claim for refund or tax
credit in the amount of P229,424.40 representing alleged overpayment of branch profit
remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).

Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of
1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of
P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third
quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to
petitioner and withheld the corresponding 10% final dividend tax thereon. 2

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only
of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981,
but also of the withheld 15% profit remittance tax based on the remittable amount after deducting
the final withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its
stockholder Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the
15% branch profit remittance tax paid thereon, is shown below:
 1981 FIRST THIRD TOTAL OF
QUARTER QUARTER FIRST and
(three months (three months THIRD
ended ended quarters
3.31.81) (In 9.30.81)
Pesos)

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00

Withheld

Cash Dividend net of 764,748.00 764,748.00 1,529,496.00

10% Dividend Tax
Withheld

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Remittance Tax
Withheld

Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60

Petitioner

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20
for the first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P. Likewise, the
10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the
third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P.

Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in
the total amount of P229,424.40. 5

In a letter dated January 29, 1981, petitioner sought a ruling from the Bureau of Internal Revenue
on whether or not the dividends petitioner received from AG&P are effectively connected with its
conduct or business in the Philippines as to be considered branch profits subject to the 15% profit
remittance tax imposed by the NIRC.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Only profits remitted abroad by a branch office to its head office which are
effectively connected with its trade or business in the Philippines are subject to
the 15% profit remittance tax. To be effectively connected it is not necessary that
the income be derived from the actual operation of taxpayer-corporation's trade
or business; it is sufficient that the income arises from the business activity in
which the corporation is engaged. For example, if a resident foreign corporation is
engaged in the buying and selling of machineries in the Philippines and invests in
some shares of stock on which dividends are subsequently received, the dividends
thus earned are not considered 'effectively connected' with its trade or business in
this country.

In the instant case, the dividends received by Marubeni from AG&P are not income
arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as
amended.6

In sum, if the profits are effectively connected with the trade or business of the company, then
it is subject to the 15% profit remittance tax. Otherwise, no.
Consequently, petitioner claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf
and Pacific Co. of Manila (AG&P) to head office in Tokyo.7

However, Commissioner of Internal Revenue denied petitioner's claim for refund/credit of

P229,424.40 on the following grounds:

While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25 % tax pursuant to Article
10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and
Japan.

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan

is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate
dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount
refundable offsets the liability, hence, nothing is left to be refunded. 8

Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal. 9

In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

The said dividends were distributions made by the Atlantic, Gulf and Pacific
Company of Manila to its shareholder out of its profits on the investments of the
Marubeni Corporation of Japan, a non-resident foreign corporation.

Subject to certain exceptions not pertinent hereto, income is taxable to the person
who earned it. Admittedly, the dividends under consideration were earned by the
Marubeni Corporation of Japan, and hence, taxable to the said corporation. While
it is true that the Marubeni Corporation Philippine Branch is duly licensed to engage
in business under Philippine laws, such dividends are not the income of the
Philippine Branch and are not taxable to the said Philippine branch.

We see no significance thereto in the identity concept or principal-agent

relationship theory of petitioner because such dividends are the income of and
taxable to the Japanese corporation in Japan and not to the Philippine branch. 10

Hence, the instant petition for review.

It is the argument of petitioner-corporation that following the principal-agent relationship theory,

Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate
final tax on dividends received from a domestic corporation in accordance with the Tax Code.

Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident
foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on
income earned from Philippine sources at the rate of 35 % of its gross income but expressly made
subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded
between the Philippines and Japan.

Issue:

Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources
is therefore the determination of whether it is a resident or a non-resident foreign corporation
under Philippine laws with respect to the transaction in question.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business"
within the Philippines.

Petitioner contends that precisely because it is engaged in business in the Philippines through its
Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons
that since the Philippine branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all. Accordingly, whether the dividends
are paid directly to the head office or coursed through its local branch is of no moment for after
all, the head office and the office branch constitute but one corporate entity, the Marubeni
Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.

The Solicitor General has adequately refuted petitioner's arguments in this wise:

The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that
the business of the foreign corporation is conducted through its branch office,
following the principal agent relationship theory. It is understood that the branch
becomes its agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the principal-
agent relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the foreign
corporation, not the branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign corporation. 12

Ruling:

Marubeni is a non-resident foreign corporation. The investment done by Marubeni Japan was
made for purposes peculiarly germane to the conduct of the corporate affairs of said corporation,
but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this
independent investment attributable only to the head office, cannot now claim the increments as
ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax
rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither
subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient
being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming
to the petitioner because the taxes thus withheld totaled the 25 % rate imposed by the Philippine-
Japan Tax Convention.

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation
that each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed
is the profit actually remitted abroad." 13

Public respondents likewise erred in automatically imposing the 25 % rate of the Tax Treaty as if
this were a flat rate.

A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates
as reflected in the phrase "shall not exceed." This means that any tax imposable by the
contracting state concerned should not exceed the 25 % limitation and that said rate would apply
only if the tax imposed by our laws exceeds the same.

Petitioner, being a non-resident foreign corporation with respect to the transaction in question,
the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the
Philippine-Japan Treaty of 1980. Said section provides:
 (b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On
dividends received from a domestic corporation liable to tax under this Chapter,
the tax shall be 15% of the dividends received, subject to the condition that the
country in which the non-resident foreign corporation is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed
to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35 %) on corporations and the tax (15 %) on
dividends as provided in this Section.

