EN BANC

[G.R. Nos. L-9738 & L-9771. May 31, 1957.]

BLAS GUTIERREZ, and MARIA MORALES, Petitioners, v. HONORABLE COURT OF TAX

APPEALS, and THE COLLECTOR OF INTERNAL REVENUE, Respondents.

COLLECTOR OF INTERNAL REVENUE, Petitioner, v. BLAS GUTIERREZ, MARIA

MORALES, and COURT OF TAX APPEALS, Respondents.

Rafael Morales, for Petitioners.

Assistant Solicitor General Ramon L. Avanceña and Solicitor Jose P. Alejandro

for Respondents.

SYLLABUS

1. EXPROPRIATION; INCOME FROM SOURCES WITHIN THE PHILIPPINES, WHERE

TAXABLE. — The compensation or income derived from the expropriation of property located in
the Philippines is an income from sources within the Philippines and subject to the taxing
jurisdiction of the place.

2. ID.; ID.; TRANSFER OF PROPERTY EQUIVALENT TO SALE; PROCEEDS SUBJECT TO

INCOME TAX AS CAPITAL GAIN. — The acquisition by the Government of private properties
through the exercise of the power of eminent domain, said properties being justly compensated,
is embraced within the meaning of the term "sale" or "disposition of property," and the proceeds
derived therefrom is subject to income tax as capital gain pursuant to the provisions of Section
37-(a)-(5) in relation to Section 29-(a) of the Tax Code.

3. ID.; ID.; ID.; ID.; INCOME NOT INCLUDED IN THE TAX EXEMPTIONS SPECIFIED IN THE
MILITARY BASES AGREEMENT. — The taxpayers maintain that since, at the request of the U.
S. Government, the proceeding to expropriate the land in question necessary for the expansion
of the Clark Field Air Base was instituted by the Philippine Government as part of its obligation
under the Military Bases Agreement, the compensation accruing therefrom must necessarily fall
under the exemption provided for by Section 29-(b)-6 of the Tax Code. This stand is untenable
because while the condemnation or expropriation of properties wad provided for in the
Agreement, the exemption from tax of the compensation to be paid for the expropriation of
privately owned lands located in the Philippines was not given any attention, and the internal
revenue exemptions specifically taken care of by said agreement applies only to members of
the U. S. Armed Forces serving in the Philippines and U. S. nationals working in these Islands in
connection with the construction, maintenance, operation and defense of said bases.

4. ID.; TRANSFER OF OWNERSHIP; WHEN TITLE PASSES TO EXPROPRIATOR. — In

condemnation proceedings, title to the land does not pass to the plaintiff until the indemnity is
paid (Calvo v. Zandueta, 49 Phil. 605), and notwithstanding possession acquired by the
expropriator, title does not actually pass to him until payment of the amount adjudged by the
Court and the registration of the judgment with the Register of Deeds (See Visayan Refining
Company v. Camus Et. Al., 40 Phil. 550; Metropolitan Water District v. De los Angeles, 55 Phil.
783).
5. ID.; GAIN OR LOSS FROM SALE, HOW DETERMINED. — The property in question was
adjudicated to the owner by court order on March 23, 1929, and in accordance with Section 35
(b) of the Tax Code, only the fair market price or value of the property as of the date of the
acquisition thereof should be considered in determining the gain or loss sustained by the
property owner when the property was disposed, without taking into account the purchasing
power of the currency used in the transaction. The value of the property at the time of its
acquisition by the owner was P28,291.78 and the same was compensated with P94,305.75
when it was expropriated. The resulting difference is not merely nominal but a capital gain and
should be correspondingly taxed.

6. TAXATION; ASSESSMENT MADE WITHIN THE PRESCRIPTIVE PERIOD, HOW

ENFORCED. — When the assessment for deficiency income tax was made by the Collector of
Internal Revenue within the 3-year prescriptive period provided for by Section 51-d of the Tax
Code, the same could be collected either by the administrative methods of distraint and levy or
by judicial action.

7. COURT OF TAX APPEALS; REVIEW OF DECISIONS OF; ONLY QUESTIONS OF LAW

MAY BE CONSIDERED. — The question of fraud is a question of fact which is for the Court of
Tax Appeals to determine. It is already settled in this jurisdiction that in passing upon petitions to
review decisions of the Court of Tax Appeals, only questions of law may be considered.

DECISION

FELIX, J.:

Maria Morales was the registered owner of an agricultural land designated as Lot No. 724-C of
the cadastral survey of Mabalacat, Pampanga. The Republic of the Philippines, at the request of
the U.S. Government and pursuant to the terms of the Military Bases Agreement of March 14,
1947, instituted condemnation proceedings in the Court of First Instance of Pampanga,
docketed as Civil Case No. 148, for the purpose of expropriating the lands owned by Maria
Morales and others needed for the expansion of the Clark Field Air Base, which project is
necessary for the mutual protection and defense of the Philippines and the United States. Blas
Gutiérrez was also made a party defendant in said Civil Case No. 148 for being the husband of
the landowner Maria Morales. At the commencement of the action, the Republic of the
Philippines, therein plaintiff, deposited with the Clerk of the Court of First Instance of Pampanga
the sum of P156,960, which was provisionally fixed as the value of the lands sought to be
expropriated, in order that it could take immediate possession of the same.

On January 27, 1949, upon order of the Court, the sum of P34,580 (PNB Check 721520-Exh. R)
was paid by the Provincial Treasurer of Pampanga to Maria Morales out of the original deposit
of P156,960 made by therein plaintiff. After due hearing, the Court of First Instance of
Pampanga rendered decision dated November 29, 1949, wherein it fixed as just compensation
P2,500 per hectare for some of the lots and P3,000 per hectare for the others, which values
were based on the reports of the Commission on Appraisal whose members were chosen by
both parties and by the Court, which took into consideration the different conditions affecting the
value of the condemned properties in making their findings.
In virtue of said decision, defendant Maria Morales was to receive the amount of P94,305.75 as
compensation for Lot No. 724-C which was one of the expropriated lands. But the Court
disapproved defendants’ claims for consequential damages considering them amply
compensated by the price awarded to their said properties. In order to avoid further litigation
expenses and delay inherent to an appeal, the parties entered into a compromise agreement on
January 7, 1950, modifying in part the decision rendered by the Court in the sense of fixing the
compensation for all the lands, without distinction, at P2,500 per hectare, which compromise
agreement was approved by the Court on January 9, 1950. This reduction of the price to P2,500
per hectare did not affect Lot No. 724-C of defendant Maria Morales. Sometime in 1950, the
spouses Blas Gutiérrez and Maria Morales received the sum of P59,785.75 representing the
balance remaining in their favor after deducting the amount of P34,580 already withdrawn from
the compensation due to them.

In a notice of assessment dated January 28, 1953, the Collector of Internal Revenue demanded
of the petitioners the payment of P8,481 as alleged deficiency income tax for the year 1950,
inclusive of surcharges and penalties. On March 5, 1953, counsel for petitioners sent a letter to
the Collector of Internal Revenue requesting the latter to withdraw and reconsider said
assessment, contending among others, that the compensation paid to the spouses by the
Government for their property was not "income derived from sale, dealing or disposition of
property" referred to by section 29 of the Tax Code and therefore not taxable; that even granting
that condemnation of private properties is embraced within the meaning of the word "sale" or
"dealing", the compensation received by the taxpayers must be considered as income for 1948
and not for 1950 since the amount deposited and paid in 1948 represented more than 25 per
cent of the total compensation awarded by the court; that the assessment was made after the
lapse of the 3-year prescriptive period provided for in section 51-(d) of the Tax Code; that the
compensation in question should be exempted from taxation by reason of the provision of
section 29 (b)-6 of the Tax Code; that the spouses Blas Gutiérrez and Maria Morales did not
realize any profit in said transaction as there were improvements on the land already made and
that the purchasing value of the peso at the time of the expropriation proceeding had
depreciated if compared to the value of the pre-war peso; and that penalties should not be
imposed on said spouses because granting that the assessment was correct, the omission of
the compensation awarded therein was due to an honest mistake.

This request was denied by the Collector of Internal Revenue, in a letter dated April 26, 1954,
refuting point by point the arguments advanced by the taxpayers. The record further shows that
a warrant of distraint and levy was issued by the Collector of Internal Revenue on the properties
of Mr. & Mrs. Blas Gutiérrez found in Mabalacat, Pampanga, and a notice of tax lien was duly
registered with the Register of Deeds of San Fernando, Pampanga, on the same date. Counsel
for the spouses then requested that the matter be referred to the Conference Staff of the Bureau
of Internal Revenue for proper hearing, to which the Collector answered in a letter dated
December 24, 1954, stating that the request would be granted upon compliance by the
taxpayers with the requirements of Department of Finance Order No. 213, i.e., the filing of a
verified petition to that effect and that one-half of the total assessment should be guaranteed by
a bond, provided that the taxpayers would agree in writing to the suspension of the running of
the period of prescription.

The taxpayers then served notice that the case would be brought on appeal to the Court of Tax
Appeals, which they did by filing a petition with said Court to review the assessment made by
the Collector of Internal Revenue, docketed as C.T.A. Case No. 65. In that instance, it was
prayed that the Court render judgment declaring that the taking of petitioners’ land by the
Government was not a sale or dealing in property; that the amount paid to petitioners as just
compensation for their property should not be diminished by way of taxation; that said
compensation was by law exempt from taxation and that the period to collect the income taxes
by summary methods had prescribed; that respondent Collector of Internal Revenue be
enjoined from carrying out further steps to collect from petitioners by summary methods the said
taxes which they alleged to be erroneously assessed and for such other remedies which would
serve the ends of law and justice.

The Solicitor General, in representation of the respondent Collector of Internal Revenue, filed an
answer on February 11, 1955, admitting some of the allegations of petitioners and denying
some of them, and as special defenses, he advanced the contention that the Court had no
jurisdiction to entertain the petition; that the profit realized by petitioners from the sale of the
land in question was subject to income tax; that the full compensation received by petitioners
should be included in the income received in 1950, same having been paid in 1950 by the
Government; that under the Bases Agreement only residents of the United States are exempt
from the payment of income tax in the Philippines in respects to profits derived under a contract
with the U.S. Government in connection with the construction, maintenance and operation of the
bases; that in the determination of the gain or loss from the sale of property acquired on or after
March 1, 1913, the cost of acquisition and the selling price shall be taken into account without
qualification as to the purchasing power of the currency; that the imposition of the 50 per cent
surcharge was in accordance with the Tax Code; that the Collector of Internal Revenue was
empowered to collect petitioners’ deficiency income tax; and prayed that the petition for review
be dismissed; petitioners be ordered to pay the amount of P8,481 plus the delinquency penalty
of 5 per cent for late payment and monthly interest at the rate of 1 per cent from April 1, 1953,
up to the date of actual payment and for such other relief that may be deemed just and
equitable in the premises.

After due hearing and after the parties had filed their respective memoranda, the Court of Tax
Appeals rendered decision on August 31, 1955, holding that it had jurisdiction to hear and
determine the case; that the gain derived by the petitioners from the expropriation of their
property constituted taxable income and as such was capital gain; and that said gain was
taxable in 1950 when it was realized. It was also found by said Court that the evidence did not
warrant the imposition of the 50 per cent surcharge because the petitioners acted in good faith
and without intent to defraud the Government when they failed to include in their gross income
the proceeds they received from the expropriated property, and, therefore, modified the
assessment made by respondent, requiring petitioners to pay only the sum of P5,654. From this
decision, both parties appealed to this Court and in this instance, petitioners Blas Gutiérrez and
Maria Morales, as appellants in G. R. No. L-9738, made the following assignments of
error:chanrob1es virtual 1aw library

1. That the Court of Tax Appeals erred in holding that, for income tax purposes, income from
expropriation should be deemed as income from sale, any profit derived therefrom is subject to
income tax as capital gain pursuant to the provisions of Section 37-(a)-(5) in relation to Section
29-(a) of the Tax Code;

2. That the Court of Tax Appeals erred in not holding that, under the particular circumstances in
which the property of the appellants was taken by the Philippine Government, the amount paid
to them as just compensation is exempt from income tax pursuant to Section 29- (b)-(6) of the
Tax Code;

3. That the Court of Tax Appeals erred in not holding that the respondent Collector is definitely
barred by the Statute of Limitations from collecting the deficiency income tax in question,
whether administratively thru summary methods, or judicially thru the ordinary court procedures;

4. That the Court of Tax Appeals erred is not holding that the capital gain found by the
respondent Collector as have been derived by the petitioners-appellants from the expropriation
of their property is merely nominal not subject to income tax, and in not holding that the
pronouncement of the court in the expropriation case in this respect is binding upon the
respondent Collector of Internal Revenue; and

5. That the Court of Tax Appeals erred in not pronouncing upon the pleadings of the parties that
the petitioners-appellants did not derive any capital gain from the expropriation of their property.

The appeal of the respondent Collector of Internal Revenue was docketed in this Court as G. R.
No. L-9771, and in this case the Solicitor General ascribed to the lower court the commission of
the following error:chanrob1es virtual 1aw library

That the Court of Tax Appeals erred in holding that respondents are not subject to the payment
of the 50 per cent surcharge in spite of the fact that the latter’s income tax return for the year
1950 is false and/or fraudulent.

The facts just narrated are not disputed and the controversy only arose from the assertion by
the Collector of Internal Revenue that petitioners-appellants failed to include from their gross
income, in filing their income tax return for 1950, the amount of P94,305.75 which they had
received as compensation for their land taken by the Government by expropriation proceedings.
It is the contention of respondent Collector of Internal Revenue that such transfer of property, for
taxation purposes, is "sale" and that the income derived therefrom is taxable. The pertinent
provisions of the National Internal Revenue Code applicable to the instant cases are the
following:chanrob1es virtual 1aw library

SEC. 29. GROSS INCOME. — (a) General definition. — "Gross income" includes gains, profits,
and income derived from salaries, wages, or compensation for personal service of whatever
kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce,
sales or dealings in property, whether real or personal, growing out of ownership or use of or
interest in such property; also from interests, rents, dividends, securities, or the transactions of
any business carried on for gain or profit, or gains, profits, and income derived from any source
whatsoever.

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:chanrob1es virtual 1aw
library

x x x

(5) SALE OF REAL PROPERTY. — Gains profits, and income from the sale of real property
located in the Philippines;

x x x
There is no question that the property expropriated being located in the Philippines,
compensation or income derived therefrom ordinarily has to be considered as income from
sources within the Philippines and subject to the taxing jurisdiction of the Philippines. However,
it is to be remembered that said property was acquired by the Government through
condemnation proceedings and appellants’ stand is, therefore, that same cannot be considered
as sale as said acquisition was by force, there being practically no meeting of the minds
between the parties. Consequently, the taxpayers contend, this kind of transfer of ownership
must perforce be distinguished from sale, for the purpose of Section 29-(a) of the Tax Code. But
the authorities in the United States on the matter sustain the view expressed by the Collector of
Internal Revenue, for it is held that:jgc:chanrobles.com.ph

"The transfer of property through condemnation proceedings is a sale or exchange within the
meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction constitutes
capital gain" (1942. Com. Int. Revenue v. Kieselbach (CCA 3) 127 F. (24) 359). "The taking of
property by condemnation and the payment of just compensation therefore is a ‘sale’ or
‘exchange’ within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from
that transaction is capital gain" (David S. Brown v. Comm., 1942, 42 BTA 139).

