[G.R. No. 148187. April 16, 2008.
] (a) The properties shall be appraised and, together with the cash,
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J p:
This is a petition for review on certiorari of the June 30, 2000
Decision of the Court of Appeals in CA-G.R. SP No. 49385, which
affirmed the Decision of the Court of Tax Appeals in C.T.A. Case No.
5200. Also assailed is the April 3, 2001 Resolution denying the motion
for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex
Mining), entered into an agreement with Baguio Gold Mining
Company ("Baguio Gold") for the former to manage and operate the
latter's mining claim, known as the Sto. Niño mine, located in Atok
and Tublay, Benguet Province. The parties' agreement was
denominated as "Power of Attorney" and provided for the following
terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio
Gold) shall make available to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS within the said 3-
year period, for use in the MANAGEMENT of the STO. NINO MINE.
The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed,
for internal audit purposes, as the owner's account in the Sto. Nino
PROJECT. Any part of any income of the PRINCIPAL from the STO.
NINO MINE, which is left with the Sto. Nino PROJECT, shall be added
to such owner's account.
5. Whenever the MANAGERS shall deem it necessary and convenient
in connection with the MANAGEMENT of the STO. NINO MINE, they
may transfer their own funds or property to the Sto. Nino PROJECT,
in accordance with the following arrangements:
Taxation 1 Cases Set 2
shall be carried by the Sto. Nino PROJECT as a special fund to be
known as the MANAGERS' account.
(b) The total of the MANAGERS' account shall not exceed
P11,000,000.00, except with prior approval of the PRINCIPAL;
provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT,
the amount not so paid in cash shall be added to the MANAGERS'
account.
(c) The cash and property shall not thereafter be withdrawn from the
Sto. Nino PROJECT until termination of this Agency.
(d) The MANAGERS' account shall not accrue interest. Since it is the
desire of the PRINCIPAL to extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a projected termination
of this Agency, the ratio which the MANAGERS' account has to the
owner's account will be determined, and the corresponding
proportion of the entire assets of the STO. NINO MINE, excluding the
claims, shall be transferred to the MANAGERS, except that such
transferred assets shall not include mine development, roads,
buildings, and similar property which will be valueless, or of slight
value, to the MANAGERS. The MANAGERS can, on the other hand,
require at their option that property originally transferred by them to
the Sto. Nino PROJECT be re-transferred to them. Until such assets
are transferred to the MANAGERS, this Agency shall remain
subsisting.
xxx xxx xxx
12. The compensation of the MANAGER shall be fifty per cent (50%)
of the net profit of the Sto. Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS' compensation.
xxx xxx xxx
16. The PRINCIPAL has current pecuniary obligation in favor of the
MANAGERS and, in the future, may incur other obligations in favor of
the MANAGERS. This Power of Attorney has been executed as
1
security for the payment and satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any obligation
of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive
of the MANAGERS' account. After all obligations of the PRINCIPAL in
favor of the MANAGERS have been paid and satisfied in full, this
Agency shall be revocable by the PRINCIPAL upon 36-month notice to
the MANAGERS. CHaDIT
17. Notwithstanding any agreement or understanding between the
PRINCIPAL and the MANAGERS to the contrary, the MANAGERS may
withdraw from this Agency by giving 6-month notice to the
PRINCIPAL. The MANAGERS shall not in any manner be held liable to
the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d)
hereof shall be operative in case of the MANAGERS' withdrawal.
xxx xxx xxx
In the course of managing and operating the project, Philex Mining
made advances of cash and property in accordance with paragraph 5
of the agreement. However, the mine suffered continuing losses over
the years which resulted to petitioner's withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982.
Thereafter, on September 27, 1982, the parties executed a
"Compromise with Dation in Payment" wherein Baguio Gold
admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by
first assigning Baguio Gold's tangible assets to petitioner, transferring
to the latter Baguio Gold's equitable title in its Philodrill assets and
finally settling the remaining liability through properties that Baguio
Gold may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to
Compromise with Dation in Payment" where the parties determined
that Baguio Gold's indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio Gold to
other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of
America NT & SA and Citibank N.A. This time, Baguio Gold undertook
Taxation 1 Cases Set 2
to pay petitioner in two segments by first assigning its tangible assets
for P127,838,051.00 and then transferring its equitable title in its
Philodrill assets for P16,302,426.00. The parties then ascertained that
Baguio Gold had a remaining outstanding indebtedness to petitioner
in the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the
remaining outstanding indebtedness of Baguio Gold by charging
P112,136,000.00 to allowances and reserves that were set up in 1981
and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its
gross income the amount of P112,136,000.00 as "loss on settlement
of receivables from Baguio Gold against reserves and
allowances." However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must
be allowed since all requisites for a bad debt deduction were
satisfied, to wit: (a) there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was charged off within the
taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management
contract it entered into with Baguio Gold. The bad debt deduction
represented advances made by petitioner which, pursuant to the
management contract, formed part of Baguio Gold's "pecuniary
obligations" to petitioner. It also included payments made by
petitioner as guarantor of Baguio Gold's long-term loans which legally
entitled petitioner to be subrogated to the rights of the original
creditor.
Petitioner also asserted that due to Baguio Gold's irreversible losses,
it became evident that it would not be able to recover the advances
and payments it had made in behalf of Baguio Gold. For a debt to be
considered worthless, petitioner claimed that it was neither required
to institute a judicial action for collection against the debtor nor to
sell or dispose of collateral assets in satisfaction of the debt. It is
2
enough that a taxpayer exerted diligent efforts to enforce collection
and exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioner's protest for lack of
legal and factual basis. It held that the alleged debt was not
ascertained to be worthless since Baguio Gold remained existing and
had not filed a petition for bankruptcy; and that the deduction did
not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%)
of the project's net profit.
Petitioner appealed before the Court of Tax Appeals (CTA) which
rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review
is hereby DENIED for lack of merit. The assessment in question, viz:
FAS-1-82-88-003067 for deficiency income tax in the amount of
P62,811,161.39 is hereby AFFIRMED. SEcTHA
ACCORDINGLY, petitioner Philex Mining Corporation is hereby
ORDERED to PAY respondent Commissioner of Internal Revenue the
amount of P62,811,161.39, plus 20% delinquency interest due
computed from February 10, 1995, which is the date after the 20-day
grace period given by the respondent within which petitioner has to
pay the deficiency amount . . . up to actual date of payment.
SO ORDERED.
The CTA rejected petitioner's assertion that the advances it made for
the Sto. Nino mine were in the nature of a loan. It instead
characterized the advances as petitioner's investment in a
partnership with Baguio Gold for the development and exploitation
of the Sto. Nino mine. The CTA held that the "Power of Attorney"
executed by petitioner and Baguio Gold was actually a partnership
agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioner's
gross income. HcaDIA
The CTA likewise held that the amount paid by petitioner for the long-
term loan obligations of Baguio Gold could not be allowed as a bad
debt deduction. At the time the payments were made, Baguio Gold
was not in default since its loans were not yet due and demandable.
Taxation 1 Cases Set 2
What petitioner did was to pre-pay the loans as evidenced by the
notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover,
Citibank imposed and collected a "pre-termination penalty" for the
pre-payment.
The Court of Appeals affirmed the decision of the CTA. Hence, upon
denial of its motion for reconsideration, petitioner took this recourse
under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by
Philex in the management of the Sto. Nino Mine pursuant to the
Power of Attorney partook of the nature of an investment rather than
a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the
net profits of the Sto. Nino Mine indicates that Philex is a partner of
Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of Philex
and Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney
and in completely disregarding the Compromise Agreement and the
Amended Compromise Agreement when it construed the nature of
the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the
propriety of the bad debts write-off.
Petitioner insists that in determining the nature of its business
relationship with Baguio Gold, we should not only rely on the "Power
of Attorney", but also on the subsequent "Compromise with Dation
in Payment" and "Amended Compromise with Dation in Payment"
that the parties executed in 1982. These documents, allegedly
3
evinced the parties' intent to treat the advances and payments as a
loan and establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the
instrument that is material in determining the true nature of the
business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties'
contractual intent must first be discovered from the expressed
language of the primary contract under which the parties' business
relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties
pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter
which established the juridical relation of the parties and defined the
parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be
considered as a subsequent or contemporaneous act that is reflective
of the parties' true intent. The compromise agreements were
executed eleven years after the "Power of Attorney" and merely laid
out a plan or procedure by which petitioner could recover the
advances and payments it made under the "Power of Attorney". The
parties entered into the compromise agreements as a consequence
of the dissolution of their business relationship. It did not define that
relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership
or joint venture was indeed intended by the parties. Under a 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. While a corporation, like
petitioner, cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been held that it may
enter into a joint venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin. It has no
precise legal definition, but it has been generally understood to mean
an organization formed for some temporary purpose. . . . It is in fact
hardly distinguishable from the partnership, since their elements are
Taxation 1 Cases Set 2
similar — community of interest in the business, sharing of profits
and losses, and a mutual right of control. . . . The main distinction
cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a
single transaction, and is thus of a temporary nature. . . . This
observation is not entirely accurate in this jurisdiction, since under
the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking.
. . . It would seem therefore that under Philippine law, a joint venture
is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it
may however engage in a joint venture with others. . . . (Citations
omitted)
Perusal of the agreement denominated as the "Power of Attorney"
indicates that the parties had intended to create a partnership and
establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in
the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold
undertook to contribute money, property and industry to the
common fund known as the Sto. Niño mine. In this regard, we note
that there is a substantive equivalence in the respective contributions
of the parties to the development and operation of the mine.
Pursuant to paragraphs 4 and 5 of the agreement, petitioner and
Baguio Gold were to contribute equally to the joint venture assets
under their respective accounts. Baguio Gold would
contribute P11M under its owner's account plus any of
its income that is left in the project, in addition to its actual mining
claim. Meanwhile, petitioner's contribution would consist of
its expertise in the management and operation of mines, as well as
the manager's account which is comprised of P11M in funds and
property and petitioner's "compensation" as manager that cannot
be paid in cash.
4
However, petitioner asserts that it could not have entered into a
partnership agreement with Baguio Gold because it did not "bind"
itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to
transfer funds or property to the Sto. Niño project "(w)henever the
MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIÑO MINE.”
The wording of the parties' agreement as to petitioner's contribution
to the common fund does not detract from the fact that petitioner
transferred its funds and property to the project as specified in
paragraph 5, thus rendering effective the other stipulations of the
contract, particularly paragraph 5 (c) which prohibits petitioner from
withdrawing the advances until termination of the parties' business
relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions
acquired an obligatory nature as soon as petitioner had chosen to
exercise its option under paragraph 5.
There is no merit to petitioner's claim that the prohibition in
paragraph 5 (c) against withdrawal of advances should not be taken
as an indication that it had entered into a partnership with Baguio
Gold; that the stipulation only showed that what the parties entered
into was actually a contract of agency coupled with an interest which
is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be
revoked or withdrawn by the principal due to an interest of a third
party that depends upon it, or the mutual interest of both principal
and agent. In this case, the non-revocation or non-withdrawal under
paragraph 5 (c) applies to the advances made by petitioner who is
supposedly the agent and not the principal under the contract. Thus,
it cannot be inferred from the stipulation that the parties' relation
under the agreement is one of agency coupled with an interest and
not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication
that the relationship of the parties was one of agency and not a
partnership. Although the said provision states that "this Agency shall
Taxation 1 Cases Set 2
be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS' account", it
does not necessarily follow that the parties entered into an agency
contract coupled with an interest that cannot be withdrawn by
Baguio Gold.
It should be stressed that the main object of the "Power of Attorney"
was not to confer a power in favor of petitioner to contract with third
persons on behalf of Baguio Gold but to create a business relationship
between petitioner and Baguio Gold, in which the former was to
manage and operate the latter's mine through the parties' mutual
contribution of material resources and industry. The essence of an
agency, even one that is coupled with interest, is the agent's ability
to represent his principal and bring about business relations between
the latter and third persons. Where representation for and in behalf
of the principal is merely incidental or necessary for the proper
discharge of one's paramount undertaking under a contract, the
latter may not necessarily be a contract of agency, but some other
agreement depending on the ultimate undertaking of the parties.
In this case, the totality of the circumstances and the stipulations in
the parties' agreement indubitably lead to the conclusion that a
partnership was formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally
obligated to return the advances made by petitioner under the
agreement. Paragraph 5 (d) thereof provides that upon termination
of the parties' business relations, "the ratio which the MANAGER'S
account has to the owner's account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims" shall be transferred to petitioner. As pointed
out by the Court of Tax Appeals, petitioner was merely entitled to a
proportionate return of the mine's assets upon dissolution of the
parties' business relations. There was nothing in the agreement that
would require Baguio Gold to make payments of the advances to
petitioner as would be recognized as an item of obligation or
"accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided
for a distribution of assets of the Sto. Niño mine upon termination, a
5
provision that is more consistent with a partnership than a creditor-
debtor relationship. It should be pointed out that in a contract of
loan, a person who receives a loan or money or any fungible thing
acquires ownership thereof and is bound to pay the creditor an equal
amount of the same kind and quality. In this case, however, there was
no stipulation for Baguio Gold to actually repay petitioner the cash
and property that it had advanced, but only the return of an amount
pegged at a ratio which the manager's account had to the owner's
account.
In this connection, we find no contractual basis for the execution of
the two compromise agreements in which Baguio Gold recognized a
debt in favor of petitioner, which supposedly arose from the
termination of their business relations over the Sto. Niño mine. The
"Power of Attorney" clearly provides that petitioner would only be
entitled to the return of a proportionate share of the mine assets to
be computed at a ratio that the manager's account had to the
owner's account. Except to provide a basis for claiming the advances
as a bad debt deduction, there is no reason for Baguio Gold to hold
itself liable to petitioner under the compromise agreements, for any
amount over and above the proportion agreed upon in the "Power of
Attorney".
Next, the tax court correctly observed that it was unlikely for a
business corporation to lend hundreds of millions of pesos to another
corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also
did not provide a specific maturity date for the advances to become
due and demandable, and the manner of payment was unclear. All
these point to the inevitable conclusion that the advances were not
loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Niño
mine is the fact that it would receive 50% of the net profits as
"compensation" under paragraph 12 of the agreement. The entirety
of the parties' contractual stipulations simply leads to no other
conclusion than that petitioner's "compensation" is actually its share
in the income of the joint venture.