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the
Philippines.

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner,
a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference
between the regular tax of 35 % on non-resident foreign corporations which petitioner would
have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.

Consequently, petitioner is entitled to a refund P 144,452.40.

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-
resident stockholder from a domestic corporation is easily within the maximum ceiling of 25 % of
the Tax Treaty.

Lastly, Respondent Commissioner of Internal Revenue erred in stating that the appeal of Marubeni
Japan was filed out of time based on BP Bilang. 129 which provides that the period to appeal was
only 15 days from notice of final judgment. The correct procedure, however, to appeal is stated
under Republic Act No. 1125 which provides for a 30-day period from notice of the final order or
judgment within which to appeal.

Thus, the appeal of Marubeni being filed within the 30-day period, was filed on time.

WHEREFORE, The Commissioner of Internal Revenue is ordered to refund or grant as tax credit
in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends
received. No costs.

So ordered.

G.R. No. 137377 December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

Facts:

In this petition for review, the Commissioner of Internal Revenue assails the decision of the CTA
where it ordered the Commissioner of Internal Revenue to desist from collecting the 1985
deficiency income, branch profit remittance and contractor's 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, petitioner's revenue examiners recommended an assessment for deficiency

income, branch profit remittance, contractor's and commercial broker's 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.

A 50% surcharge was imposed on Marubenis failure to report for tax purposes the taxable
revenues while the 25% surcharge was imposed because Marubenis 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
petitioner's 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 contractor's tax assessments in petitioner's assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 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, 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
donor's 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.

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.

Issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's 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
contractor's taxes assessed by petitioner."5

Ruling:

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 contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41
and 64. Petitioner claims, however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the 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:

xxx xxx xxx

 b) Those with income tax cases already filed in Court as of the effectivity
hereof;

xxx xxx xxx

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.

Petitioner's claim cannot be sustained.

Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty
those taxpayers "with income tax cases already filed in court as of the effectivity hereof." 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
contractor's 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. 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 contractor's tax assessment and respondent's 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 donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the
Tax Code while business taxes fall under Chapter II, Title V of the same. The contractor's 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 donor's 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."

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. 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.

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 donor's 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 respondent's 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 contractor's 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.

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
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

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 ammonia31 and for the delivery of ammonia to an
integrated fertilizer plant adjacent to the storage complex and to vessels at the dock.32

Like the NDC contract, the price was divided into three portions.

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were classified
the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese
Yen Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's
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.41Accordingly,
respondent's 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 contractor's tax imposed under the NIRC.

Under the Tax Code, 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 contractor's 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:

xxx xxx xxx50

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 various other

corporations. 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

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
equipment67 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 respondent's submission of
pertinent documents, released the amount in the letters of credit in favor of respondent and
credited the amount therein to respondent's 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.

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
contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized 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.
G.R. No. L-22074 April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.

BENGZON, J.P., J.:

Facts:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the
Philippines namely: Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas
Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance
Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance
Limited.

Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the
premiums on insurance it has originally underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the risks insured. Said reinsurrance
contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers
outside the Philippines, except the contract with Swiss Reinsurance Company, which was signed
by both parties in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with
that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc.
was required to keep a register in Manila where the risks ceded to the foreign reinsurers where
entered, and entry therein was binding upon the reinsurers.

A proportionate amount of taxes on insurance premiums not recovered from the original assured
were to be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in
consideration for managing or administering their affairs in the Philippines, to compensate the
Philippine Guaranty Co., Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts
and/or differences between the parties under the reinsurance contracts were to be arbitrated in
Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their
contract shall be construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file
its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.

Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:

1953

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

 P230,673.00
==========

1954

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding
tax. Its protest was denied and it appealed to the Court of Tax Appeals.

Issues:

a) The Commissioner of Internal Revenue's assessment for withholding tax on the

reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers were correct; and

b) WON reinsurance premiums are not income from sources within the Philippines because
they are not specifically mentioned in Section 37 of the Tax Code.

Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.

Ruling:

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources
within the Philippines. The word "sources" has been interpreted as the activity, property or service
giving rise to the income. 1 The reinsurance premiums were income created from the undertaking
of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability
for loss under original insurances. Such undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came from sources within the Philippines and,
hence, are subject to corporate income tax.

The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may
consist of only a single transaction. An activity may occur outside the place of business. Section
24 of the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the
income is performed or done in the Philippines. What is controlling, therefore, is not the
place of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources within
the Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section
37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned
therein should be treated as income from sources within the Philippines but it does not require
that other kinds of income should not be considered likewise.

Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner
of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in
question relieved it of the duty to pay the corresponding withholding tax thereon. This defense
of petitioner may free if from the payment of surcharges or penalties imposed for failure to pay
the corresponding withholding tax, but it certainly would not exculpate if from liability to pay such
withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors
of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are subject to withholding tax under Section 53 and 54 of
the Tax Code, suffice it to state that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not
remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.

The Tax Code allows no deduction from the income therein enumerated in determining the
amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954,
respectively. If the amount of P375,345.00 is not paid within 30 days from the date this judgement
becomes final, there shall be collected a surcharged of 5% on the amount unpaid, plus interest
at the rate of 1% a month from the date of delinquency to the date of payment, provided that
the maximum amount that may be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. With costs against petitioner.