The proposition that income from expropriation proceedings is income from sales or exchange
and therefore taxable has been likewise upheld in the case of Lapham v. U.S. (1949, 40 AFTR
1370) and in Kneipp v. U.S. (1949, 85 F Suppl. 902). It appears then that the acquisition by the
Government of private properties through the exercise of the power of eminent domain, said
properties being JUSTLY compensated, is embraced within the meaning of the term "sale" or
"disposition of property", and the proceeds from said transaction clearly fall within the definition
of gross income laid down by Section 29 of the Tax Code of the Philippines.

Petitioners-appellants also averred that granting that the compensation thus received is
"income", same is exempted under Section 29-(b)-6 of the Tax Code, which reads as
follows:chanrob1es virtual 1aw library

SEC. 29. GROSS INCOME. —

x x x

(b) EXCLUSIONS FROM GROSS INCOME. — The following items shall not be included in
gross income and shall be exempt from taxation under this Title:chanrob1es virtual 1aw library

x x x

(6) Income exempt under treaty. — Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.

The taxpayers maintain that since, at the request of the U.S. Government, the proceeding to
expropriate the land in question necessary for the expansion of the Clark Field Air Base was
instituted by the Philippine Government as part of its obligation under the Military Bases
Agreement, the compensation accruing therefrom must necessarily fall under the exemption
provided for by Section 29-(b)-6 of the Tax Code. We find this stand untenable, for the same
Military Bases Agreement cited by appellants contains the following:jgc:chanrobles.com.ph

"ARTICLE XXII

"CONDEMNATION OR EXPROPRIATION

"1. Whenever it is necessary to acquire by condemnation or expropriation proceedings real

property belonging to private persons, association, or corporations located in bases named in
Annex ‘A’ and Annex ‘B’ in order to carry out the purposes of this agreement, the Philippines will
institute and prosecute such condemnation proceedings in accordance with the laws of the
Philippines. The United States agrees to reimburse the Philippines for all the reasonable
expanses, damages, and costs thereby incurred, including the value of the property as
determined by the Court. In addition, subject to mutual agreements of the two governments, the
United States shall reimburse the Philippines for the reasonable costs of transportation and
removal of any occupants displaced or ejected by reason of the condemnation or expropriation"

"ARTICLE XII

"INTERNAL REVENUE EXEMPTION

"(1) No member of the United States Armed Forces except Filipino citizens, serving in the
Philippines in connection with the bases and residing in the Philippines by reason only of such
service, or his dependents, shall be liable to pay income tax in the Philippines except in respect
of income derived from Philippine sources.

"(2) No national of the United States serving in the Philippines in connection with the
construction, maintenance, operation or defense of the bases and residing in the Philippines by
reason only of such employment, or his spouse and minor children and dependent parents of
either spouse, shall be liable to pay income tax in the Philippines except in respect of income
derived from Philippine sources or sources other than the United States.

"(3) No person referred to in paragraphs 1 and 2 of this said Article shall be liable to pay the
government or local authorities of the Philippines any poll or residence tax, or any imports or
experts duties, or any other tax on personal property imported for his own use provided, that
private owned vehicles shall be subject to payment of the following only: when certified as being
used for military purposes by appropriate United States Authorities, the normal license plate fee;
otherwise, the normal license and registration fees.

"(4) No national of the United States, or corporation organized under the laws of the United
States, shall be liable to pay income tax in the Philippines in respect of any profits derived under
a contract made in the United States with the government of the United States in connection
with the construction, maintenance, operation and defense of the bases, or any tax in the nature
of a license in respect of any service of works for the United States in connection with the
construction, maintenance, operation and defense of the bases.

x x x

The facts brought about by the aforementioned terms of the said treaty need no further
elucidation. It is unmistakable that although the condemnation or expropriation of properties was
provided for, the exemption from tax of the compensation to be paid for the expropriation of
privately owned lands located in the Philippines was not given any attention, and the internal
revenue exemptions specifically taken care of by said Agreement applies only to members of
the U.S. Armed Forces serving in the Philippines and U.S. nationals working in these Islands in
connection with the construction, maintenance, operation and defense of said bases.

Anent appellant taxpayers’ allegation that the respondent Collector of Internal Revenue was
barred from collecting the deficiency income tax assessment, it having been made beyond the
3-year period prescribed by section 51-(d) of the Tax Code, We have this much to say. Although
it is true that by order of the Court of First Instance of Pampanga, the amount of P34,580 out of
the original deposit made by the Government was withdrawn in favor of appellants on January
27, 1949, the same cannot be considered as income for said year but for 1950 when the
balance of P59,785.75 was actually received. Before that date (1950), appellant taxpayers were
still the owners of their whole property that was subject of condemnation proceedings and said
amount of P34,580 was not paid to, but merely deposited in court and withdrawn by them.
Therefore, the payment of the value of Maria Morales’ Lot 724-C was actually made by the
Republic of the Philippines in 1950 and it has to be credited as income for 1950 for it was then
when title over said property passed to the Republic of the Philippines. Appellant tax payers
cannot say that the title over the property expropriated already passed to the Government when
the latter was placed in possession thereof, for in condemnation proceedings, title to the land
does not pass to the plaintiff until the indemnity is paid (Calvo v. Zandueta, 49 Phil. 605), and
notwithstanding possession acquired by the expropriator, title does not actually pass to him until
payment of the amount adjudged by the Court and the registration of the judgment with the
Register of Deeds (See Visayan Refining Company v. Camus Et. Al., 40 Phil. 550; Metropolitan
Water District v. De los Angeles, 55 Phil. 783). Now, if said amount should have been reported
as income for 1950 in the return that must have been filed on or before March 1, 1951, the
assessment made by the Collector on January 28, 1953, is still within the 3-year prescriptive
period provided for by Section 51-d and could, therefore, be collected either by the
administrative methods of distraint and levy or by judicial action (See Collector of Internal
Revenue v. A.P. Reyes Et. Al., 100 Phil., 822; Collector of Internal Revenue v. Zulueta Et. Al.,
100 Phil., 872; and Sambrano v. Court of Tax Appeals Et. Al., supra, p. 1).

As to appellant taxpayers’ proposition that the profit derived by them from the expropriation of
their property is merely nominal and not subject to income tax, We find Section 35 of the Tax
Code illuminating. Said section reads as follows:jgc:chanrobles.com.ph

"SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER

DISPOSITION OF PROPERTY. — The gain derived or loss sustained from the sale or other
disposition of property, real or personal, or mixed, shall be determined in accordance with the
following schedule:chanrob1es virtual 1aw library

(a)x x x"

(b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the
cost thereof if such property was acquired by purchase or the fair market price or value as of the
date of the acquisition if the same was acquired by gratuitous title.

x x x

The records show that the property in question was adjudicated to Maria Morales by order of the
Court of First Instance of Pampanga on March 23, 1929, and in accordance with the
aforequoted section of the National Internal Revenue Code, only the fair market price or value of
the property as of the date of the acquisition thereof should be considered in determining the
gain or loss sustained by the property owner when the property was disposed, without taking
into account the purchasing power of the currency used in the transaction. The records placed
the value of the said property at the time of its acquisition by appellant Maria Morales was
P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was
expropriated. The resulting difference is surely a capital gain and should be correspondingly
taxed.

As to the only question raised by appellant Collector of Internal Revenue in case L-9771,
assailing the lower Court’s order exonerating petitioners from the 50 per cent surcharge
imposed on the latter, on the ground that the taxpayers’ income tax return for 1950 is false
and/or fraudulent, it should be noted that the Court of Tax Appeals found that the evidence did
not warrant the imposition of said surcharge because the petitioners therein acted in good faith
and without intent to defraud the Government.

"The question of fraud is a question of fact which frequently requires a nicely balanced judgment
to answer. All the facts and circumstances surrounding the conduct of the taxpayer’s business
and all the facts incident to the preparation of the alleged fraudulent return should be
considered." (Mertens, Federal Income Taxation, Chapter 55).

The question of fraud being a question of fact and the lower court having made the finding that
"the evidence of this case does not warrant the imposition of the 50 per cent surcharge", We are
constrained to refrain from giving any consideration to the question raised by the Solicitor
General, for it is already settled in this jurisdiction that in passing upon petitions to review
decisions of the Court of Tax Appeals, We have to confine ourselves to questions of law.

Wherefore, the decision appealed from by both parties is hereby affirmed, without
pronouncement as to costs. It is so ordered.
 U.S. Supreme Court

Helvering v. Bruun, 309 U.S. 461 (1940)

Helvering v. Bruun

No. 479

Argued February 28, 1940

Decided March 25, 1940

309 U.S. 461

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Syllabus

1. Where, upon termination of a lease, the lessor repossessed the real estate and
improvements, including a new building erected by the lessee, an increase in value attributable
to the new building was taxable under the Revenue Act of 1932 as income of the lessor in the
year of repossession. P. 309 U. S. 467.

Page 309 U. S. 462

2. Hewitt Realty Co. v. Commissioner, 76 F.2d 880, and decision of this Court dealing with the
taxability vel non of stock dividends, distinguished. P. 309 U. S. 468.

3. Even though the gain in question be regarded as inseparable from the capital, it is within the
definition of gross income in § 22(a) of the Revenue Act of 1932, and, under the Sixteenth
Amendment, may be taxed without apportionment amongst the States. P. 309 U. S. 468.

105 F.2d 442 reversed.

Certiorari, 308 U.S. 544, to review the affirmance of a decision of the Board of Tax Appeals
overruling the Commissioner's determination of a deficiency in income tax.

Page 309 U. S. 464

MR. JUSTICE ROBERTS delivered the opinion of the Court.

The controversy had its origin in the petitioner's assertion that the respondent realized taxable
gain from the forfeiture of a leasehold, the tenant having erected a new building upon the
premises. The court below held that no income had been realized. [Footnote 1] Inconsistency of
the decisions on the subject led us to grant certiorari. 308 U.S. 544.
The Board of Tax Appeals made no independent findings. The cause was submitted upon a
stipulation of facts. From this it appears that, on July 1, 1915, the respondent, as owner, leased
a lot of land and the building thereon for a term of ninety-nine years.

The lease provided that the lessee might at any time, upon giving bond to secure rentals
accruing in the two ensuing years, remove or tear down any building on the land, provided that
no building should be removed or torn down after the lease became forfeited, or during the last
three and one-half years of the term. The lessee was to surrender the land, upon termination of
the lease, with all buildings and improvements thereon.

In 1929, the tenant demolished and removed the existing building and constructed a new one
which had a useful life of not more than fifty years. July 1, 1933, the lease was cancelled for
default in payment of rent and taxes, and the respondent regained possession of the land and
building.

The parties stipulated

"that as at said date, July 1, 1933, the building which had been erected upon said premises by
the lessee had a fair market value of $64,245.68, and that the unamortized cost of the old
building, which was removed from the premises in 1929 to make way for the new building, was
$12,811.43, thus leaving a net fair market value as at July 1, 1933, of $51,434.25, for

Page 309 U. S. 465

the aforesaid new building erected upon the premises by the lessee."

On the basis of these facts, the petitioner determined that, in 1933, the respondent realized a
net gain of $51,434.25. The Board overruled his determination, and the Circuit Court of Appeals
affirmed the Board's decision.

The course of administrative practice and judicial decision in respect of the question presented
has not been uniform. In 1917, the Treasury ruled that the adjusted value of improvements
installed upon leased premises is income to the lessor upon the termination of the lease.
[Footnote 2] The ruling was incorporated in two succeeding editions of the Treasury
Regulations. [Footnote 3] In 1919, the Circuit Court of Appeals for the Ninth Circuit held,
in Miller v. Gearin, 258 F. 225, that the regulation was invalid, as the gain, if taxable at all, must
be taxed as of the year when the improvements were completed. [Footnote 4]

The regulations were accordingly amended to impose a tax upon the gain in the year of
completion of the improvements, measured by their anticipated value at the termination of the
lease and discounted for the duration of the lease. Subsequently, the regulations permitted the
lessor to spread the depreciated value of the improvements over the remaining life of the lease,
reporting an aliquot part each year, with provision that, upon premature termination, a tax
should be imposed upon the excess of the then value of the improvements over the amount
theretofore returned. [Footnote 5]

In 1935, the Circuit Court of Appeals for the Second Circuit decided, in Hewitt Realty Co. v.
Commissioner,

Page 309 U. S. 466

76 F.2d 880, that a landlord received no taxable income in a year, during the term of the lease,
in which his tenant erected a building on the leased land. The court, while recognizing that the
lessor need not receive money to be taxable, based its decision that no taxable gain was
realized in that case on the fact that the improvement was not portable or detachable from the
land, and, if removed, would be worthless except as bricks, iron, and mortar. It said, 76 F.2d at
884:

"The question, as we view it, is whether the value received is embodied in something separately
disposable, or whether it is so merged in the land as to become financially a part of it,
something which, though it increases its value, has no value of its own when torn away."

This decision invalidated the regulations then in force. [Footnote 6]

In 1938, this court decided M.E. Blatt Co. v. United States, 305 U. S. 267. There, in connection
with the execution of a lease, landlord and tenant mutually agreed that each should make
certain improvements to the demised premises and that those made by the tenant should
become and remain the property of the landlord. The Commissioner valued the improvements
as of the date they were made, allowed depreciation thereon to the termination of the leasehold,
divided the depreciated value by the number of years the lease had to run, and found the
landlord taxable for each year's aliquot portion thereof. His action was sustained by the Court of
Claims. The judgment was reversed on the ground that the added value could not be
considered rental accruing over the period of the lease; that the facts found by the Court of
Claims did not support the conclusion of the Commissioner as to the value to be attributed to
the improvements

Page 309 U. S. 467

after a use throughout the term of the lease, and that, in the circumstances disclosed, any
enhancement in the value of the realty in the tax year was not income realized by the lessor
within the Revenue Act.

The circumstances of the instant case differentiate it from the Blatt and Hewitt cases, but the
petitioner's contention that gain was realized when the respondent, through forfeiture of the
lease, obtained untrammeled title, possession, and control of the premises, with the added
increment of value added by the new building, runs counter to the decision in the Miller case
and to the reasoning in the Hewitt case.

