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, ET
CA-G.R. SP No. 31283
25 April 1995

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

1981 until paid.



Whether or not compensation for advisory services

admittedly performed abroad by the personnel of a nonresident foreign corporation not doing business in the
Philippines are subject to Philippine withholding income
tax YES


Whether or not respondent CIR is barred by prescription,

laches, estoppel, or equitable considerations in cancelling
the previous approval of petitioners claim for refund more
than 5 years thereafter, after it has determined, after
investigation, that the advisory services were rendered or
performed abroad by the personnel of AIGI, a non-resident
foreign corporation not doing business in the Philippines


Whether or not respondent tax court can amend its

decision on a motion for reconsideration by respondent
Commissioner, ordering petitioner PHILAMLIFE to pay
Php643,125.00 with interest at 20% per annum until paid
on the presumption that it has utilized the tax credit
memo already issued and without evidence being
presented of actual usage of the tax credit memo YES


The test of taxability is the source, and the source of an

income is that activity which produced the income.
Petitioner Philippine American Life Insurance Co., Inc.
(PHILAMLIFE), a domestic corporation entered into a
Management Services Agreement with American International
Reinsurance Co., Inc. (AIRCO), a non-resident foreign
corporation with principal place of business in Pembroke,
Bermuda whereby, effective January 1, 1972, for a fee of not
exceeding $250,000.00 per annum, AIRCO shall perform for
PHILAMLIFE various management services.
On September 30, 1978, AIRCO merged with petitioner
American International Group, Inc. (AIGI) with the latter as the
surviving corporation and successor-in-interest in AIRCOs
Management Services Agreement with PHILAMLIFE.
On November 18, 1980, respondent Commission of Internal
Revenue (CIR) issued in favour of PHILAMLIFE Tax Credit Memo
in the amount of Php643,125.00 representing erroneous
payment of withholding tax at source on remittances to AIGI for
services rendered abroad in 1979.
On the basis of the said issuance of tax credit, PHILAMLIFE,
through a letter dated March 21, 1981, filed with CIR a claim for
refund of the second erroneous tax payment of Php643,125.00
which was made on December 16, 1980. Another letter dated
July 6, 1982 was sent wherein PHILAMLIFE alleged that the
claim for refund of the amount paid in 1980 is exactly the same
subject matter as in the previous claim for refund in 1979.
Without waiting for CIR to resolve the claim, petitioners filed
with the Court of Tax Appeals (CTA) on July 29, 1982 the
petition docketed as CTA Case No. 3540, seeking said refund.
During pendency of said case, respondent denied PHILAMLIFEs
claim for refund of Php643,125.00 as withholding tax at source
for 1980. Respondent also cancelled the tax credit memo in the
amount of Php643,125.00 previously issued to PHILAMLIFE on
November 18, 1980 and requested the latter to pay the amount
of Php643,125.00 as deficiency withholding tax at source for
1979 plus increments.
Without protesting the assessment, petitioners filed a petition
with CTA on June 14, 1985, docketed as CTA Case No. 3943,
seeking the annulment of said assessment.
After trial on the merits, respondent tax court rendered the
decision dated March 10, 1993 denying both petitions for
review and subsequent motions for reconsiderations.
Both parties filed motion for reconsideration on the March 10,
1993 decision wherein the respondent tax court issued a
resolution dated May 19, 1993 which modified the dispositive
portion of the said decision ordering the PHILAMLIFE to pay
respondent the amount of Php643,125.00 with interest at the


In our jurisprudence, the test of taxability is the source,

and the source of an income is that activity which
produced the income. It is not the presence of any
property from which one derives rentals and royalties that
is controlling, but rather as expressed under the expanded
meaning of royalties in Section 37 (a) of National
Internal Revenue Code, it includes royalties for the supply
of scientific, technical, industrial, or commercial
knowledge or information; and the technical advice,
assistance or services rendered in connection with the
technical management and administration of any
scientific, industrial or commercial undertaking, venture,
project or scheme.

The Management Services Agreement falls under the expanded

meaning of royalties as it provides for the supply of a nonresident foreign corporation of technical and commercial
information, knowledge, advice, assistance or services in
connection with technical management or administration of an
insurance business a commercial undertaking. Therefore, the
income derived for the services performed by AIGI for
PHILAMLIFE under the said agreement contract shall be
considered as income from services within the Philippines. AIGI,
being a non-resident foreign corporation not engage in trade
and business in the Philippines shall pay tax equal to 35% of the
gross income received during each taxable year from all sources
within the Philippines as interest, dividends, rents, royalties
(including remuneration for technical services), salaries,
premiums, annuities, emoluments, or other fixed or
determinable annual, periodical or casual gains, profits and
On the second issue, this Court believes that the rule on
prescription of assessment and the filing of formal protest will
not apply.

Pursuant to Section 229 of NIRC, no such suit or proceeding

shall be begun after the expiration of two years from the date
of payment of tax penalty regardless of any supervening cause
that may arise after payment. Although counting from the
original date of payment of the tax on December 3, 1979, the
filing of the instant Petition for Review on June 14, 1985 would
appear to have been filed out of time, nevertheless, justice and
equity demand that the period during which respondent
approved the herein claim for refund up to the time it was
subsequently cancelled should be deducted from the counting
of the two years prescriptive period. By deducting the period
when Petitioner received the tax credit memo on March 9,
1981 to May 15, 1985 when the same was cancelled by the
respondent only one year and four months had elapsed from
the two year period of prescription when petitioner filed CTA
3943 on June 4, 1985.
In like manner, CIRs failure to raise before the CTA the issue
relating to the real party in interest to claim the refund cannot,
and should not, prejudice the government. It is axiomatic that
the government can never be in estoppel, particularly in
matters involving taxes. The errors or omissions of certain
administrative officers should never be allowed to jeopardize
the governments financial position.
On the third issue, this Court finds no error on the part of
respondent tax court in amending its March 10, 1993 decision
acting upon timely motion for reconsiderations filed by both
petitioner and respondent. Said decision having not attained its
finality, the same may still be amended, corrected or modified
by the respondent court.
Moreover, it has been the long standing policy and practice of
this Court to respect the conclusions of quasi-judicial agencies,
such as the Court of tax Appeals which, by nature of its
function, is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or
improvident exercise of authority or discretion, the decision of
respondent court, affirming the decision of the Court of Tax
Appeals, must consequently be upheld.
By: Michael Evans Castromayor Pastor