SO ORDERED.

G.R. No. L-46029 June 23, 1988

N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

GANCAYCO, J.:

The issue posed in this petition is the income tax liability of a foreign shipping corporation which
called on Philippine ports to load cargoes for foreign destination on two occasions in 1963 and
1964, respectively, and which collected freight fees on these transactions.

Facts:

From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964,
MV "Amstelkroon," both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on
Philippine ports to load cargoes for foreign destination. The freight fees for these transactions
were paid abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these
two instances, petitioner Royal Interocean Lines acted as husbanding agent for a fee or
commission on said vessels.

No income tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the freight
receipts.

Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding
income tax returns for and in behalf of the former under Section 15 of the National Internal
Revenue Code. Applying the then prevailing market conversion rate of P3.90 to the US $1.00, the
gross receipts of petitioner N.V. Reederij "Amsterdam" for 1963 and 1964 amounted to
P382,882.50 and P535,052.00, respectively. On June 30, 1967, respondent Commissioner
assessed said petitioner in the amounts of P193,973.20 and P262,904.94 as deficiency income
tax for 1963 and 1964, respectively, as "a non-resident foreign corporation not engaged in trade
or business in the Philippines under the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade or business
in the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax
return of the aforementioned vessels computed at the exchange rate of P2.00 to USs1.001 and
paid the tax thereon in the amount of P1,835.52 and P9,448.94, respectively.

On the same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner
N.V. Reederij "AMSTERDAM" filed a written protest against the abovementioned assessment
made by the respondent Commissioner which protest was denied by said respondent in a letter
dated March 3, 1969: On March 31, 1969, petitioners filed a petition for review with the
respondent Court of Tax Appeals praying for the cancellation of the subject assessment. After
due hearing, the respondent court, on December 1, 1976, rendered a decision modifying said
assessments by eliminating the 50% fraud compromise penalties imposed upon petitioners.
Petitioners filed a motion for reconsideration of said decision but this was denied by the
respondent court.

Hence, this petition for review.

Issues:

A. Whether N.V. Reederij "Amsterdam" not having any office or place of business in the
Philippines, whose vessels called on the Philippine ports for the purpose of loading cargoes
only twice-one in 1963 and another in 1964 should be taxed as a foreign corporation
not engaged in trade or business in the Philippines under section 24(b) (1) of the tax code
or should be taxed as a foreign corporation engaged in trade or business in the Philippines
under section 24(b) (2) in relation to section 37 (e) of the same code; and

B. Whether the foreign exchange receipts of N.V. Reederij "Amsterdam" should be

converted into Philippine pesos at the official rate of p2.00 to us $1.00, or at p3.90 to us
$1.00.

Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij
"AMSTERDAM" is a non-resident foreign corporation because it allegedly disregarded Section 163
of Revenue Regulations No. 2 (providing for the determination of the net income of foreign
corporations doing business in the Philippines) and in holding that the foreign exchange ang e
receipts of said petitioner for purposes of computing its income tax should be converted into
Philippine pesos at the rate of P3.90 to US $1.00 instead of P2.00 to US $1.00.

Ruling:

The petition is devoid of merit.

Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do

business in the Philippines. It does not have a branch office in the Philippines and it made only
two calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation
may be considered engaged in trade or business, its business transactions must be continuous.
A casual business activity in the Philippines by a foreign corporation, as in the present case, does
not amount to engaging in trade or business in the Philippines for income tax purposes.

A foreign corporation engaged in trade or business within the Philippines, or which has an office
or place of business therein, is taxed on its total net income received from all sources within the
Philippines at the rate of 25% upon the amount but which taxable net income does not exceed
P100,000.00, and 35% upon the amount but which taxable net income exceeds P100,000.00.2 On
the other hand, a foreign corporation not engaged in trade or business within the Philippmes and
which does not have any office or place of business therein is taxed on income received from all
sources within the Philippines at the rate of 35% of the gross income. 3
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing
Section 163 of the Income Tax Regulations but these provisions refer to a foreign corporation
engaged in trade or business in the Philippines and not to a foreign corporation not engaged in
trade or business in the Philippines like petitioner-ship-owner herein.

The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable to the
income of petitioners for income tax purposes instead of P3.90 to s1.00 is likewise untenable.
The transactions involved in this case are for the taxable years 1963 and 1964. Under Rep. Act
No. 2609, the monetary board was authorized to fix the legal conversion rate for foreign
exchange. The free market conversion rate during those years was P3.90 to US $1.00.

Indeed, in the course of the investigation conducted by the Commissioner on the accounting
records of petitioner Royal Interocean Lines, it was verified that when said petitioner paid its
agency fees for services rendered as husbanding agent of the said vessels, it used the conversion
rate of P3.90 to US $1.00. 5 It is now estopped from claiming otherwise in this case.

WHEREFORE, the petition is DENIED with costs against petitioners. This decision is immediately
executory and no extension of time to file motion for reconsideration shall be entertained.

G.R. No. 60714 March 6, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

vs.
JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.

PARAS, J.:

This petition for review seeks the reversal of the decision of the Court of Tax Appeals in CTA Case
No. 2480 promulgated on January 15, 1982 which set aside petitioner's assessment of deficiency
income tax inclusive of interest and surcharge as well as compromise penalty for violation of
bookkeeping regulations charged against respondent.

