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PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC.

, ET rate of twenty per centum (20%) per annum from March 9,


AL., v. HON. COURT OF TAX APPEALS, AND THE 1981 until paid.
COMMISSIONER OF INTERNAL REVENUE
CA-G.R. SP No. 31283 25 April 1995 Issues:

Doctrine: 1. Whether or not compensation for advisory services


admittedly performed abroad by the personnel of a non-
The test of taxability is the ‘source’, and the source of an resident foreign corporation not doing business in the
income is that activity which produced the income. Philippines are subject to Philippine withholding income
tax – YES
Facts:
2. Whether or not respondent CIR is barred by prescription,
Petitioner Philippine American Life Insurance Co., Inc. laches, estoppel, or equitable considerations in cancelling
(PHILAMLIFE), a domestic corporation entered into a the previous approval of petitioners claim for refund more
Management Services Agreement with American International than 5 years thereafter, after it has determined, after
Reinsurance Co., Inc. (AIRCO), a non-resident foreign investigation, that the advisory services were rendered or
corporation with principal place of business in Pembroke, performed abroad by the personnel of AIGI, a non-resident
Bermuda whereby, effective January 1, 1972, for a fee of not foreign corporation not doing business in the Philippines –
exceeding $250,000.00 per annum, AIRCO shall perform for NO
PHILAMLIFE various management services.
3. Whether or not respondent tax court can amend its
On September 30, 1978, AIRCO merged with petitioner decision on a motion for reconsideration by respondent
American International Group, Inc. (AIGI) with the latter as the Commissioner, ordering petitioner PHILAMLIFE to pay
surviving corporation and successor-in-interest in AIRCO’s Php643,125.00 with interest at 20% per annum until paid
Management Services Agreement with PHILAMLIFE. on the presumption that it has utilized the tax credit
memo already issued and without evidence being
On November 18, 1980, respondent Commission of Internal presented of actual usage of the tax credit memo – YES
Revenue (CIR) issued in favour of PHILAMLIFE Tax Credit Memo
in the amount of Php643,125.00 representing erroneous Ratio:
payment of withholding tax at source on remittances to AIGI for
services rendered abroad in 1979. 1. In our jurisprudence, the test of taxability is the ‘source’,
and the source of an income is that activity which
On the basis of the said issuance of tax credit, PHILAMLIFE, produced the income. It is not the presence of any
through a letter dated March 21, 1981, filed with CIR a claim for property from which one derives rentals and royalties that
refund of the second erroneous tax payment of Php643,125.00 is controlling, but rather as expressed under the expanded
which was made on December 16, 1980. Another letter dated meaning of “royalties” in Section 37 (a) of National
July 6, 1982 was sent wherein PHILAMLIFE alleged that the Internal Revenue Code, it includes “royalties for the supply
claim for refund of the amount paid in 1980 is exactly the same of scientific, technical, industrial, or commercial
subject matter as in the previous claim for refund in 1979. knowledge or information; and the technical advice,
assistance or services rendered in connection with the
Without waiting for CIR to resolve the claim, petitioners filed technical management and administration of any
with the Court of Tax Appeals (CTA) on July 29, 1982 the scientific, industrial or commercial undertaking, venture,
petition docketed as CTA Case No. 3540, seeking said refund. project or scheme”.

During pendency of said case, respondent denied PHILAMLIFE’s The Management Services Agreement falls under the expanded
claim for refund of Php643,125.00 as withholding tax at source meaning of “royalties” as it provides for the supply of a non-
for 1980. Respondent also cancelled the tax credit memo in the resident foreign corporation of technical and commercial
amount of Php643,125.00 previously issued to PHILAMLIFE on information, knowledge, advice, assistance or services in
November 18, 1980 and requested the latter to pay the amount connection with technical management or administration of an
of Php643,125.00 as deficiency withholding tax at source for insurance business – a commercial undertaking. Therefore, the
1979 plus increments. income derived for the services performed by AIGI for
PHILAMLIFE under the said agreement contract shall be
Without protesting the assessment, petitioners filed a petition considered as income from services within the Philippines. AIGI,
with CTA on June 14, 1985, docketed as CTA Case No. 3943, being a non-resident foreign corporation not engage in trade
seeking the annulment of said assessment. and business in the Philippines shall pay tax equal to 35% of the
gross income received during each taxable year from all sources
After trial on the merits, respondent tax court rendered the within the Philippines as interest, dividends, rents, royalties
decision dated March 10, 1993 denying both petitions for (including remuneration for technical services), salaries,
review and subsequent motions for reconsiderations. premiums, annuities, emoluments, or other fixed or
determinable annual, periodical or casual gains, profits and
Both parties filed motion for reconsideration on the March 10, income.
1993 decision wherein the respondent tax court issued a
resolution dated May 19, 1993 which modified the dispositive On the second issue, this Court believes that the rule on
portion of the said decision ordering the PHILAMLIFE to pay prescription of assessment and the filing of formal protest will
respondent the amount of Php643,125.00 with interest at the not apply.
Pursuant to Section 229 of NIRC, no such suit or proceeding
shall be begun after the expiration of two years from the date
of payment of tax penalty regardless of any supervening cause
that may arise after payment. Although counting from the
original date of payment of the tax on December 3, 1979, the
filing of the instant Petition for Review on June 14, 1985 would
appear to have been filed out of time, nevertheless, justice and
equity demand that the period during which respondent
approved the herein claim for refund up to the time it was
subsequently cancelled should be deducted from the counting
of the two years prescriptive period. By deducting the period
when Petitioner received the tax credit memo on March 9,
1981 to May 15, 1985 when the same was cancelled by the
respondent only one year and four months had elapsed from
the two year period of prescription when petitioner filed CTA
3943 on June 4, 1985.

In like manner, CIR’s failure to raise before the CTA the issue
relating to the real party in interest to claim the refund cannot,
and should not, prejudice the government. It is axiomatic that
the government can never be in estoppel, particularly in
matters involving taxes. The errors or omissions of certain
administrative officers should never be allowed to jeopardize
the government’s financial position.

On the third issue, this Court finds no error on the part of


respondent tax court in amending its March 10, 1993 decision
acting upon timely motion for reconsiderations filed by both
petitioner and respondent. Said decision having not attained its
finality, the same may still be amended, corrected or modified
by the respondent court.

Moreover, it has been the long standing policy and practice of


this Court to respect the conclusions of quasi-judicial agencies,
such as the Court of tax Appeals which, by nature of its
function, is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or
improvident exercise of authority or discretion, the decision of
respondent court, affirming the decision of the Court of Tax
Appeals, must consequently be upheld.

By: Michael Evans Castromayor Pastor