The respondent insists that the realty -- a capital asset at the date of the execution of the lease -
- remained such throughout the term and after its expiration; that improvements affixed to the
soil became part of the realty indistinguishably blended in the capital asset; that such
improvements cannot be separately valued or treated as received in exchange for the
improvements which were on the land at the date of the execution of the lease; that they are
therefore in the same category as improvements added by the respondent to his land, or
accruals of value due to extraneous and adventitious circumstances. Such added value, it is
argued, can be considered capital gain only upon the owner's disposition of the asset. The
position is that the economic gain consequent upon the enhanced value of the recaptured asset
is not gain derived from capital or realized within the meaning of the Sixteenth Amendment, and
may not therefore be taxed without apportionment.

We hold that the petitioner was right in assessing the gain as realized in 1933.
We might rest our decision upon the narrow issue presented by the terms of the stipulation. It
does not appear what kind of a building was erected by the tenant, or whether the building was
readily removable from the

Page 309 U. S. 468

land. It is not stated whether the difference in the value between the building removed and that
erected in its place accurately reflects an increase in the value of land and building considered
as a single estate in land. On the facts stipulated, without more, we should not be warranted in
holding that the presumption of the correctness of the Commissioner's determination has been
overborne.

The respondent insists, however, that the stipulation was intended to assert that the sum of
$51,434.25 was the measure of the resulting enhancement in value of the real estate at the date
of the cancellation of the lease. The petitioner seems not to contest this view. Even upon this
assumption, we think that gain in the amount named was realized by the respondent in the year
of repossession.

The respondent cannot successfully contend that the definition of gross income in Sec. 22(a) of
the Revenue Act of 1932 [Footnote 7] is not broad enough to embrace the gain in question. That
definition follows closely the Sixteenth Amendment. Essentially the respondent's position is that
the Amendment does not permit the taxation of such gain without apportionment amongst the
states. He relies upon what was said in Hewitt Realty Co. v. Commissioner, supra, and upon
expressions found in the decisions of this court dealing with the taxability of stock dividends to
the effect that gain derived from capital must be something of exchangeable value proceeding
from property, severed from the capital, however invested or employed, and received by the
recipient for his separate use, benefit, and disposal. [Footnote 8] He emphasizes the necessity
that the gain be separate from the capital and separately disposable. These expressions,
however,

Page 309 U. S. 469

were used to clarify the distinction between an ordinary dividend and a stock dividend. They
were meant to show that, in the case of a stock dividend, the stockholder's interest in the
corporate assets after receipt of the dividend was the same as and inseverable from that which
he owned before the dividend was declared. We think they are not controlling here.

While it is true that economic gain is not always taxable as income, it is settled that the
realization of gain need not be in cash derived from the sale of an asset. Gain may occur as a
result of exchange of property, payment of the taxpayer's indebtedness, relief from a liability, or
other profit realized from the completion of a transaction. [Footnote 9] The fact that the gain is a
portion of the value of property received by the taxpayer in the transaction does not negative its
realization.

Here, as a result of a business transaction, the respondent received back his land with a new
building on it, which added an ascertainable amount to its value. It is not necessary to
recognition of taxable gain that he should be able to sever the improvement begetting the gain
from his original capital. If that were necessary, no income could arise from the exchange of
property, whereas such gain has always been recognized as realized taxable gain. Judgment
reversed
 G.R. No. 60714 October 4, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

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

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

PARAS, J.:

This petition for review seeks the reversal of the decision* of the Court of Tax Appeals in CTA
Case No. 2480 promulgated on January 15, 1982 which set aside petitioner's assessment of
deficiency income tax inclusive of interest and surcharge as well as compromise penalty for
violation of bookkeeping regulations charged against respondent.

The antecedental facts of the case are as follows:

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign
corporation engaged in the business of international air carriage. From 1959 to 1963, JAL did
not have planes that lifted or landed passengers and cargo in the Philippines as it had not been
granted then by the Civil Aeronautics Board (CAB) a certificate of public convenience and
necessity to operate here. However, since mid-July, 1957, JAL had maintained an officeat the
Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was maintained
merely for the promotion of the company's public relations and to hand out brochures, literature
and other information playing up the attractions of Japan as a tourist spot and the services
enjoyed in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in
the Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane
tickets and reservations for cargo spaces which were used by the passengers or customers on
the facilities of JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter
from petitioner Commissioner of Internal Revenue (hereinafter referred to as Commissioner for
brevity), all dated February 28, 1972, for a total amount of P2,099,687.52 inclusive of 50%
surcharge and interest, for years 1959 through 1963, computed as follows:

1959 1960 1961

Net income per P472,025.16 P476,671.48 P734,812.77
investigation
Tax due thereon 133,608.00 135,001.00 212,444.00
Add: 50% surch. 66,804.00 67,500.50 106,222.00
1/2% mo. int.
 (3 yrs.) 24,049.44 24,300.18 38,239.92

Total due P224,461.44 P226,801.68 P356,905.92

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

1962 1963 SUMMARY

Net income per P1,065,641.63 P1,550,230.48 P224,461.44
investigation
Tax due thereon 311,692.00 457,069.00 226,801.68
Add:50% surch. 155,846.00 228,534.50 356,905.92
1/2% mo. int. 523,642.56
(3 yrs.) 56,104.56 82,272.42 767,875.92

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

============= ============ =============
Compromise Penalty P 1,500.00

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

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

Petitioner raises two issues in this wise:

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN
THE PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE
PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN

TRADE OR BUSINESS IN THE PHILIPPINES.

The petition is impressed with merit.

The issues in the case at bar have already been laid to rest in no less than three cases resolved
by this Court. Anent the first issue, the landmark case of Commissioner of Internal Revenue vs.
British Overseas Airways Corporation (G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has
categorically ruled:
"The Tax Code defines `gross income' thus:

`Gross income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest in such
property; also from interests, rents, dividends, securities, or the transaction of any
business carried on for gain or profit, or gains, profits and income derived from any
source whatever" (Sec. 29(3);Emphasis supplied)

"The definition is broad and comprehensive to include proceeds from sales of transport
documents. The words `income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our
laws. Income means `cash received or its equivalent'; it is the amount of money coming
to a person within a specific time x x x; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in our income tax law,
`income' refers to the flow of wealth (Madrigal and Paternol vs. Rafferty and Concepcion,
38 Phil. 414 [1918]).

"x x x x x x

"x x x x x x

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

"x x x x x x

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

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

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

The above ruling was adopted en toto in the subsequent case of Commissioner of Internal
Revenue vs. Air India and the Court of Tax Appeals (G.R. No. L-72443, January 29, 1988, 157
SCRA 648) holding that the revenue derived from the sales of airplane tickets through its agent
Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income, and more
recently, in the case of Commissioner of Internal Revenue vs. American Airlines, Inc. and Court
of Tax Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was likewise declared
that for the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activities within this country regardless of the absence of flight
operations within Philippine territory.

Verily, JAL is a residentforeigncorporation under Section 84 (g) of the NationalInternalRevenue

Code of1939. Definitionofwhata resident foreign corpora-tion is was likewise reproduced under
Section 20 of the 1977 Tax Code.

The BOAC Doctrine has expressed in unqualified terms:

"Under Section 20 of the 1977 Tax Code:

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

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

"x x x. There is no specific criterion as to what constitutes `doing' or `engaging in' or

`transacting' business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization (The
Mentholatum Co., Inc., et al. vs. Anacleto Mangaliman, et al., 72 Phil. 524 (1941);
Section 1, R.A. No. 5455). In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a
continuous business, such as the appointment of a local agent, and not one of a
temporary character (Pacific Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil.
23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847 and Fisher's
Philippine Law of Stock Corporation, p. 415).
There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there
can be no conclusion other than that JAL is a resident foreign corporation, doing business in the
Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation
of sales being the paramount objective (Commissioner of Internal Revenue vs. British Overseas
Airways Corporation, supra). The case of CIR vs. American Airlines, Inc. (supra) sums it up as
follows:

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

Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National Internal
Revenue Code of 1939", the applicable law in the case at bar, resident foreign corporations are
taxed thirty percentum (30%) upon the amount by which their total net income exceed one
hundred thousand pesos. JAL is liable to pay 30% of its total net income for the years 1959
through 1963 as contradistinguished from the computation arrived at by the Commissioner as
shown in the assessment. Apparently, the Commissioner failed to specify the tax base on the
total net income of JAL in figuring out the total income due, i.e., whether 25% or 30% level.

Having established the tax liability of respondent JAL, the only thing left to determine is the
propriety of the 50% surcharge imposed by petitioner. It appears that this must be answered in
the negative. As held in the case of CIR vs. Air India (supra):

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

"x x x x x x

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

Nowhere in the records of the case can be found that JAL deliberately failed to file its income
tax returns for the years covered by the assessment. There was not even an attempt by
petitioner to prove the same or justify the imposition of the 50% surcharge. All that petitioner did
was to cite the provision of law upon which the surcharge was based without explaining why it
was applicable to respondent's case. Such cannot be countenanced for mere allegations are
definitely not acceptable. The willful neglect to file the required tax return or the fraudulent intent
to evade the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed (CIR vs. Air India, supra). The fraud contemplated by law
is actual and constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax
 contemplated by the law. It must amount to intentional wrongdoing with the sole object of
evading the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58 SCRA
519). This was not proven to be so in the case of JAL as it believed in good faith that it need not
file the tax return for it had no taxable income then. The element of fraud is lacking. At most,
only negligence may be imputed to JAL for not ascertaining the dispensability of filing the tax
returns. As such, JAL may be subjected only to the 25% surcharge prescribed by the
aforequoted law.

As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax Code then in
force which states:

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

The 6% interest per annum is the same as 1/2% interest per month and petitioner correctly
computed such interest equivalent to three years which is the maximum set by the law.

On the other hand, the compromise penalty amounting to P1,500.00 for violation of
bookkeeping regulations appears to be without support. The particular provision in the said
regulations allegedly violated was not even specified. Furthermore, the term "compromise
penalty" itself is not found among the penal provisions of the Bookkeeping Regulations
(Revenue Regulations No. V-1, as amended, March 17, 1947, pp. 836-837, Revenue
Regulations Updated by Prof. Eustaquio Ordono, 1984).1âwphi1 The compromise penalty is
therefore, improperly imposed.

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

| Net | 30% of Net | Add 25% | Add 6% interest | Summary of Total

| Income | Income as | surcharge under | per annum for a | Tax Due from the
| | Income Tax Due | Sec. 72 NIRC of | maximum of 3 | Private
| | under Secs. | 1939 | years under | Respondent
| | 24(a) and (b) (2) | | Sec. 51(d) NIRC |
| | NIRC of 1939 | | of 1939 |
_ __ _ _ __ __ __ __ _ _ __ __ __ __ __ _ _ __ __ __ __ __ _ _ __ __ __ __ _ _ __ __ __ __ __
1959 | __ | P 141,607.54 | P 35,401.88 | __ | P 202,498.77
1960 | P 472,025.16 | 143,001.44 | 35,750.36 | P 25,489.35 | 204,492.05
1961 | 476,671.48 | 220,443.83 | 55,110.95 | 25,740.25 | 315,234.66
1962 | 734,812.77 | 319,692.48 | 79,923.12 | 39,679.88 | 399,615.60
1963 | 1,065,641.63 | 465,069.14 | 116,267.28 | | 581,336.42
| 1,550,230.48 | | | |
| | | | | P1,703,177.40
| | | | | ============
Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of
ONE MILLION SEVEN HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY
SEVENAND FORTY CENTAVOS (P1,703,177.40) The dismissal for lack of merit by this Court
of the appeal in JAL v. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3,
1969 is not res judicata to the present case. The Tax Court ruled in that case that the mere sale
of tickets, unaccompanied by the physical act of carriage of transportation, does not render the
taxpayer therein subject to the common carrier's tax. The common carrier's tax is an excise tax,
being a tax on the activity of transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of transportation. Being an excise tax, the
same can be levied by the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines (Commissioner of Internal Revenue v. British
Overseas Airways Corporation, supra).

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

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of Tax
Appeals in CTA Case No. 2480 is SET ASIDE; and (c) private respondent JAL is ordered to pay
the amount of P1,703,177.40 as deficiency taxes for the fiscal years 1959 to 1963 inclusive of
interest andsurcharges.

SO ORDERED.
 June 30, 1987

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

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

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

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

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest
on the balance of the purchase price. No tax was withheld. The Commissioner then held the
NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The
BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the
claimed amount. 6 The NDC went to the Court of Tax Appeals.

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

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37
of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources
within the Philippines. — The following items of gross income shall be treated as gross
income from sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities — the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC — were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and
collect income tax on interest received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition that 'the activity or labor
— and the sale from which the (interest) income flowed had its situs' in the Philippines.
The law specifies: 'Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.'
Nothing there speaks of the 'act or activity' of non-resident corporations in the
Philippines, or place where the contract is signed. The residence of the obligor who pays
the interest rather than the physical location of the securities, bonds or notes or the
place of payment, is the determining factor of the source of interest income. (Mertens,
Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77;
Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard
Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the
obligor is a resident of the Philippines the interest payment paid by him can have no
other source than within the Philippines. The interest is paid not by the bond, note or
other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address
and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally
promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes
for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels
purchased and acquired by it from the Japanese corporations, including the interest on
the principal sum at the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-
13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to
the terms and conditions of these promisory notes, which are duly signed by its Vice
Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in
Japan during the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52
and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase price
of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor
which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta.
Mesa, Manila, Philippines; and as a corporation duly organized and existing under the
laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec.
84(c), National Internal Revenue Code.) The interest paid by petitioner, which is
admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly,
therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and
1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is
interest derived from sources within the Philippines subject to income tax under the then
Section 24(b)(1) of the National Internal Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

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

xxx xxx xxx

(4) Interest on Government Securities. — Interest upon the obligations of the

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

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

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

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

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

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

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

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

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

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

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not
the Republic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure
to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c)
of the Tax Code, thus:

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

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

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

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

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

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

is so ordered.
 G.R. No. 119761 August 29, 1996

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO
CORPORATION, respondents.

VITUG, J.:p

The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of
respondent Court of Appeals 1 affirming the 10th August 1994 decision and the 11th October
1994 resolution of the Court of Tax Appeals 2 ("CTA") in C.T.A. Case No. 5015, entitled
"Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of
Internal Revenue."

The facts, by and large, are not in dispute.

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different

brands of cigarettes.