Facts:

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign
corporation engaged in the business of international air carriage. From 1959 to 1963, JAL did not
have planes that lifted or landed passengers and cargo in the Philippines as it had not been
granted then by the Civil Aeronautics Board (CAB) a certificate of public convenience and
necessity to operate here. However, since mid-July, 1957, JAL had maintained an office at the
Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was maintained merely
for the promotion of the company's public relations and to hand out brochures, literature and
other information playing up the attractions of Japan as a tourist spot and the services enjoyed
in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the
Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and
reservations for cargo spaces which were used by the passengers or customers on the facilities
of JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter
from petitioner Commissioner of Internal Revenue (hereinafter referred to as Commissioner for
brevity), all dated February 28, 1972, for a total amount of P2,099,687.52 inclusive of 50%
surcharge and interest, for years 1959 through 1963.

On June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign
corporation, it was taxable only on income from Philippine and there being no such income during
the period in question, it was not liable for the deficiency income tax liabilities assessed. The
Commissioner in a letter-decision dated December 21, 1972, denied JAL's request for cancellation
of the assessment.

JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed the decision
and thereafter denied the motion for reconsideration filed by the Commissioner. Hence, this
petition.

Issues:

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN THE
PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN TRADE OR

BUSINESS IN THE PHILIPPINES.

Ruling:

The petition is impressed with merit.

Anent the first issue, the landmark case of Commissioner of Internal Revenue vs. British Overseas
Airways Corporation (G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has categorically ruled:

"The Tax Code defines `gross income' thus:

`Gross income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transaction of any business carried on
for gain or profit, or gains, profits and income derived from any source whatever" (Sec.
29(3);Emphasis supplied)

"The definition is broad and comprehensive to include proceeds from sales of transport
documents. The words `income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our
laws. Income means `cash received or its equivalent'; it is the amount of money coming
to a person within a specific time; it means something distinct from principal or capital.

"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.

Section 37, by its language does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be so considered.

It has been declared that for the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activities within this country regardless
of the absence of flight operations within Philippine territory.
Verily, JAL is a resident foreign corporation under Section 84 (g) of the NIRC of1939. Definition
of what a resident foreign corporation is was likewise reproduced under Section 20 of the 1977
Tax Code.

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can
be no conclusion other than that JAL is a resident foreign corporation, doing business in the
Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation
of sales being the paramount objective.

Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National Internal
Revenue Code of 1939", the applicable law in the case at bar, resident foreign corporations are
taxed thirty percentum (30%) upon the amount by which their total net income exceed one
hundred thousand pesos. JAL is liable to pay 30% of its total net income for the years 1959
through 1963 as contradistinguished from the computation arrived at by the Commissioner as
shown in the assessment.

Apparently, the Commissioner failed to specify the tax base on the total net income of JAL in
figuring out the total income due, i.e., whether 25% or 30% level.

Having established the tax liability of respondent JAL, the only thing left to determine is the
propriety of the 50% surcharge imposed by petitioner. It appears that this must be answered in
the negative.

Nowhere in the records of the case can be found that JAL deliberately failed to file its income tax
returns for the years covered by the assessment. There was not even an attempt by petitioner to
prove the same or justify the imposition of the 50% surcharge.

Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax
contemplated by the law. It must amount to intentional wrongdoing with the sole object of
evading the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58 SCRA
519). This was not proven to be so in the case of JAL as it believed in good faith that it need not
file the tax return for it had no taxable income then. The element of fraud is lacking. At most,
only negligence may be imputed to JAL for not ascertaining the dispensability of filing the tax
returns.

As such, JAL may be subjected only to the 25% surcharge prescribed by the aforequoted law.

As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax Code then
in force.

The 6% interest per annum is the same as 1/2% interest per month and petitioner correctly
computed such interest equivalent to three years which is the maximum set by the law.

On the other hand, the compromise penalty amounting to P1,500.00 for violation of bookkeeping
regulations appears to be without support. The particular provision in the said regulations
allegedly violated was not even specified. Furthermore, the term "compromise penalty" itself is
not found among the penal provisions of the Bookkeeping Regulations. The compromise penalty
is therefore, improperly imposed.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of Tax
Appeals in CTA Case No. 2480 is SET ASIDE; and (c) private respondent JAL is ordered to pay
the amount of P1,703,177.40 as deficiency taxes for the fiscal years 1959 to 1963 inclusive of
interest and surcharges.

SO ORDERED.
G.R. Nos. 79926-27 October 17, 1991

STATE INVESTMENT HOUSE, INC. and STATE FINANCING CENTER, INC., petitioners,
vs.
CITIBANK, N.A., BANK OF AMERICA, NT & SA, HONGKONG & SHANGHAI BANKING
CORPORATION, and the COURT OF APPEALS, respondents.

NARVASA, J.:p

Facts:

The chief question in the appeal at bar is whether or not foreign banks licensed to do business in
the Philippines, may be considered "residents of the Philippine Islands" within the meaning of
Section 20 of the Insolvency Law (Act No. 1956, as amended, eff. May 20, 1909)

The foreign banks involved in the controversy are Bank of America NT and SA, Citibank N.A. and
Hongkong and Shanghai Banking Corporation. On December 11, 1981, they jointly filed with the
Court of First Instance of Rizal a petition for involuntary insolvency of Consolidated Mines, Inc.
(CMI), which they amended four days later.

