(1)

[CA-G.R. SP No. 29838. January 31, 1994.]

(C.T.A. Case No. 4287)

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MAR

FISHING CO., INC. and THE COURT OF TAX APPEALS,
respondents.

DECISION

TORRES, JR., J : p

Challenged in this petition for review instituted by the Commissioner of

Internal Revenue is the decision dated October 4, 1991 of the Court of Tax Appeals in
C.T.A. Case No. 4287 entitled "Mar Fishing Co., Inc. vs. Commissioner of Internal
Revenue", the dispositive portion of which reads: 1(2)

"WHEREFORE, this instant assessment is hereby dismissed, without

prejudice to the determination by the respondent of the gift tax liability of the
petitioner and British Columbia Packers Ltd. (BCPL) in accordance with the
provisions of Sections 101 and 102 (now Sections 91 and 92) of the National
Internal Revenue Code.

No pronouncement as to cost.

SO ORDERED."

The fact of the case are as follows:

It appears that on July 27, 1987, petitioner sent a letter of assessment to the
private respondent for the amount of P311,729.99, inclusive of surcharge and interest
for deficiency withholding tax at source for the year 1982. 2(3) On August 6, 1987,
private respondent protested the assessment on the ground that the technical services
fees supposedly paid to British Columbia Packers, Ltd. (BCPL, for brevity) of Canada
were merely accrued in the books of petitioner but were not actually paid. On March

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 28, 1988, a warrant of levy of real property to enforce the tax deficiency was served
upon the private respondent. 3(4) On May 25, 1988, petitioner denied private
respondent's request for the cancellation of the warrant of levy. 4(5)

Consequently, private respondent MAR Fishing filed on July 8, 1988 a petition

for review docketed as CTA Case No. 4287 before the Court of Tax Appeals. 5(6)

On September 15, 1988, petitioner filed his answer thereto. 6(7)

After examining the records and the evidence presented, the respondent court
concluded that the said technical services fees were never paid to BCPL, hence, not
liable for deficiency withholding tax at source on the technical service fees payable to
a non-resident foreign corporation, the pertinent portion thereof in the assailed
decision is hereby reproduced, to wit. 7(8)

". . . Unlike the Bayer case and the other cases cited, the income due the
non-resident foreign corporation in the instant case was never remitted for it
was condoned or waived by the recipient BCPL due to substantial financial
losses by MFCI. Basics as it is, if there is no income involved, there is no tax to
be paid. Withholding tax is a system introduced by the government to ensure
collection of taxes due, especially considering the difficulties it may encounter
in collecting the same as in the case of a non-resident foreign corporation
without a branch or office in the Philippines. If the income from which tax shall
be imposed not actually realized, no tax may be collected therefrom. Inasmuch
as the amount of P413,196.00, the technical service fee due the BCPL, was
condoned by it, the same may be considered as a gift or donation to MFCI
subject to gift tax as of taxable year 1988, the year said income was waived by
BCPL in favor of MFCI. This manner of treating condonation as gift is provided
for under Section 50 of Revenue Regulations No. 2, issued by the Secretary of
Finance upon recommendation of the Commissioner of Internal Revenue,
quoted hereunder:

'The cancellation of forgiveness may amount to a

payment of income, to a gift, or to a capital transaction,
dependent upon the circumstances. If, for example, an
individual perform services for a creditor who, in consideration
thereof, cancels the debt, income to that amount is realized by
the debtor as compensation for his service. If, however, a
creditor merely desires to benefit a debtor and without any
consideration thereof cancels the debt, the amount of the debt
is a gift from the creditor to the debtor and need not be
included in the latter's gross income. If a corporation to which
a stockholder is indebted forgives the debt, the transaction has
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 the effect of the payment of the dividend.'" (Emphasis
supplied)

On December 4, 1991, petitioner filed a motion for reconsideration 8(9) which

was denied by the respondent court on December 9, 1992. 9(10)

Hence, the instant petition for review.

