INCOME TAX FULL CASES

G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision1 of the Court of
Appeals in CA-G.R. SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and
reversed the June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner
also assails the May 8, 2002 Resolution3 of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of
JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying
or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile
products."4 Through JUBANITEXs General Manager, Marina Q. Guzman, the corporation appointed and
engaged the services of respondent as commission agent. It was agreed that respondent will receive 10% sales
commission on all sales actually concluded and collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from
which JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted
the same to the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax
return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been
mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission
income is not taxable in the Philippines because the same was a compensation for her services rendered in
Germany and therefore considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by
the BIR on her claim for refund.7 On June 28, 2000, the CTA rendered a decision denying her claim. It held that
the commissions received by respondent were actually her remuneration in the performance of her duties as
President of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore
an income taxable in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent
received the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of
income means the activity or service that produce the income, the sales commission received by respondent is
not taxable in the Philippines because it arose from the marketing activities performed by respondent in
Germany. The dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is
hereby REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund
in the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied.9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source
thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus implied that source of
income means the physical source where the income came from. It further argued that since respondent is the
President of JUBANITEX, any remuneration she received from said corporation should be construed as payment
of her overall managerial services to the company and should not be interpreted as a compensation for a distinct
and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her marketing services. She
contended that income of nonresident aliens like her is subject to tax only if the source of the income is within
the Philippines. Source, according to respondent is the situs of the activity which produced the income. And
since the source of her income were her marketing activities in Germany, the income she derived from said
activities is not subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to
an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income
received from all sources within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code
notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be
levied, collected and paid for each taxable year upon the entire income received from all sources within the
Philippines by every nonresident alien individual not engaged in trade or business within the Philippines x x x a
tax equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or
business, are subject to Philippine income taxation on their income received from all sources within the
Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the incomes "source." In
construing the meaning of "source" in Section 25 of the NIRC, resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833,10 which took effect
on January 1, 1920.11 Under Section 1 thereof, nonresident aliens are likewise subject to tax on income "from
all sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources by every individual, a citizen or resident of the
Philippine Islands, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected,
and paid annually upon the entire net income received in the preceding calendar year from all sources within the
Philippine Islands by every individual, a nonresident alien, including interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S.
Revenue Law of 1917.12 Being a law of American origin, the authoritative decisions of the official charged with
enforcing it in the U.S. have peculiar persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within
the U.S. and specifies when similar types of income are to be treated as from sources outside the U.S. 14 Under
the said Code, compensation for labor and personal services performed in the U.S., is generally treated as
income from U.S. sources; while compensation for said services performed outside the U.S., is treated as income
from sources outside the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from
three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "sources within the United States" and suggest an investigation
into the nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the
income should be from "sources within the United States." If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the income should be from "sources
within the United States." If the income is from the sale of capital assets, the place where the sale is made should
be likewise decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is
an activity or property. As such, it has a situs or location, and if that situs or location is within the United States
the resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the
activities or property which produce the income. The result is that, on the one hand, nonresident aliens and
nonresident foreign corporations are prevented from deriving income from the United States free from tax, and,
on the other hand, there is no undue imposition of a tax when the activities do not take place in, and the property
producing income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be
situated within the jurisdiction so that the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created
by activities and property protected by this Government or obtained by persons enjoying that protection. 16
The important factor therefore which determines the source of income of personal services is not the residence of
the payor, or the place where the contract for service is entered into, or the place of payment, but the place where
the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18 the Court addressed the issue on the
applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign insurance
company in respect of risks located in the Philippines. It was held therein that the undertaking of the foreign
insurance company to indemnify the local insurance company is the activity that produced the income. Since the
activity took place in the Philippines, the income derived therefrom is taxable in our jurisdiction.
Citing Mertens, The Law of Federal Income Taxation, the Court emphasized that the technical meaning of source
of income is the property, activity or service that produced the same. Thus:
The source of an income is the property, activity or service that produced the income. The reinsurance premiums
remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the
reinsurance premiums, and the same took place in the Philippines. x x x the reinsured, the liabilities insured and
the risk originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the issue was
whether BOAC, a foreign airline company which does not maintain any flight to and from the Philippines is
liable for Philippine income taxation in respect of sales of air tickets in the Philippines, through a general sales
agent relating to the carriage of passengers and cargo between two points both outside the Philippines. Ruling in
the affirmative, the Court applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue, and reiterated the rule that the source of income is that "activity" which produced the income. It was
held that the "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC
should pay income tax in the Philippines because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas
Airways Corporation in support of their arguments, but the correct interpretation of the said case favors the
theory of respondent that it is the situs of the activity that determines whether such income is taxable in the
Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do with
the underlying principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden &
Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in
the Philippines is to be construed as the "activity" that produced the income, as viewed by the majority, or
merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The
majority, through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business
activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to support its view
that source of income is the physical source of the money earned. If such was the interpretation of the majority,
the Court would have simply stated that source of income is not the business activity of BOAC but the place
where the person or entity disbursing the income is located or where BOAC physically received the same. But
such was not the import of the ruling of the Court. It even explained in detail the business activity undertaken
by BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is subject to
Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of
the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very
lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by
the assessments. x x x21
xxxx
The source of an income is the property, activity or service that produced the income. For the source of income
to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within
the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs
of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the
flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set
forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms
all the elements to constitute it a valid contract, binding upon the parties entering into the relationship.22
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the
income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the
labor or service was performed that determines the source of the income. There is therefore no merit in
petitioners interpretation which equates source of income in labor or personal service with the residence of the
payor or the place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to
establish the factual circumstances showing that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the income, but the
sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as
an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the
vital question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi
jurisagainst the taxpayer.24 To those therefore, who claim a refund rest the burden of proving that the transaction
subjected to tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or
the service which would entitle her to 10% commission income, are "sales actually concluded and collected
through [her] efforts."25 What she presented as evidence to prove that she performed income producing
activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to
the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders
purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders
faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that
while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany,
respondent presented no such evidence. Neither did she establish reasonable connection between the
orders/instructions faxed and the reported monthly sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners counsel at the
hearing before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders signed
by the customers in Germany to prove the sale transactions therein.26 Likewise, in her Comment to the Formal
Offer of respondents evidence, she objected to the admission of the faxed documents bearing instruction/orders
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by petitioners
counsel as to the absence of substantial evidence that would constitute proof that the sale transactions for which
respondent was paid commission actually transpired outside the Philippines, is relevant because respondent
stayed in the Philippines for 89 days in 1995. Except for the months of July and September 1995, respondent
was in the Philippines in the months of March, May, June, and August 1995,30 the same months when she
earned commission income for services allegedly performed abroad. Furthermore, respondent presented no
evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and that her
appointment as commission agent is exclusivelyfor Germany and other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as adequate to support the conclusion 31 that it was in
Germany where she performed the income producing service which gave rise to the reported monthly sales in
the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her
income was from sources outside the Philippines and exempt from the application of our income tax law. Hence,
the claim for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case for refund of
income withheld from respondents remunerations for services rendered abroad, the Court in a Minute
Resolution dated February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to
refund the sum withheld from her sales commission income for the year 1994. This ruling has no bearing in the
instant controversy because the subject matter thereof is the income of respondent for the year 1994 while, the
instant case deals with her income in 1995. Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must have jurisdiction
over the subject matter and the parties; (3) it must be a judgment on the merits; (4) there must be between the
two cases identity of parties, of subject matter, and of causes of action. 34 The instant case, however, did not
satisfy the fourth requisite because there is no identity as to the subject matter of the previous and present case of
respondent which deals with income earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of
the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision
of the Court of Tax Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund of income tax
paid for the year 1995 is REINSTATED.
SO ORDERED.
G.R. No. L-19342 May 25, 1972

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.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special
Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the
payment of the deficiency corporate income taxes assessed against them by respondent Commissioner of
Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1%
monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal
Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the
resolution of said court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her five
children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement
of her estate. Later, Lorenzo T. Oa the surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted the project of partition,
which was approved by the Court on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz,
Virginia and Lorenzo, Jr., all surnamed Oa, were still minors when the project of partition was approved,
Lorenzo T. Oa, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the Court
of First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the Court
appointed him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-half
(1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed
value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission. Later,
they received from said Commission the amount of P50,000.00, more or less. This amount was not divided
among them but was used in the rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the
ten parcels of land aforementioned, two were acquired after the death of the decedent with money borrowed
from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the administrator
thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with the approval of the
Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide
the properties therein listed. 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 therefrom and the
proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the
following year-end balances:

Year

Investment

Land

Building
Account

Account

Account

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956
175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits from installment sales of
subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.;
t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T. Oa where the
corresponding shares of the petitioners in the net income for the year are also known. 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 (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in
the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and securities.
(See Exhibit 3, t.s.n., pp. 50, 102-104).

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. Accordingly, he assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended
by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the assessment and asked for
reconsideration of the ruling of respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum
for Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the
Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3,
Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR CORPORATE INCOME
TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE COURT OF
TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE
EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED
IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the
Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from
the deceased Julia Buales and the profits derived from transactions involving the same, or, must they be
deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) 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? And (3) assuming again that they are taxable as 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, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor
in interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their respective shares in their
inheritance since those dates admittedly under the administration or management of the head of the family,
the widower and father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We
believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the
respondent Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax,
and it was only from 1955 that he considered them as having formed an unregistered partnership. At least,
there is nothing in the record indicating that an earlier assessment had already been made. Such being the
case, and We see no reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by
the Bureau of Internal Revenue.

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
therefrom 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 respective shares of the profits of their common business as reported by the
said Lorenzo T. Oa.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to
holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved,
some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru
Lorenzo T. Oa, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from
these ventures were divided among petitioners proportionately in accordance with their respective shares in
the inheritance. In these circumstances, it is Our considered view that from the moment petitioners allowed
not only the incomes from their respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oa as a common fund in undertaking several transactions or in business,
with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership
within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-
owners rather than unregistered co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof
does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners,
but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and
physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in
the partition, they might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this
were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not
something they found already in existence" and that "it was not a property inherited by them pro indiviso," but
it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an
inheritance is not actually divided, there can be no unregistered co-partnership. As already indicated, for tax
purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership
the moment the said common properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in
the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof,
for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs,
and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to be used with the intent
of making profit thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.
This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing 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," and, for that
matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of unregistered partnerships which
are considered as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr.
Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities
subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code
exempts from the aforementioned tax "duly registered general partnerships," which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in confirmity with
the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes, among others,
"joint accounts,(cuentas en participacion)" and "associations", none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly
registered general co-partnerships" which are possessed of the aforementioned personality have been
expressly excluded by law (sections 24 and 84[b]) from the connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term "partnership" it includes not only a partnership as
known in common law but, as well, a syndicate, group, pool, joint venture, or other unincorporated
organization which carries on any business, financial operation, or venture, and which is not, within the
meaning of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal Income Taxation, p. 789;
emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on. ... . (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)

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.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-
24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the corporate
taxes in question, of their inherited properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered partnership, the holding
should be limited to the business engaged in apart from the properties inherited by petitioners. In other words,
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. It is admitted that the inherited properties and the income derived therefrom were used in the
business of buying and selling other real properties and corporate securities. Accordingly, the partnership
income must include not only the income derived from the purchase and sale of other properties but also the
income of the inherited properties.

Besides, as already observed earlier, 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. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that the herein petitioners have formed an
unregistered partnership and, therefore, have to be taxed as such, it might be recalled that the petitioners in
their individual income tax returns reported their shares of the profits of the unregistered partnership. We
think it only fair and equitable that the various amounts paid by the individual petitioners as income tax on
their respective shares of the unregistered partnership should be deducted from the deficiency income tax
found by this Honorable Court against the unregistered partnership. (page 7, Memorandum for the Petitioner in
Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must be reduced by
the amounts of income tax paid by each petitioner on his share of partnership profits. This is not correct; rather,
it should be the other way around. The partnership profits distributable to the partners (petitioners herein)
should be reduced by the amounts of income tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for the years in question, but the income tax due
from the partnership has been correctly assessed. Since the individual income tax liabilities of petitioners are
not in issue in this proceeding, it is not proper for the Court to pass upon the same.

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 herein in question. It is argued that to
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 recovering their overpayments in a separate action. We do not agree. As We see it,
the case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such
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. In
principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not exactly
above suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs
against petitioners.

Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.

Reyes, J.B.L. and Teehankee, JJ., concur in the result.

Castro, J., took no part.

Concepcion, C.J., is on leave.

Footnotes

1 In other words, the assessment was affirmed except for the sum of P100.00 which was the total of two P50-
items purportedly for "Compromise for non-filing" which the Tax Court held to be unjustified, since there was
no compromise agreement to speak of.