The petition was opposed by State Investment House, Inc. (SIHI) and State Financing Center,
Inc. (SFCI). It claimed that:

1) the three petitioner banks had come to court with unclean hands in that they filed the
petition for insolvency alleging the CMI was defrauding its creditors, and they wished
all creditors to share in its assets although a few days earlier, they had "received for
the account of CMI substantial payments aggregating P10,800,000.00;"
2) the Court had no jurisdiction because the alleged acts of insolvency were false: the writs
of attachment against CMI had remained in force because there were "just, valid and
lawful grounds for the(ir) issuance," and CMI was not a "merchant or tradesman" nor had
it "generally defaulted in the payment of (its) obligations for a period of thirty days . . . ;"
3) the Court had no jurisdiction to take cognizance of the petition for insolvency because
petitioners are not resident creditors of CMI in contemplation of the Insolvency Law; and
4) the Court has no power to set aside the attachment issued in favor of intervenors-
oppositors SIHI and SFCI.

CMI filed its Answer to the petition for insolvency, asserting in the main that it was not
insolvent, and later filed a "Motion to Dismiss Based on Affirmative Defense of Petitioner's Lack
of Capacity to Sue," echoing the theory of SIHI and SFCI that the petitioner banks are not
"Philippine residents."

SIHI and SFCI filed their own Answer-in-Intervention, and served on the three petitioner banks
requests for admission of certain facts in accordance with Rule 26 of the Rules of Court, receiving
a response only from Hongkong & Shanghai Bank.

SIHI and SFCI then filed a Motion for Summary Judgment dated May 23, 1983 "on the ground
that, based on the pleadings and admissions on record, the trial court had no jurisdiction to
adjudicate CMI insolvent since the petitioners (respondent foreign banks) are not "resident
creditors" of CMI as required under the Insolvency Law."

The Regional Trial Court found merit in the motion for summary judgment. It rendered "summary
judgment dismissing the petition for lack of jurisdiction over the subject matter. It ruled that on
the basis of the "facts on record, as shown in the pleadings, motions and admissions of the
parties, an insolvency court could "not acquire jurisdiction to adjudicate the debtor as insolvent
if the creditors petitioning for adjudication of insolvency are not "residents" of the Philippines"
citing a decision of the California Supreme Court which it declared "squarely applicable
especially considering that one of the sources of our Insolvency Law is the Insolvency Act of
California of 1895. And it declared that since petitioners had been merely licensed to do business
in the Philippines, they could not be deemed residents thereof.
The Intermediate Appellate Court reversed the Trial Court's Order of October 10, 1983 and
remanded the case to it for further proceedings. It ruled:

That the Trial Court had placed "a very strained and restrictive interpretation of the term
"resident," as to exclude foreign banks which have been operating in this country since
the early part of the century," and "the better approach . . . would have been to harmonize
the provisions . . . (of the Insolvency Law) with similar provisions of other succeeding
laws, like the Corporation Code of the Philippines, the General Banking Act, the Offshore
Banking Law and the National Internal Revenue Code in connection with or related to their
doing business in the Philippines;"

That in light of said statutes, the three banks "are in truth and in fact considered as
"residents" of the Philippines for purposes of doing business in the Philippines and even
for taxation matters;"

That the terms "residence" and "domicile" do not mean the same thing, and that as
regards a corporation, it is generally deemed an "inhabitant" of the state under whose law
it is incorporated, and has a "residence" wherever it conducts its ordinary business, and
may have its legal "domicile" in one place and "residence" in another.

SIHI and SFCI moved for reconsideration and then, when rebuffed, took an appeal to this Court.
Here, they argue that the Appellate Court's judgment should be reversed because it failed to
declare that

1) the failure of the three foreign banks to allege under oath in their petition for involuntary
insolvency that they are Philippine residents, wishing only to "be considered Philippine residents,"
is fatal to their cause;

2) also fatal to their cause is their failure to prove, much less allege, that under the domiciliary
laws of the foreign banks, a Philippine corporation is allowed the reciprocal right to petition for a
debtor's involuntary insolvency;

3) in fact and in law, the three banks are not Philippine residents because:

a) corporations have domicile and residence only in the state of their incorporation
or in the place designated by law, although for limited and exclusive
purposes, other states may consider them as residents;

b) juridical persons may not have residence separate from their domicile;

4) actually, the non-resident status of the banks within the context of the Insolvency Law is
confirmed by other laws;

5) the license granted to the banks to do business in the Philippines does not make them
residents;

6) no substantive law explicitly grants foreign banks the power to petition for the adjudication of
the Philippine corporation as a bankrupt;

7) the foreign banks are not denied the right to collect their credits against Philippine debtors,
only the right to "petition for the harsh remedy of involuntary insolvency" not being conceded to
them;

Issue:

To determine whether these banks have standing to initiate the involuntary insolvency
proceedings, the issue needed to be resolved is whether the Philippine branches or units of these
3 banks may be considered "residents of the Philippine Islands" as that term is used in Section
20 of the Insolvency Law or residents of the state under the laws of which they were respectively
incorporated.

Ruling:

The answer cannot be found in the Insolvency Law itself, which contains no definition of the
term, resident, or any clear indication of its meaning. There is no question that the three banks
are foreign corporations in this sense, with principal offices situated outside of the Philippines.