Taxation 1 Cases Set 2
Article 1769 (4) of the Civil Code explicitly provides that the "receipt
by a person of a share in the profits of a business is prima
facie evidence that he is a partner in the business." Petitioner asserts,
however, that no such inference can be drawn against it since its
share in the profits of the Sto Niño project was in the nature of
compensation or "wages of an employee", under the exception
provided in Article 1769 (4) (b).
On this score, the tax court correctly noted that petitioner was not
an employee of Baguio Gold who will be paid "wages" pursuant to an
employer-employee relationship. To begin with, petitioner was the
manager of the project and had put substantial sums into the venture
in order to ensure its viability and profitability. By pegging its
compensation to profits, petitioner also stood not to be remunerated
in case the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if it were
truly just an ordinary employee.
Consequently, we find that petitioner's "compensation" under
paragraph 12 of the agreement actually constitutes its share in the
net profits of the partnership. Indeed, petitioner would not be
entitled to an equal share in the income of the mine if it were just an
employee of Baguio Gold. It is not surprising that petitioner was to
receive a 50% share in the net profits, considering that the "Power of
Attorney" also provided for an almost equal contribution of the
parties to the St. Niño mine. The "compensation" agreed upon only
serves to reinforce the notion that the parties' relations were indeed
of partners and not employer-employee.
All told, the lower courts did not err in treating petitioner's advances
as investments in a partnership known as the Sto. Niño mine. The
advances were not "debts" of Baguio Gold to petitioner inasmuch as
the latter was under no unconditional obligation to return the same
to the former under the "Power of Attorney". As for the amounts that
petitioner paid as guarantor to Baguio Gold's creditors, we find no
reason to depart from the tax court's factual finding that Baguio
Gold's debts were not yet due and demandable at the time that
petitioner paid the same. Verily, petitioner pre-paid Baguio Gold's
6
outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record.
In sum, petitioner cannot claim the advances as a bad debt deduction
from its gross income. Deductions for income tax purposes partake
of the nature of tax exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence that he is entitled
to the deduction claimed. In this case, petitioner failed to
substantiate its assertion that the advances were subsisting debts of
Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt
deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed
the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is
AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY
the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from
February 10, 1995, which is the due date given for the payment of
the deficiency income tax, up to the actual date of payment.
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.
DECISION
VITUG, J p:
Taxation 1 Cases Set 2
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 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 the 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:
7
"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:
"Section 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 but not over P30,000 P300 + 9% of excess
over P10,000
Over P30,000 but not over P120,000 P2,100 + 15% of excess
over P30,000
Over P120,000 but not over P350,000 P15,600 + P20% of
excess over P120,000
Over P350,000 P61,600 + 30% of excess over P350,000"
"SECTION 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;
Taxation 1 Cases Set 2
"(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 the
support of the whole act, (b) to avoid surprises or even fruad upon
the legislature , and (c) to fairly apprise the people, through such
publications of its proceedings as are usually made, of the subjects of
legislation. The above objectives of the fundamental law appear to us
to have been sufficiently met. Anything else would be to require a
virtual compendium of the law which could not have been the
intendment of the constitutional mandate.
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
8
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 771).
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.
Taxation 1 Cases Set 2
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
byR.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 the 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 on 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?
9
'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:
"SECTION 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.
Taxation 1 Cases Set 2
"(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 extend
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).
10
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 the taxpayer.
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 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.
Taxation 1 Cases Set 2
WHEREFORE, the petitions are DISMISSED. No special
pronouncement on costs.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero,
Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur.
Padilla and Bidin, JJ., is on leave.
Footnotes
1.Justice Isagani A. Cruz on Philippine Political Law 1993 edition, pp.
146-147, citing with approval Cooley on Constitutional Limitations.
2.A system employed where the income tax treatment varies and
made to depend on the kind or category of taxable income of the
taxpayer.
3.A system where the tax treatment views indifferently the tax base
and generally treats in common all categories of taxable income of
4.A general professional partnership, in this context, must be formed
for the sole purpose of exercising a common profession, no part of
the income of which is derived from its engaging in any trade
business; otherwise, it is subject to tax as an ordinary business
partnership or, which is to say, as a corporation and thereby subject
to the corporate income tax. The only other exempt partnership is a
joint venture for undertaking construction projects or engaging in
petroleum operations pursuant to an operating agreement under a
service contract with the government (see Sections 20, 23 and
24, National Internal Revenue Code).
[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.
DECISION
AQUINO, J p:
11
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 on 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 paycorporate 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 "distributive dividend" taxable
in full (not a mere capital gain of which 1/2 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.
Taxation 1 Cases Set 2
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 Tobeñas says:
"Como establecer el deslinde entre la comunidad ordinaria o
copropiedad y la sociedad?
"El criterio diferencial — seg'un la doctrina m s generalizada — est :
por raz"n del origen, en que la sociedad presupone necesariamente
la convencion, mientras que la comunidad puede existir y existe
ordinariamente sin ella; y por raz"n del fin u objecto, en que el objeto
de la sociedad es obtener lucro, mientras que el de la indivision es
12
s'olo 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 positivo 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 señala como nota fundamental de diferenciacion, aparte
del origen o 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 Español, 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 Ona vs. 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
Taxation 1 Cases Set 2
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.
Abad Santos, Escolin, Cuevas and Alampay, JJ ., concur.
Concepcion, Jr ., is on leave.
Footnotes
**This view is supported by the following rulings of respondent
Commissioner:
"Co-ownership 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. Arañas, CTA Case No. 653, July 31,
1963).
"All co-ownerships are not deemed unregistered partnership. — Co-
heirs 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
13
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. CIR, CTA Case No. 738,
September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol.
1, 1979 Ed., pp. 77-78).
[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.
SYLLABUS
1. CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. — 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.
2. COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE
AT BAR NOT LIABLE FOR THE PAYMENT THEREOF. — 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. 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.
Taxation 1 Cases Set 2
DECISION
GANCAYCO, J p:
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 to Marenir 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
14
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 them 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.
Taxation 1 Cases Set 2
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.
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 (companias 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 participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companias
colectivas).'
15

"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 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 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.
Taxation 1 Cases Set 2
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 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
circumstance 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."
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.
16
In Evangelista, 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
Taxation 1 Cases Set 2
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 Floyd 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 plaintiff's 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
17
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.)"
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. 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.
Taxation 1 Cases Set 2
WHEREFORE, 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. L-19342. May 25, 1972.]
LORENZO T. OÑA, and HEIRS OF JULIA BUNALES, namely: RODOLFO
B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA, and
LORENZO B. OÑA, JR., petitioners, vs. THE COMMISSIONER OF
INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete and Special Attorney Purificacion Ureta for
respondent.
SYLLABUS
1. TAXATION; INTERNAL REVENUE CODE; CORPORATE TAX;
UNREGISTERED PARTNERSHIP; FORMATION THEREOF WHERE
INCOME FROM SHARES OF CO-HEIRS CONTRIBUTED TO COMMON
FUND. — 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. Oña (who managed
the properties) 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 tantamount to actually
18
contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of
the provisions of the Tax Code.
2. ID.; ID.; ID.; WHEN HEIRS NOT CONSIDERED AS UNREGISTERED CO-
PARTNERS AND NOT SUBJECT TO SUCH TAX. — In cases of
inheritance, there is a period when the heirs can be considered as co-
owners rather than unregistered co-partners within the
contemplation of our corporate tax laws. 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.
3. ID.; ID.; ID.; CIRCUMVENTIONS OF SECTIONS 24 AND 84(b) OF TAX
CODE WHEN HEIRS CONTINUE AS CO-OWNERS. — For tax purposes,
the co-ownership of inherited properties is automatically converted
into an unregistered partnership, for it is easily conceivable that after
knowing their respective shares in the partition, they (heirs) 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 not
so, 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.
4. ID.; ID.; ID., HEIRS AS UNREGISTERED CO-PARTNERS; PARTNERSHIP
CONTEMPLATED IN CIVIL CODE NOT APPLICABLE. — Petitioners'
reliance on Article 1769, par. (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 (102 Phil. 140), 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.
Taxation 1 Cases Set 2
5. ID.; ID.; ID.; ID.; SEGREGATION OF INCOME FROM BUSINESS FROM
THAT OF INHERITED PROPERTIES, NOT PROPER. — Where the
inherited properties and the income derived therefrom were used in
business of buying and selling other real properties and corporate
securities, 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.
6. ID.; ID.; INCOME TAX; ACTION FOR REIMBURSEMENT SUBJECT TO
PRESCRIPTION. — A taxpayer who has paid the wrong tax, assuming
that the failure to pay the corporate taxes in question was not
deliberate, 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.
DECISION
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. 2343and 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 Buñales died on March 23, 1944, leaving as heirs her surviving
spouse, Lorenzo T. Oña and her five children. In 1948, Civil Case No.
19
4519 was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oña, 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 Oña, were still minors when the project
of partition was approved, Lorenzo T. Oña, 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. 34-31, BIR rec.).
"The project of partition also shows that the estate shares equally
with Lorenzo T. Oña, 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. Oña 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
Taxation 1 Cases Set 2
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 P 87,860 P 17,590.00
1950 P 24,657.65 128,566.72 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. Oña, 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. Oña 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
20
an unregistered partnership. Finding no merit in petitioners' request, "I
respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See Pp. 1-4, "THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
Memorandum for Respondent, June 12, 1961). PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
"II
"THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
"The original assessment was as follows: PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED
"1955 AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM
"Net income as per investigation P40,209.89 (sic);
—————— "III
Income tax due thereon 8,042.00 "THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS
25% surcharge 2,010.50 WERE LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956
Compromise for non-filing 50.00 AS AN UNREGISTERED PARTNERSHIP;
—————— "IV
Total P10,102.50 "ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
========== UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED
"1956 IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
"Net income as per investigation P69,245.23 PARTNERSHIP TO THE EXTENT ONLY THAT THEY IN VESTED THE
PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
—————— LOANS RECEIVED USING THE INHERITED PROPERTIES AS
Income tax due thereon 13,849.00 COLLATERALS;.
25% surcharge 3,462.25 "V
Compromise for non-filing 50.00 "ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED
—————— PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
Total 17,361.25 DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
========== INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
(See Exhibit 13, page 50, BIR records) PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON,
FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP."
"Upon further consideration of the case, the 25% surcharge was
eliminated in line with the ruling of the Supreme Court in Collector v. In other words, petitioners pose for our resolution the following
Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that questions:
the questioned assessment refers solely to the income tax proper for (1) Under the facts found by the Court of Tax Appeals, should
the years 1955 and 1956 and the 'Compromise for non-filing,' the petitioners be considered as co-owners of the properties inherited by
latter item obviously referring to the compromise in lieu of the them from the deceased Julia Buñales and the profits derived from
criminal liability for failure of petitioners to file the corporate income transactions involving the same, or, must they be deemed to have
tax returns for said years. (See Exh. 17, page 86, BIR records)." (Pp. 1- formed an unregistered partnership subject to tax under Sections 24
3, Annex C to Petition). and 84(b) of the National Internal Revenue Code?
Petitioners have assigned the following as alleged errors of the Tax
Court: (2) Assuming they have formed an unregistered partnership, should
this not be only in the sense that they invested as a common fund the
Taxation 1 Cases Set 2 21
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. Oña, 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
Taxation 1 Cases Set 2
of Lorenzo T. Oña 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 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. Oña, 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. Oña.
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. Oña, 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. Oña 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 tantamount 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
22
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 "[i]t
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
Taxation 1 Cases Set 2
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
conformity 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 other, '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
23
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 as 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 co-partnerships — 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
Taxation 1 Cases Set 2
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
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 allege:
'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 Honor able 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.
24
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 affirmed, with costs against petitioners.
Footnotes
Taxation 1 Cases Set 2
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 h 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.
SYLLABUS
1. TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION
WHICH ARE NOT NECESSARY PARTNERSHIP. — "Corporations"
strictly speaking are distinct and different from "partnership". When
our Internal Revenue Code includes "partnership" among the entities
subject to the tax on "corporations", it must be allude to organization
which are not necessarily "partnership" in the technical sense of the
term.
2. ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED
FROM THE TAX UPON CORPORATIONS. — Section 24 of the Internal
Revenue Code exempts from the tax imposed upon corporations
"duly registered general partnership", which constitute precisely one
of the most typical form of partnership in this jurisdiction.
3. ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW
ORGANIZED. — As defined in section 84 (b) of the Internal Revenue
Code "the term corporation includes partnership, no matter how
created or organized." This qualifying expression clearly indicates
that a joint venture need not be undertaken in any of the standards
form, or conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for the
purposes of the tax on corporations.
4. ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND
ASSOCIATIONS WITHOUT LEGAL PERSONALITY. — Pursuant to
Section 84 (b) of the Internal Revenue Code, the term "corporations"
25
includes, among the others, "joint accounts (cuenta en
participacion)" and "associations", none of which has a legal
personality of its own independent of that of its members. For
purposes of the tax on corporations, our National Internal Revenue
Codeincludes these partnership. — with the exception only of duly
registered general partnership. — within the purview of the term
"corporations." Held: That the petitioners in the case at bar, who are
engaged in real estate transactions for monetary gain and divide the
same among themselves, constitute a partnership, so far as the said
Code is concerned, and are subject to the income tax for the
corporation.
5. ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY
SUBJECT TO RESIDENCE TAX ON CORPORATION. — The pertinent part
of the provision of Section 2 of Commonwealth Act No. 465 which
says: "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." is analogous to that of Section 24 and 84 (b) of our
Internal Revenue Code which was approved the day immediately
after the approval of said Commonwealth Act No. 565. Apparently,
the terms "corporation" and "Partnership" are used both statutes
with substantially the same meaning, Held: That the petitioners are
subject to the residence tax corporations.
DECISION
CONCEPCION, J p:
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 petitioners is
hereby dismissed with costs against petitioners."
It appears from the stipulation submitted by the parties:
Taxation 1 Cases Set 2
"1. That the petitioners borrowed from their father the sum of
P59,140.00 which amount together with their personal monies was
used by them for the purpose of buying real properties;
"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 for 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 P18,000.00; this property has an assessed
value of P8,255.00 as of 1948;
"4. That on April 23, 1944 they purchased from the Insular
Investments, Inc., a lot of 4,358 sq. m. including improvements
thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1943;
"5. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot
of 8,371 sq. m. including improvements thereon for P237,234.14.