G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,

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

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a
decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax and
the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment for the
same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioner
is hereby dismissed with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with
their personal monies was used by them for the purpose of buying real properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq.
m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area
of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value of
P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to
'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in
default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and
in their behalf, and to endorse and deposit all notes and checks for them;

7. That after having bought the above-mentioned real properties the petitioners had the same rented or
leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as
rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a
net rental income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was
deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted
the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the
payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the
years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954,
whereupon they instituted the present 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, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and
a petition for reconsideration and new trial having been subsequently denied, the case is now before Us for
review at the instance of the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the
issue hinges on the meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said
Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid annually upon the
total net income received in the preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized but not including duly registered
general co-partnerships (compaias colectivas), a tax upon such income equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not
include duly registered general copartnerships. (compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry
to a common fund, with the intention of dividing the profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:

1. Said common fund was not something they found already in existence. It was not property inherited by
them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof
in order to establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00.
This was soon followed on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, 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 the petitioners in February, 1943. In
other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in the
purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the
total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the
manager.

6. 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.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in
petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point.

Petitioners insist, however, that they 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. This pretense was
correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities
subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code
exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with
the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other,
joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly
registered general copartnerships" which are possessed of the aforementioned personality have been
expressly excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be
amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots
above referred to, under the management of one person even if true, on which we express no opinion
tends to increase the similarity between the nature of their venture and that corporations, and is, therefore, an
additional argument in favor of the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships".
By specific provisions of said laws, such "corporations" include "associations, joint-stock companies and
insurance companies." However, the term "association" is not used in the aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed affairs,
or the attainment of some object, which like a corporation, continues notwithstanding that its members or
participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a
committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such
organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary
association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law'
trust, and 'investment' trust (whether of the fixed or the management type), an interinsuarance exchange
operating through an attorney in fact, a partnership association, and any other type of organization (by
whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A
Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as
known at common law but, as well, a syndicate, group, pool, joint venture or other unincorporated
organizations which carries on any business financial operation, or venture, and which is not, within the
meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation, p. 789;
emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .

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.

As regards the residence of 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, in accordance with the
following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 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.

Lastly, the 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 June 1945 to 1948
ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National
Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:

'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. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the
petitioners herein. It is so ordered.

Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with express
purpose of engaging in real estate business for profit. The series of transactions which they had undertaken
attest to this. This appears in the following portion of the decision:

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots for P18,000. This was soon
followed on April 23, 1944, by the acquisition of another real state for P108,825. Five (5) days later (April 28,
1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as
well as the brief interregnum between each, particularly the last three purchases, 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 the petitioner in February, 1943, In other words, we cannot
but perceive a character of habitually peculiar to business transactions engaged in for purposes of gain.

I wish however to make to make the following observation:

Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides:

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish partnership, whether or not the person sharing
them have a joint or common right or interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a co-ownership shared or do not share
any profits made by the use of property held in common does not convert their venture into a partnership. Or
the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. This only means that, aside from the
circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear
intent to form a partnership, the existence of a judicial personality different from that of the individual partners,
and the freedom to transfer or assign any interest in the property by one with the consent of the others
(Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635- 636).

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real
estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a
partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that
enterprise in proportion to their contribution, but who severally retain the title to their respective contribution,
are not thereby rendered partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of the law of Partnership by
Floyd R. Mechem, 2n Ed., section 83, p. 74.)

A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor does not
agreement to share the profits and loses on the sale of land create a partnership; the parties are only tenants in
common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of reality, holding as tenants
in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in
plaintiff's commissions, no partnership existed as between the parties, whatever relation may have been as to
third parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally a
participating in both profits and losses; (c) and such a community of interest, as far as third persons are
concerned as enables each party to make contract, manage the business, and dispose of the whole property.
(Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)

The common ownership of property does not itself create a partnership between the owners, though they may
use it for purpose of making gains; and they may, without becoming partners, agree among themselves as to
the management and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson,
142 S. W. 363, 160 No. App. 14.)

This is impliedly recognized in the following portion of the decision: "Although, taken singly, they might not
suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances
(referring to the series of transactions) such as to leave no room for doubt on the existence of said intent in
petitioners herein."
G.R. No. L-68118 October 29, 1985

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.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they
had acquired from their father.

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. The company sold the two lots to petitioners
for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would
show that they were co-owners of the two lots.

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 in
addition to individual income tax on their shares thereof 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 Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil
Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided
the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be
obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider
them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners
were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, 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. It had to be terminated sooner or later.
Castan Tobeas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin
ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision
es solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho
positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato
de sociedad, la moderna orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados:
lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

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.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an
unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in
Oa vs.

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.We find that the case at bar is fundamentally similar to the De
Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from
their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited
properties; they merely continued dedicating the property to the use to which it had been put by their
forebears; they individually reported in their tax returns their corresponding shares in the income and expenses
of the 'hacienda', and they continued for many years the status of co-ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the
Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.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. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement
the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for
themselves, it was held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided
equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the two
lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging
this matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.

SO ORDERED.

G.R. No. 78133 October 18, 1988

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

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

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition.

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. Petitioners realized a net profit in the sale
made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in
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.

However, in a letter dated March 31, 1979 of then Acting 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.

In a reply of August 22, 1979, respondent Commissioner informed 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 1 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.

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, 2 affirmed the decision and
action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact
formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed
on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances
of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate
basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for
corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent
court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT

COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO
CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS
UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN

UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD
BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage their
properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or
leased to various tenants for several years and they gained net profits from the rental income. Thus, the
Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from
them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on corporations, the
issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said
Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid annually upon the
total net income received in the preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized but not including duly registered
general co-partnerships (companies collectives), a tax upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include
duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profits among themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited
by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon
followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April
28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken,
as well as the brief interregnum between each, particularly the last three purchases, 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. In other words, one cannot
but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the
total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon
Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists became the
manager.

6. 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.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in
petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis
of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing
that the purpose was not limited to the conservation or preservation of the common fund or even the
properties acquired by them. The character of habituality peculiar to business transactions engaged in for the
purpose of gain was present.

In the instant case, 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.

In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for
determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2
and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;

(3) 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;

From the above it appears that the fact that those who agree to form a co- ownership share or do not share any
profits made by the use of the property held in common does not convert their venture into a partnership. Or
the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. This only means that, aside from the
circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear
intent to form a partnership, the existence of a juridical personality different from that of the individual
partners, and the freedom to transfer or assign any interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real
estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a
partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that
enterprise in proportion to their contribution, but who severally retain the title to their respective contribution,
are not thereby rendered partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by
Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants
in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants
in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in
plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally
participating in both profits and losses; (c) and such a community of interest, as far as third persons are
concerned as enables each party to make contract, manage the business, and dispose of the whole property.-
Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though they may
use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as
to the management, and use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have
a joint or common right or interest in the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property.

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.

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 p. 7 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.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of
March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

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

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.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

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

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

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be
expressed in the title thereof.

Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any
person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have
filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer
or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged
In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as
Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:

Sec. 21. Tax on citizens or residents.

xxx xxx xxx

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

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000

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

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or
practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of
calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions
which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or
business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent
(40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as
the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still retained
the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting,
however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income
tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.

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

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall
be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets,
however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No.
7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects
of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose,
(3) the law applies, all things being equal, to both present and future conditions, and (4) the classification
applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs.
PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly
shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers
and to maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view
this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who
are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters
which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so
unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down,
for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however,
has not been demonstrated to have been reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when there is
a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry
out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners
comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only
the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or
incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or
paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that
would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in
Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez,
minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on
the questioned implementing regulation of public respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through business enterprises and therefore, should file an
income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.

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

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to
increase collections as far as individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is
categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to
individuals and professionals. (Emphasis ours)

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

(b) In determining his distributive share in the net income of the partnership, each partner

(1) Shall take into account separately his distributive share of the partnership's income, gain, loss,
deduction, or credit to the extent provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of
the gross income undiminished by his share of the deductions.

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

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496
as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become
myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole
income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little,
the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all
persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of
nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens
subject to income tax liability on their income from all sources) and of the generally accepted and
internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations
to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four
main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable
Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context
of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships
which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as
independent taxable entities for income tax purposes. A general professional partnership is such an example. 4
Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return
[mainly for administration and data]), are liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits. In the determination of the tax liability, a
partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-
through entity in the generation of income by, and the ultimate distribution of such income to, respectively,
each of the individual partners.

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

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.

Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

FERNAN, C.J.:

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 with branch office at the 4th
Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax
Appeals 1 dated February 12, 1986 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).

The following facts are undisputed: 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 QUARTER (three months ended 3.31.81) (In Pesos)

THIRD QUARTER (three months ended 9.30.81)

TOTAL OF FIRST and THIRD quarters

Cash Dividends Paid

849,720.44

849,720.00

1,699,440.00

10% Dividend Tax Withheld

84,972.00

84,972.00

169,944.00

Cash Dividend net of 10% Dividend Tax Withheld

764,748.00

764,748.00

1,529,496.00

15% Branch Profit Remittance Tax Withheld

114,712.20
114,712.20

229,424.40 3

Net Amount Remitted to Petitioner

650,035.80

650,035.80

1,300,071.60

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 on April 20, 1981 under Central Bank
Receipt No. 6757880. 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 on August 4,
1981 under Central Bank Confirmation Receipt No. 7905930. 4

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 on April 20 and August 4, 1981. 5

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company,
sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch
profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.

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

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, 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. (Revenue Memorandum Circular No. 55-80).

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

Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on
September 24, 1981, 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) on April 20 and August 4, 1981 to ... head office in Tokyo. 7

On June 14, 1982, respondent 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 Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in question
are income taxable to the Marubeni Corporation of Tokyo, Japan. 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. The investments in the Atlantic Gulf &
Pacific Company of the Marubeni Corporation of Japan were directly made by it and the dividends on the
investments were likewise directly remitted to and received by the Marubeni Corporation of Japan. Petitioner
Marubeni Corporation Philippine Branch has no participation or intervention, directly or indirectly, in the
investments and in the receipt of the dividends. And it appears that the funds invested in the Atlantic Gulf &
Pacific Company did not come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni
Corporation Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the
remittance of the foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni
Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.

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 Section 24(c) (1) of the Tax Code of 1977 which states:

Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1) Shall be
subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as provided in
Sections 53 and 54 of this 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 under Section 24 (b) (1) of the same Code which
reads:

(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation not engaged in
trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received
during each taxable year from all sources within the Philippines as ... dividends ....

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. 11 Thus:

Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other
Contracting State may be taxed in that other Contracting State.

(2) However, such dividends may also be taxed in the Contracting State of which the company paying the
dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial
owner of the dividends the tax so charged shall not exceed;

(a) ...

(b) 25 per cent of the gross amount of the dividends in all other cases.

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.

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

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

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head
office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can
be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares
including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of
Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made
this independent investment attributable only to the head office, cannot now claim the increments as ordinary
consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %.

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 totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2)
(b).

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

Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) 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. In other words, by reason of our bilateral negotiations with Japan, we
have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty.

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, which
shall be collected and paid as provided in Section 53 (d) of this Code, 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. [Section 24 (b) (1)].

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

Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:

Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------

Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............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 under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25
% of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring under
the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the
Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was not perfected in
accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal from final orders,
resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen (15) days counted from the
notice of the final order, resolution, award, judgment or decision appealed from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been
created by virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.

Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of
the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling,
or decision shall become final.

Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund
on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on November 17, 1986, and notice of which was
received by petitioner on November 26, 1986. Two days later, or on November 28, 1986, petitioner
simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for review with the
Supreme Court. 14 From the foregoing, it is evident that the instant appeal was perfected well within the 30-
day period provided under R.A. No. 1125, the whole 30-day period to appeal having begun to run again from
notice of the denial of petitioner's motion for reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which
affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's
claim for refund is hereby REVERSED. 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. L-22074 April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

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

Josue H. Gustilo and Ramirez and Ortigas for petitioner.

Office of the Solicitor General and Attorney V.G. Saldajena for respondents.

BENGZON, J.P., J.:

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
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . . 100.00
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . . 100.00
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.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby ordered to
pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and P173,153.00 or the total
sum of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus the statutory delinquency
penalties thereon. With costs against petitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal Revenue's
assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.

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.

The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to
reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were
performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability
of Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a
register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign resinsurers,
localizing in the Philippines the actual cession of the risks and premiums and assumption of the reinsurance
undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the
privilege of doing insurance business in the Philippines were payable by the foreign reinsurers when the same
were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an
amount equivalent to 5% of the ceded premiums, in consideration for administration and management by the
latter of the affairs of the former in the Philippines in regard to their reinsurance activities here. Disputes and
differences between the parties were subject to arbitration in the City of Manila. All the reinsurance contracts,
except that with Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines
and later signed by the foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc.
and Swiss Reinsurance Company was signed by both parties in Switzerland, the same specifically provided that
its provision shall be construed according to the laws of the Philippines, thereby manifesting a clear intention of
the parties to subject themselves to Philippine law.

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.1wph1.t

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden
to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to
defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which
a government is supposed to provide. Considering that the reinsurance premiums in question were afforded
protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state.