On various dates, the Philippine Patent Office issued to the corporation separate certificates of
trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06
January 1987, of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy
Minister Ramon Diaz of the Presidential Commission on Good Government, "the initial position
of the Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands since they
were listed in the World Tobacco Directory as belonging to foreign companies. However,
Fortune Tobacco changed the names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,'
thereby removing the said brands from the foreign brand category. Proof was also submitted to
the Bureau (of Internal Revenue ['BIR']) that 'Champion' was an original Fortune Tobacco
Corporation register and therefore a local brand." 3 Ad Valorem taxes were imposed on these
brands, 4 at the following rates:

BRAND AD VALOREM TAX RATE

E.O. 22 and E.O. 273 RA 6956
06-23-86 07-25-87 06-18-90
07-01-86 01-01-88 07-05-90

Hope Luxury M. 100's

Sec. 142, (c), (2) 40% 45%
Hope Luxury M. King
Sec. 142, (c), (2) 40% 45%
More Premium M. 100's
Sec. 142, (c), (2) 40% 45%
More Premium International
Sec. 142, (c), (2) 40% 45%
Champion Int'l. M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. King
Sec. 142, (c), last par. 15% 20%
Champion Lights
Sec. 142, (c), last par. 15% 20% 5

A bill, which later became Republic Act ("RA") No. 7654, 6 was enacted, on 10 June
1993, by the legislature and signed into law, on 14 June 1993, by the President of the
Philippines. The new law became effective on 03 July 1993. It amended Section
142(c)(1) of the National Internal Revenue Code ("NIRC") to read; as follows:

Sec. 142. Cigars and Cigarettes. —

xxx xxx xxx

(c) Cigarettes packed by machine. — There shall be levied, assessed and

collected on cigarettes packed by machine a tax at the rates prescribed below
based on the constructive manufacturer's wholesale price or the actual
manufacturer's wholesale price, whichever is higher:

(1) On locally manufactured cigarettes which are currently classified and taxed at
fifty-five percent (55%) or the exportation of which is not authorized by contract or
otherwise, fifty-five (55%) provided that the minimum tax shall not be less than
Five Pesos (P5.00) per pack.

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided

that the minimum tax shall not be less than Three Pesos (P3.00) per pack.

xxx xxx xxx

When the registered manufacturer's wholesale price or the actual manufacturer's

wholesale price whichever is higher of existing brands of cigarettes, including the
amounts intended to cover the taxes, of cigarettes packed in twenties does not
exceed Four Pesos and eighty centavos (P4.80) per pack, the rate shall be
twenty percent (20%). 7 (Emphasis supplied)

About a month after the enactment and two (2) days before the effectivity of RA 7654,
Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the
full text of which expressed:

REPUBLIKA NG PILIPINAS
KAGAWARAN NG PANANALAPI
KAWANIHAN NG RENTAS INTERNAS

July 1, 1993

REVENUE MEMORANDUM CIRCULAR NO. 37-93

SUBJECT: Reclassification of Cigarettes Subject to Excise Tax

TO: All Internal Revenue Officers and Others Concerned.

In view of the issues raised on whether "HOPE," "MORE" and "CHAMPION"

cigarettes which are locally manufactured are appropriately considered as locally
manufactured cigarettes bearing a foreign brand, this Office is compelled to
review the previous rulings on the matter.

Section 142 (c)(1) National Internal Revenue Code, as amended by R.A. No.
6956, provides:

On locally manufactured cigarettes bearing a foreign brand, fifty-

five percent (55%) Provided, That this rate shall apply regardless
of whether or not the right to use or title to the foreign brand was
sold or transferred by its owner to the local manufacturer.
Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign
countries appearing in the current World Tobacco Directory shall
govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on
cigarettes is that the locally manufactured cigarettes bear a foreign brand
regardless of whether or not the right to use or title to the foreign brand was sold
or transferred by its owner to the local manufacturer. The brand must be
originally owned by a foreign manufacturer or producer. If ownership of the
cigarette brand is, however, not definitely determinable, ". . . the listing of brands
manufactured in foreign countries appearing in the current World Tobacco
Directory shall govern. . . ."

"HOPE" is listed in the World Tobacco Directory as being manufactured by (a)

Japan Tobacco, Japan and (b) Fortune Tobacco, Philippines. "MORE" is listed in
the said directory as being manufactured by: (a) Fills de Julia Reig, Andorra; (b)
Rothmans, Australia; (c) RJR-Macdonald Canada; (d) Rettig-Strenberg, Finland;
(e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand;
(h) Fortune Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J.
Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m)
R.J. Reynolds, USA. "Champion" is registered in the said directory as being
manufactured by (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan
Tobacco, Japan; (d) Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f)
Tabac Reunies, Switzerland.

Since there is no showing who among the above-listed manufacturers of the

cigarettes bearing the said brands are the real owner/s thereof, then it follows
that the same shall be considered foreign brand for purposes of determining
the ad valorem tax pursuant to Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where
it cannot be established or there is dearth of evidence as to whether a brand is
foreign or not, resort to the World Tobacco Directory should be made."

In view of the foregoing, the aforesaid brands of cigarettes, viz: "HOPE," "MORE"
and "CHAMPION" being manufactured by Fortune Tobacco Corporation are
 hereby considered locally manufactured cigarettes bearing a foreign brand
subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

(SGD) LIWAYWAY VINZONS-CHATO

Commissioner

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio,
Jr., sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it was addressed to no
one in particular. On 15 July 1993, Fortune Tobacco received, by ordinary mail, a
certified xerox copy of RMC 37-93.

In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune
Tobacco requested for a review, reconsideration and recall of RMC 37-93. The request
was denied on 29 July 1993. The following day, or on 30 July 1993, the CIR assessed
Fortune Tobacco for ad valorem tax deficiency amounting to P9,598,334.00.

8
On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA.

On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged:

WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the

brands of cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being
manufactured by Fortune Tobacco Corporation as locally manufactured
cigarettes bearing a foreign brand subject to the 55% ad valorem tax on
cigarettes is found to be defective, invalid and unenforceable, such that when
R.A. No. 7654 took effect on July 3, 1993, the brands in question were not
CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1)
of the Tax Code, as amended by R.A. No. 7654 and were therefore still classified
as other locally manufactured cigarettes and taxed at 45% or 20% as the case
may be.

Accordingly, the deficiency ad valorem tax assessment issued on petitioner

Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of
surcharge and interest, is hereby canceled for lack of legal basis.

Respondent Commissioner of Internal Revenue is hereby enjoined from

collecting the deficiency tax assessment made and issued on petitioner in
relation to the implementation of RMC No. 37-93.

SO ORDERED. 9

In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion
for reconsideration.

The CIR forthwith filed a petition for review with the Court of Appeals, questioning the
CTA's 10th August 1994 decision and 11th October 1994 resolution. On 31 March 1993,
the appellate court's Special Thirteenth Division affirmed in all respects the assailed
decision and resolution.

In the instant petition, the Solicitor General argues: That —

I. RMC 37-93 IS A RULING OR OPINION OF THE

COMMISSIONER OF INTERNAL REVENUE INTERPRETING
THE PROVISIONS OF THE TAX CODE.

II. BEING AN INTERPRETATIVE RULING OR OPINION, THE

PUBLICATION OF RMC 37-93, FILING OF COPIES THEREOF
WITH THE UP LAW CENTER AND PRIOR HEARING ARE NOT
NECESSARY TO ITS VALIDITY, EFFECTIVITY AND
ENFORCEABILITY.

III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN

NOTIFIED OR RMC 37-93 ON JULY 2, 1993.

IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES

TO ALL LOCALLY MANUFACTURED CIGARETTES SIMILARLY
SITUATED AS "HOPE," "MORE" AND "CHAMPION"
CIGARETTES.

V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM

RECLASSIFYING "HOPE," "MORE" AND "CHAMPION"
CIGARETTES BEFORE THE EFFECTIVITY OF R.A. NO. 7654.

VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE

INQUIRY IS NOT INTO ITS VALIDITY, EFFECTIVITY OR
ENFORCEABILITY BUT INTO ITS CORRECTNESS OR
PROPRIETY; RMC 37-93 IS CORRECT. 10

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR
which can thus become effective without any prior need for notice and hearing, nor
publication, and that its issuance is not discriminatory since it would apply under similar
circumstances to all locally manufactured cigarettes.

The Court must sustain both the appellate court and the tax court.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings
for the effective implementation of the provisions of the National Internal Revenue Code.
Let it be made clear that such authority of the Commissioner is not here doubted. Like
any other government agency, however, the CIR may not disregard legal requirements
or applicable principles in the exercise of its quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances — a legislative

rule and an interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department of Finance
Secretary, 11 the Court expressed:

. . . a legislative rule is in the nature of subordinate legislation, designed to

implement a primary legislation by providing the details thereof . In the same way
that laws must have the benefit of public hearing, it is generally required that
before a legislative rule is adopted there must be hearing. In this connection, the
Administrative Code of 1987 provides:

Public Participation. — If not otherwise required by law, an agency shall, as far

as practicable, publish or circulate notices of proposed rules and afford interested
parties the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed
rates shall have been published in a newspaper of general circulation at least two
(2) weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed.

In addition such rule must be published. On the other hand, interpretative rules
are designed to provide guidelines to the law which the administrative agency is
in charge of enforcing. 12

It should be understandable that when an administrative rule is merely interpretative in

nature, its applicability needs nothing further than its bare issuance for it gives no real
consequence more than what the law itself has already prescribed. When, upon the
other hand, the administrative rule goes beyond merely providing for the means that can
facilitate or render least cumbersome the implementation of the law but substantially
adds to or increases the burden of those governed, it behooves the agency to accord at
least to those directly affected a chance to be heard, and thereafter to be duly informed,
before that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under which it has
been issued, convinces us that the circular cannot be viewed simply as a corrective
measure (revoking in the process the previous holdings of past Commissioners) or
merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and
most importantly, been made in order to place "Hope Luxury," "Premium More" and
"Champion" within the classification of locally manufactured cigarettes bearing foreign
brands and to thereby have them covered by RA 7654. Specifically, the new law would
have its amendatory provisions applied to locally manufactured cigarettes which at the
time of its effectivity were not so classified as bearing foreign brands. Prior to the
issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion"
cigarettes were in the category of locally manufactured cigarettes not bearing foreign
brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA
7654, would have had no new tax rate consequence on private respondent's products.
Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes
within the scope of the amendatory law and subject them to an increased tax rate, the
now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply intrepreted
the law; verily, it legislated under its quasi-legislative authority. The due observance of
the requirements of notice, of hearing, and of publication should not have been then
ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations

It has been observed that one of the problem areas bearing on compliance with
Internal Revenue Tax rules and regulations is lack or insufficiency of due notice
to the tax paying public. Unless there is due notice, due compliance therewith
may not be reasonably expected. And most importantly, their strict enforcement
could possibly suffer from legal infirmity in the light of the constitutional provision
on "due process of law" and the essence of the Civil Code provision concerning
effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV,
Constitution; Art. 2, New Civil Code).

In order that there shall be a just enforcement of rules and regulations, in

conformity with the basic element of due process, the following procedures are
hereby prescribed for the drafting, issuance and implementation of the said
Revenue Tax Issuances:

(1) This Circular shall apply only to (a) Revenue Regulations; (b)
Revenue Audit Memorandum Orders; and (c) Revenue
Memorandum Circulars and Revenue Memorandum Orders
bearing on internal revenue tax rules and regulations.

(2) Except when the law otherwise expressly provides, the

aforesaid internal revenue tax issuances shall not begin to be
operative until after due notice thereof may be fairly presumed.

Due notice of the said issuances may be fairly presumed only

after the following procedures have been taken;

xxx xxx xxx

(5) Strict compliance with the foregoing procedures is

enjoined. 13

Nothing on record could tell us that it was either impossible or impracticable for the BIR
to observe and comply with the above requirements before giving effect to its questioned
circular.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be
uniform and equitable. Uniformity requires that all subjects or objects of taxation,
similarly situated, are to be treated alike or put on equal footing both in privileges and
liabilities. 14 Thus, all taxable articles or kinds of property of the same class must be
taxed at the same rate 15 and the tax must operate with the same force and effect in
every place where the subject may be found.

Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and
"Champion" cigarettes and, unless petitioner would be willing to concede to the
submission of private respondent that the circular should, as in fact my esteemed
colleague Mr. Justice Bellosillo so expresses in his separate opinion, be
considered adjudicatory in nature and thus violative of due process following the Ang
Tibay 16 doctrine, the measure suffers from lack of uniformity of taxation. In its decision,
the CTA has keenly noted that other cigarettes bearing foreign brands have not been
similarly included within the scope of the circular, such as —

1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

(a) "PALM TREE" is listed as manufactured by office of Monopoly,

Korea (Exhibit "R")

2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY

(a) "GOLDEN KEY" is listed being manufactured by United

Tobacco, Pakistan (Exhibit "S")

(b) "CANNON" is listed as being manufactured by Alpha Tobacco,

Bangladesh (Exhibit "T")

3. Locally manufactured by LA PERLA INDUSTRIES, INC.

(a) "WHITE HORSE" is listed as being manufactured by

Rothman's, Malaysia (Exhibit "U")

(b) "RIGHT" is listed as being manufactured by SVENSKA,

Tobaks, Sweden (Exhibit "V-1")

4. Locally manufactured by MIGHTY CORPORATION

(a) "WHITE HORSE" is listed as being manufactured by

Rothman's, Malaysia (Exhibit "U-1")

5. Locally manufactured by STERLING TOBACCO CORPORATION

(a) "UNION" is listed as being manufactured by Sumatra Tobacco,

Indonesia and Brown and Williamson, USA (Exhibit "U-3")

(b) "WINNER" is listed as being manufactured by Alpha Tobacco,

Bangladesh; Nangyang, Hongkong; Joo Lan, Malaysia; Pakistan
Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar,
Sudan (Exhibit "U-4"). 17
The court quoted at length from the transcript of the hearing conducted on 10 August
1993 by the Committee on Ways and Means of the House of Representatives; viz:

THE CHAIRMAN. So you have specific information on Fortune Tobacco alone.

You don't have specific information on other tobacco manufacturers. Now, there
are other brands which are similarly situated. They are locally manufactured
bearing foreign brands. And may I enumerate to you all these brands, which are
also listed in the World Tobacco Directory . . . Why were these brand not
reclassified at 55 if your want to give a level playing filed to foreign
manufacturers?

MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue

Memorandum Circular that was supposed to come after RMC No. 37-93 which
have really named specifically the list of locally manufactured cigarettes bearing
a foreign brand for excise tax purposes and includes all these brands that you
mentioned at 55 percent except that at that time, when we had to come up with
this, we were forced to study the brands of Hope, More and Champion because
we were given documents that would indicate the that these brands were actually
being claimed or patented in other countries because we went by Revenue
Memorandum Circular 1488 and we wanted to give some rationality to how it
came about but we couldn't find the rationale there. And we really found based
on our own interpretation that the only test that is given by that existing law would
be registration in the World Tobacco Directory. So we came out with this
proposed revenue memorandum circular which we forwarded to the Secretary of
Finance except that at that point in time, we went by the Republic Act 7654 in
Section 1 which amended Section 142, C-1, it said, that on locally manufactured
cigarettes which are currently classified and taxed at 55 percent. So we were
saying that when this law took effect in July 3 and if we are going to come up with
this revenue circular thereafter, then I think our action would really be subject to
question but we feel that . . . Memorandum Circular Number 37-93 would really
cover even similarly situated brands. And in fact, it was really because of the
study, the short time that we were given to study the matter that we could not
include all the rest of the other brands that would have been really classified as
foreign brand if we went by the law itself. I am sure that by the reading of the law,
you would without that ruling by Commissioner Tan they would really have been
included in the definition or in the classification of foregoing brands. These
brands that you referred to or just read to us and in fact just for your
information, we really came out with a proposed revenue memorandum circular
for those brands. (Emphasis supplied)

(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).

xxx xxx xxx

MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is
why I felt that we . . . I wanted to come up with a more extensive coverage and
precisely why I asked that revenue memorandum circular that would cover all
those similarly situated would be prepared but because of the lack of time and I
came out with a study of RA 7654, it would not have been possible to really come
 up with the reclassification or the proper classification of all brands that are listed
there. . . (emphasis supplied) (Exhibit "FF-2d," page IX-1)

xxx xxx xxx

HON. DIAZ. But did you not consider that there are similarly situated?

MS. CHATO. That is precisely why, Sir, after we have come up with this
Revenue Memorandum Circular No. 37-93, the other brands came about the
would have also clarified RMC 37-93 by I was saying really because of the fact
that I was just recently appointed and the lack of time, the period that was
allotted to us to come up with the right actions on the matter, we were really
caught by the July 3 deadline. But in fact, We have already prepared a revenue
memorandum circular clarifying with the other . . . does not yet, would have been
a list of locally manufactured cigarettes bearing a foreign brand for excise tax
purposes which would include all the other brands that were mentioned by the
Honorable Chairman. (Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). 18

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a
valid and effective administrative issuance.

WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax
Appeals, is AFFIRMED. No costs.

SO ORDERED.

Kapunan, J., concurs.

Separate Opinions

BELLOSILLO, J.: separate opinion:

RA 7654 was enacted by Congress on 10 June 1993, signed into law by the President on 14
June 1993, and took effect 3 July 1993. It amended partly Sec. 142, par. (c), of the National
Internal Revenue Code (NIRC) to read —

Sec. 142. Cigars and cigarettes. — . . . . (c) Cigarettes packed by machine. —

There shall be levied, assessed and collected on cigarettes packed by machine a
tax at the rates prescribed below based on the constructive manufacturer's
wholesale price or the actual manufacturer's wholesale price, whichever is
higher.

(1) On locally manufactured cigarettes which are currently classified and taxed at
fifty-five percent (55%) or the exportation of which is not authorized by contract or
otherwise, fifty-five percent (55%) provided that the minimum tax shall not be less
than Five Pesos (P5.00) per pack (emphasis supplied).

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided

that the minimum tax shall not be less than Three Pesos (P3.00) per pack.
Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium
More and Champion were considered local brands subjected to an ad valorem tax at the rate of
20-45%. However, on 1 July 1993 or two (2) days before RA 7654 took effect, petitioner
Commissioner of Internal Revenue issued RMC 37-93 reclassifying
"Hope, More and Champion being manufactured by Fortune Tobacco Corporation . . . . (as)
locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on
cigarettes." 1 RMC 37-93 in effect subjected Hope Luxury, Premium
More and Champion cigarettes to the provisions of Sec. 142, par. (c), subpar. (1), NIRC, as
amended by RA 7654, imposing upon these cigarette brands an ad valorem tax of "fifty-five
percent (55%) provided that the minimum tax shall not be less than Five Pesos (P5.00) per
pack."

On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours before the effectivity of
RA 7654, a copy of RMC 37-93 with a cover letter signed by Deputy Commissioner Victor A.
Deoferio of the Bureau of Internal Revenue was sent by facsimile to the factory of respondent
corporation in Parang, Marikina, Metro Manila. It appears that the letter together with a copy of
RMC 37-93 did not immediately come to the knowledge of private respondent as it was
addressed to no one in particular. It was only when the reclassification of respondent
corporation's cigarette brands was reported in the column of Fil C. Sionil in Business Bulletin on
4 July 1993 that the president of respondent corporation learned of the matter, prompting him to
inquire into its veracity and to request from petitioner a copy of RMC 37-93. On 15 July 1993
respondent corporation received by ordinary mail a certified machine copy of RMC 37-93.

Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was
forthwith denied by the Appellate Division of the Bureau of Internal Revenue. As a
consequence, on 30 July 1993 private respondent was assessed an ad valorem tax deficiency
amounting to P9,598,334.00. Respondent corporation went to the Court of Tax Appeals (CTA)
on a petition for review.

On 10 August 1994, after due hearing, the CTA found the petition meritorious and ruled —

Revenue Memorandum Circular No. 37-93 reclassifying the brands of

cigarettes, viz: Hope, More and Champion being manufactured by Fortune
Tobacco Corporation as locally manufactured cigarettes bearing a foreign brand
subject to the 55% ad valorem tax on cigarettes is found to be defective, invalid
and unenforceable . . . . Accordingly, the deficiency ad valorem tax assessment
issued on petitioner Fortune Tobacco Corporation in the amount of
P9,598,334.00, exclusive of surcharge and interest, is hereby cancelled for lack
of legal basis. 2

The CTA held that petitioner Commissioner of Internal Revenue failed to observe due
process of law in issuing RMC 37-93 as there was no prior notice and hearing, and that
RMC 37-93 was in itself discriminatory. The motion to reconsider its decision was denied
by the CTA for lack of merit. On 31 March 1995 respondent Court of Appeals affirmed in
toto the decision of the CTA. 3 Hence, the instant petition for review.

Petitioner now submits through the Solicitor General that RMC 37-93 reclassifying Hope
Luxury, Premium More and Champion as locally manufactured cigarettes bearing brands is
merely an interpretative ruling which needs no prior notice and hearing as held in Misamis
Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary. 4 It maintains
that neither is the assailed revenue memorandum circular discriminatory as it merely "lays down
the test in determining whether or not a locally manufactured cigarette bears a foreign brand
using (only) the cigarette brands Hope, More and Champion as specific examples." 5

Respondent corporation on the other hand contends that RMC 37-93 is not a mere
interpretative ruling but is adjudicatory in nature where prior notice and hearing are mandatory,
and that Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary on which the Solicitor General relies heavily is not applicable. Respondent Fortune
Tobacco Corporation also argues that RMC 37-93 discriminates against its cigarette brands
since those of its competitors which are similarly situated have not been reclassified.

The main issues before us are (a) whether RMC 37-93 is merely an interpretative rule the
issuance of which needs no prior notice and hearing, or an adjudicatory ruling which calls for the
twin requirements of prior notice and hearing, and, (b) whether RMC 37-93 is discriminatory in
nature.

A brief discourse on the powers and functions of administrative bodies may be instructive.

Administrative agencies posses quasi-legislative or rule making powers and quasi-judicial or

administrative adjudicatory powers. Quasi-legislative or rule making power is the power to make
rules and regulations which results in delegated legislation that is within the confines of the
granting statute and the doctrine of nondelegability and separability of powers.

Interpretative rule, one of the three (3) types of quasi-legislative or rule making powers of an
administrative agency (the other two being supplementary or detailed legislation, and contingent
legislation), is promulgated by the administrative agency to interpret, clarify or explain statutory
regulations under which the administrative body operates. The purpose or objective of an
interpretative rule is merely to construe the statute being administered. It purports to do no more
than interpret the statute. Simply, the rule tries to say what the statute means. Generally, it
refers to no single person or party in particular but concerns all those belonging to the same
class which may be covered by the said interpretative rule. It need not be published and neither
is a hearing required since it is issued by the administrative body as an incident of its power to
enforce the law and is intended merely to clarify statutory provisions for proper observance by
the people. In Tañada v. Tuvera, 6 this Court expressly said that "[i]interpretative regulations . . .
. need not be published."

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the
administrative agency to adjudicate the rights of persons before it. It is the power to hear and
determine questions of fact to which the legislative policy is to apply and to decide in
accordance with the standards laid down by the law itself in enforcing and administering the
same law. 7 The administrative body exercises its quasi-judicial power when it performs in a
judicial manner an act which is essentially of an executive or administrative nature, where the
power to act in such manner is incidental to or reasonably necessary for the performance of the
executive or administrative duty entrusted to it. 8 In carrying out their quasi-judicial functions the
administrative officers or bodies are required to investigate facts or ascertain the existence of
facts, hold hearings, weigh evidence, and draw conclusions from them as basis for their official
action and exercise of discretion in a judicial nature. Since rights of specific persons are affected
it is elementary that in the proper exercise of quasi-judicial power due process must be
observed in the conduct of the proceedings.
The importance of due process cannot be underestimated. Too basic is the rule that no person
shall be deprived of life, liberty or property without due process of law. Thus when an
administrative proceeding is quasi-judicial in character, notice and fair open hearing are
essential to the validity of the proceeding. The right to reasonable prior notice and hearing
embraces not only the right to present evidence but also the opportunity to know the claims of
the opposing party and to meet them. The right to submit arguments implies that opportunity
otherwise the right may as well be considered impotent. And those who are brought into contest
with government in a quasi-judicial proceeding aimed at the control of their activities are entitled
to be fairy advised of what the government proposes and to be heard upon its proposal before it
issues its final command.

There are cardinal primary rights which must be respected in administrative proceedings. The
landmark case of Ang Tibay v. The Court of Industrial Relations 9 enumerated these rights: (1)
the right to a hearing, which includes the right of the party interested or affected to present his
own case and submit evidence in support thereof; (2) the tribunal must consider the evidence
presented; (3) the decision must have something to support itself; (4) the evidence must be
substantial; (5) the decision must be rendered on the evidence presented at the hearing, or at
least contained in the record and disclosed to the parties affected; (6) the tribunal or any of its
judges must act on its or his own independent consideration of the law and facts of the
controversy, and not simply accept the views of a subordinate in arriving at a decision; and, (7)
the tribunal should in all controversial questions render its decision in such manner that the
parties to the proceeding may know the various issues involved and the reasons for the decision
rendered.

In determining whether RMC No. 37-93 is merely an interpretative rule which requires no prior
notice and hearing, or an adjudicatory rule which demands the observance of due process, a
close examination of RMC 37-93 is in order. Noticeably, petitioner Commissioner of Internal
Revenue at first interprets Sec. 142, par. (c), subpar. (1), of the NIRC, as amended, by citing the
law and clarifying or explaining what it means —

Section 142 (c) (1), National Internal Revenue Code, as amended by R.A. No.
6956, provides: On locally manufactured cigarettes bearing a foreign brand, fifty-
five percent (55%) Provided, That this rate shall apply regardless of whether or
not the right to use or title to the foreign brand was sold or transferred by its
owner to the local manufacturer. Whenever it has to be determined whether or
not a cigarette bears a foreign brand, the listing of brands manufactured in
foreign countries appearing in the current World Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on
cigarettes is that the locally manufactured cigarettes bear a foreign brand
regardless of whether or not the right to use or title to the foreign brand was sold
or transferred by its owner to the local manufacturer. The brand must be
originally owned by a foreign manufacturer or producer. If ownership of the
cigarette brand is, however, not definitely determinable,
". . . the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern . . ."

Then petitioner makes a factual finding by declaring that Hope (Luxury),

(Premium) More and Champion are manufactured by other foreign manufacturers —
 Hope is listed in the World Tobacco Directory as being manufactured by (a)
Japan Tobacco, Japan and (b) Fortune Tobacco, Philippines. More is listed in the
said directory as being manufactured by: (a) Fills de Julia Reig, Andorra; (b)
Rothmans, Australia; (c) RJR-MacDonald, Canada; (d) Rettig-Strenberg, Finland;
(e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand;
(h) Fortune Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J.
Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m)
R.J. Reynolds, USA. "Champion" is registered in the said directory as being
manufactured by: (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan
Tobacco, Japan; (d) Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f)
Tabac Reunies, Switzerland.

From this finding, petitioner thereafter formulates an inference that since it cannot be
determined who among the manufacturers are the real owners of the brands in question, then
these cigarette brands should be considered foreign brands —

Since there is no showing who among the above-listed manufacturers of the

cigarettes bearing the said brands are the real owner/s thereof, then it follows
that the same shall be considered foreign brand for purposes of determining
the ad valorem tax pursuant to Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where
it cannot be established or there is dearth of evidence as to whether a brand is
foreign or not, resort to the World Tobacco Directory should be made."

Finally, petitioner caps RMC 37-93 with a disposition specifically directed at respondent
corporation reclassifying its cigarette brands as locally manufactured bearing foreign brands —

In view of the foregoing, the aforesaid brands of

cigarettes, viz: Hope, More and Champion being manufactured by Fortune
Tobacco Corporation are hereby considered locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

It is evident from the foregoing that in issuing RMC 37-93 petitioner Commissioner of Internal
Revenue was exercising her quasi-judicial or administrative adjudicatory power. She cited and
interpreted the law, made a factual finding, applied the law to her given set of facts, arrived at a
conclusion, and issued a ruling aimed at a specific individual. Consequently prior notice and
hearing are required. It must be emphasized that even the text alone of RMC 37-93 implies that
reception of evidence during a hearing is appropriate if not necessary since it invokes BIR
Ruling No. 410-88, dated August 24, 1988, which provides that "in cases where it cannot be
established or there is dearth of evidence as to whether a brand is foreign or not . . . ." Indeed, it
is difficult to determine whether a brand is foreign or not if it is not established by, or there is
dearth of, evidence because no hearing has been called and conducted for the reception of
such evidence. In fine, by no stretch of the imagination can RMC 37-93 be considered purely as
an interpretative rule — requiring no previous notice and hearing and simply interpreting,
construing, clarifying or explaining statutory regulations being administered by or under which
the Bureau of Internal Revenue operates.
It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders v. Department of
Finance Secretary, and RMC 37-93 in the instant case reclassify certain products for purposes
of taxation. But the similarity between the two revenue memorandum circulars ends there. For in
properly determining whether a revenue memorandum circular is merely an interpretative rule or
an adjudicatory rule, its very tenor and text, and the circumstances surrounding its issuance will
have no to be considered.

We quote RMC 47-91 promulgated 11 June 1991 —

Revenue Memorandum Circular No. 47-91

SUBJECT : Taxability of Copra

TO : All Revenue Officials and Employees and Others Concerned.

For the information and guidance of all officials and employees and others
concerned, quoted hereunder in its entirety is VAT Ruling No. 190-90 dated
August 17, 1990:

COCOFED MARKETING RESEARCH CORPORATION

6th Floor Cocofed Building
144 Amorsolo Street
Legaspi Village, Makati
Metro Manila

Attention: Ms. Esmyrn

a E. Reyes
Vice President —
Finance

Sirs:

This has reference to your letter dated January 16, 1990 wherein
you represented that inspite of your VAT registration of your copra
trading company, you are supposed to be exempt from VAT on
the basis of BIR Ruling dated January 8, 1988 which considered
copra as an agricultural food product in its original state. In this
connection, you request for a confirmation of your opinion as
aforestated.

In reply, please be informed that copra, being an agricultural non-

food product, is exempt from VAT only if sale is made by the
primary producer pursuant to Section 103 (a) of the Tax Code, as
amended. Thus as a trading company and a subsequent seller,
your sale of copra is already subject to VAT pursuant to Section
9(b) (1) of Revenue Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-88.

Very truly yours,

 (Sgd.) JOSE U. ONG
Commissioner of Internal Revenue

As a clarification, this is the present and official stand of this Office unless sooner
revoked or amended. All revenue officials and employees are enjoined to give
this Circular as wide a publicity as possible.

(Sgd.) JOSE U. ONG

Commissioner of Internal Revenue

Quite obviously, the very text of RMC 47-91 itself shows that it is merely an interpretative rule as
it simply quotes a VAT Ruling and reminds those concerned that the ruling is the present and
official stand of the Bureau of Internal Revenue. Unlike in RMC 37-93 where petitioner
Commissioner manifestly exercised her quasi-judicial or administrative adjudicatory power, in
RMC 47-91 there were no factual findings, no application of laws to a given set of facts, no
conclusions of law, and no dispositive portion directed at any particular party.

Another difference is that in the instant case, the issuance of the assailed revenue
memorandum circular operated to subject the taxpayer to the new law which was yet to take
effect, while in Misamis, the disputed revenue memorandum circular was issued simply to
restate and then clarify the prevailing position and ruling of the administrative agency, and no
new law yet to take effect was involved. It merely interpreted an existing law which had already
been in effect for some time and which was not set to be amended. RMC 37-93 is thus
prejudicial to private respondent alone.

A third difference, and this likewise resolves the issue of discrimination, is that RMC 37-93 was
ostensibly issued to subject the cigarette brands of respondent corporation to a new law as it
was promulgated two days before the expiration of the old law and a few hours before the
effectivity of the new law. That RMC 37-93 is particularly aimed only at respondent corporation
and its three (3) cigarette brands can be seen from the dispositive portion of the assailed
revenue memorandum circular —

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More,
and Champion being manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a foreign brand subject to the
55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

Thus the argument of the Solicitor General that RMC 37-93 is not discriminatory as "[i]t merely
lays down the test in determining whether or not a locally manufactured cigarette bears a
foreign brand using the cigarette brands Hope, More and Champion as specific examples,"
cannot be accepted, much less sustained. Without doubt, RMC 37-93 has a tremendous effect
on respondent corporation — and solely on respondent corporation — as its deficiency ad
valorem tax assessment on its removals of Hope, Luxury, Premium More,
and Champion cigarettes for six (6) hours alone, i.e., from six o'clock in the evening of 2 July
1993 which is presumably the time respondent corporation was supposed to have received the
facsimile message sent by Deputy Commissioner Victor A. Deoferio, until twelve o'clock
midnight upon the effectivity of the new law, was already P9,598,334.00. On the other hand,
RMC 47-91 was issued with no purpose except to state and declare what has been the official
stand of the administrative agency on the specific subject matter, and was indiscriminately
directed to all copra traders with no particular individual in mind.

That petitioner Commissioner of Internal Revenue is an expert in her filed is not attempted to be
disputed; hence, we do not question the wisdom of her act in reclassifying the cigarettes.
Neither do we deny her the exercise of her quasi-legislative or quasi-judicial powers. But most
certainly, by constitutional mandate, the Court must check the exercise of these powers and
ascertain whether petitioner has gone beyond the legitimate bounds of her authority.

In the final analysis, the issue before us in not the expertise, the authority to promulgate rules,
or the wisdom of petitioner as Commissioner of Internal Revenue is reclassifying the cigarettes
of private respondents. It is simply the faithful observance by government by government of the
basic constitutional right of a taxpayer to due process of law and equal protection of the laws.
This is what distresses me no end — the manner and the circumstances under which the
cigarettes of private respondent were reclassified and correspondingly taxed under RMC 37-93,
and adjudicatory rule which therefore requires reasonable notice and hearing before its
issuance. It should not be confused with RMC 47-91, which is a mere interpretative rule.

In the earlier case of G.R. No. 119322, which practically involved the same opposing interests, I
also voted to uphold the constitutional right of the taxpayer concerned to due process and equal
protection of the laws. By a vote of 3-2, that view prevailed. In sequela, we in the First Division
who constituted the majority found ourselves unjustly drawn into the vortex of a nightmarish
episode. The strong ripples whipped up by my opinion expressed therein — and of the majority
— have yet to varnish when we are again in the imbroglio of a similar dilemma. The unpleasant
experience should be reason enough to simply steer clear of this controversy and surf on a
pretended loss of judicial objectivity. Such would have been an easy way out, a gracious exit, so
to speak, albeit lame. But to camouflage my leave with a sham excuse would be to turn away
from a professional vow I keep at all times; I would not be true to myself, and to the people I am
committed to serve. Thus, as I have earlier expressed, if placed under similar circumstances in
some future time, I shall have to brave again the prospect of another vilification and a tarnished
image if only to show proudly to the whole world that under the present dispensation judicial
independence in our country is a true component of our democracy.

In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as well as the effect of
such issuance. For it cannot be denied that the circumstances clearly demonstrate that it was
hastily issued — without prior notice and hearing, and singling out private respondent alone —
when two days before a new tax law was to take effect petitioner reclassified and taxed the
cigarette brands of private respondent at a higher rate. Obviously, this was to make it appear
that even before the anticipated date of effectivity of the statute — which was undeniably priorly
known to petitioner — these brands were already currently classified and taxed at fifty-five
percent (55%), thus shoving them into the purview of the law that was to take effect two days
after!

For sure, private respondent was not properly informed before the issuance of the questioned
memorandum circular that its cigarette brands Hope Luxury, Premium
More and Champion were being reclassified and subjected to a higher tax rate. Naturally, the
result would be to lose financially because private respondent was still selling its cigarettes at a
price based on the old, lower tax rate. Had there been previous notice and hearing, as claimed
by private respondent, it could have very well presented its side, either by opposing the
reclassification, or by acquiescing thereto but increasing the price of its cigarettes to adjust to
the higher tax rate. The reclassification and the ensuing imposition of a tax rate increase
therefore could not be anything but confiscatory if we are also to consider the claim of private
respondent that the new tax is even higher than the cost of its cigarettes.

Accordingly, I vote to deny the petition.

HERMOSISIMA, JR., J.: dissenting

Private respondent Fortune Tobacco Corporation in the instant case disputes its liability for
deficiency ad valorem excise taxes on its removals of "Hope," "More," and "Champion"
cigarettes from 6:00 p.m. to 12:00 midnight of July 2, 1993, in the total amount of
P9,598,334.00. It claims that the circular, upon which the assessment was based and made, is
defective, invalid and unenforceable for having been issued without notice and hearing and in
violation of the equal protection clause guaranteed by the Constitution.

The majority upholds these claims of private respondent, convinced that the Circular in
question, in the first place, did not give prior notice and hearing, and so, it could not have been
valid and effective. It proceeds to affirm the factual findings of the Court of Tax Appeals, which
findings were considered correct by respondent Court of Appeals, to the effect that the petitioner
Commissioner of Internal Revenue had indeed blatantly failed to comply with the said twin
requirements of notice and hearing, thereby rendering the issuance of the questioned Circular to
be in violation of the due process clause of the Constitution. It is also its dominant opinion that
the questioned Circular discriminates against private respondent Fortune Tobacco Corporation
insofar as it seems to affect only its "Hope," "More," and "Champion" cigarettes, to the exclusion
of other cigarettes apparently of the same kind or classification as these cigarettes
manufactured by private respondent.

With all due respect, I disagree with the majority in its disquisition of the issues and its resulting
conclusions.

Section 245 of the National Internal Revenue Code,

as amended, empowers the Commissioner of Internal
Revenue to issue the questioned Circular

Section 245 of the National Internal Revenue Code, as amended, provides:

Sec. 245. Authority of Secretary of Finance to promulgate rules and regulations.

— The Secretary of Finance, upon recommendation of the Commissioner, shall
promulgate all needful rules and regulations for the effective enforcement of the
provisions of this Code . . . without prejudice to the power of the Commissioner of
Internal Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including rulings on the
classification of articles for sales tax and similar purposes.

The subject of the questioned Circular is the reclassification of cigarettes subject to excise
taxes. It was issued in connection with Section 142 (c) (1) of the National Internal Revenue
Code, as amended, which imposes ad valorem excise taxes on locally manufactured cigarettes
bearing a foreign brand. The same provision prescribes the ultimate criterion that determines
which cigarettes are to be considered "locally manufactured cigarettes bearing a foreign brand."
It provides:

. . . Whenever it has to be determined whether or not a cigarette bears a foreign

brand, the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

There is only one World Tobacco Directory for a given current year, and the same is
mandated by law to be the BIR Commissioner's controlling basis for determining whether
or not a particular locally manufactured cigarette is one bearing a foreign brand. In so
making a determination, petitioner should inquire into the entries in the World Tobacco
Directory for the given current year and shall be held bound by such entries therein. She
is not required to subject the results of her inquiries to feedback from the concerned
cigarette manufacturers, and it is doubtlessly not desirable nor managerially sound to
court dispute thereon when the law does not, in the first place, require debate or hearing
thereon. Petitioner may make such a determination because she is the Chief Executive
Officer of the administrative agency that is the Bureau of Internal Revenue in which are
vested quasi-legislative powers entrusted to it by the legislature in recognition of its more
encompassing and unequalled expertise in the field of taxation.

The vesture of quasi-legislative and quasi-judicial powers in administrative

bodies is not unconstitutional, unreasonable and oppressive. It has been
necessitated by "the growing complexity of the modern society" (Solid Homes,
Inc. vs. Payawal, 177 SCRA 72, 79). More and more administrative bodies are
necessary to help in the regulation of society's ramified activities. "Specialized in
the particular field assigned to them, they can deal with the problems thereof with
more expertise and dispatch than can be expected from the legislature or the
courts of justice" . . . 1

Statutorily empowered to issue rulings or opinions embodying the proper determination in

respect to classifying articles, including cigarettes, for purposes of tax assessment and
collection, petitioner was acting well within her prerogatives when she issued the questioned
Circular. And in the exercise of such prerogatives under the law, she has in her favor the
presumption of regular performance of official duty which must be overcome by clearly
persuasive evidence of stark error and grave abuse of discretion in order to be overturned and
disregarded.

It is irrelevant that the Court of Tax Appeals makes much of the effect of the passing of Republic
Act No. 7654 2 on petitioner's power to classify cigarettes. Although the decisions assailed and
sought to be reviewed, as well as the pleadings of private respondent, are replete with alleged
admissions of our legislators to the effect that the said Act was intended to freeze the current
classification of cigarettes and make the same an integral part of the said Act, certainly the
repeal, if any, of petitioner's power to classify cigarettes must be reckoned from the effectivity of
the said Act and not before. Suffice it to say that indisputable is the plain fact that the
questioned Circular was issued on July 1, 1993, while the said Act took effect on July 3, 1993.

The contents of the questioned circular have not

been proven to be erroneous or illegal as to render
issuance thereof an act of grave abuse of
discretion on the part of petitioner Commissioner
Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National Internal Revenue
Code, as amended, levies the following ad valorem taxes on cigarettes in accordance with their
predetermined classifications as established by the Commissioner of Internal Revenue:

. . . based on the manufacturer's registered wholesale price:

(1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent

(55%) Provided, That this rate shall apply regardless of whether or not the right
to use or title to the foreign brand was sold or transferred by its owner to the local
manufacturer. Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign countries appearing
in the current World Tobacco Directory shall govern.

(2) Other locally manufactured cigarettes, forty five percent (45%).

xxx xxx xxx

Prior to the issuance of the questioned Circular, assessed against and paid by private
respondent as ad valorem excise taxes on their removals of "Hope," "More," and "Champion"
cigarettes were amounts based on paragraph (2) above, i.e., the tax rate made applicable on
the said cigarettes was 45% at the most. The reason for this is that apparently, petitioner's
predecessors have all made determinations to the effect that the said cigarettes were to be
considered "other locally manufactured cigarettes" and not "locally manufactured cigarettes
bearing a foreign brand." Even petitioner, until her issuance of the questioned Circular, adhered
to her predecessors' determination as to the proper classification of the above-mentioned
cigarettes for purposes of ad valorem excise taxes. Apparently, the past determination that the
said cigarettes were to be classified as "other locally manufactured cigarettes" was based on
private respodnent's convenient move of changing the names of "Hope" to "Hope Luxury" and
"More" to "Premium More." It also submitted proof that "Champion" was an original Fortune
Tobacco Corporation register and, therefore, a local brand. Having registered these brands with
the Philippine Patent Office and with corresponding evidence to the effect, private respondent
paid ad valorem excise taxes computed at the rate of not more than 45% which is the rate
applicable to cigarettes considered as locally manufactured brands.

How these past determinations pervaded notwithstanding their erroneous basis is only
tempered by their innate quality of being merely errors in interpretative ruling, the formulation of
which does not bind the government. Advantage over such errors may precipitously be
withdrawn from those who have been benefiting from them once the same have been
discovered and rectified.

Petitioner correctly emphasizes that:

. . . the registration of said brands in the name of private respondent is proof only
that it is the exclusive owner thereof in the Philippines; it does not necessarily
follow, however, that it is the exclusive owner thereof in the whole world.
Assuming arguendo that private respondent is the exclusive owner of said
brands in the Philippines, it does not mean that they are local. Otherwise, they
would not have been listed in the WTD as international brands manufactured by
different entities in different countries. Moreover, it cannot be said that the brands
registered in the names of private respondent are not the same brands listed in
 the WTD because private respondent is one of the manufacturers of said brands
listed in the WTD. 3

Private respondent attempts to cast doubt on the determination made by petitioner in the
questioned Circular that Japan is a manufacturer of "Hope" cigarettes. Private respondent's own
inquiry into the World Tobacco Directory reveals that Japan is not a manufacturer of "Hope"
cigarettes. In pointing this out, private respondent concludes that the entire Circular is erroneous
and makes such error the principal proof of its claim that the nature of the determination
embodied in the questioned Circular requires a hearing on the facts and a debate on the
applicable law. Such a determination is adjudicatory in nature and, therefore, requires notice
and hearing. Private respondent is, however, apparently only eager to show error on the part of
petitioner for acting with grave abuse of discretion. Private respondent conveniently forgets that
petitioner, equipped with the expertise in taxation, recognized in that expertise by the legislature
that vested in her the power to make rules respecting classification of articles for taxation
purposes, and presumed to have regularly exercised her prerogatives within the scope of her
statutory power to issue determinations specifically under Section 142 (c) (1) in relation to
Section 245 of the National Internal Revenue Code, as amended, simply followed the law as
she understood it. Her task was to determine which cigarette brands were foreign, and she was
directed by the law to look into the World Tobacco Directory. Foreign cigarette brands were
legislated to be taxed at higher rates because of their more extensive public exposure and
international reputation; their competitive edge against local brands may easily be checked by
imposition of higher tax rates. Private respondent makes a mountain of the mole hill
circumstance that "Hope" is listed, not as being "manufactured" by Japan but as being "used" by
Japan. Whether manufactured or used by Japan, however, "Hope" remains a cigarette brand
that can not be said to be limited to local manufacture in the Philippines. The undeniable fact is
that it is a foreign brand the sales in the Philippines of which are greatly boosted by its
international exposure and reputation. The petitioner was well within her prerogatives, in the
exercise of her rule-making power, to classify articles for taxation purposes, to interpret the laws
which she is mandated to administer. In interpreting the same, petitioner must, in general, be
guided by the principles underlying taxation, i.e., taxes are the lifeblood of Government, and
revenue laws ought to be interpreted in favor of the Government, for Government can not
survive without the funds to underwrite its varied operational expenses in pursuit of the welfare
of the society which it serves and protects.

Private respondent claims that its business will be destroyed by the imposition of additional ad
valorem taxes as a result of the effectivity of the questioned Circular. It claims that under the
vested rights theory, it cannot now be made to pay higher taxes after having been assessed for
less in the past. Of course private respondent will trumpet its losses, its interests, after all, being
its sole concern. What private respondent fails to see is the loss of revenue by the Government
which, because of erroneous determinations made by its past revenue commissioners, collected
lesser taxes than what it was entitled to in the first place. It is every citizen's duty to pay the
correct amount of taxes. Private respondent will not be shielded by any vested rights, for there
are not vested rights to speak of respecting a wrong construction of the law by administrative
officials, and such wrong interpretation does not place the Government in estoppel to correct or
overrule the same. 4

The Questioned Circular embodies an interpretative

ruling of petitioner Commissioner which as such does
not require notice and hearing
As one of the public offices of the Government, the Bureau of Internal Revenue, through its
Commissioner, has grown to be a typical administrative agency vested with a fusion of different
governmental powers: the power to investigate, initiate action and control the range of
investigation, the power to promulgate rules and regulations to better carry out statutory
policies, and the power to adjudicate controversies within the scope of their activities. 5 In the
realm of administrative law, we understand that such an empowerment of administrative
agencies was evolved in response to the needs of a changing society. This development arose
as the need for broad social control over complex conditions and activities became more and
more pressing, and such complexity could no longer be dealt with effectivity and directly by the
legislature or the judiciary. The theory which underlies the empowerment of administrative
agencies like the Bureau of Internal Revenue, is that the issues with which such agencies deal
ought to be decided by experts, and not be a judge, at least not in the first instance or until the
facts have been sifted and arranged. 6

One of the powers of administrative agencies like the Bureau of Internal Revenue, is the power
to make rules. The necessity for vesting administrative agencies with this power stems from the
impracticability of the lawmakers providing general regulations for various and varying details
pertinent to a particular legislation. 7

The rules that administrative agencies may promulgate may either be legislative or
interpretative. The former is a form of subordinate legislation whereby the administrative agency
is acting in a legislative capacity, supplementing the statute, filling in the details, pursuant to a
specific delegation of legislative power. 8

Interpretative rules, on the other hand, are "those which purport to do no more than interpret the
statute being administered, to say what it means." 9

There can be no doubt that there is a distinction between an administrative rule

or regulation and an administrative interpretation of a law whose enforcement is
entrusted to an administrative body. When an administrative agency promulgates
rules and regulations, it "makes" a new law with the force and effect of a valid
law, while when it renders an opinion or gives a statement of policy, it merely
interprets a pre-existing law (Parker, Administrative Law, p. 197; Davis
Administrative Law, p. 194). Rules and regulations when promulgated in
pursuance of the procedure or authority conferred upon the administrative
agency by law, partake of the nature of a statute, and compliance therewith may
be enforced by a penal sanction provided in the law. This is so because statutes
are usually couched in general terms, after expressing the policy, purposes,
objectives, remedies and sanctions intended by the legislature. The details and
the manner of carrying out the law are often times left to the administrative
agency entrusted with its enforcement. In this sense, it has been said that rules
and regulations are the product of a delegated power to create new or additional
legal provisions that have the effect of law. (Davis, op. cit. p. 194.)

A rule is binding on the courts as long as the procedure fixed for its promulgation
is followed and its scope is within the statutory authority granted by the
legislature, even if the courts are not in agreement with the policy stated therein
or its innate wisdom (Davis, op. cit. pp. 195-197). On the other hand,
administrative interpretation of the law is at best merely advisory, for it is the
courts that finally determine what the law means. 10
"Whether a given statutory delegation authorizes legislative or interpretative regulations
depends upon whether the statute places specific 'sanctions' behind the regulations authorized,
as for example, by making it a criminal offense to disobey them, or by making conformity with
their provisions a condition of the exercise of legal privileges." 11 This is because interpretative
regulations are by nature simply statutory interpretations, which have behind them no statutory
sanction. Such regulations, whether so expressly authorized by statute or issued only as an
incident of statutory administration, merely embody administrative findings of law which are
always subject to judicial determination as to whether they are erroneous or not, even when
their issuance is authorized by statute.

The questioned Circular has undisputedly been issued by petitioner in pursuance of her rule-
making powers under Section 245 of the National Internal Revenue Code, as amended.
Exercising such powers, petitioner re-classified "Hope," "More" and "Champion" cigarettes as
locally manufactured cigarettes bearing foreign brands. The re-classification, as previously
explained, is the correct interpretation of Section 142 (c) (1) of the said Code. The said legal
provision is not accompanied by any penal sanction, and no detail had to be filled in by
petitioner. The basis for the classification of cigarettes has been provided for by the legislature,
and all petitioner has to do, on behalf of the government agency she heads, is to proceed to
make the proper determination using the criterion stipulated by the lawmaking body. In making
the proper determination, petitioner gave it a liberal construction consistent with the rule that
revenue laws are to be construed in favor of the Government whose survival depends on the
contributions that taxpayers give to the public coffers that finance public services and other
governmental operations.

The Bureau of Internal Revenue which petitioner heads, is the government agency charged with
the enforcement of the laws pertinent to this case and so, the opinion of the Commissioner of
Internal Revenue, in the absence of a clear showing that it is plainly wrong, is entitled to great
weight. Private respondent claims that its rights under previous interpretations of Section 142 (c)
(1) may not abruptly be cut by a new interpretation of the said section, but precisely the said
section is subject to various and changing construction, and hence, any ruling issued by
petitioner thereon is necessarily interpretative and not legislative. Private respondent insists that
the questioned circular is adjudicatory in nature because it determined the rights of private
respondent in a controversy involving his tax liability. It also asseverates that the questioned
circular involved administrative action that is particular and immediate, thereby rendering it
subject to the requirements of notice and hearing in compliance with the due process clause of
the Constitution.

We find private respondent's arguments to be rather strained.

Petitioner made a determination as to the classification of cigarettes as mandated by the

aforecited provisions in the National Internal Revenue Code, as amended. Such determination
was an interpretation by petitioner of the said legal provisions. If in the course of making the
interpretation and embodying the same in the questioned circular which the petitioner
subsequently issued after making such a determination, private respondent's cigarettes
products, by their very nature of being foreign brands as evidenced by their enlistment in the
World Tobacco Directory, which is the controlling basis for the proper classification of cigarettes
as stipulated by the law itself, have come to be classified as locally manufactured cigarettes
bearing foreign brands and as such subject to a tax rate higher than what was previously
imposed thereupon based on past rulings of other revenue commissioners, such a situation is
simply a consequence of the performance by petitioner of here duties under the law. No
adjudication took place, much less was there any controversy ripe for adjudication. The natural
consequences of making a classification in accordance with law may not be used by private
respondent in arguing that the questioned circular is in fact adjudicatory in nature. Such an
exercise in driving home a point is illogical as it is fallacious and misplaced.

Private respondent concedes that under general rules of administrative law, "a ruling which is
merely 'interpretative' in character may not require prior notice to affected parties before its
issuance as well as a hearing" and "for this reason, in most instances, interpretative regulations
are not given the force of law." 12 Indeed, "interpretative regulations and those merely internal in
nature
. . . need not be published." 13 And it is now settled that only legislative regulations and not
interpretative rulings must have the benefit of public
hearing. 14

Because (1) the questioned circular merely embodied an interpretation or a way of reading and
giving meaning to Section 142 (c) (1) of the National Internal Revenue Code, as amended; (2)
petitioner did not fill in any details in the aforecited section but only classified cigarettes on the
basis of the World Tobacco Directory in the light of the paramount principle of construing
revenue laws in favor of the Government to the end that Government collects as much tax
money as it is entitled to in order to fulfill its public purposes for the general good of its citizens;
(3) no penal sanction is provided in the aforecited section that was construed by petitioner in the
questioned circular; and (4) a similar circular declassifying copra from being an agricultural food
to non-food product for purposes of the value added tax laws, resulting in the revocation of an
exemption previously enjoyed by copra traders, has been ruled by us to be merely an
interpretative ruling and not a legislative, much less, an adjudicatory, action on the part of the
revenue commissioner, 15 this Court must not be blind to the fact that the questioned Circular is
indeed an interpretative ruling not subject to notice and hearing.

Neither is the questioned Circular tainted by a

violation of the equal protection clause under the
Constitution

Private respondent anchors its claim of violation of its equal protection rights upon the too
obvious fact that only its cigarette brands, i.e., "Hope," "More" and "Champion," are mentioned
in the questioned circular. Because only the cigarettes that they manufacture are enumerated in
the questioned circular, private respondent proceeded to attack the same as being
discriminatory against it. On the surface, private respondent seems to have a point there. A
scrutiny of the questioned Circular, however, will show that it is undisputedly one of general
application for all cigarettes that are similarly situated as private respondent's brands. The new
interpretation of Section 142 (1) (c) has been well illustrated in its application upon private
respondent's brands, which illustration is properly a subject of the questioned Circular.
Significantly, indicated as the subject of the questioned circular is the "reclassification of
cigarettes subject to excise taxes." The reclassification resulted in the foregrounding of private
respondent's cigarette brands, which incidentally is largely due to the controversy spawned no
less by private respondent's own action of conveniently changing its brand names to avoid
falling under a classification that would subject it to higher ad valorem tax rates. This caused
then Commissioner Bienvenido Tan to depart from his initial determination that private
respondent's cigarette brands are foreign brands. The consequent specific mention of such
brands in the questioned Circular, does not change the fact that the questioned Circular has
always been intended for and did cover, all cigarettes similarly situated as "Hope," "More" and
"Champion." Petitioner is thus correct in stating that:

. . . RMC 37-93 is not discriminatory. It lays down the test in determining whether
or not a locally manufactured cigarette bears a foreign brand using the cigarette
brands "Hope," More and "Champion" as specific examples. Such test applies to
all locally manufactured cigarette brands similarly situated as the cigarette
brands aforementioned. While it is true that only "Hope," "More" and "Champion"
cigarettes are actually determined as locally manufactured cigarettes bearing a
foreign brand, RMC 37-93 does not state that ONLY cigarettes fall under such
classification to the exclusion of other cigarettes similarly situated. Otherwise
stated, RMC 37-93 does not exclude the coverage of other cigarettes similarly
situated. Otherwise stated, RMC 37-93 does not exclude the coverage of other
cigarettes similarly situated as locally manufactured cigarettes bearing a foreign
brand. Hence, in itself, RMC 37-93 is not discriminatory. 16

Both the respondent Court of Appeals and the Court of Tax Appeals held that the questioned
Circular reclassifying "Hope," "More" and "Champion" cigarettes, is defective, invalid and
unenforceable and has rendered the assessment against private respondent of deficiency ad
valorem excise taxes to be without legal basis. The majority agrees with private respondent and
respondent Courts. As the foregoing opinion chronicles the fatal flaws in private respondent's
arguments, it becomes more apparent that the questioned Circular is in fact a valid and
subsisting interpretative ruling that the petitioner had power to promulgate and enforce.

WHEREFORE, I vote to grant the petition and set aside the decisions of the Court of Tax
Appeals and the Court of Appeals, respectively, and to reinstate the decision of petitioner
Commissioner of Internal Revenue denying private respondent's request for a review,
reconsideration and recall of Revenue Memorandum Circular No. 37-93 dated July 1, 1993.
 G.R. No. 137377 December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

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 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.

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:

I. 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
Add: 50% surcharge 84,636,108.50
 20% int. p.a.fr. 7-15-85 to 8-15-
86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Undeclared gross income from
Philphos and NDC construction
projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr. 4-26-85 to 8-15-
86 12,305,360.66
TOTAL AMOUNT DUE P83,036,965.16
III. DEFICIENCY CONTRACTOR'S TAX
FY ended March 31, 1985
Undeclared gross receipts/gross
income from Philphos and NDC
construction projects P967,269,811.14
Contractor's tax due thereon (4%) 38,690,792.00
50% surcharge for non-
Add: declaration 19,345,396.00
20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86 17,854,739.46
TOTAL AMOUNT DUE P85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
FY ended March 31, 1985
Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
50% surcharge for non-
Add: declaration 814,284.50
20% surcharge for late payment 407,142.25
Sub-total 2,849,995.75
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86 751,539.98
 TOTAL AMOUNT DUE P3,600,535.68

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"1

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 2 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 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 under E.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:

"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."4

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."5

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;
 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
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.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. 64 expanded 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 Code while 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. 7

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. 41.8

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.9 While an amendment is generally construed as becoming a part of the original
act as if it had always been contained therein,10 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.11

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.12 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.13 In an amendatory act, every case of doubt must be resolved against its
retroactive effect.14

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. 15 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.16 A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. 17 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.18 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.19
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. 20 The Philphos plant
complex which was envisioned to be the largest phosphatic 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), 21 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."22 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.23 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,24 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 Contract, whether or not
expressly referred to in the abovementioned Annex I." 25

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.26 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.27 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.28

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. 29

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."30 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 31 and for the delivery of ammonia to an
integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. 32 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.33 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,34 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." 35

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. 36

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 Offshore Portion. 37 Japanese Yen Portion II
and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.38

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. 39 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,40 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. 41 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.42

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 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 xxx43

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.44

A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 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;46 and is directly collectible from the person exercising the privilege.47 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. 48 Like property taxes, it cannot be
imposed on an occupation or privilege outside the taxing district. 49

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:

"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 xxx50

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. 51 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.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel
Corporation which did the design, fabrication, engineering and manufacture thereof; 53 Yashima
& Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment;54 and B.S. Japan for the supply of radio equipment.55 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.56 All sub-contractors and manufacturers are Japanese corporations and are based
in Japan and all engineering and design works were performed in that country. 57

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.58 The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader 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.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to
the pier to the spot where they were installed.60 Their installation simply consisted of bolting
them onto the pier.61

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.62

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. 63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units. 64 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. 65 Annex III to the Philphos contract
lists down under the Japanese Yen Portion I the materials for the ammonia storage 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. 66 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 equipment67 while Philphos sent a representative to Japan to inspect the storage
equipment.68

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.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

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.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . .
"72 of the two projects involved two taxing jurisdictions. These acts occurred in two countries —
Japan and the Philippines. While the construction and 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 Co73 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.74 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.
 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.