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 tenant; 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 leased to various tenants;
"8. That from the month of March, 1945 up to and 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 in 1946, they realized a gross rental income in the sum of
P24,786.30, out of which amount was deducted 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
26
corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to the assessments
made by said officer, as follows:
INCOME TAXES
1945...........................................................P614.84
1946...........................................................1,144.71
1947..............................................................910.34
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 P527.50
RESIDENCE TAXES OF CORPORATION
1945................................................................P38.75
1946..................................................................38.75
1947..................................................................38.75
1948..................................................................38.75
1949..................................................................38.75
______________
Total including surchage P193.75
TOTAL TAXES DUE P6,878.34
Said letter of demand and the 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 rendered the
above-mentioned decision for the respondent, and, a petition for
Taxation 1 Cases Set 2
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 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 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 (compañias 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 (compañias
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:
27
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
P18,000.000. 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 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 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 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.
Taxation 1 Cases Set 2
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
participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its
28
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 copartner ships" — 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 of
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 provision 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 designated 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 interinsurance
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 Merten's Law of Federal Income
Taxation, p. 788; italics ours.)
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
Taxation 1 Cases Set 2
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; italics 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; italics
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.
As regards the residence tax for corporations, section 2
of Commonwealth Act No. 465 provides in part:
"Entities liable to residence tax. — Every corporation, no matter how
created or organized, whether domestic or resident foreign, engaged
in or doing business in the Philippines shall pay an annual residence
tax of five pesos and an annual additional tax which, in no case, shall
exceed one thousand pesos, 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." (italics ours.)
Considering that the pertinent part of this provision is analogous to
that of sections 24 and 84(b) of our National Internal Revenue
Code(Commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of
said Commonwealth Act No. 465 (June 14, 1939), it is apparent that
the terms "corporation" and "partnership" are used in both statutes
29
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 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. . . .." (Italics ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is
hereby affirmed with costs against the petitioners herein. It is so
ordered.
Separate Opinions
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 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 purchased 21 lots for P18,000. This
was soon followed on April 23, 1944, by the acquisition of another
real estate 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 afore-mentioned common fund or even of
the property acquired by petitioner in February, 1943. In other
Taxation 1 Cases Set 2
words, one cannot but perceive a character of habituality peculiar
to business transactions engaged in for purposes of gain."
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 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 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
30
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 purchase of land, by two, does not constitute a copartnership
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 S. 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 plaintiff's commissions, 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 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."
Taxation 1 Cases Set 2
[G.R. No. 112675. January 25, 1999.]
AFISCO INSURANCE CORPORATION; CCC INSURANCE
CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION; DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINES; EASTERN ASSURANCE COMPANY &
SURETY CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE
INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION
INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE
CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN
INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.;
MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE
COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW
ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE
CORPORATION; PARAMOUNT INSURANCE CORPORATION;
PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION; PERLA
COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE
CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF
THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE
SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE
COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-
EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA
SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE
CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA
INSURANCE CO., INC. — all assessed as "POOL OF MACHINERY
INSURERS," petitioners, vs. COURT OF APPEALS, COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
SYNOPSIS
This is a Petition For Review on Certiorari assailing the Decision of the
Court of Appeals dismissing petitioners' appeal of the Decision of the
Court of Tax Appeals which had sustained petitioners' liability for
31
deficiency income tax, interest and withholding tax. Petitioners
contended that the Court of Appeals erred in finding that the pool or
clearing house was an informal partnership, which was taxable as a
corporation under the NIRC. Petitioners further claimed that the
remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insisted that taxing such remittances
contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and would be
tantamount to an illegal double taxation. Moreover, petitioners
argued that since Munich was not a signatory to the Pool Agreement,
the remittances it received from the pool cannot be deemed
dividends. However, even if such remittances were treated as
dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,as well as Article 7 of paragraph
1 and Article 5 of the RP-West German Tax Treaty. Petitioners
likewise contended that the Internal Revenue Commissioner was
already barred by prescription from making an assessment.
In the present case, the ceding companies entered into a Pool
Agreement or association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich.
Petitioner's allegation of double taxation is untenable. The pool is a
taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is different from the tax on
the dividends received by the said companies. The tax exemptions
claimed by petitioners cannot be granted. The sections of the
1977 NIRC which petitioners cited are inapplicable, because these
were not yet in effect when the income was earned and when the
subject information return for the year ending 1975 was filed.
Petitioners' claim that Munich is tax-exempt based on the RP-West
German Tax Treaty is likewise unpersuasive, because the Internal
Revenue Commissioner assessed the pool for corporate taxes on the
basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect.
Petitioners likewise failed to comply with the requirement of Section
333 of the NIRC for the suspension of the prescriptive period. The
Resolutions of the Court of Appeals are affirmed.
Taxation 1 Cases Set 2
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF
INTERNAL REVENUE IS ACCORDED WEIGHT AND EVEN FINALITY IN
THE ABSENCE OF SHOWING THAT IT IS PATENTLY WRONG. — The
opinion or ruling of the Commission of Internal Revenue, the agency
tasked with the enforcement of tax laws, is accorded much weight
and even finality, when there is no showing that it is patently wrong,
particularly in this case where the findings and conclusions of the
internal revenue commissioner were subsequently affirmed by the
CTA, a specialized body created for the exclusive purpose of
reviewing tax cases, and the Court of Appeals. Indeed, "[I]t 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 the nature of its functions, 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 its authority."
2. CIVIL LAW; PARTNERSHIP; REQUISITES. — Article 1767 of the Civil
Code recognizes the creation of a contract of partnership when "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." Its requisites are: "(1) mutual contribution to a
common stock, and (2) a joint interest in the profits." In other words,
a partnership is formed when persons contract "to devote to a
common purpose either money, property, or labor with the intention
of dividing the profits between themselves." Meanwhile, an
association implies associates who enter into a "joint enterprise . . .
for the transaction of business."
3. ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED PARTNERSHIP
OR ASSOCIATION TAXABLE AS A CORPORATION UNDER SECTION 24
OF THENIRC. — In the case before us, the ceding companies entered
into a Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance
treaty and surplus reinsurance treaty with Munich. The following
unmistakably indicates a partnership or an association covered by
Section 24 of the NIRC: (1) The pool has a common fund, consisting
of money and other valuables that are deposited in the name and
credit of the pool. This common fund pays for the administration and
32
operation expenses of the pool. (2) The pool functions through an
executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding
companies. (3) True, the pool itself is not a reinsurer and does not
issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have
received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a
"Rules of Distribution" annexed to the Pool Agreement. Profit motive
or business is, therefore, the primordial reason for the pool's
formation.
4. TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED
PARTNERSHIPS AND ASSOCIATIONS ARE CONSIDERED AS
CORPORATIONS FOR TAX PURPOSES. — This Court rules that the
Court of Appeals, in affirming the CTA which had previously sustained
the internal revenue commissioner, committed no reversible error.
Section 24 of the NIRC,as worded in the year ending 1975, provides:
"SEC. 24. Rate of tax on corporations. — (a) Tax on domestic
corporations. — A tax is hereby imposed upon the taxable net income
received during each 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-partnership (compañias colectivas),
general professional partnerships, private educational institutions,
and building and loan associations . . . ." Ineludibly, the Philippine
legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations.
Parenthetically, the NLRC's inclusion of such entities in the tax on
corporations was made even clearer by the Tax Reform Act of 1997,
which amended the Tax Code.The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a
series of transactions spanning more than ten years, as in the case
before us.
5. ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN CASE
AT BAR. — Double taxation means taxing the same property twice
when it should be taxed only once. That is, ". . . taxing the same
Taxation 1 Cases Set 2
person twice by the same jurisdiction for the same thing." In the
instant case, the pool is a taxable entity distinct from the individual
corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the said
companies. Clearly, there is no double taxation here.
6. ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN CASE AT
BAR; REASONS. — The tax exemptions claimed by petitioners cannot
be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are
the lifeblood of the nation. Hence, "exemptions therefrom are highly
disfavored in law and he who claims tax exemption must be able to
justify his claim or right." Petitioners have failed to discharge this
burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income
was earned and when the subject information return for the year
ending 1975 was filed. Referring to the 1975 version of the
counterpart sections of the NIRC,the Court still cannot justify the
exemptions claimed. Section 255 provides that no tax shall ". . . be
paid upon reinsurance by any company that has already paid the tax
. . . ." This cannot be applied to the present case because, as
previously discussed, the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot individually claim the
income tax paid by the former as their own.
7. ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN
INSURANCE CORPORATION IN CASE AT BAR; REASONS; TAX
EXEMPTION CONSTRUEDSTRICTISSIMI JURIS. — Section 24 (b) (1)
pertains to tax on foreign corporations; hence, it cannot be claimed
by the ceding companies which are domestic corporations. Nor can
Munich, a foreign corporation, be granted exemption based solely on
this provision of the Tax Code because the same subsection
specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich
is patently an associate of the ceding companies in the entity formed,
pursuant to their reinsurance treaties which required the creation of
said pool. Under its pool arrangement with the ceding companies,
Munich shared in their income and loss. This is manifest from a
reading of Articles 3 and 10 of the Quota-Share Reinsurance Treaty
33
and Articles 3 and 10 of the Surplus Reinsurance Treaty. The
foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris,
and the statutory exemption claimed must be expressed in a
language too plain to be mistaken.
8. ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT BAR;
REASON. — The petitioners' claim that Munich is tax-exempt based
on the RP-West German Tax Treaty is likewise unpersuasive, because
the internal revenue commissioner assessed the pool for corporate
taxes on the basis of the information return it had submitted for the
year ending 1975, a taxable year when said treaty was not yet in
effect. Although petitioners omitted in their pleadings the date of
effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984.
9. ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION;
CHANGE IN THE ADDRESS OF THE TAXPAYER WILL NOT TOLL THE
RUNNING OF THE PRESCRIPTIVE PERIOD UNLESS THE
COMMISSIONER OF INTERNAL REVENUE HAS BEEN INFORMED OF
SAID CHANGE. — The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of
the NIRC,because "the taxpayer cannot be located at the address
given in the information return filed and for which reason there was
delay in sending the assessment." Indeed, whether the government's
right to collect and assess the tax has prescribed involves facts which
have been ruled upon by the lower courts. It is axiomatic that in the
absence of a clear showing of palpable error or grave abuse of
discretion, as in this case, this Court must not overturn the factual
findings of the CA and the CTA. Furthermore, petitioners admitted in
their Motion for Reconsideration before the Court of Appeals that the
pool changed its address, for they stated that the pool's information
return filed in 1980 indicated therein its "present address." The Court
finds that this falls short of the requirement of Section 333 of
the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only "if the
taxpayer informs the Commissioner of Internal Revenue of any
change in the address."
Taxation 1 Cases Set 2
DECISION
PANGANIBAN, J p:
Pursuant to "reinsurance treaties," a number of local insurance firms
formed themselves into a "pool" in order to facilitate the handling of
business contracted with a nonresident foreign reinsurance
company. May the "clearing house" or "insurance pool" so formed be
deemed a partnership or an association that is taxable as a
corporation under the National Internal Revenue Code (NIRC)?
Should the pool's remittances to the member companies and to the
said foreign firm be taxable as dividends? Under the facts of this case,
has the government's right to assess and collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review
on Certiorari before us, assailing the October 11, 1993 Decision of the
Court of Appeals in CA-GR SP 29502, which dismissed petitioners'
appeal of the October 19, 1992 Decision of the Court of Tax
Appeals (CTA) which had previously sustained petitioners' liability for
deficiency income tax, interest and withholding tax. The Court of
Appeals ruled:
"WHEREFORE, the petition is DISMISSED, with costs against
petitioners."
The petition also challenges the November 15, 1993 Court of Appeals
(CA) Resolution denying reconsideration.
The Facts
The antecedent facts, as found by the Court of Appeals, are as
follows:
"The petitioners are 41 non-life insurance corporations, organized
and existing under the laws of the Philippines. Upon issuance by them
of Erection, Machinery Breakdown, Boiler Explosion and Contractors'
All Risk insurance policies, the petitioners on August 1, 1965 entered
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance
Treaty with the Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance
34
corporation. The reinsurance treaties required petitioners to form a Add: 25% surcharge 326,236.05
[p]ool. Accordingly, a pool composed of the petitioners was formed
14% interest from
on the same day.
1/25/76 to 1/25/79 137,019.14
"On April 14, 1976, the pool of machinery insurers submitted a
Compromise
financial statement and filed an "Information Return of Organization
Exempt from Income Tax" for the year ending in 1975, on the basis of penalty-non-filing of return 300.00
which it was assessed by the Commissioner of Internal Revenue
late payment 300.00
deficiency corporate taxes in the amount of P1,843,273.60, and
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on ––––––––––––
dividends paid to Munich and to the petitioners, respectively. These
TOTAL AMOUNT DUE & P1,768,799.39
assessments were protested by the petitioners through its auditors
Sycip, Gorres, Velayo and Co. COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
"On January 27, 1986, the Commissioner of Internal Revenue denied
the protest and ordered the petitioners, assessed as "Pool of ===========
Machinery Insurers," to pay deficiency income tax, interest, and 10% withholding tax at
with[h]olding tax, itemized as follows:
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
Net income per information return P3,737,370.00
14% interest from
===========
1/25/76 to 1/25/79 6,884.18
Income tax due thereon P1,298,080.00
Compromise
Add: 14% Int. fr. 4/15/76
penalty-non-filing of return 300.00
to 4/15/79 545,193.60
late payment 300.00
––––––––––––
––––––––––––
TOTAL AMOUNT DUE & P1,843,273.60
TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE ===========
COLLECTIBLE =========="
Dividend paid to Munich
The CA ruled in the main that the pool of machinery insurers was a
Reinsurance Company P3,728,412.00 partnership taxable as a corporation, and that the latter's collection
=========== of premiums on behalf of its members, the ceding companies, was
taxable income. It added that prescription did not bar the Bureau of
35% withholding tax at source due thereon P1,304,944.20 Internal Revenue (BIR) from collecting the taxes due, because "the

Taxation 1 Cases Set 2 35

taxpayer cannot be located at the address given in the information
return filed." Hence, this Petition for Review before us.
The Issues
Before this Court, petitioners raise the following issues:
"1. Whether or not the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not insure
or assume any risk in its own name, was a partnership or association
subject to tax as a corporation;
"2. Whether or not the remittances to petitioners and MUNICHRE of
their respective shares of reinsurance premiums, pertaining to their
individual and separate contracts of reinsurance, were "dividends"
subject to tax; and
"3. Whether or not the respondent Commissioner's right to assess
the Clearing House had already prescribed."