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 pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to taxation
under this Title not engaged in trade or business within the Philippines and not having any office or place of
business therein, there shall be deducted and withheld at the source in the same manner and upon the same
items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof, and such tax shall be
returned and paid in the same manner and subject to the same conditions as provided in that section.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. All persons, corporations and general copartnerships (compaias colectivas), in what
ever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust
capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any nonresident alien individual,
not engaged in trade or business within the Philippines and not having any office or place of business therein,
shall (except in the case provided for in subsection [a] of this section) deduct and withhold from such annual or
periodical gains, profits, and income a tax equal to twelve per centum thereof: Provided That no deductions or
withholding shall be required in the case of dividends paid by a foreign corporation unless (1) such corporation
is engaged in trade or business within the Philippines or has an office or place of business therein, and (2) more
than eighty-five per centum of the gross income of such corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such dividends (or for such part of such period as the
corporation has been in existence)was derived from sources within the Philippines as determined under the
provisions of section thirty-seven: Provided, further, That the Collector of Internal Revenue may authorize such
tax to be deducted and withheld from the interest upon any securities the owners of which are not known to
the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated in determining the
amount to be withheld. According, 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 againsts petitioner.

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.

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 Section 24 (b) (1) of 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 USs1.00 1 and paid the tax thereon in the
amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e)
of the National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. 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 where petitioners raised the following 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 PHILI PINE 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.

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.

The Court reproduces with approval the following disquisition of the respondent court

A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax, corporations are
classified into (a) domestic corporations and (b) foreign corporations. (Sec. 24(a) and (b), Tax Code.) Foreign
corporations are further classified into (1) resident foreign corporations and (2) non-resident foreign
corporations. (Sec. 24(b) (1) and (2). Tax Code.) A resident foreign corporation is a foreign corporation engaged
in trade or business within the Philippines or having an office or place of business therein (Sec. 84(g), Tax Code)
while a non- resident foreign corporation is a foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.)

A domestic corporation is taxed on its income from sources within and without the Philippines, but a foreign
corporation is taxed only on its income from sources within the Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev.
Regs. No. 2.) However, while a foreign corporation doing business in the Philippines is taxable on income solely
from sources within the Philippines, it is permitted to deductions from gross income but only to the extent
connected with income earned in the Philippines. (Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreign
corporations not doing business in the Philippines are taxable on income from all sources within the Philippines,
as interest, dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations, emoluments,
or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains" The
tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.)

At the time material to this case, certain corporations were given special treatment, namely, building and loan
associations operating as such in accordance with Section 171 of the Corporation Law, educational institutions,
domestic life insurance companies and for" foreign life insurance companies doing business in the Philippines.
(Sec. 24(a) & (c), Tax Code.) It bears emphasis, however, that foreign life insurance companies which were not
doing business in the Philippines were taxable as other foreign corporations not authorized to do business in
the Philippines. (Sec. 24(c) Tax Code.)

Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a non-resident foreign corporation,
organized and existing under the laws of The Netherlands with principal office in Amsterdam and not licensed
to do business in the Philippines. (pp. 8-81, CTA records.) As a non-resident foreign corporation, it is thus a
foreign corporation, not engaged in trade or business within the Philippines and not having any office or place
of business therein. (Sec. 84(h), Tax Code.) As stated above, it is therefore taxable on income from all sources
within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and
income and capital gains, and the tax is equal to thirty per centum of such amount, under Section 24(b) (1) of
the Tax Code. The accent is on the words of--`such amount." Accordingly, petitioner N. V. Reederij "Amsterdam"
being a non-resident foreign corporation, its taxable income for purposes of our income tax law consists of its
gross income from all sources within the Philippines.

The law seems clear and specific. It thus calls for its application as worded as it leaves no leeway for
interpretation. The applicable provision imposes a tax on foreign corporations falling under the classification of
non-resident corporations without any exceptions or conditions, unlike in the case of foreign corporations
engaged in trade or business within the Philippines which contained (at the time material to this case) an
exception with respect to foreign life insurance companies. Adherence to the provision of the law, which
specifies and determines the taxable income of, and the rate of income tax applicable to, non-resident foreign
corporations, without mentioning any exceptions, would therefore lead to the conclusion that petitioner N.V.
Reederij "Amsterdam" is subject to income tax on gross income from all sources within the Philippines.

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. Thus, the respondent court aptly ruled:

It must be stressed, however, that Section 37 (e) of the Code, as implemented by Section 163 of the
Regulations, provides the rule of the determination of the net income taxable in the Philippines of a foreign
steamship company doing business in the Philippines. To assure that non-resident foreign steamship companies
not engaged in business in the Philippines and not having any office or place of business herein are not covered
therein, the regulations explicitly and clearly provide that "the net income of a foreign steamship co company
doing business in or from this country is ascertained," under the formula contained therein, "for the purpose of
the income tax.! The reason is easily discernible. As stated above, the taxable income of non-resident foreign
corporations consists of its gross income from all sources within the Philippines. Accordingly, a foreign
steamgship corporation derives income partly from sources within and partly from sources without the
Philippines if it is carrying on a business of transportation service between points in the Philippines and points
outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.) Only then does Section 37 (e) of the Tax Code,
are implemented by Section 163 of the Regulations, apply in computing net income subject to tax. There is no
basis therefore for an assertion "that Section 37 (e) does not distinguish between a foreign corporation engaged
in business in the Philippines and a foreign corporation not engaged in business in the Philippines."" (p. 84, CTA
records.) (Decision, pp. 11-12.)

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.

This conversion rate issue was definitely settled by this Court in the case of Commissioner of Internal Revenue
vs. Royal Interocean Lines and the Court of Tax Appeals 4 to wit:

It should be noted that on July 1 6, 1959, the policy incorporated in Circular No. 20 and implemented in
subsequent circulars was relaxed with the enactment of Republic Act No. 2609 which directed the monetary
authorities to take steps for the adoption of a four-year program of gradual decontrol, during which the
Monetary Board, with the approval of the President, could and did fix the conversion rate of the Philippine peso
to the US dollar at a ratio other than that prescribed in Section 48 of Republic Act 265. During the period
involved in the case at bar, the free market conversion rate ranged from P3.47 to P3.65 to a US dollar at which
rate the freight fees in question were computed in the contested assessment. Inasmuch said frees were
revenues derived from foreign exchange transactions, it follows necessarily that the petitioner was fully justified
in computing the taxpayer's receipts at Id free market rates.

xxx xxx xxx

The case of the United States Lines, on which the appealed decision of the Court of Tax Appeals is anchored,
refers to transactions that took place before the approval of Republic Act 2609 on July 16, 1959 when the only
legal rate of exchange obtaining in the Philippines was P2 to US $1, and all foreign exchange had to be
surrendered to the Central Bank subject to its disposition pursuant to its own rules and regulations. Upon the
other hand, the present case refers to transactions that took place during the effectivity of Republic Act 2609
when there was, apart from the parity rate, a legal free market conversion rate for foreign exchange
transactions, which rate had been fixed in open trading, such as those involved in the case at bar.

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.

SO ORDERED.

G.R. No. 60714 March 6, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

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

The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for 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.

The antecedental facts of the case are as follows:

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 officeat 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,
computed as follows:

1959 1960 1961

Net income per P472,025.16 P476,671.48 P734,812.77

investigation

Tax due thereon 133,608.00 135,001.00 212,444.00

Add: 50% surch. 66,804.00 67,500.50 106,222.00

1/2% mo. int.

(3 yrs.) 24,049.44 24,300.18 38,239.92

Total due P224,461.44 P226,801.68 P356,905.92

=========== =========== ===========

1962 1963 S U M M AR Y

Net income per P1,065,641.63 P1,550,230.48 P224,461.44

investigation

Tax due thereon 311,692.00 457,069.00 226,801.68

Add:50% surch. 155,846.00 228,534.50 356,905.92

1/2% mo. int. 523,642.56

(3 yrs.)

56,104.56 82,272.42 767,875.92

Total due P 523,642.56 P 767,875.92 P2,099,687.52

============= ============ =============

Compromise Penalty P 1,500.00

On June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign corporation, it was
taxable only on income from Philippine sources as determined under Section 37 of the Tax Code, and there
being no such income during the period in question, it was not liable for the deficiency income tax liabilities
assessed (Rollo, pp. 53-55). The Commissioner resolved otherwise and in a letter-decision dated December 21,
1972, denied JAL's request for cancellaton of the assessment (Ibid., p. 29).

JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed the decision (Ibid., pp. 51-
76) and thereafter denied the motion for reconsideration filed by the Commissioner (Ibid., p. 77). Hence, this
petition.

Petitioner raises two issues in this wise:

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.

The petition is impressed with merit.

The issues in the case at bar have already been laid to rest in no less than three cases resolved by this Court.
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 x x x; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in our income tax law, `income' refers to the flow of
wealth (Madrigal and Paternol vs. Rafferty and Concepcion, 38 Phil. 414 [1918]).
"x x x xxx

"x x x xxx

"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.

"x x x xxx

"True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and
(6) sale of personal property, does not mention income from the sale of tickets for international transportation.
However, that does not render it less an income from sources within the Philippines.

Section 37, by its language does not intend the enumeration to be exclusive. It merely directs that the types of
income listed therein be treated as income from sources within the Philippines. A cursory reading of the section
will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be
so considered (British Traders Insurance Co., Ltd. vs. Commissioner of Internal Revenue, 13 SCRA 719 [1965]).

"x x x xxx

"The absence of flight operations to and from the Philippines is not determinative of the source of income or
the situs of income taxation. x x x The test of taxability is the `source'; and the source of an income is that
activity x x x which produced the income (Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601
[1965]). Unquestionably, the passage documentations in these cases were sold in the Philippines and the
revenue therefrom was derived from a business activity regularly pursued within the Philippines. x x x The word
`source' conveys one essential Idea, that of origin, and the origin of the income herein is the Philippines (Manila
Gas Corporation vs. Collector of Internal Revenue, 62 Phil. 895 [1935])."

The above ruling was adopted en toto in the subsequent case of Commissioner of Internal Revenue vs. Air India
and the Court of Tax Appeals (G.R. No. L-72443, January 29, 1988, 157 SCRA 648) holding that the revenue
derived from the sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines,
must be considered taxable income, and more recently, in the case of Commissioner of Internal Revenue vs.
American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was
likewise 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 residentforeigncorporation under Section 84 (g) of the NationalInternalRevenue Code of1939.
Definitionofwhata resident foreign corpora-tion is was likewise reproduced under Section 20 of the 1977 Tax
Code.

The BOAC Doctrine has expressed in unqualified terms:

"Under Section 20 of the 1977 Tax Code:

"(h) the term `resident foreign corporation' applies to a foreign corporation engaged in trade or business within
the Philippines or having an office or place of business therein.

"(i) the term `non-resident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein."

"x x x. There is no specific criterion as to what constitutes `doing' or `engaging in' or `transacting' business. Each
case must be judged in the light of its peculiar environmental circumstances. The term implies continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or
for the purpose and object of the business organization (The Mentholatum Co., Inc., et al. vs. Anacleto
Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A. No. 5455). 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 (Pacific
Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd
ed., pp. 844-847 and Fisher's Philippine Law of Stock Corporation, p. 415).

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
(Commissioner of Internal Revenue vs. British Overseas Airways Corporation, supra). The case of CIR vs.
American Airlines, Inc. (supra) sums it up as follows:

"x x x, foreign airline companies which sold tickets in the Philippines through their local agents, whether called
liaison offices, agencies or branches, were considered resident foreign corporations engaged in trade or
business in the country. Such activities show continuity of commercial dealings or arrangements and
performance of acts or works or the exercise of some functions normally incident to and in progressive
prosecution of commercial gain or for the purpose and object of the business organization."

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. As held in the case
of CIR vs. Air India (supra):

"The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue Code is imposed
on a delinquent taxpayer who willfully neglects to file the required tax return within the period prescribed by
the law, or who willfully files a false or fraudulent tax return, x x x.

"x x x xxx

"On the other hand, the same Section provides that if the failure to file the required tax return is not due to
willful neglect, a penalty of 25% is to be added to the amount of the tax due from the taxpayer."

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. All that petitioner did was to cite the provision of law upon which the
surcharge was based without explaining why it was applicable to respondent's case. Such cannot be
countenanced for mere allegations are definitely not acceptable. The willful neglect to file the required tax
return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by
legal consequences, cannot be presumed (CIR vs. Air India, supra). The fraud contemplated by law is actual and
constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to
in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by 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 which
states:

(d) Interest on deficiency. Interest upon the amount determined as a deficiency shall be assessed at the same
time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue;
and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for
the payment of the tax x x x; PROVIDED, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions
regarding prescription to the contrary notwithstanding.

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 (Revenue Regulations No. V-1, as amended, March 17, 1947, pp. 836-837, Revenue
Regulations Updated by Prof. Eustaquio Ordono, 1984). The compromise penalty is therefore, improperly
imposed.