Petitioner maintains that the respondent court erred in dismissing the

assessment against the private respondent on the grounds that (1) the alleged
condonation, on which the dismissal was based, was only an afterthought and was not
averred in the letter-protest; (2) that no evidence was presented whatsoever regarding
the condonation; and (3) that the assailed decision is contrary to law and
jurisprudence. On the other hand, private respondent contended that they had always
maintained that it never paid any technical service fees in favor of BCPL as evidenced
by (1) declaration under oath of BCPL's Vice-President for Finance that they have
waived the fees due to the substantial losses suffered by company (Exhibit "3"); (2)
letter from the Director of the Foreign Exchange Department of the Central Bank
stating that no applications for authority to remit foreign exchange to BCPL during
1982 were filed (Exhibit "C"); (3) certification of the external auditors, Joaquin
Cunanan & Company (Exhibit "D"). The said technical service fees due to BCPL
were merely accrued in its books but were never remitted to BCPL, who in turn
waived or condoned the technical service fees, hence, private respondent cannot be
held liable for any withholding tax deficiency.

After an assiduous scrutiny of the assailed decision of the respondent court,

We find that the assailed decision is supported by law and jurisprudence. Contrary to
petitioner's contention, private respondent has manifested that the technical services
fee due to BCPL were merely accrued in its books but were never remitted to BCPL
as shown in the letter dated August 6, 1987 addressed to the petitioner. This fact was
further bolstered by evidence presented during the hearing before the respondent court
negating that technical service fee due to the BCPL was never remitted and in fact,
condoned/waived in favor of the private respondent, to wit: (1) sworn declaration of
the Vice-President for Finance of BCPL; (2) letter dated November 15, 1988 of the
Director of Foreign Exchange Regulation Department of the Central Bank; (3)
certification of External Auditor Joaquin, Cunanan & Company. We agree with the
finding of facts of the Court of Tax Appeals. The factual findings of the tax court are
entitled to the highest respects and can only be disturbed on appeal if not supported
by substantial evidence or if there has been showing of gross error or abuse on the
part of the tax court. 10(11)

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 As a matter of principle, it is not advisable for the appellate court to set aside
the conclusion reached by an agency such as the Court of Tax Appeals which is, by
the very nature of its function, dedicated exclusively to the study and consideration of
the tax problems and has necessarily developed an expertise on the subject unless
there has been an abuse or improvement exercise of its authority. 11(12)

In the case at bar, it having been substantially proven that no remittance of the
technical services fee has been made to BCPL, private respondent is not liable for the
tax deficiency assessed by the petitioner. Contrary to the allegation of the petitioner,
private respondent has submitted sufficient evidence to show that no remittance has
been made to the foreign corporation. Noteworthy is the fact that it is the petitioner
who did not present evidence to negate the claim of the private respondent as shown
in the assailed decision, to wit: 12(13)

"Respondent for his part, never presented any evidence to controvert

said facts. In fact, he did not even present the BIR examiner who alleged that
payment of the technical services was actually made. On the contrary,
respondent submitted his case based on the pleadings and records of the case
and did not even bother to submit any memorandum."

All persons, corporations, partnerships and association having the control,

receipt, custody, disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits and income received or obtained from
sources within the Philippines by a non-resident alien firm, co-partnership,
corporation, association, trust company, trustee and insurance company, not engaged
in business or trade within the Philippines and not having an office or place of
business therein, are required to withhold a tax of 35 percent thereon, file the requisite
withholding return on the prescribed form and pay the tax withheld. The taxability of
a foreign corporation's income depends upon the locus of the activity, property or
service giving rise thereto. Stated otherwise, the flow of wealth proceeded from the
activity within the Philippine territory, enjoying therein the protection accorded by
our Government. Such flow of wealth should, in consideration for the protection,
share in the burden of supporting the government. Our legislators adopted the
administrative advise in Secs. 53 and 54 (now Secs. 50 and 51) — withholding the
corresponding income tax at the source of the income — to ensure collection of
whatever tax that may be due on income earned in the Philippines from those who
have no office or agent here. The fact that a foreign corporation does not engage in
business here and had no local office or agent is the very reason why its income is
subject to withholding tax. 13(14)

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 In accordance with Section 50 of the National Internal Revenue Code, the
non-resident foreign corporation (BCPL) is liable to 35% rate of withholding tax on
income earned from sources within the Philippines. However, in the instant case, the
technical service fee in the amount of P413,196.00 for 1982 was never remitted to the
foreign corporation (BCPL), hence, there is no income realized by the foreign
corporation from sources within the Philippines from which the withholding tax could
have been based. Considering that the technical service fee was condoned/waived by
the foreign corporation, private respondent cannot be held liable for the payment of
the withholding tax deficiency assessed by the petitioner. This, however, does not
mean that private respondent is not liable for any tax at all for the condonation or
waiver of foreign corporation is equivalent or tantamount to a gift or donation which
is also taxable. Section 50 of the Revenue Regulations No. 2 provides that the
cancellation or condonation of the indebtedness without any consideration may
amount to a gift from the creditor and need not be included in the debtor's gross
income. Consequently, as stated in the assailed decision is without prejudice to the
determination by the respondent (Commissioner of Internal Revenue) of the gift tax
liability of the petitioner (Mar Fishing Co., Inc.) and the British Columbia Packers
Ltd. (BCPL) in accordance with the provisions of Sections 101 and 102 (now
Sections 91 and 92) of the National Internal Revenue Code, page 13, Decision),
technical service fee due to the foreign corporation which was condoned can now be
subjected to Donors of Gift Tax pursuant to Sections 91 and 92 of the National
Internal Revenue Code.

We agree with the decision of the Tax Court to the effect that —

"The decision of this Court lies not only on the provisions of law
involved but also on equity and fair play. If the withholding agent and the
non-resident foreign taxpayer have in fact recognized in the books income due
the latter by reason of their contract or agreement and in fact have accrued the
same, the government to which the corresponding tax is due should not be
prejudiced by the laxity, delay or negligence of the withholding agent in
remitting the income abroad. Withholding taxes should immediately be paid to
respondent within the period provided under Section 54 aforequoted. Along the
same principle, if the withholding agent who wishes to remit the income abroad
is prevented by the government to do so, it is but equitable that should not be
held liable immediately but should wait until such time the withholding agent
comply with his remittance obligation. This is so because the government itself
is the one who prevented the taxpayer form receiving the 'gains, profit or
income', equitably it should not ask for the tax due."

We find the assailed decision to be in accord with the law and the evidence.

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 ACCORDINGLY, the instant petition for review is hereby DENIED for lack
of merit. No pronouncement as to costs.

SO ORDERED.

Purisima, Jr. and Montenegro, JJ., concur.

Footnotes
1. Decision, Rollo, pages 28-40.
2. Letter, Rollo, page 57.
3. Warrant, Rollo, page 59.
4. Letter, Rollo, page 61.
5. Petition, Rollo, pages 51-56.
6. Answer, Rollo, pages 63-66.
7. Decision, Rollo, pages 38-39.
8. Motion, Rollo, pages 42-45.
9. Resolution, Rollo, page 46.
10. Commissioner of Internal Revenue vs. Arnoldrs Carpentry Shop, Inc., 159 SCRA
199.
11. Commissioner of Internal Revenue vs. Court of Tax Appeals, G.R. No. 61509, April
19, 1988;
Sy Po vs. Court of Tax Appeals, L-81446, August 18, 1988.
12. Decision, Rollo, page 4.
13. British Traders Insurance Company, Ltd. vs. Commissioner, G.R. No. L-20501, April
30, 1965.

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 Endnotes

1 (Popup - Popup)
CTA 4287

2 (Popup - Popup)
1. Decision, Rollo, pages 28-40.

3 (Popup - Popup)
2. Letter, Rollo, page 57.

4 (Popup - Popup)
3. Warrant, Rollo, page 59.

5 (Popup - Popup)
4. Letter, Rollo, page 61.

6 (Popup - Popup)
5. Petition, Rollo, pages 51-56.

7 (Popup - Popup)
6. Answer, Rollo, pages 63-66.

8 (Popup - Popup)
7. Decision, Rollo, pages 38-39.

9 (Popup - Popup)
8. Motion, Rollo, pages 42-45.

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 10 (Popup - Popup)
9. Resolution, Rollo, page 46.

11 (Popup - Popup)
10. Commissioner of Internal Revenue vs. Arnoldrs Carpentry Shop, Inc., 159 SCRA
199.

12 (Popup - Popup)
11. Commissioner of Internal Revenue vs. Court of Tax Appeals, G.R. No. 61509, April
19, 1988;
Sy Po vs. Court of Tax Appeals, L-81446, August 18, 1988.

13 (Popup - Popup)
12. Decision, Rollo, page 4.

14 (Popup - Popup)
13. British Traders Insurance Company, Ltd. vs. Commissioner, G.R. No. L-20501, April
30, 1965.

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