The National Internal Revenue Code declares that the term "'resident foreign corporation' applies
to a foreign corporation engaged in trade or business within the Philippines," as distinguished
from a " "non-resident foreign corporation" . . . (which is one) not engaged in trade or business
within the Philippines."

The Offshore Banking Law, Presidential Decree No. 1034, states "that branches, subsidiaries,
affiliation, extension offices or any other units of corporation or juridical person organized under
the laws of any foreign country operating in the Philippines shall be considered residents of the
Philippines."

The General Banking Act, Republic Act No. 337, places "branches and agencies in the Philippines
of foreign banks which are called Philippine branches," in the same category as "commercial
banks, savings associations, etc., making no distinction between the former and the later in so
far, as the terms "banking institutions" and "bank" are used in the Act.

This Court itself has already had occasion to hold that a foreign corporation licitly doing business
in the Philippines, which is a defendant in a civil suit, may not be considered a non-resident within
the scope of the law. Parenthetically, if it may not be considered as a party not residing in the
Philippines, or as a party who resides out of the country, then, logically, it must be considered a
party who does reside in the Philippines, who is a resident of the country.

The Court cannot thus accept the petitioners' theory that corporations may not have a residence
(i.e., the place where they operate and transact business) separate from their domicile (i.e., the
state of their formation or organization), and that they may be considered by other states as
residents only for limited and exclusive purposes.

What effectively makes such a foreign corporation a resident corporation in the Philippines is its
actually being in the Philippines and licitly doing business here, "locality of existence" being, to
repeat, the "necessary element in . . . (the) signification" of the term, resident corporation.

Neither can the Court accept the theory that the omission by the banks in their petition for
involuntary insolvency of an explicit and categorical statement that they are "residents of the
Philippine Islands," is fatal to their cause. In truth, in light of the concept of resident foreign
corporations just expounded, when they alleged in that petition that they are foreign banking
corporations, licensed to do business in the Philippines, and actually doing business in this Country
through branch offices or agencies, they were in effect stating that they are resident foreign
corporations in the Philippines.

The petitioners next argue that "Philippine law is emphatic that only foreign corporations whose
own laws give Philippine nationals reciprocal rights may do business in the Philippines." It seems
to the Court quite apparent that the Insolvency Law contains no requirement that the laws of the
state under which a foreign corporation has been formed or organized should grant reciprocal
rights to Philippine citizens to apply for involuntary insolvency of a resident or citizen thereof. The
petitioners' point is thus not well taken and need not be belabored.

Still another argument put forth by the petitioners is that the three banks' failure to incorporate
their branches in the Philippines into new banks in accordance with said Section 68 of the General
Banking Act connotes an intention on their part to continue as residents of their respective states
of incorporation and not to be regarded as residents of the Philippines. The argument is based
on an incomplete and inaccurate quotation of the cited Section. What Section 68 required of a
"foreign bank presently having branches and agencies in the Philippines, . . . within one year from
the effectivity" of the General Banking Act, was to comply with any of three (3) options, not
merely with one sole requirement. These three (3) options are the following:

1) (that singled out and quoted by the petitioners, i.e.:) "incorporate its branch or
branches into a new bank in accordance with Philippine laws . . . ; or

2) "assign capital permanently to the local branch with the concurrent maintenance
of a 'net due to' head office account which shall include all net amounts due to
other branches outside the Philippines in an amount which when added to the
assigned capital shall at all times be not less than the minimum amount of capital
accounts required for domestic commercial banks under section twenty-two of this
Act;" or

3) "maintain a "net due to" head office account which shall include all net amounts
due to other branches outside the Philippines, in an amount which shall not be
less than the minimum amount of capital accounts required for domestic
commercial banks under section twenty-two of this Act."

The less said about this argument then, the better.

WHEREFORE, the petition is DENIED and the challenged Decision of the Court of Appeals is
AFFIRMED in toto, with costs against the petitioners.

SO ORDERED.

EN BANC
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.

Facts:

BOAC is a 100% British Government-owned corporation organized and existing under the laws of
the United Kingdom It is engaged in the international airline business and is a member-signatory
of the Interline Air Transport Association (IATA). As such it operates air transportation service
and sells transportation tickets over the routes of the other airline members.

From 1959 to 1972, except for a nine-month period, partly in 1961 and partly in 1962, when it
was granted a temporary landing permit by the CAB, BOAC had no landing rights for traffic
purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the
Philippines but maintained a general sales agent in the Philippines - Warner Barnes & Co. Ltd.
and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers
and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against
BOAC.
Issues:

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

Rulings:

1. 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 site
of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.

The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the "source";
and the source of an income is that activity ... which produced the income.
Unquestionably, the passage documentations in these cases were sold in the Philippines
and the revenue therefrom was derived from an activity regularly pursued within the
Philippines. And, even if the BOAC tickets sold covered the "transport of passengers and
cargo to and from foreign cities", it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source" conveys one essential idea,
that of origin, and the origin of the income herein is the Philippines.

2. BOAC is a resident foreign corporation. In order that a foreign corporation may be

regarded as doing business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character. BOAC, during the periods covered by the subject -
assessments, maintained a general sales agent in the Philippines. That general sales agent
was engaged in selling and issuing tickets, among others. Such 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.

G.R. No. 195909 : September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ST. LUKE'S MEDICAL CENTER,
INC., Respondent.
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent.

Facts:

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. The Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax.

St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus,
St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend
the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock,
non-profit charitable institutions and civic organizations promoting social welfare.