In sum, the following schedule as recomputed illustrates the total tax liability of the private respondent for the
years 1959 through 1963 -

Net Income 30% of Net Income as Add 25% surcharge Add 6% interest per Summary of Total Income Tax Due
under under Sec. 72 NIRC annum for a maximum Tax Due from the
Secs. 24(a) and (b) of 1939 of 3 years under Private Respondent
(2) NIRC of 1939 Sec. 51(d) NIRC of
1939

1959 P 472,025.16 P 141,607.54 P 35,401.88 P 25,489.35 P 202,498.77

1960 476,671.48 143,001.44 35,750.36 25,740.25 204,492.05

1961 734,812.77 220,443.83 55,110.95 39,679.88 315,234.66

1962 1,065,641.63 319,692.48 79,923.12 399,615.60

1963 1,550,230.48 465,069.14 116,267.28 581,336.42

P1,703,177.40

Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of ONE MILLION
SEVEN HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY SEVENAND FORTY CENTAVOS (P1,703,177.40)
The dismissal for lack of merit by this Court of the appeal in JAL v. Commissioner of Internal Revenue (G.R. No.
L-30041) on February 3, 1969 is not res judicata to the present case. The Tax Court ruled in that case that the
mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the
taxpayer therein subject to the common carrier's tax. The common carrier's tax is an excise tax, being a tax on
the activity of transporting, conveying or removing passengers and cargo from one place to another. It purports
to tax the business of transportation. Being an excise tax, the same can be levied by the State only when the
acts, privileges or businesses are done or performed within the jurisdiction of the Philippines (Commissioner of
Internal Revenue v. British Overseas Airways Corporation, supra).

The subject matter of the case underconsideration is income tax, a direct tax on the income of persons and
other entities "of whatever kind and in whatever form derived from any source." Since the two cases treat of a
different subject matter, the decision in G.R. No. L-30041 cannot be res judicata with respect to this case.

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 andsurcharges.

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.

Roco, Bunag, Kapunan & Migallos for petitioners.

Agcaoili & Associates for Citibank, N.A, and Bank of America NT & SA.

Belo, Abiera & Associates for Hongkong & Shanghai Banking Corp.

NARVASA, J.:p
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) reading in part as follows: 1

An adjudication of insolvency may be made on the petition of three or more creditors, residents of the
Philippine Islands, whose credits or demands accrued in the Philippine Islands, and the amount of which credits
or demands are in the aggregate not less than one thousand pesos: Provided, that none of said creditors has
become a creditor by assignment, however made, within thirty days prior to the filing of said petition. Such
petition must be filed in the Court of First Instance of the province or city in which the debtor resides or has his
principal place of business, and must be verified by at least three (3) of the petitioners. . . .

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. 2
The case was docketed as Sp. Proc. No. 9263 and assigned to Branch 28 of the Court.

The petition for involuntary insolvency alleged:

1) that CMI had obtained loans from the three petitioning banks, and that as of November/December,
1981, its outstanding obligations were as follows:

a) In favor of Bank of America (BA) P15,297,367.67

(as of December 10, 1981) US$ 4,175,831.88

(b) In favor of Citibank US$ 4,920,548.85

(as of December 10, 1981)

c) In favor of Hongkong & Shanghai Bank US$ 5,389,434.12

(as of November 30, 1981); P6,233,969.24

2) that in November, 1981, State Investment House, Inc. (SIHI) and State Financing Center, Inc. (SFCI) had
separately instituted actions for collection of sums of money and damages in the Court of First Instance of Rizal
against CMI, docketed respectively as Civil Cases Numbered 43588 and 43677; and that on application of said
plaintiffs, writs of preliminary attachment had been issued which were executed on "the royalty/profit sharing
payments due CMI from Benguet Consolidated Mining, Inc;" and

3) that CMI had "committed specific acts of insolvency as provided in Section 20 of the Insolvency Law, to
wit:

xxx xxx xxx

5. that he (CMI) has suffered his (CMI's) property to remain under attachment or legal process for three
days for the purpose of hindering or delaying or defrauding his (CMI's) creditors;

xxx xxx xxx

11. that being a merchant or tradesman he (CMI) has generally defaulted in the payment of his (CMI's)
current obligations for a period of thirty days; . . .

The petition was opposed by State Investment House, Inc. (SIHI) and State Financing Center, Inc. (SFCI). 3 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, 4 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." 5 Resolution on the motion was
"deferred until after hearing of the case on the merits" it appearing to the Court that the grounds therefor did
not appear to be indubitable. 6

SIHI and SFCI filed their own Answer-in-Intervention, 7 and served on the three petitioner banks requests for
admission of certain facts in accordance with Rule 26 of the Rules of Court, 8 receiving a response only from
Hongkong & Shanghai Bank. 9

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." 10 Oppositions to the motion were filed, 11 to which a reply was submitted. 12

The Regional Trial Court 13 found merit in the motion for summary judgment. By Order dated October 10,
1983, it rendered "summary judgment dismissing the . . . petition for lack of jurisdiction over the subject
matter, with costs against petitioners." 14 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 three foreign banks sought to take an appeal from the Order of October 10, 1983. They filed a notice of
appeal and a record on appeal. 15 SIHI and SFCI moved to dismiss their appeal claiming it was attempted out of
time. The Trial Court denied the motion.

SIHI and SFCI filed with this Court a petition for certiorari and prohibition (G.R. NO. 66449), impugning that
denial. The Court dismissed the petition and instead required the three banks to file a petition for review in
accordance with Rule 45 of the Rules of Court. 16 This the banks did (their petition was docketed as G.R. No.
66804). However, by Resolution dated May 16, 1984, the court referred the petition for review to the
Intermediate Appellate Court, where it was docketed as AC SP-03674. 17

In the meantime, the Trial Court approved on May 3, 1985 the banks' record on appeal and transmitted it to
this Court, where it was recorded as UDK-6866. As might have been expected, this Court required the banks to
file a petition for review under Rule 45, but they asked to be excused from doing so since they had already filed
such a petition, which had been referred to the Intermediate Appellate Court and was there pending as AC-G.R.
No. SP 03674, supra. This Court then also referred UDK-6866 to the Intermediate Appellate Court where it was
docketed as AC-G.R. No. CV 07830.

Both referred cases, AC-G.R. No. SP 03674 and AC-G.R. No. CV 07830, were consolidated by Resolution of the
Court of Appeals dated April 9, 1986, and Decision thereon was promulgated on July 14, 1987 by the Fifteenth
Division of said Court. 18

The Appellate Court reversed the Trial Court's Order of October 10, 1983 and remanded the case to it for
further proceedings. It ruled:

1) that the purpose of the Insolvency Law was "to convert the assets of the bankrupt in cash for
distribution among creditors, and then to relieve the honest debtor from the weight of oppressive
indebtedness and permit him to start life anew, free from the obligations and responsibilities consequent upon
business misfortunes;" 19 and that it was "crystal clear" that the law was "designed not only for the benefit of
the creditors but more importantly for the benefit of the debtor himself," the object being "to provide not only
for the suspension of payments and the protection of creditors but also the discharge of insolvent honest
debtors to enable them to have a fresh start;"

2) 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;"

3) 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;"

4) that the banks had "complied with all the laws, rules and regulations (for doing business in the country)
and have been doing business in the Philippines for many years now;" that the authority granted to them by the
Securities and Exchange Commission upon orders of the Monetary Board "covers not only transacting banking
business . . . but likewise maintaining suits "for recovery of any debt, claims or demand whatsoever," and that
their petition for involuntary insolvency was "nothing more than a suit aimed at recovering a debt granted by
them to Consolidated Mines, Inc., or at least a portion thereof;"

4) that to deprive the foreign banks of their right to proceed against their debtors through insolvency
proceedings would "contravene the basic standards of equity and fair play, . . . would discourage their
operations in economic development projects that create not only jobs for our people but also opportunities
for advancement as a nation;" and

5) 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 Monetary Board can not appoint a conservator or receiver for a foreign bank or orders its
liquidation having only the power to revoke its license, subject to such proceedings as the Solicitor General may
thereafter deem proper to protect its creditors;

8) 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;

9) said banks have come to court with unclean hands, their filing of the petition for involuntary insolvency
being an attempt to defeat validly acquired rights of domestic corporations.

The concept of a foreign corporation under Section 123 of the Corporation Code is of "one formed, organized or
existing under laws other than those of the Philippines and . . . (which) laws allow Filipino citizens and
corporations to do business . . . ." There is no question that the three banks are foreign corporations in this
sence, with principal offices situated outside of the Philippines. There is no question either that said banks have
been licensed to do business in this country and have in fact been doing business here for many years, through
branch offices or agencies, including "foreign currency deposit units;" in fact, one of them, Hongkong &
Shanghai Bank has been doing business in the Philippines since as early as 1875.
The issue is whether these Philippine branches or units may be considered "residents of the Philippine Islands"
as that term is used in Section 20 of the Insolvency Law, supra, 20 or residents of the state under the laws of
which they were respectively incorporated. 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 are however other
statutes, albeit of subsequent enactment and effectivity, from which enlightening notions of the term may be
derived.

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." 21

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." 22

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, mortgage banks, development banks, rural banks, stock savings and loan associations" (which
have been formed and organized under Philippine laws), making no distinction between the former and the
later in so far, as the terms "banking institutions" and "bank" are used in the Act, 23 declaring on the contrary
that in "all matters not specifically covered by special provisions applicable only to foreign banks, or their
branches and agencies in the Philippines, said foreign banks or their branches and agencies lawfully doing
business in the Philippines "shall be bound by all laws, rules, and regulations applicable to domestic banking
corporations of the same class, except such laws, rules and regulations as provided for the creation, formation,
organization, or dissolution of corporations or as fix the relation, liabilities, responsibilities, or duties of
members, stockholders or officers or corporations." 24

This Court itself has already had occasion to hold 25 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
legal provision authorizing attachment against a defendant not residing in the Philippine Islands;" 26 in other
words, a preliminary attachment may not be applied for and granted solely on the asserted fact that the
defendant is a foreign corporation authorized to do business in the Philippines and is consequently and
necessarily, "a party who resides out of the Philippines." 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. Be this as it may, this
Court pointed out that:

. . . Our laws and jurisprudence indicate a purpose to assimilate foreign corporations, duly licensed to do
business here, to the status of domestic corporations. (Cf. Section 73, Act No. 1459, and Marshall Wells Co. vs.
Henry W. Elser & Co., 46 Phil. 70, 76; Yu; Cong Eng vs. Trinidad, 47 Phil. 385, 411) We think it would be entirely
out of line with this policy should we make a discrimination against a foreign corporation, like the petitioner,
and subject its property to the harsh writ of seizure by attachment when it has complied not only with every
requirement of law made specially of foreign corporations, but in addition with every requirement of law made
of domestic corporations. . . . .

Obviously, the assimilation of foreign corporations authorized to do business in the Philippines "to the status of
domestic corporations," subsumes their being found and operating as corporations, hence, residing, in the
country.

The same principle is recognized in American law: that the "residence of a corporation, if it can be said to have
a residence, is necessarily where it exercises corporate functions . . . ;" that it is .considered as dwelling "in the
place where its business is done . . . ," as being "located where its franchises are exercised . . . ," and as being
"present where it is engaged in the prosecution of the corporate enterprise;" that a "foreign corporation
licensed to do business in a state is a resident of any country where it maintains an office or agent for
transaction of its usual and customary business for venue purposes;" and that the "necessary element in its
signification is locality of existence." 27 Courts have held that "a domestic corporation is regarded as having a
residence within the state at any place where it is engaged in the particulars of the corporate enterprise, and
not only at its chief place or home office;" 28 that "a corporation may be domiciled in one state and resident in
another; its legal domicil in the state of its creation presents no impediment to its residence in a real and
practical sense in the state of its business activities." 29

The foregoing propositions are in accord with the dictionary concept of residence as applied to juridical
persons, a term which appears to comprehend permanent as well as temporary residence.

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. Of course, as petitioners correctly aver, it is not really the grant of a license to a foreign corporation
to do business in this country that makes it a resident; the license merely gives legitimacy to its doing business
here. 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.

There is, of course, as petitioners argue, no substantive law explicitly granting foreign banks the power to
petition for the adjudication of a Philippine corporation as a bankrupt. This is inconsequential, for neither is
there any legal provision expressly giving domestic banks the same power, although their capacity to petition
for insolvency can scarcely be disputed and is not in truth disputed by petitioners. The law plainly grants to a
juridical person, whether it be a bank or not or it be a foreign or domestic corporation, as to natural persons as
well, such a power to petition for the adjudication of bankruptcy of any person, natural or juridical, provided
that it is a resident corporation and joins at least two other residents in presenting the petition to the
Bankruptcy Court.

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." As basis for the argument they invoke
Section 123 of the Corporation Code which, however, does not formulate the proposition in the same way.
Section 123 does not say, as petitioners assert, that it is required that the laws under which foreign
corporations are formed "give Philippine nationals, reciprocal rights." What it does say is that the laws of the
country or state under which a foreign corporation is "formed, organized or existing . . . allow Filipino citizens
and corporations to do business in its own country or state," which is not quite the same thing. Now, it seems
to the Court that there can be no serious debate about the fact that the laws of the countries under which the
three (3) respondent banks were formed or organized (Hongkong and the United States) do "allow Filipino
citizens and corporations to do business" in their own territory and jurisdiction. It also 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.