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of
Appeals that the pool is taxable as a corporation, and that the
government's right to assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that
the pool or clearing house was an informal partnership, which was
taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them "individually and
separately," and that their liability was limited to the extent of their
allocated share in the original risks thus reinsured. Hence, the pool
Taxation 1 Cases Set 2
did not act or earn income as a reinsurer. Its role was limited to its
principal function of "allocating and distributing the risk(s) arising
from the original insurance among the signatories to the treaty or the
members of the pool based on their ability to absorb the risk(s)
ceded[;] as well as the performance of incidental functions, such as
records, maintenance, collection and custody of funds, etc."
Petitioners belie the existence of a partnership in this case, because
(1) they, the reinsurers, did not share the same risk or solidary
liability; (2) there was no common fund; (3) the executive board of
the pool did not exercise control and management of its funds, unlike
the board of directors of a corporation; and (4) the pool or clearing
house "was not and could not possibly have engaged in the business
of reinsurance from which it could have derived income for itself."
The Court is not persuaded. The opinion or ruling of the Commission
of Internal Revenue, the agency tasked with the enforcement of tax
laws, is accorded much weight and even finality, when there is no
showing that it is patently wrong, particularly in this case where the
findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the
exclusive purpose of reviewing tax cases, and the Court of
Appeals. Indeed,
"[I]t 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 the nature of its functions, 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 its authority."
This Court rules that the Court of Appeals, in affirming the CTA which
had previously sustained the internal revenue commissioner,
committed no reversible error. Section 24 of the NIRC,as worded in
the year ending 1975, provides:
"SEC. 24. Rate of tax on corporations. — (a) Tax on domestic
corporations. — A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the
36
Philippines, no matter how created or organized, but not including
duly registered general co-partnership (compañias colectivas),
general professional partnerships, private educational institutions,
and building and loan associations . . . ."
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically, the
NLRC's inclusion of such entities in the tax on corporations was made
even clearer by the Tax Reform Act of 1997, which amended the Tax
Code.Pertinent provisions of the new law read as follows:
"SEC. 27. Rates of Income Tax on Domestic Corporations. —
(A) In General. — Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon the
taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined
in Section 22 (B) of this Code, and taxable under this Title as a
corporation . . . ."
"SEC. 22. Definition. — When used in this Title:
xxx xxx xxx
(B) The term 'corporation' shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas
en participacion), associations, or insurance companies, but does not
include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under
a service contract without the Government. 'General professional
partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue held
that Section 24 covered these unregistered partnerships and even
associations or joint accounts, which had no legal personalities apart
Taxation 1 Cases Set 2
from their individual members. The Court of Appeals astutely
applied Evangelista:
". . . Accordingly, a pool of individual real property owners dealing in
real estate business was considered a corporation for purposes of the
tax in Sec. 24 of the Tax Code in Evangelista v. Collector of Internal
Revenue, supra. The Supreme Court said:
'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)'"
Article 1767 of the Civil Code recognizes the creation of a contract of
partnership when "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." Its requisites
are: "(1) mutual contribution to a common stock, and (2) a joint
interest in the profits." In other words, a partnership is formed when
persons contract "to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between
themselves." Meanwhile, an association implies associates who
enter into a "joint enterprise . . . for the transaction of business."
In the case before us, the ceding companies entered into a Pool
Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of
the NIRC:
(1) The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the pool. This
common fund pays for the administration and operation expenses of
the pool.
(2) The pool functions through an executive board, which resembles
the board of directors of a corporation, composed of one
representative for each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any
insurance policy; however, its work is indispensable, beneficial and
37
economically useful to the business of the ceding companies and
Munich, because without it they would not have received their
premiums. The ceding companies share "in the business ceded to the
pool" and in the "expenses" according to a "Rules of Distribution"
annexed to the Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly
found by the CTA:
". . . The fact that the pool does not retain any profit or income does
not obliterate an antecedent fact, that of the pool being used in the
transaction of business for profit. It is apparent, and petitioners
admit, that their association or coaction was indispensable [to] the
transaction of the business. . . If together they have conducted
business, profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the members, this
is only a matter of consequence, as it implies that profit actually
resulted."
The petitioners' reliance on Pascual v. Commissioner is misplaced,
because the facts obtaining therein are not on all fours with the
present case. InPascual, there was no unregistered partnership, but
merely a co-ownership which took up only two isolated
transactions. The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a
series of transactions spanning more than ten years, as in the case
before us.
Second Issues:
Pool's Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the
ceding companies and Munich are not dividends subject to tax. They
insist that taxing such remittances contravene Sections 24 (b) (I)
and 263 of the 1977 NIRC and "would be tantamount to an illegal
double taxation, as it would result in taxing the same premium
income twice in the hands of the same taxpayer." Moreover,
petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be
Taxation 1 Cases Set 2
deemed dividends. They add that even if such remittances were
treated as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC, as well as Article 7
of paragraph 1 and Article 5 of paragraph 5 of the RP-West German
Tax Treaty.
Petitioners are clutching at straws. Double taxation means taxing the
same property twice when it should be taxed only once. That is, ". . .
taxing the same person twice by the same jurisdiction for the same
thing." In the instant case, the pool is a taxable entity distinct from
the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since
their entitlement thereto remains unproven and unsubstantiated. It
is axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, "exemptions therefrom are highly disfavored in law
and he who claims tax exemption must be able to justify his claim or
right." Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because
these were not yet in effect when the income was earned and when
the subject information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of
the NIRC,the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall ". . . be paid upon
reinsurance by any company that has already paid the tax . . . ." This
cannot be applied to the present case because, as previously
discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income
tax paid by the former as their own.
On the other hand, Section 24 (b) (1) pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding companies
which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of
the Tax Code,because the same subsection specifically
taxes dividends, the type of remittances forwarded to it by the pool.
38
Although not a signatory to the Pool Agreement, Munich is patently
an associate of the ceding companies in the entity formed, pursuant
to their reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich
shared in their income and loss. This is manifest from a reading
of Articles 3 and 10 of the Quota-Share Reinsurance Treaty
and Articles 3 and 10 of the Surplus Reinsurance Treaty. The
foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris,
and the statutory exemption claimed must be expressed in a
language too plain to be mistaken.
Finally, the petitioners' claim that Munich is tax-exempt based on the
RP-West German Tax Treaty is likewise unpersuasive, because the
internal revenue commissioner assessed the pool for corporate taxes
on the basis of the information return it had submitted for the year
ending 1975, a taxable year when said treaty was not yet in
effect. Although petitioners omitted in their pleadings the date of
effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984.
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and
collect the subject tax had prescribed. They claim that the subject
information return was filed by the pool on April 14, 1976. On the
basis of this return, the BIR telephoned petitioners on November 11,
1981, to give them notice of its letter of assessment dated March 27,
1981. Thus, the petitioners contend that the five-year statute of
limitations then provided in the NIRC had already lapsed, and that
the internal revenue commissioner was already barred by
prescription from making an assessment.
We cannot sustain the petitioners. The CA and the CTA categorically
found that the prescriptive period was tolled under then Section 333
of the NIRC, because " the taxpayer cannot be located at the address
given in the information return filed and for which reason there was
Taxation 1 Cases Set 2
delay in sending the assessment." Indeed, whether the
government's right to collect and assess the tax has prescribed
involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or
grave abuse of discretion, as in this case, this Court must not overturn
the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for
Reconsideration before the Court of Appeals that the pool changed
its address, for they stated that the pool's information return filed in
1980 indicated therein its "present address." The Court finds that this
falls short of the requirement of Section 333 of the NIRC for the
suspension of the prescriptive period. The law clearly states that the
said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolutions of the Court of
Appeals dated October 11, 1993 and November 15, 1993 are hereby
AFFIRMED. Costs against petitioners.
SO ORDERED.
[G.R. No. L-53961. June 30, 1987.]
NATIONAL DEVELOPMENT
COMPANY, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
DECISION
CRUZ, J p:
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
39
twelve ocean-going vessels. 1 The purchase price was to come from
the proceeds of bonds issued by the Central Bank.
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. 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. 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
Taxation 1 Cases Set 2
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 8: 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 promissory 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
40
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."
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. — . . .
(b) Exclusions 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:
Taxation 1 Cases Set 2
"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."
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. Any doubt
concerning this question must be resolved in favor of the taxing
power.
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-partnerships (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 equal 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
41
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 of 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:
Taxation 1 Cases Set 2
"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 remmit the
amount of 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."
The petitioner was remiss in the discharge of its obligation as the
withholding agent of the government and so should be held liable for
its omission.WHEREFORE, the appealed decision is AFFIRMED,
without any pronouncement as to costs. It is so ordered.
[G.R. No. 137377. December 18, 2001.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI
CORPORATION, respondent.
SYNOPSIS
Petitioner Commissioner of Internal Revenue assailed the decision of
the CA and the Court of Tax Appeals (CTA), ruling that respondent's
deficiency tax liabilities are deemed cancelled and extinguished upon
the respondent's availment of tax amnesty under Executive Orders
Nos. 41 and 64. Petitioner claimed the respondent is disqualified
from availing of the amnesties because the latter falls under the
exception in Sec. 4(b) of E.O. No. 41.
On appeal, the Supreme Court held for a taxpayer not to be
disqualified under Sec. 4(b) of E.O. No. 41, there must have been no
income tax cases filed in court against him when E.O. No. 41 took
effect on August 22, 1986. CTA Case No. 4109 questioning
respondent's 1985 deficiency income and contractor's tax
assessments was filed with the CTA on September 26, 1986. Insofar
as respondent's deficiency income tax is concerned, respondent did
42
not fall under the exception in Sec. 4(b) of E.O. No. 41. However,
insofar as the contractor's tax which is a tax on business covered
by E.O. No. 64 is concerned, respondent already fell under the
exception in Sec. 4(b) of E.O. Nos. 41 and 64 and was disqualified
from availing of the business tax amnesty granted therein.
SYLLABUS
1. TAXATION; AMNESTY COVERAGE UNDER E.O. NOS. 41 & 64;
PERSONS ENTITLED THERETO; EXCEPTION; CASE AT BAR. —
Petitioner's claim cannot be sustained. Section 4(b) of E.O. No. 41 is
very clear and unambiguous. It excepts from income tax amnesty
those taxpayers "with income tax cases already filed in court as of the
effectivity hereof." The point of reference is the date
of effectivity of E.O. No. 41. The filing of income tax cases in court
must have been made before and as of the date of effectivity of E.O.
No. 41. Thus, for a taxpayer not to be disqualified under Section 4(b)
there must have been no income tax cases filed in court against him
when E.O. No. 41 took efect. This is regardless of when the taxpayer
filed for income tax amnesty, provided of course he files it on or
before the deadline for filing. E.O. No. 41 took effect on August 22,
1986. CTA Case No. 4109 questioning the 1985 deficiency income,
branch profit remittance and contractor's tax assessments was filed
by respondent with the Court of Tax Appeals on September 26, 1986.
When E.O. No. 41 became effective on August 22, 1986, CTA Case No.
4109 had not yet been filed in court. Respondent corporation did not
fall under the said exception in Section 4(b), hence, respondent was
not disqualified from availing of the amnesty for income tax
under E.O. No. 41. The same ruling also applies to the deficiency
branch profit remittance tax assessment. A branch profit remittance
tax is defined and imposed in Section 24(b)(2)(ii), Title II, Chapter III
of the National Internal Revenue Code. In the tax code,this tax falls
under Title II on Income Tax. It is a tax on income. Respondent
therefore did not fall under the exception in Section 4(b) when it filed
for amnesty of its deficiency branch profit remittance tax
assessment.
2. ID.; ID.; STATUTE AMENDING A TAX LAW IS NOT GENERALLY GIVEN
RETROACTIVE EFFECT; CASE AT BAR. — By virtue of Section 8 of E.O.
No. 64, the provisions of E.O. No. 41 not contrary to or inconsistent
Taxation 1 Cases Set 2
with the amendatory act were reenacted in E.O. No. 64. Thus, Section
4 of E.O. No. 41 on the exceptions to amnesty coverage also applied
to E.O. No. 64. With respect to Section 4(b) in particular, this
provision excepts from tax amnesty coverage a taxpayer who has
"income tax cases already filed in court as of the effectivity hereof."
As to what Executive Order the exception refers to, respondent
argues that because of the words "income" and "hereof," they refer
to Executive Order No. 41. In view of the amendment introduced
by E.O. No. 64, Section 4(b) cannot be construed to refer to E.O. No.
41 and its date of effectivity. The general rule is that an amendatory
act operates prospectively. While an amendment is generally
construed as becoming a part of the original act as if it had always
been contained therein, it may not be given a retroactive effect
unless it is so provided expressly or by necessary implication and no
vested right or obligations of contract are thereby impaired. There is
nothing in E.O. No. 64 that provides that it should retroact to the date
of effectivity of E.O. No. 41, the original issuance. Neither is it
necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions
inE.O. No. 41. It supplements the original act by adding other taxes
not covered in the first. It has been held that where a statute
amending a tax law is silent as to whether it operates retroactively,
the amendment will not be given a retroactive effect so as to subject
to tax past transactions not subject to tax under the original act. In
an amendatory act, every case of doubt must be resolved against its
retroactive effect.
3. ID.; ID.; TERMS OF TAX AMNESTY MUST BE STRICTLY CONSTRUED
AGAINST THE TAXPAYER; CASE AT BAR. — E.O. Nos. 41 and 64 are tax
amnesty issuances. A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax
law. It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders
who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. If
granted, the terms of the amnesty, like that of a tax exemption, must
be construed strictly against the taxpayer and liberally in favor of the
43
taxing authority. For the right of taxation is inherent in government.
The State cannot strip itself of the most essential power of taxation
by doubtful words. He who claims an exemption (or an amnesty)
from the common burden must justify his claim by the clearest grant
of organic or state law. It cannot be allowed to exist upon a vague
implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state. In the instant case, the
vagueness in Section 4(b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term
"income tax cases" should be read as to refer to estate and donor's
taxes and taxes on business while the word "hereof," to E.O. No. 64.
Since Executive Order No. 64 took effect on November 17, 1986,
consequently, insofar as the taxes in E.O. No. 64 are concerned, the
date of effectivity referred to in Section 4(b) of E.O. No. 41 should be
November 17, 1986. Respondent filed CTA Case No. 4109 on
September 26, 1986. When E.O. No. 64 took effect on November 17,
1986, CTA Case No. 4109 was already filed and pending in court. By
the time respondent filed its supplementary tax amnesty return on
December 15, 1986, respondent already fell under the exception in
Section 4(b) of E.O. Nos. 41 and 64 and was disqualified from availing
of the business tax amnesty granted therein.
DECISION I.
PUNO, J p:
In this petition for review, the Commissioner of Internal Revenue
assails the decision dated January 15, 1999 of the Court of Appeals in
CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996
of the Court of Tax Appeals in CTA Case No. 4109. The tax court
ordered the Commissioner of Internal Revenue to desist from
collecting the 1985 deficiency income, branch profit remittance and
contractor's taxes from Marubeni Corporation after finding the latter
to have properly availed of the tax amnesty under Executive Orders
Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is Add:
a foreign corporation organized
and existing under the laws of Japan. It is engaged in general import
and export trading, financing and the construction business. It is duly
registered to engage in such business in the Philippines and maintains
a branch office in Manila.
Taxation 1 Cases Set 2
Sometime in November 1985, petitioner Commissioner of Internal
Revenue issued a letter of authority to examine the books of accounts
of the Manila branch office of respondent corporation for the fiscal
year ending March 1985. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts
in the Philippines, both of which were completed in 1984. One of the
contracts was with the National Development Company (NDC) in
connection with the construction and installation of a wharf/port
complex at the Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte. The other contract was with
the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte
Industrial Development Estate.
On March 1, 1986, petitioner's revenue examiners recommended an
assessment for deficiency income, branch profit remittance,
contractor's and commercial broker's taxes. Respondent questioned
this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated
August 15, 1986 from petitioner assessing respondent several
deficiency taxes. The assessed deficiency internal revenue taxes,
inclusive of surcharge and interest, were as follows: HAIDcE
DEFICIENCY INCOME TAX
FY ended March 31, 1985
Undeclared gross income (Philphos
and NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
———————
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
50% surcharge 84,636,108.50
20% int. p.a.fr. 7-15-85
to 8-15-86 36,675,646.90
44
 Add: ——————— 50% surcharge for non-declaration 19,345,396.00
TOTAL AMOUNT DUE P290,583,972.40 20% surcharge for late payment 9,672,698.00
============ ———————
DEFICIENCY BRANCH PROFIT Sub-total 67,708,886.00
REMITTANCE
Add: 20% int. p.a. fr. 4-21-85
TAX
FY ended March 31, 1985 to 8-15-86 17,854,739.46
Undeclared gross income from ———————
Philphos and NDC constructionP483,634,905.57 TOTAL AMOUNT DUE P85,563,625.46
projects
============
Less: Income tax thereon 169,272,217.00
IV. DEFICIENCY COMMERCIAL BROKER'S
———————
TAX
Amount subject to Tax 314,362,688.57 FY ended March 31, 1985
——————— Undeclared share from commission income
Tax due thereon 47,154,403.00 (denominated as "subsidy from Home
50% surcharge 23,577,201.50 Office") P24,683,114.50
20% int. p.a. fr. 4-26-85 ———————
to 8-15-86 12,305,360.66 Tax due thereon 1,628,569.00
Add: ——————— 50% surcharge for non-declaration 814,284.50
TOTAL AMOUNT DUE P83,036,965.16 20% surcharge for late payment 407,142.25
============ ———————
DEFICIENCY CONTRACTOR'S TAX Sub-total 2,849,995.75
Add: FY ended March 31, 1985 20% int. p.a. fr. 4-21-85
Undeclared gross receipts/gross income from to 8-15-86 751,539.98
Philphos and NDC constructionP967,269,811.14 ———————
projects
TOTAL AMOUNT DUE P3,600,535.68
———————
============
Contractor's tax due thereon (4%) 38,690,792.00

Taxation 1 Cases Set 2 45

The 50% surcharge was imposed for your client's failure to report for
tax purposes the aforesaid taxable revenues while the 25% surcharge
was imposed because of your client's failure to pay on time the above
deficiency percentage taxes.
xxx xxx xxx."
Petitioner found that the NDC and Philphos contracts were made on
a "turn-key" basis and that the gross income from the two projects
amounted to P967,269,811.14. Each contract was for a piece of work
and since the projects called for the construction and installation of
facilities in the Philippines, the entire income therefrom constituted
income from Philippine sources, hence, subject to internal revenue
taxes. The assessment letter further stated that the same was
petitioner's final decision and that if respondent disagreed with it,
respondent may file an appeal with the Court of Tax Appeals within
thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review
with the Court of Tax Appeals. The first petition, CTA Case No. 4109,
questioned the deficiency income, branch profit remittance and
contractor's tax assessments in petitioner's assessment letter. The
second, CTA Case No. 4110, questioned the deficiency commercial
broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 declaring a
one-time amnesty covering unpaid income taxes for the years 1981
to 1985 was issued. Under this E.O., a taxpayer who wished to avail
of the income tax amnesty should, on or before October 31, 1986: (a)
file a sworn statement declaring his net worth as of December 31,
1985; (b) file a certified true copy of his statement declaring his net
worth as of December 31, 1980 on record with the Bureau of Internal
Revenue (BIR), or if no such record exists, file a statement of said net
worth subject to verification by the BIR; and (c) file a return and pay
a tax equivalent to ten per cent (10%) of the increase in net worth
from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax
amnesty return dated October 30, 1986 and attached thereto its
sworn statement of assets and liabilities and net worth as of Fiscal
Taxation 1 Cases Set 2
Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of P2,891,273.00
equivalent to ten percent (10%) of its net worth increase between
1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from
October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was
expanded by Executive Order (E.O.) No. 64. In addition to the income
tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O.
No. 64 3 included estate and donor's taxes under Title III and the tax
on business under Chapter II, Title V of the National Internal Revenue
Code, also covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges underE.O. No. 41 were
extended to the foregoing tax liabilities, and the period within which
the taxpayer could avail of the amnesty was extended to December
15, 1986. Those taxpayers who already filed their amnesty return
under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an
amended return and paying an additional 5% on the increase in net
worth to cover business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January
31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty
return under the benefit of E.O. No. 64 and paid a further amount of
P1,445,637.00 to the BIR equivalent to five percent (5%) of the
increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the
Court of Tax Appeals rendered a decision in CTA Case No. 4109. The
tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes
subject of said case as deemed cancelled and withdrawn. The Court
of Tax Appeals disposed of as follows:
46
"WHEREFORE, the respondent Commissioner of Internal Revenue is
hereby ORDERED to DESIST from collecting the 1985 deficiency taxes
it had assessed against petitioner and the same are deemed
considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order
No. 41, as amended."
Petitioner challenged the decision of the tax court by filing CA-G.R.
SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and
affirmed the decision of the Court of Tax Appeals. Hence, this
recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the
Decision of the Court of Tax Appeals which ruled that herein
respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos.
41 and 64.
(2) Whether or not respondent is liable to pay the income, branch
profit remittance, and contractor's taxes assessed by petitioner."
The main controversy in this case lies in the interpretation of the
exception to the amnesty coverage of E.O. Nos. 41 and 64. There are
three (3) types of taxes involved herein — income tax, branch profit
remittance tax and contractor's tax. These taxes are covered by the
amnesties granted by E.O. Nos. 41 and 64. Petitioner claims,
however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4
(b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of
the amnesty granted thereunder, viz:
"Sec. 4. Exceptions. — The following taxpayers may not avail
themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and
14;
Taxation 1 Cases Set 2
b) Those with income tax cases already filed in Court as of the
effectivity hereof;
c) Those with criminal cases involving violations of the income tax law
already filed in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National
Internal Revenue Code, as amended, insofar as the said liabilities are
concerned;
e) Those with tax cases pending investigation by the Bureau of
Internal Revenue as of the effectivity hereof as a result of information
furnished under Section 316 of the National Internal Revenue Code,
as amended;
f) Those with pending cases involving unexplained or unlawfully
acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal
Exactions and Transactions) and Chapter Four (Malversation of Public
Funds and Property) of the Revised Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax
amnesty on October 30, 1986, CTA Case No. 4109 had already been
filed and was pending; before the Court of Tax Appeals. Respondent
therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is
very clear and unambiguous. It excepts from income tax amnesty
those taxpayers "with income tax cases already filed in court as of the
effectivity hereof." The point of reference is the date
of effectivity of E.O. No. 41. The filing of income tax cases in court
must have been made before and as of the date of effectivity of E.O.
No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b)
there must have been no income tax cases filed in court against him
when E.O. No. 41 took effect. This is regardless of when the taxpayer
filed for income tax amnesty, provided of course he files it on or
before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit remittance
and contractor's tax assessments was filed by respondent with the
Court of Tax Appeals on September 26, 1986. When E.O. No.
41 became effective on August 22, 1986, CTA Case No. 4109 had not
yet been filed in court. Respondent corporation did not fall under the
said exception in Section 4 (b), hence, respondent was not
47
disqualified from availing of the amnesty for income tax under E.O.
No. 41.
The same ruling also applies to the deficiency branch profit
remittance tax assessment. A branch profit remittance tax is defined
and imposed inSection 24 (b) (2) (ii), Title II, Chapter III of the National
Internal Revenue Code. 6 In the tax code,this tax falls under Title II on
Income Tax. It is a tax on income. Respondent therefore did not fall
under the exception in Section 4 (b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractor's tax
assessment and respondent's availment of the amnesty under E.O.
No. 64. E.O. No. 64expanded the coverage of E.O. No. 41 by including
estate and donor's taxes and tax on business. Estate and donor's
taxes fall under Title III of the Tax Codewhile business taxes fall under
Chapter II, Title V of the same. The contractor's tax is provided
in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on
business.
When E.O. No. 64 took effect on November 17, 1986, it did not
provide for exceptions to the coverage of the amnesty for business,
estate and donor's taxes. Instead, Section 8 of E.O. No. 64 provided
that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which
are not contrary to or inconsistent with this amendatory Executive
Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No.
41 not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has "income tax cases already filed
in court as of the effectivity hereof." As to what Executive Order the
exception refers to, respondent argues that because of the words
"income" and "hereof," they refer to Executive Order No. 41.
Taxation 1 Cases Set 2
In view of the amendment introduced by E.O. No. 64, Section 4 (b)
cannot be construed to refer to E.O. No. 41 and its date of effectivity.
The general rule is that an amendatory act operates
prospectively. While an amendment is generally construed as
becoming a part of the original act as if it had always been contained
therein, it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired.
There is nothing in E.O. No. 64 that provides that it should retroact to
the date of effectivity of E.O. No. 41, the original issuance. Neither is
it necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions
in E.O. No. 41. It supplements the original act by adding other taxes
not covered in the first. It has been held that where a statute
amending a tax law is silent as to whether it operates retroactively,
the amendment will not be given a retroactive effect so as to subject
to tax past transactions not subject to tax under the original act. In
an amendatory act, every case of doubt must be resolved against its
retroactive effect.
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
amnesty is a general pardon or intentional overlooking by the State
of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law. If granted, the
terms of the amnesty, like that of a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the taxing
authority. For the right of taxation is inherent in government. The
State cannot strip itself of the most essential power of taxation by
doubtful words. He who claims an exemption (or an amnesty) from
the common burden must justify his claim by the clearest grant of
organic or state law. It cannot be allowed to exist upon a vague
48
implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.
In the instant case, the vagueness in Section 4 (b) brought about
by E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term "income tax cases" should be read as to refer to
estate and donor's taxes and taxes on business while the word
"hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on
November 17, 1986, consequently, insofar as the taxes in E.O. No.
64 are concerned, the date of effectivity referred to in Section 4 (b)
of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986.
When E.O. No. 64 took effect on November 17, 1986, CTA Case No.
4109 was already filed and pending in court. By the time respondent
filed its supplementary tax amnesty return on December 15, 1986,
respondent already fell under the exception in Section 4 (b) of E.O.
Nos. 41 and 64 and was disqualified from availing of the business tax
amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail
of the amnesty under the two Executive Orders, it is still not liable for
the deficiency contractor's tax because the income from the projects
came from the "Offshore Portion" of the contracts. The two contracts
were divided into two parts, i.e., the Onshore Portion and the
Offshore Portion. All materials and equipment in the contract under
the "Offshore Portion" were manufactured and completed in Japan,
not in the Philippines, and are therefore not subject to Philippine
taxes.
Before going into respondent's arguments, it is necessary to discuss
the background of the two contracts, examine their pertinent
provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the
NDC, as the corporate investment arm of the Philippine Government,
established the Philphos to engage in the large-scale manufacture of
phosphatic fertilizer for the local and foreign markets. The Philphos
plant complex which was envisioned to be the largest phosphatic
Taxation 1 Cases Set 2
fertilizer operation in Asia, and among the largest in the world,
covered an area of 180 hectares within the 435-hectare Leyte
Industrial Development Estate in the municipality of Isabel, province
of Leyte.
In 1982, the NDC opened for public bidding a project to construct and
install a modern, reliable, efficient and integrated wharf/port
complex at the Leyte Industrial Development Estate. The wharf/port
complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was to
be specifically adapted to the site for the handling of phosphate rock,
bagged or bulk fertilizer products, liquid materials and other products
of Philphos, the Philippine Associated Smelting and Refining
Corporation (Pasar), and other industrial plants within the Estate.
The bidding was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and
respondent entered into an agreement entitled "Turn-Key Contract
for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corporation." The
Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems,
fuel oil depot, utilities systems, storage and service buildings, offsite
facilities, harbor service vessels, navigational aid system, fire-fighting
system, area lighting, mobile equipment, spare parts and other
related facilities. The scope of the works under the contract covered
turn-key supply, which included grants of licenses and the transfer of
technology and know-how, and:
". . . the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing
and commissioning of the Wharf-Port Complex as set forth in Annex
I of this Contract, as well as the coordination of tie-ins at boundaries
and schedule of the use of a part or the whole of the Wharf/Port
Complex through the Owner, with the design and construction of
other facilities around the site. The scope of works shall also include
any activity, work and supply necessary for, incidental to or
appropriate under present international industrial port practice, for
the timely and successful implementation of the object of this
49
Contract, whether or not expressly referred to in the
abovementioned Annex I."
The contract price for the wharf/port complex was
¥12,790,389,000.00 and P44,327,940.00. In the contract, the price in
Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price
in Philippine currency was referred to as the Philippine Pesos Portion.
The Japanese Yen Portions I and II were financed in two (2) ways: (a)
by yen credit loan provided by the Overseas Economic Cooperation
Fund (OECF); and (b) by supplier's credit in favor of Marubeni from
the Export-Import Bank of Japan. The OECF is a Fund under the
Ministry of Finance of Japan extended by the Japanese government
as assistance to foreign governments to promote economic
development. The OECF extended to the Philippine Government a
loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port
Development Project and authorized the NDC to implement the
same. The other type of financing is an indirect type where the
supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank
of Japan to advance payment to its sub-contractors.
Under the financing schemes, the Japanese Yen Portions I and II and
the Philippine Pesos Portion were further broken down and
subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the corresponding
materials, equipment and services were contained in a list attached
as Annex III to the contract.
A few months after execution of the NDC contract, Philphos opened
for public bidding a project to construct and install two ammonia
storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on
May 2, 1982, Philphos and respondent corporation entered into an
agreement entitled "Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation." The object of the contract was to establish
and place in operating condition a modern, reliable, efficient and
integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia and for the
Taxation 1 Cases Set 2
delivery of ammonia to an integrated fertilizer plant adjacent to the
storage complex and to vessels at the dock. The storage complex was
to consist of ammonia storage tanks, refrigeration system, ship
unloading system, transfer pumps, ammonia heating system, fire-
fighting system, area lighting, spare parts, and other related
facilities. The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of
licenses and transfer of technology and know-how, and:
". . . the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing
and commissioning of the Ammonia Storage Complex as set forth in
Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and
construction of other facilities at and around the Site. The scope of
works shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial
practice, for the timely and successful implementation of the object
of this Contract, whether or not expressly referred to in the
abovementioned Annex I.”
The contract price for the project was ¥3,255,751,000.00 and
P17,406,000.00. Like the NDC contract, the price was divided into
three portions. The price in Japanese currency was broken down into
the Japanese Yen Portion I and Japanese Yen Portion II while the price
in Philippine currency was classified as the Philippine Pesos Portion.
Both Japanese Yen Portions I and II were financed by supplier's credit
from the Export-Import Bank of Japan. The price stated in the three
portions were further broken down into the corresponding materials,
equipment and services required for the project and their individual
prices. Like the NDC contract, the breakdown in the Philphos contract
is contained in a list attached to the latter as Annex III.
The division of the price into Japanese Yen Portions I and II and the
Philippine Pesos Portion under the two contracts corresponds to the
two parts into which the contracts were classified — the Foreign
Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign
50
Offshore Portion. Japanese Yen Portion II and the Philippine Pesos
Portion correspond to the Philippine Onshore Portion.
Under the Philippine Onshore Portion, respondent does not deny its
liability for the contractor's tax on the income from the two projects.
In fact respondent claims, which petitioner has not denied, that the
income it derived from the Onshore Portion of the two projects had
been declared for tax purposes and the taxes thereon already paid to
the Philippine government. It is with regard to the gross receipts
from the Foreign Offshore Portion of the two contracts that the
liabilities involved in the assessments subject of this case arose.
Petitioner argues that since the two agreements are turn-key, they
call for the supply of both materials and services to the client, they
are contracts for a piece of work and are indivisible. The situs of the
two projects is in the Philippines, and the materials provided and
services rendered were all done and completed within the territorial
jurisdiction of the Philippines. Accordingly, respondent's entire
receipts from the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total gross
receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co.
A contractor's tax is imposed in the National Internal Revenue
Code (NIRC)as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and
others. —A contractor's tax of four percent of the gross receipts is
hereby imposed on proprietors or operators of the following business
establishments and/or persons engaged in the business of selling or
rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors,
as defined in Republic Act No. 4566;
xxx xxx xxx
(q) Other independent contractors. The term "independent
contractors" includes persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax
under the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical
Taxation 1 Cases Set 2
or mental faculties of such contractors or their employees. It does not
include regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives, and
which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
xxx xxx xxx."
Under the afore-quoted provision, an independent contractor is a
person whose activity consists essentially of the sale of all kinds of
services for a fee, regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word
"contractor" refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting
himself to control as to the petty details.
A contractor's tax is a tax imposed upon the privilege of engaging in
business. It is generally in the nature of an excise tax on the exercise
of a privilege of selling services or labor rather than a sale on
products; and is directly collectible from the person exercising the
privilege. Being an excise tax, it can be levied by the taxing authority
only when the acts, privileges or business are done or performed
within the jurisdiction of said authority. Like property taxes, it cannot
be imposed on an occupation or privilege outside the taxing district.
In the case at bar, it is undisputed that respondent was an
independent contractor under the terms of the two subject
contracts. Respondent, however, argues that the work therein were
not all performed in the Philippines because some of them were
completed in Japan in accordance with the provisions of the
contracts.
An examination of Annex III to the two contracts reveals that the
materials and equipment to be made and the works and services to
be performed by respondent are indeed classified into two. The first
part, entitled "Breakdown of Japanese Yen Portion I" provides:
51

"Japanese Yen Portion I of the Contract Price has been subdivided
according to discrete portions of materials and equipment which will
be shipped to Leyte as units and lots. This subdivision of price is to be
used by owner to verify invoice for Progress Payments under Article
19.2.1 of the Contract. The agreed subdivision of Japanese Yen
Portion I is as follows:
xxx xxx xxx."
The subdivision of Japanese Yen Portion I covers materials and
equipment while Japanese Yen Portion II and the Philippine Pesos
Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the
supplies for the project are listed under Portion I while labor and
other supplies are listed under Portion II and the Philippine Pesos
Portion. Mr. Takeshi Hojo, then General Manager of the Industrial
Plant Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of the two
projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan. The
machines and equipment were designed, engineered and fabricated
by Japanese firms sub-contracted by Marubeni from the list of sub-
contractors in the technical appendices to each contract. Marubeni
sub-contracted a majority of the equipment and supplies to Kawasaki
Steel Corporation which did the design, fabrication, engineering and
manufacture thereof; Yashima & Co. Ltd. which manufactured the
mobile equipment; Bridgestone which provided the rubber fenders
of the mobile equipment; and B.S. Japan for the supply of radio
equipment. The engineering and design works made by Kawasaki
Steel Corporation included the lay-out of the plant facility and
calculation of the design in accordance with the specifications given
by respondent. All sub-contractors and manufacturers are Japanese
corporations and are based in Japan and all engineering and design
works were performed in that country.
The materials and equipment under Portion I of the NDC Port Project
is primarily composed of two (2) sets of ship unloader and loader;
several boats and mobile equipment. The ship unloader unloads
bags or bulk products from the ship to the port while the ship loader
Taxation 1 Cases Set 2
loads products from the port to the ship. The unloader and loader are
big steel structures on top of each is a large crane and a compartment
for operation of the crane. Two sets of these equipment were
completely manufactured in Japan according to the specifications of
the project. After manufacture, they were rolled on to a barge and
transported to Isabel, Leyte. Upon reaching Isabel, the unloader and
loader were rolled off the barge and pulled to the pier to the spot
where they were installed. Their installation simply consisted of
bolting them onto the pier.
Like the ship unloader and loader, the three tugboats and a line boat
were completely manufactured in Japan. The boats sailed to Isabel
on their own power. The mobile equipment, consisting of three to
four sets of tractors, cranes and dozers, trailers and forklifts, were
also manufactured and completed in Japan. They were loaded on to
a shipping vessel and unloaded at the Isabel Port. These pieces of
equipment were all on wheels and self-propelled. Once unloaded at
the port, they were ready to be driven and perform what they were
designed to do.
In addition to the foregoing, there are other items listed in Japanese
Yen Portion I in Annex III to the NDC contract. These other items
consist of supplies and materials for five (5) berths, two (2) roads, a
causeway, a warehouse, a transit shed, an administration building
and a security building. Most of the materials consist of steel sheets,
steel pipes, channels and beams and other steel structures,
navigational and communication as well as electrical equipment.
In connection with the Philphos contract, the major pieces of
equipment supplied by respondent were the ammonia storage tanks
and refrigeration units. The steel plates for the tank were
manufactured and cut in Japan according to drawings and
specifications and then shipped to Isabel. Once there, respondent's
employees put the steel plates together to form the storage tank. As
to the refrigeration units, they were completed and assembled in
Japan and thereafter shipped to Isabel. The units were simply
installed there. Annex III to the Philphos contract lists down under
the Japanese Yen Portion I the materials for the ammonia storage
52
tank, incidental equipment, piping facilities, electrical and
instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were
inspected and tested in Japan prior to shipment in accordance with
the terms of the contracts. The inspection was made by
representatives of respondent corporation, of NDC and Philphos.
NDC, in fact, contracted the services of a private consultancy firm to
verify the correctness of the tests on the machines and
equipment while Philphos sent a representative to Japan to inspect
the storage equipment.
The sub-contractors of the materials and equipment under Japanese
Yen Portion I were all paid by respondent in Japan. In his deposition
upon oral examination, Kenjiro Yamakawa, formerly the Assistant
General Manager and Manager of the Steel Plant Marketing
Department, Engineering & Construction Division, Kawasaki Steel
Corporation, testified that the equipment and supplies for the two
projects provided by Kawasaki under Japanese Yen Portion I were
paid by Marubeni in Japan. Receipts for such payments were duly
issued by Kawasaki in Japanese and English. Yashima & Co. Ltd. and
B.S. Japan were likewise paid by Marubeni in Japan.
Between Marubeni and the two Philippine corporations, payments
for all materials and equipment under Japanese Yen Portion I were
made to Marubeni by NDC and Philphos also in Japan. The NDC,
through the Philippine National Bank, established letters of credit in
favor of respondent through the Bank of Tokyo. The letters of credit
were financed by letters of commitment issued by the OECF with the
Bank of Tokyo. The Bank of Tokyo, upon respondent's submission of
pertinent documents, released the amount in the letters of credit in
favor of respondent and credited the amount therein to respondent's
account within the same bank.
Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and
control of testing and commissioning, coordination. . . " of the two
projects involved two taxing jurisdictions. These acts occurred in two
countries — Japan and the Philippines. While the construction and
Taxation 1 Cases Set 2
installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC
project and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished products
when shipped to the Philippines. The other construction supplies
listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not
finished products when shipped to the Philippines. They, however,
were likewise fabricated and manufactured by the sub-contractors in
Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal
Revenue v. Engineering Equipment & Supply Co is not in point. In that
case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment
designed, supplied and installed centralized air-conditioning systems
for clients who contracted its services. Engineering, however, did not
manufacture all the materials for the air-conditioning system. It
imported some items for the system it designed and installed. The
issues in that case dealt with services performed within the local
taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other
issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP
No. 42518 is affirmed.
SO ORDERED.
53

[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.
SYLLABUS
1. TAXATION; INCOME TAX; REINSURANCE PREMIUMS CEDED TO
FOREIGN REINSURERS SUBJECT TO WITHHOLDING TAX. —
Reinsurance premiums on local risks ceded by domestic insurers to
foreign reinsurers not doing business in the Philippines are subject to
withholding tax.
2. ID.; ID.; REINSURANCE PREMIUMS CEDED TO FOREIGN
REINSURERS CONSIDERED INCOME FROM PHILIPPINE SOURCES. —
Where the reinsurance contracts show that the activities that
constituted the undertaking to reinsure a domestic insurer against
losses arising from the original insurances in the Philippines were
performed in the Philippines, the reinsurance premiums are
considered as coming from sources within the Philippines and are
subject to Philippine Income Tax.
3. ID.; ID.; ID.; PLACE OF ACTIVITY CREATING INCOME CONTROLLING.
— 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.
4. ID.; ID.; SECTION 37 OF TAX CODE NOT ALL INCLUSIVE
ENUMERATION. — Section 37 of the Tax Code 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.
5. ID.; ID.; NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS
AGENTS. — The defense of reliance in good faith on rulings of the
Commissioner of Internal Revenue requiring no withholding of the
Taxation 1 Cases Set 2
tax due on reinsurance premiums may free the taxpayer from the
payment of surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate it
from liability to pay such withholding tax. The Government is not
estopped from collecting taxes by the mistakes or errors of its agents.
6. ID.; ID.; WITHHOLDING TAX ON REINSURANCE PREMIUMS
COMPUTED ON TOTAL AMOUNT CEDED. — The withholding tax on
reinsurance premiums should be computed on the total amount
ceded instead of on the amount actually remitted to foreign
reinsurers. Sections 53 and 54 of the Tax Code allow no deduction
from the income therein enumerated in determining the amount to
be withheld. Accordingly, in computing the withholding tax due on
the reinsurance premiums no deduction shall be recognized.
DECISION
BENGZON, J.P., J p:
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 Compañia de Seguros, La Union y El Fenix Español, Overseas
Assurances Corp., Ltd., Sociedad Anonima de Reaseguros Alianza,
Tokio Marine & 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 insurances 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 reinsurance 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 were entered, and entry therein was binding upon
54
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 filed 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% P187,411.00
25% surcharge 46,853.00
Compromise for non-filing of withholding
income tax return 100.00
Taxation 1 Cases Set 2
—————
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 maintains 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 losses 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 reinsurers, localizing in the Philippines the actual cession
of the risks and premiums and assumption of the reinsurance
55
undertaking by the foreign reinsurers. Taxes on premiums imposed
by Section 255 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 laws.
Section 24 of the Tax Code subjects foreignn 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 implies continuity and progression of
transactions 2 whileactivity 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.
Taxation 1 Cases Set 2
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.
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 improvements 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 it from the payment of
surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate it from liability
to pay such withholding tax. The Government is not estopped from
collecting taxes by the mistakes or errors of its agents.
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 Sections 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-19392, April 14, 1965.
56
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 corporation 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) Non-resident aliens. — All persons, corporations and general
copartnerships (companias colectivas), in whatever 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 non-resident 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 equal
to twelve per centum hereof: Provided, That no such deduction 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-fiveper 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
Taxation 1 Cases Set 2
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.
Accordingly, in computing the withholding tax due on the reinsurance
premiums 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 judgment becomes final, there shall
be collected a surcharge of 5% on the amount unpaid, plus interest
at the rate of 1% a month from the date of delinquency to the date
of payment, provided that the maximum amount that may be
collected as interest shall not exceed the amount corresponding to a
period of three (3) years. With costs against petitioner.
[G.R. No. L-19392. April 14, 1965.]
ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET
AL., petitioners, vs. THE COLLECTOR (NOW COMMISSIONER) OF
INTERNAL REVENUE, respondent.
SYLLABUS
1. TAXATION; INSURANCE; REINSURANCE PREMIUMS REMITTED TO
FOREIGN INSURANCE COMPANIES TAXABLE WITHIN PHILIPPINES. —
The portions of premiums earned from insurance locally
underwritten by domestic corporations, ceded to and received by
non-resident foreign reinsurance companies, through a non-resident
foreign insurance broker, pursuant to reinsurance contracts signed
by the reinsurers abroad but signed by the domestic corporation in
the Philippines, are subject to income tax locally.
57
2. ID.; ID.; SUBJECT TO WITHHOLDING TAX. — The reinsurance
premiums remitted by local insurance companies to foreign re-
insurance companies are subject to withholding tax on income under
Sections 53 and 54 of the National Internal Revenue Code.
3. ID.; INCOME FROM SOURCES WITHIN THE PHILIPPINES;
REINSURANCE PREMIUMS. — Reinsurance premiums remitted by
domestic insurance corporation to foreign reinsurance companies
are considered income of the latter derived from sources within the
Philippines.
4. ID.; PREMIUMS UNDER SECTION 53 OF TAX CODE INCLUDE ALL
PREMIUMS CONSTITUTING INCOME. — Since Section 53 of the Tax
Code subjects to withholding tax various specified income, among
them, "premiums, the generic connotation of each and every word
or phrase composing the enumeration in subsection (b) thereof is
income. Perforce, the word "premiums", which is neither qualified
nor defined by the law itself, should mean income and should include
all premiums constituting income, whether they be insurance or
reinsurance premiums.
5. ID.; REINSURANCE PREMIUMS CONSIDERED DETERMINABLE AND
PERIODICAL INCOME. — Under Section 53 of the Tax Code,
reinsurance premiums are determinable and periodical income:
determinable, because they can be calculated accurately on the basis
of the reinsurance contracts; periodical, inasmuch as they were
earned and remitted from time to time.
6. ID.; PRINCIPLE OF LEGISLATIVE PRE-ENACTMENT; WHEN NOT
APPLICABLE. — The principle of legislative re-enactment is not
applicable where the sections of the law in question were not re-
enacted but merely amended and the administrative rulings were
merely contained in letters to taxpayers and never published, and
were not regulations to implement a law but only opinions on queries
submitted.
7. COURTS; APPEALS; DISQUALIFICATION OF TRIAL JUDGE MAY NOT
BE RAISED FOR FIRST TIME ON APPEAL. — Where appellants, instead
of asking for the trial judge's disqualification by raising their objection
Taxation 1 Cases Set 2
in the lower court, are content to raise it for the first before the
Supreme Court, it is held that they may not be heard to complain on
this point after the trial judge has given his opinion on the merits of
the case.
DECISION
BENGZON, J. P., J p:
In 1950 the Commonwealth Insurance Co., a domestic corporation,
entered into reinsurance contracts with 32 British insurance
companies not engaged in trade or business in the Philippines,
whereby the former agreed to cede to them a portion of the
premiums on insurance on fire, marine and other risks it has
underwritten in the Philippines. Alexander Howden & Co., Ltd., also
a British corporation not engaged in business in this country,
represented the aforesaid British insurance companies. The
reinsurance contracts were prepared and signed by the foreign
reinsurers in England and sent to Manila where Commonwealth
Insurance Co. signed them.
Pursuant to the aforesaid contracts, Commonwealth Insurance Co.,
in 1951, remitted P798,297.47 to Alexander Howden & Co., Ltd., as
reinsurance premiums. In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed in April 1952 an income tax return
declaring the sum of P798,297.47, with accrued interest thereon in
the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross
income for calendar year 1951. It also paid the Bureau of Internal
Revenue P66,112.00 as income tax thereon.
On May 12, 1954, within the two-year period provided for by law,
Alexander Howden & Co., Ltd., fled with the Bureau of Internal
Revenue a claim for refund of the P66,112.00, later reduced to
P65,115.00, because Alexander Howden & Co., Ltd., agreed to the
payment of P997.00 as income tax on the P4,985.77 accrued interest.
A ruling of the Commissioner of Internal Revenue, dated December
8, 1953 was invoked, stating that it exempted from withholding tax
reinsurance premiums received from domestic insurance companies
by foreign insurance companies not authorized to do business in the
Philippines. Subsequently, Alexander Howden & Co., Ltd. instituted
58
an action in the Court of First Instance of Manila for the recovery of
the aforesaid amount claimed. Pursuant to Section 22 of Republic Act
1125 the case was certified to the Court of Tax Appeals. On
November 24, 1961, the Tax Court denied the claim.
Plaintiffs have appealed, thereby squarely raising the following
issues: (1) Are portions of premiums earned from insurances locally
underwritten by a domestic corporation, ceded to and received by
non- resident foreign reinsurance companies, thru a non-resident
foreign insurance broker, pursuant to reinsurance contracts signed
by the reinsurers abroad but signed by the domestic corporation in
the Philippines, subject to income tax or not? (2) If subject thereto,
may or may not the income tax on reinsurance premiums be withheld
pursuant to Sections 53 and 54 of the National Internal Revenue
Code?
Section 24 of the National Internal Revenue Code subjects to tax a
non-resident foreign corporation's income from sources within the
Philippines. The first issue therefore hinges on whether or not the
reinsurance premiums in question came from sources within the
Philippines.
Appellants would impress upon this Court that the reinsurance
premiums came from sources outside the Philippines, for these
reasons: (1) The contracts of reinsurance, out of which the
reinsurance premiums were earned, were prepared and signed
abroad, so that their situs lies outside the Philippines; (2) The
reinsurers, not being engaged in business in the Philippines, received
the reinsurance premiums as income from their business conducted
in England and, as such, taxable in England; and, (3) Section 37 of the
Tax Code, enumerating what are income from sources within the
Philippines, does not include reinsurance premiums.
The source of an income is the property, activity or service that
produced the income. 1 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.
Taxation 1 Cases Set 2
In the first place, the reinsured, the liabilities insured and the risks
originally underwritten by Commonwealth Insurance Co., upon which
the reinsurance premiums and indemnity were based, were all
situated in the Philippines.
Secondly, contrary to appellants' view, the reinsurance contracts
were perfected in the Philippines, for Commonwealth Insurance Co.
signed them last in Manila. The American cases cited are inapplicable
to this case because in all of them the reinsurance contracts were
signed outside the jurisdiction of the taxing State. And, thirdly, the
parties to the reinsurance contracts in question evidently intended
Philippine law to govern. Article 11 thereof provided for arbitration
in Manila, according to the laws of the Philippines, of any dispute
arising between the parties in regard to the interpretation of said
contracts or rights in respect of any transaction involved.
Furthermore, the contracts provided for the use of Philippine
currency as the medium of exchange and for the payment of
Philippine taxes.
Appellants should not confuse activity that creates income
with business in the course of which an income is realized. An activity
may consist of a single act; while business implies continuity of
transactions. 2 An income may be earned by a corporation in the
Philippines although such corporation conducts all
itsbusiness abroad. Precisely, Section 24 of the Tax Code does not
require a foreign corporation to be engaged in business in the
Philippines, in order for its income from sources within the
Philippines to be taxable. It subjects foreign corporations not doing
business in the Philippines to tax for income from sources within the
Philippines. If by source of income is meant the business of the
taxpayer, foreign corporations not engaged in business in the
Philippines would be exempt from taxation on their income from
sources within the Philippines.
Furthermore, as used in our income tax law, "income" refers to the
flow of wealth. 3 Such flow, in the instant case, proceeded from the
Philippines. Such income enjoyed the protection of the Philippine
government. As wealth flowing from within the taxing jurisdiction of
the Philippines and in consideration for protection accorded it by the
59
Philippines, said income should properly share the burden of
maintaining the government.
Appellants further contend that reinsurance premiums not being
among those mentioned in Section 37 of the Tax Code as income
from sources within the Philippines, the same should not be treated
as such. Section 37, however, is not an all-inclusive enumeration. It
states that "the following items of gross income shall be treated as
gross income from sources within the Philippines". It does not state
or imply that an income not listed therein is necessarily from sources
outside the Philippines.
As to appellants, contention that reinsurance premiums constitute
"gross receipts" instead of "gross income", not subject to income tax,
suffice it to say that, as correctly observed by the Court of Tax
Appeals, "gross receipts" of amounts that do not constitute return of
capital, such as reinsurance premiums, are part of the gross income
of a taxpayer. At any rate, the tax actually collected in this case was
computed not on the basis of gross premium receipts but on the net
premium income that is, after deducting general expenses, payment
of policies and taxes.
The reinsurance premiums in question being taxable, we turn to the
issues whether or not they are subject to withholding tax under
Section 54 in relation to Section 53 of the Tax Code.
Subsection (b) of Section 53 subjects to withholding tax the following:
interest, dividends, rents, salaries, wages, premiums, annuities,
compensation, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income of any
non-resident alien individual not engaged in trade or business within
the Philippines and not having any office or place of business therein.
Section 54, by reference, applies this provision to foreign
corporations not engaged in trade or business in the Philippines.
Appellants maintain that reinsurance premiums are not "premiums"
at all as contemplated by Subsection (b) of Section 53; that they are
not within the scope of "other fixed or determinable annual or
Taxation 1 Cases Set 2
periodical gains, profits, and income"; that, therefore, they are not
items of income subject to withholding tax.
The argument of appellants is that "premiums", as used in Section 53
(b), is preceded by "rents, salaries, wages" and followed by
"annuities, compensations, remunerations" which connote
periodical income payable to the recipient on account of some
investment or for personal services rendered. "Premiums" should,
therefore, in appellants' view, be given a meaning kindred to the
other terms in the enumeration and be understood in its broadest
sense as "a reward or recompense for some act done; a bonus;
compensation for the use of money; a price for a loan; a sum in
addition to interest."
We disagree with the foregoing proposition. Since Section 53 subjects
to withholding tax various specified income, among them,
"premiums", the generic connotation of each and every word or
phrase composing the enumeration in Subsection (b) thereof is
income. Perforce, the word "premiums", which is neither qualified
nor defined by the law itself, should mean income and should include
all premiums constituting income, whether they be insurance or
reinsurance premiums.
Assuming that reinsurance premiums are not within the word
"premiums" in Section 53, still they may be classified as determinable
and periodical incomeunder the same provision of law. Section 199
of the Income Tax Regulations defines fixed, determinable, annual
and periodical income:
"Income is fixed when it is to be paid in amounts definitely pre-
determined. On the other hand, it is determinable whenever there is
a basis of calculation by which the amount to be paid may be
ascertained.
"The income need not be paid annually if it is paid periodically; that
is to say, from time to time, whether or not at regular intervals. That
the length of time during which the payments are to be made may be
increased or diminished in accordance with some one's will or with
the happening of an event does not make the payments any the less
determinable or periodical. . . ."
60

Reinsurance premiums, therefore, are determinable and periodical
income; determinable, because they can be calculated accurately on
the basis of the reinsurance contracts; periodical, inasmuch as they
were earned and remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of the
Commissioner of Internal Revenue dated December 8, 1953.
Appellants' brief also cited rulings of the same official, dated October
13, 1953, February 7, 1955 and February 8, 1955, as well as the
decision of the defunct Board of Tax Appeals in the case of Franklin
Baker Co. 4 , thereby attempting to show that the prevailing
administrative interpretation of Sections 53 and 54 of the Tax Code
exempted from withholding tax reinsurance premiums ceded to non-
resident foreign insurance companies. It is asserted that since
Sections 53 and 54 were "substantially re-enacted" by Republic Acts
1065 (approved June 12, 1954), 1291 (approved June 15, 1955), 1505
(approved June 16, 1956) and 2343 (approved June 20, 1959) when
the said administrative rulings prevailed, the rulings should be given
the force of law under the principle of legislative approval by re-
enactment.
The principle of legislative approval by re-enactment may briefly be
stated thus: When a statute is susceptible of the meaning placed
upon it by a ruling of the government agency charged with its
enforcement and the Legislature thereafter re-enacts the provisions
with substantial charge, such action is to some extent confirmatory
that the ruling carries out the legislative purpose.
The aforestated principle, however, is not applicable to this case.
Firstly, Sections 53 and 54 were never reenacted. Republic Acts 1065,
1291, 1505 and 2343were merely amendments in respect to the rate
of tax imposed in Sections 53 and 54. Secondly, the administrative
rulings of the Commissioner of Internal Revenue relied upon by the
taxpayers were only contained in letters to taxpayers and never
published, so that the Legislature is not presumed to know said
rulings. Thirdly, in the case on which appellants rely, Interprovincial
Autobus Co., Inc. vs. Collector of Internal Revenue, 98 Phil. 290,
January 31, 1956, what was declared to have acquired the force and
Taxation 1 Cases Set 2
effect of law was a regulation promulgated to implement a law;
whereas, in this case, what appellant would seek to have the force of
law are opinions on queries submitted.
It may not be amiss to note that in 1963, after the Tax Court rendered
judgment in this case, Congress enacted Republic Act 3825, as an
amendment to Sections 24 and 54 of the Tax Code, exempting from
income taxes and withholding tax, reinsurance premiums received by
foreign corporations not engaged in business in the
Philippines. Republic Act 3825 in effect took out from Sections 24 and
54 something which formed a part of the subject matter
therein, 6thereby affirming the taxability of reinsurance premiums
prior to the aforestated amendment.
Finally, appellant would argue that Judge Augusto M. Luciano, who
penned the decision appealed from, was disqualified to sit in this case
since he had appeared as counsel for the Commissioner of Internal
Revenue and, as such, answered plaintiffs' complaint before the
Court of First Instance of Manila.
The Rules of Court provides that no judge shall sit in any case in which
he has been counsel without the written consent of all the parties in
interest, signed by them and entered upon the record. The party
objecting to the judge's competency may file, in writing, with such
judge his objection, stating therein the grounds for it. The judge shall
thereupon proceed with the trial or withdraw therefrom, but his
action shall be made in writing and made part of the record.
Appellants, instead of asking for Judge Luciano's disqualification by
raising their objection in the Court of Tax Appeals, are content to
raise it for the first timebefore this Court. Such being the case they
may not now be heard to complain on this point, when Judge Luciano
has given his opinion on the merits of the case. A litigant cannot be
permitted to speculate upon the action of the court and raise an
objection of this nature after decision has been rendered.
WHEREFORE, the judgment appealed from is hereby affirmed with
costs against appellants. It is so ordered.
61

[CA-G.R. SP No. 31283. April 25, 1995.]
(CTA Case No. 3504, 3743)
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC., ET AL.,
petitioner, vs. HON. COURT OF TAX APPEALS, AND THE
COMMISSIONER OF INTERNAL REVENUE, respondent.
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 the following services, to wit (Pages 9-10,
BIR records; Exh. "D").

DECISION 'Investment
TAYAO-JAGUROS, J p: Reporting on world monetary and investment trends and
investigating, analyzing and making recommendations as to
Before the Court is a petition for review filed by Philippine American particular investment opportunities.
Life Insurance Co., Inc. and American International Group, Inc. from Underwriting and Marketing
the decision dated March 10, 1993 and resolution dated May 19, (a) Providing advice and recommendations with respect to new
1993 of the Court of Tax Appeals denying both petitions for review, products.
and the subsequent motion for reconsideration, respectively, in (b) Providing assistance in the production of international
C.T.A. Cases Nos. 3504 and 3943 entitled "The Phil. American Life business in the employee benefits, pension and other fields.
Insurance Co., Inc., et al. vs. The Hon. Commissioner of Internal (c) Providing assistance in the sale of ordinary life business.
Revenue", involving claims for refund of an alleged erroneous Education and Training
payment of withholding tax at source for 1980 and an assessment for (a) Providing training courses, seminars, and other educational
deficiency withholding tax at source for 1979. programs for underwriters, actuaries and other personnel.
(b) Providing scholarship program for personnel of PHILAMLIFE.
The respondent court has correctly stated the facts of this Accounting and Auditing
consolidated case, to wit: (a) Recommending standard accounting procedures and forms
"This is a consolidated case involving a claim for the refund of the for financial and budgetary statements and other accounting devise.
amount of P643,125.00 as allegedly erroneous payment of (b) Providing assistance with regard to data processing.
withholding tax at source for 1980 in C.T.A. Case No. 3504 and an (c) Arranging and supervising internal audits of PHILAMLIFE.
assessment for the similar amount of P643,125.00 as deficiency (d) Providing recommendations with respect to systems and
withholding tax at source for 1979 as a result of the cancellation of a procedures.
previously issued tax credit memo for the said amount in C.T.A. Case PHILAMLIFE U.S. Branch
No. 3943. (a) Provide necessary services for the development of
PHILAMLIFE's U.S. Branch.
The case were consolidated as they involved the same issue and the Corporate
same parties. (a) Assuming certain foreign currency obligations on behalf of
The facts of the case are well recited in the memorandum of the PHILAMLIFE personnel.
respondent, as follows: (b) Compensating overseas Directors of PHILAMLIFE for work
performed on behalf of PHILAMLIFE.
"STATEMENT OF THE FACTS (c) To continually study, consider and advise PHILAMLIFE with
Petitioner Philippine American Life Insurance Co., Inc. (PHILAMLIFE) respect to its corporate structure.
a domestic corporation entered into a Management Services Personnel
Taxation 1 Cases Set 2 62
(a) Providing the services of consulting architects, and other
experts in the construction field.
(b) Providing medical services, training and advise to
PHILAMLIFE's Medical Department.'
On September 30, 11978, AIRCO merged with petitioner American
International Group, Inc. (AIGI) with the latter as the surviving
corporation and successor-in-interest in AIRCO's Management
services Agreement with PHILAMLIFE (page 8, BIR records).
On November 18, 1980, respondent [Commissioner of Internal
Revenue] issued in favor of PHILAMLIFE Tax Credit Memo (T.R. No.
141-80) in the amount of P643,125.00 representing erroneous
payment of withholding tax at source on remittances to AIGI for
services rendered abroad in 1979 (Pages 15-16, BIR records; Exh. "E").
On the basis of the aforesaid issuance of tax credit, PHILAMLIFE, in a
letter dated March 12, 1981, filed with respondent a claim for the
refund of the second erroneous tax payment of P643,125.00 which
was made on December 16, 1980' (Page 14, BIR records). Said claim
was followed up by another letter dated July 6, 1982 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" (Page 4, BIR records).
Without waiting for respondent to resolve the claim for refund,
petitioners filed with the Honorable Court on July 29, 1982 the
petition docketed as C.T.A. Case No. 3540, seeking said refund.
During the pendency of C.T.A Case No. 3540, respondent, in a letter
dated April 15, 1985, denied PHILAMLIFE's claim for refund of
P643,125.00 as withholding tax at source for 1980. Moreover,
respondent cancelled the Tax Credit Memo (T.R. No. 141-80) in the
amount of P643,125.00 previously issued to PHILAMLIFE on
November 18, 1980 and requested the latter to pay the amount of
P643,125.00 as deficiency withholding tax at source for 1979 plus
increments (Pages 62-64, BIR records).
Without protesting the assessment for the amount of P643,125.00 as
deficiency withholding tax at source for 1979, petitioners filed with
Taxation 1 Cases Set 2
this Honorable Court on June 14, 1985 the petition, docketed as
C.T.A. Case No. 3943, seeking the annulment of said assessment."
(pp. 1-5, Dec; pp. 112-115, Orig. Rec.)
After trial on the merits, respondent tax court rendered the above
decision on March 10, 1993.
Subsequently, both petitioners and respondent filed their respective
motions for reconsideration from said decision.
On May 19, 1993, respondent tax court issued a resolution, to wit:
"Both parties filed before this Court 'Motions for Reconsideration' of
the decision dated March 10, 1993 on March 26, 1993 (respondent)
and April 22, 1993 (petitioners).
This Court, after careful consideration of the motions, hereby:
1. GRANTS the respondent's motion since the dispositive
portion of the decision does not order the petitioner (PHILAMLIFE) to
pay respondent the amount of P643,125.00; and
2. DENIES the motion of the petitioners as it raises no new
matters not already considered and passed upon in the decision.
IN VIEW OF THE FOREGOING, this Court hereby MODIFIES the
dispositive portion of its decision as follows:
"WHEREFORE, both petitions for review are hereby dismissed and
petitioner PHILAMLIFE is hereby ordered to pay respondent the
amount of P643,125.00 with interest at the rate of twenty (20) per
centum per annum from March 9, 1981 until it is paid, without
pronouncement as to cost."
SO ORDERED."
(pp. 137-138, id.)
Hence, the instant petition for review filed before this Court by
PHILAMLIFE and AIGI.
In the petition, PHILAMLIFE and AIGI raise the following issues, to wit:
"(1) Whether or not compensation for advisory services
admittedly performed abroad by the personnel of a non-resident
foreign corporation not doing business in the Philippines (AIGI) are
subject to Philippines withholding income tax.
63
(2) Whether or not respondent Commissioner is barred by
prescription, laches, estoppel, or equitable considerations in
cancelling the previous approval of petitioner's claim for refund more
than 5 years thereafter, after it has determined, after investigation,
that the advisory services were rendered/performed abroad by the
personnel of AIGI, a non-resident foreign corporation not doing
business in the Philippines.
(3) Whether or not respondent Court can amend its decision, on
a motion for reconsideration by respondent Commissioner, ordering
petitioner Philamlife to pay P643,125.00 with interest at 20% per
annum until paid 'on the presumption that it has utilized the tax
credit memo already issued' (Ref. Decision, p. 14, line 7) and without
any evidence being presented of actual usage of the tax credit
memo."
(pp. 4-5, Rollo)
We find no merit in this petition.
In their first assignment of error, petitioners insist that there is no
legal nor factual bias for the respondent court to conclude that the
compensation paid for advisory services rendered outside the
Philippines to petitioner AIGI, a non-resident foreign corporation not
engaged in trade or business in the Philippines, is considered "rentals
and royalties from properties located in the Philippines" pursuant to
Section 37 (a) (4) of the National Internal Revenue Code. Petitioners
contend that petitioner AIGI is not covered by the above provision of
the Tax Code considering that it has no properties located in the
Philippines from which rentals and royalties can be derived.
After a careful perusal of the facts and law of the case, we agree with
respondent court's ruling which comprehensively discusses the
above issue, to wit:
"On the first issue, we quote the pertinent laws involved.
Section 37. Income from Services within the Philippines, (a)
Gross income from sources within the Philippines — the following
items of gross income shall be treated as gross income from source
within the Philippines.
(1) ...
(2) ...
Taxation 1 Cases Set 2
(3) ...
(4) Rentals and royalties — Rentals and royalties from properties
located in the Philippines or from any interest in such property,
including rentals or royalties for —
(a) ...
(b) ...
(c) The supply of scientific, technical, industrial or commercial
knowledge or informations;
(d) The supply of any assistance that is auxiliary and subsidiary
to, and is furnished as a means of enabling the application or
enjoyment of, any property, or right as is mentioned in paragraph (a),
any such equipment as is mentioned in paragraph (b) or any such
knowledge or information as is mentioned in paragraph (c); or
(e) ...
(f) Technical advice, assistance or services rendered in
connection with the technical management and administration of
any scientific, industrial or commercial undertaking, venture, project
of scheme; and
(g) ...
(5) ...
(6) ...
A reading of the various management services enumerated in the
said Management Services Agreement will show that they can easily
fall under any of the aforequoted expanded meaning of royalties.
Basically, from the heading 'Investments' to 'Personnel', the services
call for the supply by the non-resident 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 management
contract shall be considered as income from services within the
Philippines. AIGI being a non-resident foreign corporation not
engaged in trade or business in the Philippines 'shall pay a tax equal
to thirty-five (35%) percent 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
64
or determinable annual, periodical or casual gains, profits and
income and capital gains: . . . (Section 12(6) (I) of the National Internal
Revenue Code. (Underscoring for emphasis).
As against the above legal provisions of law, petitioner in support of
its stand cited the opinion of the Revenue Examiner as concurred [in]
by the Chief of the Appellate division that the income may be
considered as derived from sources without the Philippines and
therefore not subject to Philippine tax because the services were
performed outside the Philippines. Pursuant to Section 37 (a)(3) of
the Tax Code, compensation for labor or personal services are
considered from sources within the Philippines where the services
are performed within the Philippines and since the services were
ascertained by the Examiner to have been rendered outside the
Philippines the same should not have been subjected to Philippine
tax.
The argument of the Petitioner may be true perhaps prior to the
amendment of section 37(a)(4) by P.D. 1457 on June 11, 1978. Prior
of said amendment, the term 'rentals or royalties' has a very limited
meaning. It refers only to rentals or royalties for 'the use of or for the
privilege of using in the Philippine patents, copyrights, secret
processes and formulas, goodwill, trademarks, trade brand, franchise
and other like properties'. Prior to this amendment the jurisprudence
cited by Petitioner and marked as Exh. 'B' would apply which states
that 'in case of income derived from services, the factor which
determines the source of income is not the residence of the payor or
the place where the contract for the services is entered into or the
place of payment. It is the place where the services are actually
rendered' (Par. 45. 33, Vol VIII, Merten's Law of Federal Income
Taxation). However, when the said provision of law was amended to
include the expanded meaning of royalties, this jurisprudence is
accordingly modified to exclude all the type of services enumerated
in the amended law."
(pp. 6-10, dec. pp. 117-121, Orig Rec.)
Thus, this Court rules that while it is true petitioner AIGI has no
properties in the Philippines, agreement with petitioner PHILAMLIFE
necessary for the latter company's efficient operation and growth,
Taxation 1 Cases Set 2
with petitioner AIGI deriving income form said agreement, petitioner
AIGI is well-within the ambit of Section 37 (a)(7) of the Tax Code.
In our jurisprudence, the test of taxability is the 'source', and the
source of an income is "that activity . . . which produced the income"
(Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601,
reiterated in Commissioner of Internal Revenue vs. Japan Air Lines,
Inc., 202 SCRA 450). 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", it includes "
royalties for the supply of scientific, technical, industrial, or
commercial knowledge or informations; 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", and others
(Section 37 (a) (7) as amended by P.D. 1457).
As to the second issue posited by petitioners, We find no compelling
reason to differ with the correct observation of the lower court, to
wit:
"On the second issue, this Court believes that the rule on prescription
of assessment and the filing of formal protest will not apply in the
C.T.A. Case No. 3943. The decision of the Commissioner of Internal
Revenue revoking the tax credit memo he has issued and issuing an
assessment accordingly was actually a denial of the claim for refund
covering the 1979 withholding tax at source which was previously
granted. The original action that was filed by the Petitioner which
precipitated the so refund filed by Petitioner. Therefore, the rules on
prescription of action in the case of recovery of tax erroneously or
illegally collected shall apply.
Pursuant to Section 292 (now 230) of the NIRC 'no such suit or
proceeding shall be begun after the expiration of two years from the
date of payment of the tax or 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
65
deducted from the counting of the two year prescriptive period. To
interpret otherwise, will be opening an avenue for respondent to
technically deprive any legitimate claimant-taxpayer of his
erroneously or illegally paid taxes by simply granting the same at the
start but only to be revoked later upon the expiration of the two year
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."
(pp. 12-13, Dec. pp. 123-124, id.)
Moreover, the Supreme Court in the recent case of Commissioner of
Internal Revenue vs. Procter & Gamble Philippine Manufacturing
Corporation, 204 SCRA 377, ruled, to wit:
"In like manner, petitioner Commissioner of Internal Revenue's
failure to raise before the Court of Tax Appeals the issue relating to
the real party in interest to claim the refund cannot, and should not,
prejudice the government. Such is merely a procedural defect. It is
axiomatic that the government can never be in estoppel, particularly
in matters involving taxes. Thus, for example, the payment by the tax-
payer of income taxes, pursuant to a BIR assessment does not
preclude the government from making further assessments. The
errors or omissions of certain administrative officers should never be
allowed to jeopardize the government's financial position. (See: Phil.
Long Distance Tel. Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin
v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen
Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-
14874, Sept. 30, 1960; Republic v. Caballero, 79 SCRA 179; Favis v.
Municipality of Sabongan, L-26522, Feb. 27, 1963)."
portion of the decision did not order the petitioner PHILAMLIFE to
pay public respondent the amount of P643,125.00 which amendment
is supported by the findings of the respondent tax court.
Finally, in the case of Commissioner of Internal Revenue v. C.A., 204
SCRA 182, the Supreme Court reiterated, to wit:
"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 the 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 that of the
Court of Tax Appeals, must consequently be upheld."
This Court does not find any cogent reason to depart from the above
ruling as applied in the instant case.
WHEREFORE, the instant petition for review is DISMISSED by the
Court for lack of merit. The respondent court's decision dated March
10, 1993 and order dated May 19, 1993 in C.T.A. Cases Nos. 3504 and
3943 are hereby Affirmed. Costs against petitioners.
IT IS SO ORDERED.

Neither do We find error on the part of respondent tax court in

amending its March 10, 1993 decision acting upon the 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 Court (Adez Realty,
Incorporated vs. Court of Appeals, 212 SCRA 623). As shown in its may
19, 1993 resolution, respondent tax court granted respondent
Commissioner's motion for reconsideration since the dispositive
Taxation 1 Cases Set 2 66