The BIR claimed that St. Luke's was actually operating for profit. St. Luke's contended that the
BIR should not consider its total revenues, because its free services to patients was 65.20% of
its 1998 operating income and that making profit per se does not destroy its income tax
exemption.

Issue:
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

Ruling:

Yes. St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. St.
Luke's failed to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under
Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and
such profits are reinvested pursuant to its corporate purposes. As a proprietary non-profit
hospital, St. Luke's is entitled to the preferential tax rate of 10% on its net income from its for-
profit activities. The Court finds that St. Luke's is a corporation that is not "operated exclusively"
for charitable or social welfare purposes insofar as its revenues from paying patients are
concerned.

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications
for hospitals are that they must be proprietary and non-profit. "Proprietary" means private,
following the definition of a "proprietary educational institution" as "any private school maintained
and administered by private individuals or groups" with a government permit. "Non-profit" means
no net income or asset accrues to or benefits any member or specific person, with all the net
income or asset devoted to the institution's purposes and all its activities conducted not for profit.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is intended to achieve;
and no money inures to the private benefit of the persons managing or operating the institution.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is
not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be "organized and operated exclusively" for charitable
purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be "operated exclusively" for social welfare. If a tax exempt charitable institution
conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities
remain tax exempt.
EN BANC
G.R. No. 95022 March 23, 1992
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT
PLAN, represented by its Trustee-Director, respondents.

Facts:

GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension,
disability and death benefits to its employees. As such, it was exempt from income tax.

GCL made investments and earned interest income from which was withheld the fifteen per
centum (15%) final withholding tax. GCL filed with CIR a claim for refund for the amounts
withheld. GCL disagreed with the collection of the 15% final withholding tax from the interest
income as it is an entity fully exempt from income tax.

The request for refund was denied. GCL elevated the matter to the CTA, which ruled in favor of
GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest
income and ordering a refund of the tax withheld.

Issue:

Whether or not GCL is exempt from the final withholding tax on interest income from money
placements and purchase of treasury bills required by Pres. Decree No. 1959.

Ruling:

Yes. GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue
in accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far as employees' trusts
are concerned, Sec. 1 of RA No. 4917 should be taken in relation to then Section 56(b) (now
53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June
1957. This provision specifically exempted employee's trusts from income tax.

Employees' trusts or benefit plans normally provide economic assistance to employees upon the
occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability.
It provides security against certain hazards to which members of the Plan may be exposed. It is
an independent and additional source of protection for the working group. What is more, it is
established for their exclusive benefit and for no other purpose.
There can be no denying either that the final withholding tax is collected from income in respect
of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The
application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from
income, we see no logic in withholding a certain percentage of that income which it is not
supposed to pay in the first place.

G.R. No. L-54108 January 17, 1984

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS CO. (PHILIPPINE
BRANCH), respondents.

Facts:

Smith Kline and French Overseas Company, a multinational firm domiciled in Philadelphia,
Pennsylvania, is licensed to do business in the Philippines. It is engaged in the importation,
manufacture and sale of pharmaceuticals, drugs and chemicals.

In its 1971 original ITR, Smith Kline declared a net taxable income of P1,489,277 and paid
P511,247 as tax due. Among the deductions claimed from gross income was P501+k as its share
of the head office overhead expenses. However, there was an overpayment of P324,255 "arising
from underdeduction of home office overhead" in its amended return. It made a formal claim for
the refund of the alleged overpayment.

Smith Kline later received from its international independent auditors an authenticated
certification to the effect that the Philippine share in the unallocated overhead expenses of the
main office for the year was significantly lower. By reason of the new adjustment, Smith Kline's
tax liability was greatly reduced from P511,247 to P186,992 resulting in an overpayment
of P324,255. Without awaiting the action of the Commissioner of Internal Revenue on its claim,
Smith Kline filed a petition for review with the CTA. The CTA ordered the CIR to refund the
overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to the SC.

Issue:

Whether or not Smith Kline is entitled for the refund or grant of tax credit for the overpayment.

Ruling:
Yes, Smith Kline is entitled. Smith Kline's amended 1971 return is in conformity with the law and
regulations. The Tax Court correctly held that the refund or credit of the resulting overpayment
is in order.

Under section 37(b) of the Revenue Code and section 160 of R.R. No. 2, Smith Kline can claim as
its deductible share a ratable part of such expenses based upon the ratio of the local branch's
gross income to the total gross income, worldwide, of the multinational corporation.

The governing law is found in section 37 of the old National Internal Revenue Code,
Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National
Internal Revenue Code of 1977 and which reads:

SEC. 37. Income from sources within the Philippines.

xxx xxx xxx
(b) Net income from sources in the Philippines. From the items of gross income
specified in subsection (a) of this section there shall be deducted the expenses,
losses, and other deductions properly apportioned or allocated thereto and a
ratable part of any expenses, losses, or other deductions which cannot definitely
be allocated to some item or class of gross income. The remainder, if any, shall be
included in full as net income from sources within the Philippines.
xxx xxx xxx

Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the
deductions to be made to determine the net income from Philippine sources:

SEC. 160. Apportionment of deductions. From the items specified in section

37(a), as being derived specifically from sources within the Philippines there shall
be deducted the expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other expenses, losses or deductions
which cannot definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the
Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
Where an expense is clearly related to the production of Philippine-derived income or to Philippine
operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that
expense can be deducted from the gross income acquired in the Philippines without resorting to
apportionment.