That the Monetary Board can not appoint a conservator or receiver for a foreign bank or order its liquidation
having only the power to revoke its license, subject to such proceedings as the Solicitor General may thereafter
deem proper to protect its creditors, which is another point that petitioners seek to make, is of no moment. It
has no logical connection to the matter of whether or not the foreign bank may properly ask for a judicial
declaration of the involuntary insolvency of a domestic corporation, which is the issue at hand. The fact is, in
any event, that the law is not lacking in sanctions against foreign banks or powerless to protect the latter's
creditors.

The petitioners contend, too, that the respondent banks have come to court with unclean hands, their filing of
the petition for involuntary insolvency being an attempt to defeat validly acquired rights of domestic
corporations. The Court wishes to simply point out that the effects of the institution of bankruptcy proceedings
on all the creditors of the alleged bankrupt are clearly spelled out by the law, and will be observed by the
Insolvency Court regardless of whatever motives apart from the desire to share in the assets of the insolvent
in satisfying its credits that the party instituting the proceedings might have.

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.

The petitioners allege that three days before respondent banks filed their petition for involuntary insolvency
against CMI, they received from the latter substantial payments on account in the aggregate amount of
P6,010,800.00, with the result that they were "preferred in the distribution of CMI's assets thereby defrauding
other creditors of CMI." Non sequitur. It is in any case a circumstance that the Bankruptcy Court may well take
into consideration in determining the manner and proportion by which the assets of the insolvent company
shall be distributed among its creditors; but it should not be considered a ground for giving the petition for
insolvency short shrift. Moreover, the payment adverted to does not appear to be all that large. The total
liabilities of CMI to the three respondent banks as of December, 1981 was P21,531,336.91, and
US$14,485,814.85. Converted into Philippine currency at the rate of P7.899 to the dollar, the average rate of
exchange during December, 1981, 30 the dollar account would be P114,423,451.50. Thus, the aggregate
liabilities of CMI to the banks, expressed in Philippine currency, was P135,954,788.41 as of December, 1981,
and therefore the payment to them of P6,010,800.00 constituted only some 4.42% of the total indebtedness.

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.

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.

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

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court
of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's
assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the
fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983
denying reconsideration.

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

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

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate
amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by
BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the
years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the
CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the Tax Court
on 27 January 1972, assailing the assessment and praying for the refund of the amount paid.

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

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

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

This case was subsequently tried jointly with the First Case.

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

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

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

1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly, taxable.

2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business
in the Philippines or has an office or place of business in the Philippines.

3. In the alternative that private respondent may not be considered a resident foreign corporation but a
non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent
(35%) of its gross income received from all sources within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what
constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its
peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the
business organization. 2 "In order that a foreign corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a continuous business, such as the appointment
of a local agent, and not one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise
of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very
lifeblood of the airline business, the generation of sales being the paramount objective. There should be no
doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net
income received in the preceding taxable year from all sources within the Philippines. 5

Sec. 24. Rates of tax on corporations. ...

(b) Tax on foreign corporations. ...

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

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

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 transactions of any business carried on for
gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words
'income from any source whatever' disclose a legislative policy to include all income not expressly exempted
within the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the
amount of money coming to a person within a specific time ...; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow
of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted
to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8 For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency.
The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to
pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and
conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces
within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the
relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property,
and (6) sale of personal property, does not mention income from the sale of tickets for international
transportation. However, that does not render it less an income from sources within the Philippines. Section 37,
by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income
listed therein be treated as income from sources within the Philippines. A cursory reading of the section will
show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so
considered. " 10

BOAC, however, would impress upon this Court that income derived from transportation is income for services,
with the result that the place where the services are rendered determines the source; and since BOAC's service
of transportation is performed outside the Philippines, the income derived is from sources without the
Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint
Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the source of income or the
site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case.
The test of taxability is the "source"; and the source of an income is that activity ... which produced the income.
11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 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. 13

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by
the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71.
For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now
taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings.
(Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross
Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income from Philippine sources.
The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage
tax it would have been place under Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal
in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the
present case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets,
unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject
to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise tax,
being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to
another. It purports to tax the business of transportation. 14 Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or performed within the jurisdiction of the
Philippines. The subject matter of the case under consideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in one cannot be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent,
the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as
deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from
April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for
refund in the amount of P858,307.79 is hereby denied. Without costs.

SO ORDERED.

Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint
decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority
opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent
in the Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment
through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the
rate of income tax on foreign corporations, international carriers such as respondent BOAC, have since then
been taxed at a reduced rate of 2-% on their gross Philippine billings. There is, therefore, no longer ant source
of substantial conflict between the two opinions as to the present 2-% tax on their gross Philippine billings
charged against such international carriers as herein respondent foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera
speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373
and 2561, dated 26 January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation
(BOAC), a foreign airline company which does not maintain any flight operations to and from the Philippines, is
liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales
agent, relating to the carriage of passengers and cargo between two points both outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC
to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having
an office or place of business in the Philippines is subject to Philippine income taxation only in respect of
income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE
("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969,
read as follows:

(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines
(expect foreign life insurance companies) shall be taxable as provided in subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once
more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any foreign
counrty, except foreign life insurance company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:

(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received by
every foreign corporation not engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that premiums shall not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident
foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it
is liable to income tax only to the extent that it derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of
its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply
that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no
presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or
service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court
dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local insurance
company to a foreign reinsurance company in respect of risks located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines. [T]he reinsurance, the
liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the Philippines. 4

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was the
indemnification of the local insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in case the casualty insured
against occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local
insurance companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United States income tax
system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and
was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth
Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a
standard U.S. text on federal income taxation:

The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from
three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "source within the United States" and suggest an investigation
into the nature and location of the activities or property which produce the income. If the income is from labor
(services) the place where the labor is done should be decisive; if it is done in this counrty, the income should
be from "source within the United States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income should be from "source within the
United States". If the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term "source" in this fundamental light. It is
not a place; it is an activity or property. As such, it has a situs or location; and if that situs or location is within
the United States the resulting income is taxable to nonresident aliens and foreign corporations. The intention
of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue or is derived must be situated
within the jurisdiction so that the source of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created
by activities and property protected by this Government or obtained by persons enjoying that protection. 5

3. We turn now to the question what is the source of income rule applicable in the instant case. There are
two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect
of contracts of service; and (b) the source rule applicable in respect of sales of personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as
follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of
our Tax Code reads as follows:
Section 37. Income for 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:

xxx xxx xxx

(3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis
supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in
the following manner:

(c) Gross income from sources without the Philippines. The following items of gross income shall be
treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a
juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section shall be
allocated or apportioned to sources within or without the Philippines, under the rules and regulations
prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation or other services
rendered partly within and partly without the Philippines, or (2) from the sale of personnel property produced
(in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part)
by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within
and partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax
Code which "was based upon a recognition that transportation was a service and that the source of the income
derived therefrom was to be treated as being the place where the service of transportation was rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2
(implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. Gross income from sources within the
Philippines includes compensation for labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was made, or of the place of payment
(Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular
species of foreign transportation companies i.e., foreign steamship companies deriving income from sources
partly within and partly without the Philippines:

Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels
touch parts of the Philippines should include as gross income, the total receipts of all out-going business
whether freight or passengers. With the gross income thus ascertained, the ratio existing between it and the
gross income from all ports, both within and without the Philippines of all vessels, whether touching of the
Philippines or not, should be determined as the basis upon which allowable deductions may be computed, .
(Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. A foreign corporation carrying on the business of transmission
of telegraph or cable messages between points in the Philippines and points outside the Philippines derives
income partly form source within and partly from sources without the Philippines.
... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give rise to
income wholly from sources outside the Philippines, and therefore not subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to
the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the
place where the sale of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or manufactured and sold
outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the
Philippines, although the personal property had been produced outside the Philippines, or if the sale of the
property takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines. In other words,
the income (and the related expenses, losses and deductions) will be allocated between sources within and
sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may be
usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from
(1) transportation or other services rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be
treated as derived partly from sources within and partly from sources without the Philippines. ... (Emphasis
supplied)

In contrast, income derived from the purchase and sale of personal property i. e., trading is, under the Tax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax
Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains, profits and income
derived from the purchase of personal property within and its sale without the Philippines or from the
purchase of personal property without and its sale within the Philippines, shall be treated as derived entirely
from sources within the country in which sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall
be treated as derived entirely from the country in which sold. The word "sold" includes "exchange." The
"country" in which "sold" ordinarily means the place where the property is marketed. This Section does not
apply to income from the sale personal property produced (in whole or in part) by the taxpayer within and sold
without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the
Philippines. (See Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into by
BOAC in the Philippines. Those transactions may be characterized either as sales of personal property (i. e.,
"sales of airline tickets") or as entering into a lease of services or a contract of service or carriage. The
applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a
matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the
ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation from
BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point to another
outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC
and the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does
not receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different
from the purchase price of a physical good or commodity such as a pair of shoes of a refrigerator or an
automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger or cargo
outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is
BOAC properly regarded as engaged in trading in the purchase and sale of personal property? Certainly,
BOAC was not purchasing tickets outside the Philippines and selling them in the Philippines. Consider next
sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a product" its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the
application here of "source rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term
than service and including the activity of selling) or from the here involved is income taxation, and not a sales
tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No.
1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of
this section upon the total net income received in the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether for passenger, excess
baggege or mail, provide the cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross revenues from chartered
flights originating from the Philippines shall likewise form part of "gross Philippine billings" regardless of the
place of sale or payment of the passage documents. For purposes of determining the taxability to revenues
from chartered flights, the term "originating from the Philippines" shall include flight of passsengers who stay in
the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from
the Philippines). Under this new approach, international carriers who service port or points in the Philippines
are treated in exactly the same way as international carriers not serving any port or point in the Philippines.
Thus, the source of income rule applicable, as above discussed, to transportation or other services rendered
partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. in place
of Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed on the basis of billings
in respect of passengers and cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2- per cent tax is effectively a tax on gross receipts or an excise or
privilege tax and not a tax on income. Thereby, the Government has done away with the difficulties attending
the allocation of income and related expenses, losses and deductions. Because taxes are the very lifeblood of
government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes,
with varying degrees of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to point out that the
determination of the appropriate characterization here that of contracts of air carriage rather than sales of
airline tickets entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of
international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint
decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority
opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent
in the Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment
through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the
rate of income tax on foreign corporations, international carriers such as respondent BOAC, have since then
been taxed at a reduced rate of 2-% on their gross Philippine billings. There is, therefore, no longer ant source
of substantial conflict between the two opinions as to the present 2-% tax on their gross Philippine billings
charged against such international carriers as herein respondent foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera
speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373
and 2561, dated 26 January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation
(BOAC), a foreign airline company which does not maintain any flight operations to and from the Philippines, is
liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales
agent, relating to the carriage of passengers and cargo between two points both outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC
to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having
an office or place of business in the Philippines is subject to Philippine income taxation only in respect of
income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE
("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969,
read as follows:

(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines
(expect foreign life insurance companies) shall be taxable as provided in subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once
more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any foreign
counrty, except foreign life insurance company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:

(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received by
every foreign corporation not engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that premiums shall not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident
foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it
is liable to income tax only to the extent that it derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of
its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply
that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no
presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or
service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court
dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local insurance
company to a foreign reinsurance company in respect of risks located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines. [T]he reinsurance, the
liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the Philippines. 4

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was the
indemnification of the local insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in case the casualty insured
against occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local
insurance companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United States income tax
system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and
was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth
Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a
standard U.S. text on federal income taxation:

The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from
three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "source within the United States" and suggest an investigation
into the nature and location of the activities or property which produce the income. If the income is from labor
(services) the place where the labor is done should be decisive; if it is done in this counrty, the income should
be from "source within the United States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income should be from "source within the
United States". If the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term "source" in this fundamental light. It is
not a place; it is an activity or property. As such, it has a situs or location; and if that situs or location is within
the United States the resulting income is taxable to nonresident aliens and foreign corporations. The intention
of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue or is derived must be situated
within the jurisdiction so that the source of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created
by activities and property protected by this Government or obtained by persons enjoying that protection. 5

3. We turn now to the question what is the source of income rule applicable in the instant case. There are
two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect
of contracts of service; and (b) the source rule applicable in respect of sales of personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as
follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of
our Tax Code reads as follows:

Section 37. Income for 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:

xxx xxx xxx

(3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis
supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in
the following manner:

(c) Gross income from sources without the Philippines. The following items of gross income shall be
treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a
juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section shall be
allocated or apportioned to sources within or without the Philippines, under the rules and regulations
prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation or other services
rendered partly within and partly without the Philippines, or (2) from the sale of personnel property produced
(in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part)
by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within
and partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax
Code which "was based upon a recognition that transportation was a service and that the source of the income
derived therefrom was to be treated as being the place where the service of transportation was rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2
(implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. Gross income from sources within the
Philippines includes compensation for labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was made, or of the place of payment
(Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular
species of foreign transportation companies i.e., foreign steamship companies deriving income from sources
partly within and partly without the Philippines:

Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels
touch parts of the Philippines should include as gross income, the total receipts of all out-going business
whether freight or passengers. With the gross income thus ascertained, the ratio existing between it and the
gross income from all ports, both within and without the Philippines of all vessels, whether touching of the
Philippines or not, should be determined as the basis upon which allowable deductions may be computed, .
(Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. A foreign corporation carrying on the business of transmission
of telegraph or cable messages between points in the Philippines and points outside the Philippines derives
income partly form source within and partly from sources without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give rise to
income wholly from sources outside the Philippines, and therefore not subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to
the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the
place where the sale of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or manufactured and sold
outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the
Philippines, although the personal property had been produced outside the Philippines, or if the sale of the
property takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines. In other words,
the income (and the related expenses, losses and deductions) will be allocated between sources within and
sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may be
usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from
(1) transportation or other services rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be
treated as derived partly from sources within and partly from sources without the Philippines. ... (Emphasis
supplied)

In contrast, income derived from the purchase and sale of personal property i. e., trading is, under the Tax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax
Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains, profits and income
derived from the purchase of personal property within and its sale without the Philippines or from the
purchase of personal property without and its sale within the Philippines, shall be treated as derived entirely
from sources within the country in which sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall
be treated as derived entirely from the country in which sold. The word "sold" includes "exchange." The
"country" in which "sold" ordinarily means the place where the property is marketed. This Section does not
apply to income from the sale personal property produced (in whole or in part) by the taxpayer within and sold
without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the
Philippines. (See Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into by
BOAC in the Philippines. Those transactions may be characterized either as sales of personal property (i. e.,
"sales of airline tickets") or as entering into a lease of services or a contract of service or carriage. The
applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a
matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the
ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation from
BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point to another
outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC
and the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does
not receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different
from the purchase price of a physical good or commodity such as a pair of shoes of a refrigerator or an
automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger or cargo
outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is
BOAC properly regarded as engaged in trading in the purchase and sale of personal property? Certainly,
BOAC was not purchasing tickets outside the Philippines and selling them in the Philippines. Consider next
sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a product" its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the
application here of "source rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term
than service and including the activity of selling) or from the here involved is income taxation, and not a sales
tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No.
1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of
this section upon the total net income received in the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether for passenger, excess
baggege or mail, provide the cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross revenues from chartered
flights originating from the Philippines shall likewise form part of "gross Philippine billings" regardless of the
place of sale or payment of the passage documents. For purposes of determining the taxability to revenues
from chartered flights, the term "originating from the Philippines" shall include flight of passsengers who stay in
the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from
the Philippines). Under this new approach, international carriers who service port or points in the Philippines
are treated in exactly the same way as international carriers not serving any port or point in the Philippines.
Thus, the source of income rule applicable, as above discussed, to transportation or other services rendered
partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. in place
of Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed on the basis of billings
in respect of passengers and cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2- per cent tax is effectively a tax on gross receipts or an excise or
privilege tax and not a tax on income. Thereby, the Government has done away with the difficulties attending
the allocation of income and related expenses, losses and deductions. Because taxes are the very lifeblood of
government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes,
with varying degrees of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to point out that the
determination of the appropriate characterization here that of contracts of air carriage rather than sales of
airline tickets entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of
international carriers.

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:
The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the
Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011
in CTA Case No. 6746. This Court resolves this case on a pure question of law, which involves the interpretation
of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC),
on the income tax treatment of proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation.
Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be justified by
the facilities, personnel, funds, or other requirements that are available;

(d) To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, 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. The BIR reduced the amount to P63,935,351.57 during trial in the
First Division of the CTA. 4

On 14 January 2003, 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."
5 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. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came
from charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit
from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from
patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients
was P218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of
P334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes
under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income
tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section
27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes
proprietary non-profit hospitals out of the income tax exemption under Section 30 of the NIRC and instead,
imposes a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered to pay
P57,659,981.19 as deficiency income and expanded withholding tax for 1998 with surcharges and interest for
late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part
of its income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this Court
to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's review
power is generally limited to "cases in which only an error or question of law is involved." 12 This Court cannot
depart from this limitation if a party fails to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23
February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the
1998 deficiency VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is
hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax
and deficiency expanded withholding tax for the taxable year 1998 in the respective amounts of P5,496,963.54
and P778,406.84 or in the sum of P6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total
amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)
(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St.
Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable
activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR based on the
10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and
(G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients, whether
paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of
Internal Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and
various documents 17 identifying St. Luke's as a charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable
institution does not lose its charitable character and its consequent exemption from taxation merely because
recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution x x x." 19 The generation of income from paying patients
does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the
old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or
associations which, otherwise, would be subject thereto, because of the existence of x x x net income." 22 The
NIRC of 1997 substantially reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting
the argument that tax exemption is lost whenever there is net income, the Court in Jesus Sacred Heart College
declared: "[E]very responsible organization must be run to at least insure its existence, by operating within the
limits of its own resources, especially its regular income. In other words, it should always strive, whenever
possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to
apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand,
Congress specifically used the word "non-stock" to qualify a charitable "corporation or association" in Section
30(E) of the NIRC. According to the CTA, this is unique in the present tax code, indicating an intent to exempt
this type of charitable organization from income tax. Section 27(B) does not require that the hospital be "non-
stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively for charitable
purpose are exempt from income tax on income received by them as such, applying the provision of Section
30(E) of the NIRC of 1997, as amended." 25

The 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.
The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition
raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of
law which must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual
review "when the Court of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded
the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other
Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant evidence. The CTA
obviously considered the evidence and concluded that it is self-serving. The CTA declared that it has "gone
through the records of this case and found no other evidence aside from the self-serving affidavit executed by
[the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under
Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38 in the
dispositive portion of the CTA First Division Decision includes only deficiency interest under Section 249(A) and
(B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the
NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to remove the
exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is now
substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which
are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection
(D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty
percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources,
the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity,
the conduct of which is not substantially related to the exercise or performance by such educational institution
or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school
maintained and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing
laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable
institution and an organization promoting social welfare. The arguments of St. Luke's focus on the wording of
Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that
the legislative intent of introducing Section 27(B) was only to remove the exemption for "proprietary non-
profit" hospitals. 35 The relevant provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title
in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific person;

xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC
does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G).
Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the
removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income
of two specific institutions, namely, proprietary non-profit educational institutions 36 and proprietary non-
profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)
(1).

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.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de
Cebu, 37 this Court considered as non-profit a sports club organized for recreation and entertainment of its
stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course. 38 The club was non-profit because of its
purpose and there was no evidence that it was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined
"charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening
the burden of government." 41 A non-profit club for the benefit of its members fails this test. An organization
may be considered as non-profit if it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such institution earns from activities conducted
for profit is taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center.
The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides
for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address public needs, because certain private
entities already assume a part of the burden. This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt from
tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of Congress." 43 The
requirements for a tax exemption are strictly construed against the taxpayer 44 because an exemption restricts
the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the
purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45
and Jesus Sacred Heart College 46 which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.

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. 47

For real property taxes, the incidental generation of income is permissible because the test of exemption is the
use of the property. The Constitution provides that "[c]haritable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation." 48 The test of exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a certain way, i.e. for a charitable purpose.
Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to
extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is
materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for
charitable purposes. The organization of the institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifically requires that the
corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its
income is distributable as dividends to its members, trustees, or officers" 49 and that any profit "obtain[ed] as
an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized." 50 However, under Lung Center, any profit by a charitable
institution must not only be plowed back "whenever necessary or proper," but must be "devoted or used
altogether to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC
requires that these operations be exclusive to charity. There is also a specific requirement that "no part of [the]
net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a part of its operations.

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.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively"
by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)

In short, the last paragraph of Section 30 provides that 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. This
paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association [must be]
organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement
in Section 30(G) that the civic organization must be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it
is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its
not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a
charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-
profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the
tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed
that a hospital which receives approximately P1.73 billion from paying patients is not an institution "operated
exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities
conducted for profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's
declared P1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free Services" expenditure
of P218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to support
its claim that 65.20% of its "income after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00

OPERATING EXPENSES

Professional care of patients P1,016,608,394.00

Administrative 287,319,334.00
Household and Property 91,797,622.00

P1,395,725,350.00

INCOME FROM OPERATIONS P334,642,615.00 100%

Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%

OTHER INCOME17,482,304.00

EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The
words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing
violence to the Constitution and the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services
to paying patients are activities conducted for profit. They cannot be considered any other way. There is a
"purpose to make profit over and above the cost" of services. 55 The P1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998.
However, if a part of the remaining 34.80% of the operating income is reinvested in property, equipment or
facilities used for services to paying and non-paying patients, then it cannot be said that the income is "devoted
or used altogether to the charitable object which it is intended to achieve." 56 The income is plowed back to
the corporation not entirely for charitable purposes, but for profit as well. In any case, the last paragraph of
Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable "regardless of the
disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity
conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of
the Committee of Conference for the Senate, which introduced the phrase "or from any activity conducted for
profit."

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicin social econmica,
lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido
para insertar las palabras o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College of
Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms
generally occupied by people of good economic standing, then it should be subject to income tax. He said that
this was one of the reasons Congress inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to
charitable institutions because Senator Cuenco's response shows an intent to focus on the activities of
charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock and non-
profit corporation does not, by this reason alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from being taxed.

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. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or
social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G)
does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions
should therefore be limited to institutions beneficial to the public and those which improve social welfare. A
profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other
taxpayers.1wphi1

St. Luke's fails 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. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St.
Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a
corporation for purely charitable and social welfare purposes"59 and thus exempt from income tax. 60 In
Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to
implement the tax law, are sufficient justification to delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011
in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue
Code. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and
249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax
Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of
the Rules of Court.
SO ORDERED.

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.

MELENCIO-HERRERA, J.:

This case is said to be precedent setting. While the amount involved is insignificant, the Solicitor General avers
that there are about 85 claims of the same nature pending in the Court of Tax Appeals and Bureau of Internal
Revenue totalling approximately P120M.

Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of respondent Court of
Appeals, dated August 27, 1990, in CA-G.R. SP No. 20426, entitled "Commissioner of Internal Revenue vs. GCL
Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals," which affirmed the Decision
of the latter Court, dated 15 December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to
the GCL Retirement Plan representing the withholding tax on income from money market placements and
purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.

There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity) is an
employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death
benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by
Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. 1

In 1984, Respondent GCL made investsments and earned therefrom interest income from which was witheld
the fifteen per centum (15%) final witholding tax imposed by Pres. Decree No. 1959, 2 which took effect on 15
October 1984, to wit:

Date Kind of Investment Principal Income Earned 15% Tax

ACIC
12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66
10/22/84 234,632.75 9,815.89 1,472.38
11/19/84 225,886.51 10,629.22 1,594.38
11/23/84 344,448.64 17,313.33 2,597.00
12/05/84 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15

P11,302.19

On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66
withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12
February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both
letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an
entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) 3 of the
Tax Code.

The refund requested having been denied, Respondent GCL elevated the matter to respondent Court of Tax
Appeals (CTA). The latter 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. Upon appeal, originally to this
Court, but referred to respondent Court of Appeals, the latter upheld the CTA Decision. Before us now,
Petitioner assails that disposition.

It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56 (b) of the
National Internal Revenue Code (Tax Code, for brevity), employees' trusts were exempt from income tax. That
law provided:

Sec. 56 Imposition of tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust, including

xxx xxx xxx

(b) Exception. The tax imposed by this Title shall not apply to employees' trust which forms a part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if
contributions are made to trust by such employer, or employees, or both, for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in accordance with such
plan, . . .

On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the withholding from the interest on
bank deposits at the source of a tax of fifteen per cent (15%) of said interest. However, it also allowed a specific
exemption in its Section 53, as follows:

Sec. 53. Withholding of tax at source.

xxx xxx xxx

(c) Withholding tax on interest on bank deposits. (1) Rate of withholding tax. Every bank or banking
institution shall deduct and withhold from the interest on bank deposits (except interest paid or credited to
non-resident alien individuals and foreign corporations), a tax equal to fifteen per cent of the said interest:
Provided, however, That no withholding of tax shall be made if the aggregate amount of the interest on all
deposit accounts maintained by a depositor alone or together with another in any one bank at any time during
the taxable period does not exceed three hundred fifty pesos a year or eighty-seven pesos and fifty centavos
per quarter. For this purpose, interest on a deposit account maintained by two persons shall be deemed to be
equally owned by them.

(2) Treatment of bank deposit interest. The interest income shall be included in the gross income in
computing the depositor's income tax liability in according with existing law.