Sycip, Salazar, Luna and Associates and Lichauco, Picazo and Agcaoili for petitioners.
Office of the Solicitor General for respondent.

BENGZON, J.P., J.:

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
insurances 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 income tax thereon.

On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd.
filed 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 P977.00 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 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. 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 its businesses 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 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 issue 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, compensations, 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 periodical gains, profits, and income"; that, therefore, they are not items of income
subject to withholding tax.

It is urged for the applicant that no opposition has been registered against his petition on the
issues above-discussed. Absence of opposition, however, does not preclude the scanning of
the whole record by the appellate court, with a view to preventing the conferment of citizenship
to persons not fully qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31,
1965). The applicant's complaint of unfairness could have some weight if the objections on
appeal had been on points not previously passed upon. But the deficiencies here in question
are not new but well-known, having been ruled upon repeatedly by this Court, and we see no
excuse for failing to take them into account.1äwphï1.ñët

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 income under 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
someone's will or with the happening of an event does not make the payments any the
less determinable or periodical. ...

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: Where 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 without substantial
change, such action is to some extent confirmatory that the ruling carries out the legislative
purpose.5

The aforestated principle, however, is not applicable to this case. Firstly, Sections 53 and 54
were never reenacted. Republic Acts 1065, 1291, 1505 and 2343 were 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, L-6741, January 31, 1956, what was declared to have acquired
the force or effect of law was a regulation promulgated to implement a law; whereas, in this
case, what appellants 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,6 thereby 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 plaintiff's 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. 7

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 time before 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. 8

WHEREFORE, the judgment appealed from is hereby affirmed with costs against appellants. It
is so ordered.
 G.R. No. 45697 November 1, 1939

MANILA ELECTRIC COMPANY, plaintiff-appellant,

vs.
A.L. YATCO, Collector of Internal Revenue, defendant-appellee.

Ross, Lawrence, Selph and Carrascoso for appellant.

Office of the Solicitor-General Tuason for appellee.

MORAN, J.:

In 1935, plaintiff Manila Electric Company, a corporation organized and existing under the laws
of the Philippines, with its principal office and place of business in the City of Manila, insured
with the city of New York Insurance Company and the United States Guaranty Company,
certain real and personal properties situated in the Philippines. The insurance was entered into
in behalf of said plaintiff by its broker in New York City. The insurance companies are foreign
corporations not licensed to do business in the Philippines and having no agents therein. The
policies contained provisions for the settlement and payment of losses upon the occurence of
any risk insured against, a sample of which is policy No. 20 of the New York insurance
Company attached to and made an integral part of the agreed statement of facts.

Plaintiff through its broker paid, in New York, to said insurance company premiums in the sum
of P91,696. The Collector of Internal Revenue, under the authority of section 192 of act No.
2427, as amended, assessed and levied a tax of one per centum on said premiums, which
plaintiff paid under protest. The protest having been overruled, plaintiff instituted the present
action to recover the tax. The trial court dismissed the complaint, and from the judgment thus
rendered, plaintiff took the instant appeal.

The pertinent portions of the Act here involved read:

SEC. 192. It shall be unlawful for any person, company or corporation, or forward
applications for insurance in or to issue or to deliver or accept policies of or for any
company or companies not having been legally authorized to transact business in the
Philippine Islands, as provided in this chapter; and any such person, company or
corporation violating the provisions of this section shall be deemed guilty of a penal
offense, and upon conviction thereof, shall for each such offense be punished by a fine
of two hundred pesos, or imprisonment for two months, or both in the discretion not
authorized to transact business in the Philippine Island may be placed upon terms and
conditions as follows:

xxx xxx xxx

. . . . And provided further, that the prohibitions of this section shall not affect the right of
an owner of property to apply for and obtain for himself policies in foreign companies in
cases were said owner does not make use of the services of any agent, company or
corporation residing or doing business in the Philippine Islands. In all case where owners
of property obtain insurance directly with foreign companies, it shall be the duty of said
 owners to report to the insurance commissioner and to the Collector of Internal Revenue
each case where insurance has been so effected, and shall pay the tax of one per
centum on premium paid, in the manner required by law of insurance companies, and
shall be subject to the same penalties for failure to do so.

Appellant maintains that the second paragraph of the provisions of the Act aforecited is
unconstitutional, and has been so declared by the Supreme Court of the United States in the
case of Compania General de Tabacos v. Collector of Internal Revenue, 275 U.S., 87, 48 Sup.
Ct. Rep., 100, 72 Law. ed., 177.

The case relied upon involves a suit to recover from the Collector of Internal Revenue certain
taxes in connection with insurance premiums which the Tobacco Barcelona, Spain, paid to the
Guardian Insurance Company of London, England, and to Le Comite des Assurances Maritimes
de Paris, of Paris, France. The Tobacco Company, through its head office in Barcelona, insured
against fire with the London Company the merchandise it had in deposit in the warehouse in the
Philippines. As the merchandise were from time to time shipped to Europe, the head office at
Barcelona insured the same with the Paris Company against marine risks while such
merchandise were in transit from the Philippines to Spain. The London Company, unlike the
Paris Company, was licensed to do insurance business in the Philippines and had an agent
therein. Losses, if any, on policies were to be paid to the Tobacco Company in Paris. The tax
assessed and levied by the Collector of Internal Revenue, under the same law now involved,
was challenged as unconstitutional. The Supreme Court of the united States sustained the tax
with respect to premiums paid to the London Company and held it erroneous with respect to
premiums paid to the Paris Company.lawphi1.net

The factual basis upon which the imposition of the tax on premiums paid to the Paris Company
was declared erroneous, is stated by the Supreme Court of the United States thus:

Coming then to the tax on the premiums paid to the Paris Company the contract of
insurance on which the premium was paid was made at Barcelona in Spain, the
headquarters of the Tobacco Company between the Tobacco Company and the Paris
Company, and any losses arising thereunder were to be paid in Paris. The Paris
Company had no communication whatever with anyone in the Philippine Islands. The
collection of this tax involves an ex-action upon a company of Spain lawfully doing
business in the Philippine Islands effected by reason of a contract made by that
company with a company in Paris on merchandise shipped from the Philippine Islands
for delivery in Barcelona. It is an imposition upon a contract not made in the Philippines
and having no situs there and to be measured by money paid as premiums in Paris, with
the place of payment of loss, if any, in Paris. We are very clear that the contract and the
premiums paid under it are not within the jurisdiction of the government of the Philippine
Islands.

And, upon the authority of the cases of Allgeyer v. Lousiana, 165 U.S., 578, 41 Law. ed., 832,
and St. Louis Cotton Compress Company v. Arkansas, 250 U.S., 346, 677 Law. ed., 279, the
Supreme Court of the United States held that "as the state is forbidden to deprive a person of
his liberty without due process of law, it may not compel anyone within its jurisdiction to pay
tribute to it for contracts or money paid to secure the benefits of contract made and to be
performed outside of the state."
On the other hand, the Supreme Court of the United States, in sustaining the imposition of the
tax upon premiums paid by the assured to the London Company, says:

. . . . Does the fact that while the Tobacco Company and the London Company were
within the jurisdiction of the Philippines they made a contract outside of the Philippines,
prevent the imposition upon the assured of a tax of 1 per cent upon the money paid by it
as a premium to the London Company? We may properly assume that this tax placed
upon the assured must ultimately be paid by the insurer, and treating its real incidence
as such, the question arises whether making and carrying out the policy does not involve
an exercise or use of the right of the London Company to do business in the Philippine
Islands under its license, because the policy covers fire risks no property within the
Philippine Islands which may require adjustment and the activities of agents in the
Philippine Islands with respect to settlement of losses arising thereunder. This we think
must be answered affirmatively under Equitable Life Assur. Soc. v. Pennsylvania, 238
U.S., 143 Law. ed., 1239, 35 Sup. Ct. Rep., 829. The case is a close one, but in
deference to the conclusion we reached in the latter case, we affirm the judgment of the
court below in respect to the tax upon the premium paid to the London Company.

The ruling in the Paris Company case is obviously not applicable in the instant one, for there,
not only was the contract executed in a foreign country, but the merchandise insured was in
transit from the Philippines to Spain, and nothing was to be done in the Philippines in pursuance
of the contract. However, the rule laid down in connection with the London Company may, by
analogy, be applied in the present case, the essential facts of both cases being similar. Here,
the insured is a corporation organized under the laws of the Philippines, its principal office and
place of business being in the City of Manila. The New York Insurance Company and the United
States Guaranty Company may be said to be doing policies issued by them cover risks on
properties within the Philippines, which may require adjustment and the activities of agents in
the Philippines with respect to the settlement of losses arising thereunder. For instance, it is
therein stipulated that "the insured, as often as may be reasonably required, shall exhibit to any
person designated by the company all the remains of any property therein described and submit
to examination under oath by any person named by the company, and as often as may be
reasonably required, shall exhibit to any person designated by the company all the remains of
any property therein described and submit to an examination all books of accounts . . . at such
reasonable time and place as may be designated by the company or its representative." And, in
case of disagreement as to the amount of losses or damages as to require the appointment of
appraisers, the insurance contract provides that "the appraisers shall first select a competent
umpire; and failure for fifteen days to agree to such umpire, then, on request of the insured or of
the company, such umpire shall be selected by a judge of the court of record in the state in
which the property insured is located.".

True it is that the London Company had a license to do business in the Philippines, but this fact
was not a decisive factor in the decision of that case, for reliance was therein placed on
the Equitable Life Assurance Society v. Pennsylvania, 238 U.S., 143, 59 Law. ed., 1239, 35
Sup. Ct. Rep., 829, wherein it was said that "the Equitable Society was doing business in
Pennsylvania when it was annually paying the dividends in Pennsylvania or sending an adjuster
into the state in case of dispute or making proof of death," and therefore "the taxpayer had
subjected itself to the jurisdiction of Pennsylvania in doing business there." (See Compañia
General de Tabacos v. Collector of Internal Revenue, 275 U.S., 87, 72 Law. ed., 177, 182.)
The controlling consideration, therefore, in the decision of the London Company case was that
said company, by making and carrying out policies covering risks located in this country which
might require adjustment or the making of proof of loss therein, did business in the Philippines
and subjected itself to its jurisdiction, a rule that can perfectly be applied in the present case to
the new York Insurance Company and the United States Guaranty Company.

It is argued, however, that the sending of an unjuster to the Philippines to fix the amount of
losses, is a mere contingency and not an actual fact, as such, it cannot be a ground for holding
that the insurance companies subjected themselves to the taxing jurisdiction of the Philippines.
This argument could have been made in the London Company case where no adjuster appears
to have ever been sent to the Philippines nor any adjustment ever made, and yet the
stipulations to that effect were held to be sufficient to bring the foreign corporation within the
taxing jurisdiction of the Philippines.

In epitome, then, the whole question involved in this appeal is whether or not the disputed tax is
one imposed by the Commonwealth of the Philippines upon a contract beyond its jurisdiction.
We are of the opinion and so hold that where the insured against also within the Philippines, the
risk insured against also within the Philippines, and certain incidents of the contract are to be
attended to in the Philippines, such as, payment of dividends when received in cash, sending of
an unjuster into the Philippines in case of dispute, or making of proof of loss, the
Commonwealth of the Philippines has the power to impose the tax upon the insured, regardless
of whether the contract is executed in a foreign country and with a foreign corporation. Under
such circumstances, substantial elements of the contract may be said to be so situated in the
Philippines as to give its government the power to tax. And, even if it be assumed that the tax
imposed upon the insured will ultimately be passed on the insurer, thus constituting an indirect
tax upon the foreign corporation, it would still be valid, because the foreign corporation, by the
stipulations of its contract, has subjected itself to the taxing jurisdiction of the Philippines. After
all, Commonwealth of the Philippines, by protecting the properties insured, benefits the foreign
corporation, and it is but reasonable that the latter should pay a just contribution therefor. It
would certainly be a discrimination against domestic corporations to hold the tax valid when the
policy is given by them and invalid when issued by foreign corporations.

Judgment affirmed, with costs against appellant.

 G.R. No. L-22074 April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

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

Josue H. Gustilo and Ramirez and Ortigas for petitioner.

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

BENGZON, J.P., J.:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the
Philippines namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas
Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire
Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff
Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign
reinsurers a portion of the premiums on insurance it has originally underwritten in the
Philippines, in consideration for the assumption by the latter of liability on an equivalent portion
of the risks insured. Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in
Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability simultaneous
with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co.,
Inc. was required to keep a register in Manila where the risks ceded to the foreign reinsurers
where entered, and entry therein was binding upon the reinsurers. A proportionate amount of
taxes on insurance premiums not recovered from the original assured were to be paid for by the
foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in
an amount equal to 5% of the reinsurance premiums. Conflicts and/or differences between the
parties under the reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co.,
Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by the
laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the
foreign reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file
its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
 1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not subject to
withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals.

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

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co.,

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

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

Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.

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

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources
within the Philippines. The word "sources" has been interpreted as the activity, property or
service giving rise to the income. 1 The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc.,
against liability for loss under original insurances. Such undertaking, as explained above, took
place in the Philippines. These insurance premiums, therefore, came from sources within the
Philippines and, hence, are subject to corporate income tax.

The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may
consist of only a single transaction. An activity may occur outside the place of business. Section
24 of the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore, is not the place
of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources within
the Philippines because they are not specifically mentioned in Section 37 of the Tax Code.
Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income
mentioned therein should be treated as income from sources within the Philippines but it does
not require that other kinds of income should not be considered likewise.1äwphï1.ñët

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army
to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to
serve, public improvement designed for the enjoyment of the citizenry and those which come
within the State's territory, and facilities and protection which a government is supposed to
provide. Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the
state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner
of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in
question relieved it of the duty to pay the corresponding withholding tax thereon. This defense of
petitioner may free if from the payment of surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate if from liability to pay such
withholding tax The Government is not estopped from collecting taxes by the mistakes or errors
of its agents.3

In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are subject to withholding tax under Section 53 and 54 of
the Tax Code, suffice it to state that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And since it
did not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.

The pertinent section of the Tax Code States:

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

The applicable portion of Section 53 provides:

(b) Nonresident aliens. — All persons, corporations and general copartnerships

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

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is
hereby ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954,
respectively. If the amount of P375,345.00 is not paid within 30 days from the date this
judgement becomes final, there shall be collected a surcharged of 5% on the amount unpaid,
plus interest at the rate of 1% a month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. With costs againsts petitioner.