The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which direct benefit its branches all over
the world, including the Philippines, fall under a different category however. These are items
which cannot be definitely allocated or Identified with the operations of the Philippine branch.

EN BANC
G.R. No. L-5896 August 31, 1955
A. SORIANO Y CIA., petitioner-appellant,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

Facts:

Petitioner was engaged in the business of selling surplus goods acquired from the Foreign
Liquidation Commission pursuant to an agreement with the United States Government. Part of
the surplus goods consisted of tractors which were then in the various U. S. military bases or
depots in the Philippines. The United Africa Co., Ltd. sent its representative, Gibson, to the
Philippines to look into the availability of tractors for sale in the Philippines. Gibson learned of the
petitioner's business and contracted to buy tractors from the latter, to be delivered f.a.s. (free
alongside ship), Manila. Fifty seven (57) tractors acquired from the petitioner were shipped from
the port of Manila to United Africa Co., Ltd. at Dares Salaem, East Africa.

Issue:

Whether or not petitioner is liable for the payment of percentage or sales tax on its gross sales
of the 57 tractors in question to the United Africa Co., Ltd. under the provisions of Sec. 186 of
the National Internal Revenue Code.

Ruling:

Yes, petitioner is liable. The tax in dispute is one on transaction (sales) and not a tax on the
property sold. The sale of the tractors was consummated in the Philippines, for title was
transferred to the foreign buyer at the pier in Manila; hence, the situs of the sale is Philippines
and it is taxable in this country.

NIRC, Sec. 186. Percentage tax on sales of other articles. There is levied,
assessed and collected once only on every original sale, barter, exchange, and
similar transaction intended to transfer ownership of, or title to, the articles not
enumerated in sections 184 and 185, a tax equivalent to five per centum of the
gross selling price or gross value in money of the articles so sold, bartered,
exchanged, or transferred, such tax to be paid by the manufacturer, producer, or
importer; xxx
Under the above provisions, petitioner's liability would thus depend on first, whether or not it was
an importer of the 57 tractors in question, and second, whether it made an original sale thereof
in the Philippines.

In the cases of Go Chen Tee vs. Meer,1 L-2825 ( July 7, 1950) and Saura Import and Export
Co. vs. Meer,2 L-2927 (February 26, 1951), this Court has already held that one who acquires title
to surplus equipment found in U. S. army bases or installations within the Philippines by purchase,
and then brings them out of those bases or depots, is an importer, and sales made by him by
such surplus goods to the general public are taxable under sections 185 and 186 of the Tax Code.
The delivery of the tractors was made by the petitioner to the carrier f.a.s. Manila. The rule is
that where the contract is to deliver goods f.a.s, the property passes on delivery at the wharf or
the dock (II Williston on Sales, pp. 120-121; 46 Am. Jur. 608-609). Otherwise stated, delivery to
the carrier is delivery to the buyer, (Behn, Meyer & Co., Ltd. vs. Yangco, 38 Phil., 602; 46 Am.
Jur. 605). True that this rule yields to evidence of a contrary intent between the parties, but there
is here no proof to show that petitioner and its foreign buyer intended otherwise, that is, that
delivery and the passing of title to its buyer should take place right in the army bases where the
tractors were located.

The law subjects to the payment of the sales tax not to the buyer who intends to export what he
buys, but the seller, because such sale is domestic and therefore liable for the payment of sales
tax in this country.

EN BANC
June 30, 1987
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Facts:

The National Development Company (NDC) entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels and unconditionally
promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each
vessel, the balance of the contract price of the twelve (12) ocean-going vessels purchased and
acquired by it from the Japanese corporations, including the interest on the principal sum at the
rate of five per cent (5%) per annum.. The vessels were eventually completed and delivered to
the NDC in Tokyo. The NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The
Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74.

Issue:

Whether or not NDC is liable for its failure to withhold the income tax on interest due from the
Japanese shipbuilders.

Ruling:

Yes. The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government and so should be held liable for its omission.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37
of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. (a) Gross income from
sources within the Philippines. The following items of gross income shall be
treated as gross income from sources within the Philippines:

(1) Interest. Interest derived from sources within the Philippines, and interest
on bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise; xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC were done in Tokyo.

The law, however, does not speak of activity but of "source," which in this case is the NDC. This
is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to
levy and collect income tax on interest received by foreign corporations not
engaged in trade or business within the Philippines is not planted upon the
condition that 'the activity or labor and the sale from which the (interest) income
flowed had its situs' in the Philippines. The law specifies: 'Interest derived from
sources within the Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise.' Nothing there speaks of
the 'act or activity' of non-resident corporations in the Philippines, or place where
the contract is signed. The residence of the obligor who pays the interest rather
than the physical location of the securities, bonds or notes or the place of payment,
is the determining factor of the source of interest income. (Mertens, Law of Federal
Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo
Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins.
Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor
is a resident of the Philippines the interest payment paid by him can have no other
source than within the Philippines. The interest is paid not by the bond, note or
other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p.
124.)

Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan on the unpaid
balance of the purchase price of the vessels acquired by petitioner is interest derived from sources
within the Philippines subject to income tax under the then Section 24(b)(1) of the National
Internal Revenue Code.

It is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the Republic of the Philippines that
was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the
deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese
shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code.