(3) Depositors enjoying tax exemption privileges or preferential tax treatment. In all cases where the
depositor is tax-exempt or is enjoying preferential income tax treatment under existing laws, the withholding
tax imposed in this paragraph shall be refunded or credited as the case may be upon submission to the
Commissioner of Internal Revenue of proof that the said depositor is a tax-exempt entity or enjoys a
preferential income tax treatment.

xxx xxx xxx

This exemption and preferential tax treatment were carried over in Pres. Decree No. 1739, effective on 17
September 1980, which law also subjected interest from bank deposits and yield from deposit substitutes to a
final tax of twenty per cent (20%). The pertinent provisions read:

Sec. 2. Section 21 of the same Code is hereby amended by adding a new paragraph to read as follows:

Sec. 21. Rates of tax on citizens or residents.

xxx xxx xxx

Interest from Philippine Currency bank deposits and yield from deposit substitutes whether received by citizens
of the Philippines or by resident alien individuals, shall be subject to the final tax as follows: (a) 15% of the
interest on savings deposits, and (b) 20% of the interest on time deposits and yield from deposit substitutes,
which shall be collected and paid as provided in Sections 53 and 54 of this Code. Provided, That no tax shall be
imposed if the aggregate amount of the interest on all Philippine Currency deposit accounts maintained by a
depositor alone or together with another in any one bank at any time during the taxable period does not
exceed Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos (P200.00) per quarter. Provided, further,
That if the recipient of such interest is exempt from income taxation, no tax shall be imposed and that, if the
recipient is enjoying preferential income tax treatment, then the preferential tax rates so provided shall be
imposed (Emphasis supplied).

Sec. 3. Section 24 of the same Code is hereby amended by adding a new subsection (cc) between subsections
(c) and (d) to read as follows:

(cc) Rates of tax on interest from deposits and yield from deposit substitutes. Interest on Philippine
Currency bank deposits and yield from deposit substitutes received by domestic or resident foreign
corporations shall be subject to a final tax on the total amount thereof as follows: (a) 15% of the interest on
savings deposits; and (b) 20% of the interest on time deposits and yield from deposit substitutes which shall be
collected and paid as provided in Sections 53 and 54 of this Code. Provided, That if the recipient of such interest
is exempt from income taxation, no tax shall be imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so provided shall be imposed (Emphasis supplied).
Sec. 9. Section 53(e) of the same Code is hereby amended to read as follows:

Se. 53(e) Withholding of final tax on interest on bank deposits and yield from deposit substitutes.

(1) Withholding of final tax. Every bank or non-bank financial intermediary shall deduct and withhold
from the interest on bank deposits or yield from deposit substitutes a final tax equal to fifteen (15%) per cent of
the interest on savings deposits and twenty (20%) per cent of the interest on time deposits or yield from
deposit substitutes: Provided, however, That no withholding tax shall be made if the aggregate amount of the
interest on all deposit accounts maintained by a depositor alone or together with another in any one bank at
any time during the taxable period does not exceed Eight Hundred Pesos a year or Two Hundred Pesos per
quarter. For this purpose, interest on a deposit account maintained by two persons shall be deemed to be
equally owned by them.

(2) Depositors or placers/investors enjoying tax exemption privileges or preferential tax treatment. In all
cases where the depositor or placer/investor is tax exempt or is enjoying preferential income tax treatment
under existing laws, the withholding tax imposed in this paragraph shall be refunded or credited as the case
may be upon submission to the Commissioner of Internal Revenue of proof that the said depositor, or
placer/investor is a tax exempt entity or enjoys a preferential income tax treatment.

Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was issued, amending the aforestated
provisions to read:

Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended to read as follows:

(d) On interest from bank deposits and yield or any other monetary benefit from deposit substitutes and
from trust fund and similar arrangements. Interest from Philippine Currency Bank deposits and yield or any
other monetary benefit from deposit substitutes and from trust fund and similar arrangements whether
received by citizens of the Philippines, or by resident alien individuals, shall be subject to a 15% final tax to be
collected and paid as provided in Sections 53 and 54 of this Code.

Sec. 3. Section 24(cc) of this Code, as amended, is hereby further amended to read as follows:

(cc) Rates of tax on interest from deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements. Interest on Philippine Currency Bank deposits and yield or any
other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by
domestic or resident foreign corporations shall be subject to a 15% final tax to be collected and paid as
provided in Section 53 and 54 of this Code.

Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as follows:

Sec. 53 (d) (1). Withholding of Final Tax. Every bank or non-bank financial intermediary or commercial.
industrial, finance companies, and other non-financial companies authorized by the Securities and Exchange
Commission to issue deposit substitutes shall deduct and withhold from the interest on bank deposits or yield
or any other monetary benefit from deposit substitutes a final tax equal to fifteen per centum (15%) of the
interest on deposits or yield or any other monetary benefit from deposit substitutes and from trust fund and
similar arrangements.

It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended by
Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from income
taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential
income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion
of the exempting and preferential tax treatment provisions under the old law is a clear manifestation that the
single 15% (now 20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust funds
and similar arrangements, regardless of the tax status or character of the recipients thereof. In short,
petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated, employees'
trusts ceased to be exempt and thereafter became subject to the final withholding tax.

Upon the other hand, GCL contends that the tax exempt status of the employees' trusts applies to all kinds of
taxes, including the final withholding tax on interest income. That exemption, according to GCL, is derived from
Section 56(b) and not from Section 21 (d) or 24 (cc) of the Tax Code, as argued by Petitioner.

The sole issue for determination is whether or not the GCL Plan is exempt from the final withholding tax on
interest income from money placements and purchase of treasury bills required by Pres. Decree No. 1959.

We uphold the exemption.

To begin with, it is significant to note that the 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. This law
specifically provided:

Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit
plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or
seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee
concerned to the private benefit plan or that arising from liability imposed in a criminal action; . . . (emphasis
ours).

In so far as employees' trusts are concerned, the foregoing provision 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 and is repeated hereunder for
emphasis:

Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust.

xxx xxx xxx

(b) Exception. The tax imposed by this Title shall not apply to employee's trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees . . .

The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust,
springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out
employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. 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.

The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation and
establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act.
Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A. 1983, reading:

Considering that under Section 17 of the social Security Act, all contributions collected and payments of
sickness, unemployment, retirement, disability and death benefits made thereunder together with the income
of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that a similar system
providing for retirement, etc. benefits for employees outside the Social Security Act be exempted from income
taxes. (Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in
Commissioner of Internal Revenue v. Visayan Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715);
emphasis supplied.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under
the old law, therefore, can not be deemed to extent to employees' trusts. Said Decree, being a general law, can
not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting
exemption from income tax to employees' trusts. Rep. Act 1983, which excepted employees' trusts in its Section
56 (b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted on 17 June 1967, long before the
issuance of Pres. Decree No. 1959 on 15 October 1984. A subsequent statute, general in character as to its
terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative
purpose to do so is manifested. This is so even if the provisions of the latter are sufficiently comprehensive to
include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA
190).

Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on "Income Tax."
Section 21 (d), as amended by Rep. Act No. 1959, refers to the final tax on individuals and falls under Chapter II;
Section 24 (cc) to the final tax on corporations under Chapter III; Section 53 on withholding of final tax to
Returns and Payment of Tax under Chapter VI; and Section 56 (b) to tax on Estates and Trusts covered by
Chapter VII, Section 56 (b), taken in conjunction with Section 56 (a), supra, explicitly excepts employees' trusts
from "the taxes imposed by this Title." Since the final tax and the withholding thereof are embraced within the
title on "Income Tax," it follows that said trust must be deemed exempt therefrom. Otherwise, the exception
becomes meaningless.

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.

Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October 1984, and Bureau of Internal
Revenue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as authorities for the argument that Pres.
Decree No. 1959 withdrew the exemption of employees' trusts from the withholding of the final tax on interest
income. Said Circular and Ruling pronounced that the deletion of the exempting and preferential tax treatment
provisions by Pres. Decree No. 1959 is a clear manifestation that the single 15% tax rate is imposable on all
interest income regardless of the tax status or character of the recipient thereof. But since we herein rule that
Pres. Decree No. 1959 did not have the effect of revoking the tax exemption enjoyed by employees' trusts,
reliance on those authorities is now misplaced.

WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of respondent Court of Appeals,
affirming that of the Court of Tax Appeals is UPHELD. No costs.

SO ORDERED.

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.

The Solicitor General for petitioner.

Siguion Reyna, Montecillo & Ongsiako and J.C. Castaeda, Jr. and E.C. Alcantara for respondents.

AQUINO, J.:

This case is about the refund of a 1971 income tax amounting to P324,255. 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 income tax return, Smith Kline declared a net taxable income of P1,489,277 (Exh. A) and paid
P511,247 as tax due. Among the deductions claimed from gross income was P501,040 ($77,060) as its share of
the head office overhead expenses. However, in its amended return filed on March 1, 1973, there was an
overpayment of P324,255 "arising from underdeduction of home office overhead" (Exh. E). It made a formal
claim for the refund of the alleged overpayment.

It appears that sometime in October, 1972, Smith Kline received from its international independent auditors,
Peat, Marwick, Mitchell and Company, an authenticated certification to the effect that the Philippine share in
the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually
$219,547 (P1,427,484). It further stated in the certification that the allocation was made on the basis of the
percentage of gross income in the Philippines to gross income of the corporation as a whole. 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.

On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue on its claim Smith Kline
filed a petition for review with the Court of Tax Appeals.

In its decision of March 21, 1980, the Tax Court ordered the Commissioner to refund the overpayment or grant
a tax credit to Smith Kline. The Commissioner appealed to this Court.
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 form 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 can not 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.

Example: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all
sources for 1939 of P180,000, including therein:

Interest on bonds of a domestic corporation P9,000

Dividends on stock of a domestic corporation 4,000

Royalty for the use of patents within the Philippines 12,000

Gain from sale of real property located within the Philippines 11,000

Total P36,000

that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross
income was from sources without the Philippines, determined under section 37(c).

The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of P8,000 is
properly allocated to income from sources within the Philippines and the amount of P40,000 is properly
allocated to income from sources without the Philippines.

The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part
thereof, based upon the relation of gross income from sources within the Philippines to the total gross income,
shall be deducted in computing net income from sources within the Philippines. Thus, these are deducted from
the P36,000 of gross income from sources within the Philippines expenses amounting to P14,000 [representing
P8,000 properly apportioned to the income from sources within the Philippines and P6,000, a ratable part (one-
fifth) of the expenses which could not be allocated to any item or class of gross income.] The remainder,
P22,000, is the net income from sources within the Philippines.

From the foregoing provisions, it is manifest that 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. For 1971, the parent company of Smith Kline spent $1,077,739. Under
section 37(b) of the Revenue Code and section 160 of the regulations, 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.

In his petition for review, the Commissioner does not dispute the right of Smith Kline to avail itself of section
37(b) of the Tax Code and section 160 of the regulations. But the Commissioner maintains that such right is not
absolute and that as there exists a contract (in this case a service agreement) which Smith Kline has entered
into with its home office, prescribing the amount that a branch can deduct as its share of the main office's
overhead expenses, that contract is binding.

The Commissioner contends that since the share of the Philippine branch has been fixed at $77,060, Smith Kline
itself cannot claim more than the said amount. To allow Smith Kline to deduct more than what was expressly
provided in the agreement would be to ignore its existence. It is a cardinal rule that a contract is the law
between the contracting parties and the stipulations therein must be respected unless these are proved to be
contrary to law, morals, good customs and public policy. There being allegedly no showing to the contrary, the
provisions thereof must be followed.

The Commissioner also argues that the Tax Court erred in relying on the certification of Peat, Marwick, Mitchell
and Company that Smith Kline is entitled to deduct P1,427,484 ($219,547) as its allotted share and that Smith
Kline has not presented any evidence to show that the home office expenses chargeable to Philippine
operations exceeded $77,060.

On the other hand, Smith Kline submits that the contract between itself and its home office cannot amend tax
laws and regulations. The matter of allocated expenses which are deductible under the law cannot be the
subject of an agreement between private parties nor can the Commissioner acquiesce in such an agreement.

Smith Kline had to amend its return because it is of common knowledge that audited financial statements are
generally completed three or four months after the close of the accounting period. There being no financial
statements yet when the certification of January 11, 1972 was made the treasurer could not have correctly
computed Smith Kline's share in the home office overhead expenses in accordance with the gross income
formula prescribed in section 160 of the Revenue Regulations. What the treasurer certified was a mere
estimate.

Smith Kline likewise submits that it has presented ample evidence to support its claim for refund. To this end, it
has presented before the Tax Court the authenticated statement of Peat, Marwick, Mitchell and Company to
show that since the gross income of the Philippine branch was P7,143,155 ($1,098,617) for 1971 as per audit
report prepared by Sycip, Gorres, Velayo and Company, and the gross income of the corporation as a whole was
$6,891,052, Smith Kline's share at 15.94% of the home office overhead expenses was P1,427,484 ($219,547)
(Exh. G to G-2, BIR Records, 4-5).

Clearly, the weight of evidence bolsters its position that the amount of P1,427,484 represents the correct
ratable share, the same having been computed pursuant to section 37(b) and section 160.

In a manifestation dated July 19, 1983, Smith Kline declared that with respect to its share of the head office
overhead expenses in its income tax returns for the years 1973 to 1981, it deducted its ratable share of the total
overhead expenses of its head office for those years as computed by the independent auditors hired by the
parent company in Philadelphia, Pennsylvania U.S.A., as soon as said computations were made available to it.

We hold that 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.

WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs. SO ORDERED
G.R. No. L-5896 August 31, 1955

A. SORIANO Y CIA., petitioner-appellant,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

Modesto Formilleza for petitioner.

Office of the Solicitor General Juan R. Liwag and Solicitor Jose P. Alejandro for respondent.

REYES, J.B.L., J.:

This is a petition for review of the decision of the Board of Tax Appeals affirming the decision of the respondent-
appellee Collector of Internal Revenue holding the petitioner A. Soriano y Cia. liable for the payment of
P47,002.52 as sales tax and surcharge (as required by Sec. 182 of the National Internal Revenue Code, as
amended) on its gross sales to the United Africa Co., Ltd. of 57 tractors acquired from the Foreign Liquidation
Commission.
It appears that in the year 1947, 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 whereby
petitioner undertook to rehabilitate the Veterans Administration Building (formerly Heacock Building) for and in
consideration of over a million pesos worth of surplus goods. Part of the surplus goods consisted of tractors
which were then in the various U. S. military bases or depots in the Philippines. The petitioner had yards known
as "Sta. Mesa Yard" and "Pieco Yard" located in Manila, where some of the surplus goods were stored, and
those which were defective reconditioned.

In January, 1947, the United Africa Co., Ltd. sent its representative, Hugh Watson 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, in good working
condition and capable of running off lighters under their own power. A tractor expert, Mr. Tex Taylor, was
employed by the foreign company to select, inspect and test the tractors before delivery.

Tex Taylor went to the different military bases, took the serial numbers of the tractors which he wanted, and
gave the list thereof to the petitioner, who then secured from the Foreign Liquidation Commission the purchase
invoices and other documents for the immediate release of the tractors. The tractors were then removed by
petitioner to its Pieco Yard, where they were tested by Tex Taylor. Those found to be in good condition were
approved by Taylor, wherefore petitioner presented to him the sales invoices for his signature, stamping his
approval thereon. Twenty-four of the tractors were found defective and so were brought to petitioner's Sta.
Mesa Yard for reconditioning. Upon approval of each invoice, the same was presented by petitioner to the
Philippine Refining Company, Inc., an affiliate of the foreign buyer, for payment of the purchase price. The
Philippine Refining Co. would in turn notify the National City Bank of New York and the Hongkong and Shanghai
Banking Corporation, Manila, where the United Africa Co. had dollar deposits, to make payment of petitioner's
invoices. The tractors were delivered by petitioner to the pier in Manila by means of barges as soon as notice
was received from the representative of its foreign buyer that a carrying vessel was ready. On June 24 and
August 26, 1947, the Philippine Refining Co., Inc. shipped the 57 tractors acquired from petitioner from the port
of Manila to United Africa Co., Ltd. at Dares Salaem, East Africa. The total value of the tractors was P757,000.
However, due to certain defects of some of them upon reaching Africa, the sum of P4,959.19 was reimbursed
by petitioner to its foreign buyer by credit memo.

The question at issue is 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.

Section 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; . . .. (Emphasis supplied)

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.

The theory of the Bureau of Internal Revenue, affirmed by the defunct Board of Tax Appeals, is that petitioner
imported the tractors from the army bases; that they were subsequently sold to its foreign buyer within the
Philippines; and that title passed upon delivery to the carrier f.a.s. Manila.

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.

Petitioner insists, however, that it did not import the 57 tractors in question for the Foreign Liquidation
Commission because title to the same passed to its foreign buyer while the goods were still at the foreign
bases, and that they passed Philippine territory merely in transit to pier, Manila, where they were delivered
f.a.s.; hence its sale of the tractors was not domestic and therefore not liable for the payment of sales tax.

Petitioner's theory is not supported by the records. It admits that delivery of the tractors was made by it to the
carrier f.a.s. Manila (letter to Secretary of Finance of August 18, 1950, I Records, p. 192; also letter of October
17, 1949, p. 132). 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. On the contrary, petitioner itself has
admitted that Tex Taylor (who is no alleged to have accepted delivery of the tractors in behalf of the United
Africa Co., Ltd.) has no power or authority whatever to do so.

In its letter to the Collector of Internal Revenue on July 16, 1949 (Records, Vol. I, p. 119), petitioner stated:

(2) Prices and terms having been agreed upon, Mr. Gibson secured the services of a tractor expert from United
States thru United Africa Co. offices in New York. Tractor expert Mr. Tex Taylor came over to the Philippines to
inspect and "accept" the tractors.

We wish to state here that the so-called acceptance by Mr. Taylor of these tractors was simply an acceptance as
to condition and did not constitute an acceptance of delivery. The tractors in question were U. S. Army and
Navy Surplus equipment. They were second hand and needed reconditioning. Mr. Tex Taylor saw to it that they
were properly reconditioned. Neither Mr. Gibson nor Mr. Taylor had authority to accept delivery of these
tractors.

And in a subsequent letter addressed to the Secretary of Finance on October 17, 1949 (Records, p. 131),
petitioner further stated:

(b) Mr. Tex Taylor, who is alleged to have inspected and accepted in the Philippines the tractors subject of this
sale was a mere technician, employee of the United Africa Co. with specific and limited functions consisting of
examining and approving the condition of the tractors for purchase and could not have been considered the
general and legal representative of our purchaser for he had no authority to enter into any sort of business
transaction in the Philippines.

These letters show that Tex Taylor had not authority to accept delivery of the tractors for the buyer United
Africa Co., Ltd., his duty being merely to inspect and approve their condition. The designation by Taylor of the
tractors he selected at the bases, therefore, was merely a preliminary step for their removal from the bases to
petitioner's service and storage yards in Manila, where Taylor actually inspected and tested them, and those
found defective (23 tractors) were brought to the Sta. Mesa Yard where they were reconditioned (t.s.n. pp. 14-
15). Then petitioner made delivery of the tractors at the pier in Manila whenever there was an available boat
for transportation to Africa, and it was so informed by the representatives of the United Africa Co. Hence, it was
only at Manila that the goods were delivered, and title passed to the buyer; and from their removal from the
bases until their delivery at shipside, title to the tractors was in the seller.

Other undisputed facts in the record also force the conclusion that title to the tractors in question passed to
petitioner's buyer not at the bases, but only at pier, Manila. First, it was petitioner who paid for the delivery
charges from the different bases to the pier, pursuant to the tax in "fob" or "f.a.s." sales that "the seller pays all
charges and is subject to risk until the goods are placed alongside the 'vessel' (Williston, supra). Second, the
tractors were described in petitioner's invoices (Vol. I, Records, pp. 65-70) as bearing certain numbers followed
by the phrase "Our Unit Sta. Mesa" or "Our Unit Pieco", showing that the tractors were first brought to
petitioner's yards and numbered accordingly, in the same way that all goods found and stored in these yards
were numbered, and it was only after they had passed petitioner's yards that they were delivered to the buyer.
Third, two of petitioner's invoices (Records, I, pp. 70-71) stated that the tractors were inspected and accepted
at Pieco Yard and/or Sta. Mesa Yard, which disproves petitioner's contention that Tex Taylor tested and
approved of them right in the bases. Fourth, petitioner's own witness Epimaco Gonzales admitted that it was
only at Pieco Yard that Taylor inspected and tested that tractors (t.s.n. 9-10).

Petitioner argues that the goods in question did not acquire a taxable situs in the Philippines because they
merely passed Philippine territory in transit and that they were not intended for local use but for exportation to
a foreign country. We find this argument irrelevant, since 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.

Finally, petitioner urges that the repeal of the consignment or "export tax" under Sec. 187 of the Internal
Revenue Code shows the intention of the legislature to exempt all exports from tax.

It should not be forgotten that the consignment tax formerly imposed on exports by section 187 of the Tax
Code (now repealed by R. A. 41) is different from the sales tax imposed by Art. 186, which has not been
repealed. The distinction between the two kinds of tax was pointed out by this Court in the case of Vegetable
Oil Corp. vs. Trinidad, 45 Phil., 834-835, where we held:

That the consignment tax is not a sales tax is, however, too obvious for argument, the fact that it is provided for
in the same section as the sales tax does not necessarily make it so. There is all the difference in the word
between a consignment and a sale. As stated by counsel for the appellee, the tax on consignment is a privilege
tax pure and simple; it is a tax on the business of consigning commodities abroad from these Islands. . . . If the
tax were one on sales we would readily agree that the sales, in order to be taxable in the Philippines must be
consummated there.

When the above case decided, the sales tax and the consignment tax were both provided for in section 1459 of
the Administrative Code. Later, obviously to avoid confusion, the legislature separated the two taxes, the sales
tax having been provided under sections 184, 185 and 186 of the Internal Revenue Code, while the
consignment tax was placed under Sec. 187. The latter section was subsequently repealed by Republic Act No.
41, so that the consignment tax on exports no longer exists, while the sales tax remains.

Petitioner contends that to tax one who sells goods intended for export would be to nullify the legislative intent
behind the repeal of the tax on consignments abroad, which is to encourage exports. The argument is
fallacious. 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.

Domestic and foreign sale distinguished.The sales tax liability of a person consigning his timber abroad
depends upon where the title to the timber consigned passes from the seller to the buyer. If the title to the
timber consigned abroad passes to the buyer within the jurisdiction of the Philippines, the transaction is
domestic and is subject to the sales tax; otherwise, the transaction will be considered a foreign sale and is
exempt from the sales tax prescribed in section 186 of the Tax Code. (Formilleza, Commentaries on the N. I. R.
C., Vol. II, pp. 729-730)

As for the legislative policy to exempt consignments abroad from tax in order to encourage exports, the
Solicitor General has pointed out that it is only the exportation of locally produced or manufactured products,
and not every kind of exportation, that Congress wanted to encourage and promote. Hence, section 189 of the
Code exempts from percentage tax coconut oil and by-products of copra produced or manufactured in the
Philippines; section 190, idem, exempts from compensating tax imported articles to be used in the manufacture
or preparation of articles in this country for consignments abroad; section 3 of R. A. 601 exempts from the
foreign exchange tax amounts used for the payment of transportation charges on articles or containers
imported into the Philippines intended for use in the manufacture or preparation of local products for
consignment abroad; and R. A. 822 exempts from the processing tax imposed by Sec. 189 of the Code
dessicated coconut manufactured in this country if removed for exportation. Clearly enough, the exportation of
the tractors in question does not come under the declared policy of the legislature to encourage exportation of
products locally manufactured and produced. On the other hand, as correctly observed by the Solicitor General,
our country needed then, and still needs now, tractors for the development of our own agriculture, so that the
sale of such tractors to foreign buyers for a profit, thereby depriving our own countrymen of their use in the
development of our own agriculture and increase of our production, hardly justifies the tax exemption that
petitioner claims.

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have
carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding
companies for the construction of twelve ocean-going vessels. 1 The purchase price was to come from the
proceeds of bonds issued by the Central Bank. 2 Initial payments were made in cash and through irrevocable
letters of credit. 3 Fourteen promissory notes were signed for the balance by the NDC and, as required by the
shipbuilders, guaranteed by the Republic of the Philippines. 4 Pursuant thereto, the remaining payments and
the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed
and delivered to the NDC in Tokyo. 5

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. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of
distraint and levy to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00,
representing the compromise penalty. 7 The NDC then came to this Court in a petition for certiorari.

The petition must fail for the following reasons.

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 xxx 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. 8 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.)

Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing
under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa,
Manila, Philippines 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. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial
Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which are duly signed
by its Vice Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the
years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest
on the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of
Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest
under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly
organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the
Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which is admittedly a
resident of the Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to
the Japanese shipbuilders in Japan in 1960, 1961 and 1962 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. 9

There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and
that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4]
of the Tax Code, reading as follows:
SEC. 29. Gross Income. xxxx xxx xxx xxx

(b) Exclusion from gross income. The following items shall not be included in gross income and shall be
exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. Interest upon the obligations of the Government of the Republic
of the Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of
this Code, only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A.
No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is
silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No.
1407, does not exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted
because of the undertaking signed by the Secretary of Finance in each of the promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby
absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and
punctual payment of both principal and interest of the above note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a
clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be
categorically and unmistakably expressed. 11 Any doubt concerning this question must be resolved in favor of
the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact,
such undertaking was made by the government in consonance with and certainly not against the following
provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership (companies
colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal capacity, executors,
administrators, receivers, conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or categorical gains, profits and income of any nonresident alien individual, not engaged in
trade or business within the Philippines and not having any office or place of business therein, shall (except in
the cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical
gains, profits and income a tax to twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to taxation
under this Title not engaged in trade or business within the Philippines and not having any office or place of
business therein, there shall be deducted and withheld at the source in the same manner and upon the same
items as is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and such tax shall
be returned and paid in the same manner and subject to the same conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the
NDC but without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the
petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary
activities not only by its charter but also by the Corporation Code and other pertinent laws.

The petitioner also forgets that 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, thus:

Section 53(c). Return and Payment. Every person required to deduct and withhold any tax under this
section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or
before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the
Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax,
and is indemnified against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, 13 the Court
quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly
causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not
the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue
decides that the income paid to an individual is not subject to withholding, the withholding agent may
thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released from liability," so
said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation;
hence, an exempting provision should be construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so
should be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered.