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There is no dispute that the payees duly reported their respective shares of and Revenue Regulations No. 2, Section 70 (1), reading as follows:
the fees in their income tax returns and paid the corresponding taxes
thereon.17 The Court of Tax Appeals also found, after examining the evidence, SEC. 70. Compensation for personal services.--Among the
that no distribution of dividends was involved.18 ordinary and necessary expenses paid or incurred in carrying
on any trade or business may be included a reasonable
The petitioner claims that these payments are fictitious because most of the allowance for salaries or other compensation for personal
payees are members of the same family in control of Algue. It is argued that services actually rendered. The test of deductibility in the case
no indication was made as to how such payments were made, whether by of compensation payments is whether they are reasonable
check or in cash, and there is not enough substantiation of such payments. In and are, in fact, payments purely for service. This test and
short, the petitioner suggests a tax dodge, an attempt to evade a legitimate deductibility in the case of compensation payments is whether
assessment by involving an imaginary deduction. they are reasonable and are, in fact, payments purely for
service. This test and its practical application may be further
We find that these suspicions were adequately met by the private respondent stated and illustrated as follows:
when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus,
testified that the payments were not made in one lump sum but periodically Any amount paid in the form of compensation, but not in fact
and in different amounts as each payee's need arose. 19 It should be as the purchase price of services, is not deductible. (a) An
remembered that this was a family corporation where strict business ostensible salary paid by a corporation may be a distribution
procedures were not applied and immediate issuance of receipts was not of a dividend on stock. This is likely to occur in the case of a
required. Even so, at the end of the year, when the books were to be closed, corporation having few stockholders, Practically all of whom
each payee made an accounting of all of the fees received by him or her, to draw salaries. If in such a case the salaries are in excess of
make up the total of P75,000.00. 20 Admittedly, everything seemed to be those ordinarily paid for similar services, and the excessive
informal. This arrangement was understandable, however, in view of the close payment correspond or bear a close relationship to the
relationship among the persons in the family corporation. stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services
We agree with the respondent court that the amount of the promotional fees rendered, but the excessive payments are a distribution of
was not excessive. The total commission paid by the Philippine Sugar Estate earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30
Development Co. to the private respondent was P125,000.00. 21 After O.G. No. 18, 325.)
deducting the said fees, Algue still had a balance of P50,000.00 as clear profit
from the transaction. The amount of P75,000.00 was 60% of the total It is worth noting at this point that most of the payees were not in the regular
commission. This was a reasonable proportion, considering that it was the employ of Algue nor were they its controlling stockholders. 23
payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate
The Solicitor General is correct when he says that the burden is on the
properties. This finding of the respondent court is in accord with the following
taxpayer to prove the validity of the claimed deduction. In the present case,
provision of the Tax Code: however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and
SEC. 30. Deductions from gross income.--In computing net reasonable in the light of the efforts exerted by the payees in inducing investors
income there shall be allowed as deductions — and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard
earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by
those in the seat of power.
We hold that the appeal of the private respondent from the decision of the
petitioner was filed on time with the respondent court in accordance with Rep.
Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.
SO ORDERED.
BPI-FAMILY SAVINGS BANK, Inc., Petitioner, v. COURT OF APPEALS,
COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL In its Corporate Annual Income Tax Return for the year 1989, the following
REVENUE, Respondents. items are reflected:chanrob1es virtual 1aw library
Deductions P1,026,218,791.00
PANGANIBAN, J.:
Net Income (Loss) (P8,286,960.00)
If the State expects its taxpayers to observe fairness and honesty in paying Taxable Income (Loss) P8,286,960.00
their taxes, so must it apply the same standard against itself in refunding
excess payments. When it is undisputed that a taxpayer is entitled to a refund Less:chanrob1es virtual 1aw library
the State should not invoke technicalities to keep money not belonging to it.
No one, not even the State, should enrich oneself at the expense of 1988 Tax Credit P185,001.00
another.chanrobles.com : virtual law library
1989 Tax Credit P112,491.00
The Case
————————
Before us is a Petition for Review assailing the March 31, 1995 Decision of the TOTAL AMOUNT P297,492.00
Court of Appeals 1 (CA) in CA-GR SP No. 34240, which affirmed the
December 24, 1993 Decision 2 of the Court of Tax Appeals (CTA). The CA REFUNDABLE
disposed as follows:jgc:chanrobles.com.ph
"It appears from the foregoing 1989 Income Tax Return that petitioner had a
"WHEREFORE, foregoing premises considered, the petition is hereby total refundable amount of P297,492 inclusive of the P112,491.00 being
DISMISSED for lack of merit." 3 claimed as tax refund in the present case. However, petitioner declared in the
same 1989 Income Tax Return that the said total refundable amount of
On the other hand, the dispositive portion of the CTA Decision affirmed by the P297,492.00 will be applied as tax credit to the succeeding taxable year.
CA reads as follows:jgc:chanrobles.com.ph
"On October 11, 1990, petitioner filed a written claim for refund in the amount
"WHEREFORE, in [view of] all the foregoing, Petitioner’s claim for refund is of P112,491.00 with the respondent Commissioner of Internal Revenue
hereby DENIED and this Petition for Review is DISMISSED for lack of merit." alleging that it did not apply the 1989 refundable amount of P297,492.00
4 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax
liabilities due to the alleged business losses it incurred for the same year.
Also assailed is the November 8, 1995 CA Resolution 5 denying
reconsideration. "Without waiting for respondent Commissioner of Internal Revenue to act on
the claim for refund, petitioner filed a petition for review with respondent Court
The Facts of Tax Appeals, seeking the refund of the amount of P112.491.00.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner
In affirming the CTA, the Court of Appeals ruled as declared in its 1989 Income Tax Return that it would apply the excess
follows:jgc:chanrobles.com.ph withholding tax as a tax credit for the following year, the Tax Court held that
petitioner was presumed to have done so. The CTA and the CA ruled that
"It is incumbent upon the petitioner to show proof that it has not credited to its petitioner failed to overcome this presumption because it did not present its
1990 Annual income Tax Return, the amount of P297,492.00 (including 1990 Return, which would have shown that the amount in dispute was not
P112,491.00), so as to refute its previous declaration in the 1989 Income Tax applied as a tax credit. Hence, the CA concluded that petitioner was not
Return that the said amount will be applied as a tax credit in the succeeding entitled to a tax refund.chanroblesvirtual|awlibrary
year of 1990. Having failed to submit such requirement, there is no basis to
grant the claim for refund. . . . We disagree with the Court of Appeals. As a rule, the factual findings of the
appellate court are binding on this Court. This rule, however, does not apply
"Tax refunds are in the nature of tax exemptions. As such, they are regarded where, inter alia, the judgment is premised on a misapprehension of facts, or
as in derogation of sovereign authority and to be construed strictissimi juris when the appellate court failed to notice certain relevant facts which if
against the person or entity claiming the exemption. In other words, the burden considered would justify a different conclusion. 11 This case is one such
of proof rests upon the taxpayer to establish by sufficient and competent exception.
evidence its entitlement to the claim for refund." 8
In the first place, petitioner presented evidence to prove its claim that it did not
Issue apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda
Esmundo, the manager of petitioner’s accounting department, testified to this
In their Memorandum, respondents identify the issue in this fact. It likewise presented its claim for refund and a certification issued by Mr.
wise:jgc:chanrobles.com.ph Gil Lopez, petitioner’s vice-president, stating that the amount of P112,491 "has
not been and/or will not be automatically credited/offset against any
"The sole issue to be resolved is whether or not petitioner is entitled to the succeeding quarters’ income tax liabilities for the rest of the calendar year
refund of P112,491.00, representing excess creditable withholding tax paid for ending December 31, 1990." Also presented were the quarterly returns for the
the taxable year 1989." 9 first two quarters of 1990.
The Court’s Ruling The Bureau of Internal Revenue, for its part, failed to controvert petitioner’s
claim. In fact, it presented no evidence at all. Because it ought to know the tax
records of all taxpayers, the CIR could have easily disproved petitioner’s claim.
The Petition is meritorious. To repeat, it did not do so.
Main Issue:chanrob1es virtual 1aw library More important, a copy of the Final Adjustment Return for 1990 was attached
to petitioner’s Motion for Reconsideration filed before the CTA. 12 A final
Petitioner Entitled to Refund adjustment return shows whether a corporation incurred a loss or gained a
profit during the taxable year. In this case, that Return clearly showed that
It is undisputed that petitioner had excess withholding taxes for the year 1989 petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have
and was thus entitled to a refund amounting to P112,491. Pursuant to Section applied the amount in dispute as a tax credit.
69 10 of the 1986 Tax Code which states that a corporation entitled to a refund
Again, the BIR did not controvert the veracity of the said return. It did not even claim for refund for the year 1990. In that case, the Tax Court held that
file an opposition to petitioner’s Motion and the 1990 Final Adjustment Return "petitioner suffered a net loss for the taxable year 1990 . . .’’ 18 Respondent,
attached thereto. In denying the Motion for Reconsideration, however, the CTA however, urges this Court not to take judicial notice of the said case. 19
ignored the said Return. In the same vein, the CA did not pass upon that
significant document. As a rule, "courts are not authorized to take judicial notice of the contents of
the records of other cases, even when such cases have been tried or are
True, strict procedural rules generally frown upon the submission of the Return pending in the same court, and notwithstanding the fact that both cases may
after the trial. The law creating the Court of Tax Appeals, however, specifically have been heard or are actually pending before the same judge." 20
provides that proceedings before it "shall not be governed strictly by the
technical rules of evidence." 13 The paramount consideration remains the Be that as it may, Section 2, Rule 129 provides that courts may take judicial
ascertainment of truth. Verily, the quest for orderly presentation of issues is notice of matters ought to be known to judges because of their judicial
not an absolute. It should not bar courts from considering undisputed facts to functions. In this case, the Court notes that a copy of the Decision in CTA Case
arrive at a just determination of a controversy. No. 4897 was attached to the Petition for Review filed before this Court.
Significantly, respondents do not claim at all that the said Decision was
In the present case, the Return attached to the Motion for Reconsideration fraudulent or nonexistent. Indeed, they do not even dispute the contents of the
clearly showed that petitioner suffered a net loss in 1990. Contrary to the said Decision, claiming merely that the Court cannot take judicial notice
holding of the CA and the CTA, petitioner could not have applied the amount thereof.chanrobles.com : virtuallawlibrary
as a tax credit. In failing to consider the said Return, as well as the other
documentary evidence presented during the trial, the appellate court To our mind, respondents’ reasoning underscores the weakness of their case.
committed a reversible error. For if they had really believed that petitioner is not entitled to a tax refund, they
could have easily proved that it did not suffer any loss in 1990. Indeed, it is
It should be stressed that the rationale of the rules of procedure is to secure a noteworthy that respondents opted not to assail the fact appearing therein —
just determination of every action. They are tools designed to facilitate the that petitioner suffered a net loss in 1990 — in the same way that it refused to
attainment of justice. 14 But there can be no just determination of the present controvert the same fact established by petitioner’s other documentary
action if we ignore, on grounds of strict technicality, the Return submitted exhibits.
before the CTA and even before this Court. 15 To repeat, the undisputed fact
is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax In any event, the Decision in CTA Case No. 4897 is not the sole basis of
liability to which the tax credit could be applied. Consequently, there is no petitioner’s case. It is merely one more bit of information showing the stark
reason for the BIR and this Court to withhold the tax refund which rightfully truth: petitioner did not use its 1989 refund to pay its taxes for 1990.
belongs to the petitioner.chanrobles.com : chanrobles.com.ph
Finally, respondents argue that tax refunds are in the nature of tax exemptions
Public respondents maintain that what was attached to petitioner’s Motion for and are to be construed strictissimi juris against the claimant. Under the facts
Reconsideration was not the final adjustment Return, but petitioner’s first two of this case, we hold that petitioner has established its claim. Petitioner may
quarterly returns for 1990. 16 This allegation is wrong. An examination of the have failed to strictly comply with the rules of procedure; it may have even
records shows that the 1990 Final Adjustment Return was attached to the been negligent. These circumstances, however, should not compel the Court
Motion for Reconsideration. On the other hand, the two quarterly returns for to disregard this cold, undisputed fact: that petitioner suffered a net loss in
1990 mentioned by respondent were in fact attached to the Petition for Review 1990, and that it could not have applied the amount claimed as tax credits.
filed before the CTA. Indeed, to rebut respondents’ specific contention,
petitioner submitted before us its Surrejoinder, to which was attached the Substantial justice, equity and fair play are on the side of petitioner.
Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment Technicalities and legalisms, however exalted, should not be misused by the
Return for 1990. 17 government to keep money not belonging to it and thereby enrich itself at the
expense of its law-abiding citizens. If the State expects its taxpayers to
CTA Case No. 4897 observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments of such taxes. Indeed,
Petitioner also calls the attention of this Court, as it had done before the CTA, the State must lead by its own example of honor, dignity and uprightness.
to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision
and Resolution of the Court of Appeals REVERSED and SET ASIDE. The
Commissioner of Internal Revenue is ordered to refund to petitioner the
amount of P112,491 as excess creditable taxes paid in 1989. No
costs.chanroblesvirtuallawlibrary
SO ORDERED.
[G.R. No. L-7859. December 22, 1955.]
Promulgated in 1940, the law in question opens (section 1) with a declaration
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the of emergency, due to the threat to our industry by the imminent imposition of
deceased Antonio Jayme Ledesma, Plaintiff-Appellant, v. J. ANTONIO export taxes upon sugar as provided in the Tydings-McDuffie Act, and the
ARANETA, as the Collector of Internal Revenue, Defendant-Appellee. "eventual loss of its preferential position in the United States market" ;
wherefore, the national policy was expressed "to obtain a readjustment of the
Ernesto J. Gonzaga for Appellant. benefits derived from the sugar industry by the component elements thereof"
and "to stabilize the sugar industry so as to prepare it for the eventuality of the
Solicitor General Ambrosio Padilla, First Assistant Solicitor General loss of its preferential position in the United States market and the imposition
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for Appellee. of the export taxes."cralaw virtua1aw library
Third, to limit the production of sugar to areas more economically suited to the
REYES, J. B. L., J.: production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve
This case was initiated in the Court of First Instance of Negros Occidental to their living and working conditions: Provided, That the President of the
test the legality of the taxes imposed by Commonwealth Act No. 567, Philippines may, until the adjournment of the next regular session of the
otherwise known as the Sugar Adjustment Act.
National Assembly, make the necessary disbursements from the fund herein that the distribution of benefits therefrom be readjusted among its components
created (1) for the establishment and operation of sugar experiment station or to enable it to resist the added strain of the increase in taxes that it had to
stations and the undertaking of researchers (a)to increase the recoveries of sustain (Sligh v. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson v. State ex
the centrifugal sugar factories with the view of reducing manufacturing costs, rel. Marey, 99 Fla. 1311, 128 So 853; Maxcy Inc. v. Mayo, 103 Fla. 552, 139
(b) to produce and propagate higher yielding varieties of sugar cane more So. 121).
adaptable to different distinct conditions in the Philippines, (c) to lower the
costs of raising sugar cane, (d) to improve the buying quality of denatured As stated in Johnson v. State ex rel. Marey, with reference to the citrus industry
alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing in Florida —
the other by-products of the industry, (f) to determine what crop or crops are
suitable for rotation and for the utilization of excess cane lands, and (g) on "The protection of a large industry constituting one of the great sources of the
other problems the solution of which would help rehabilitated and stabilize the state’s wealth and therefore directly or indirectly affecting the welfare of so
industry, and (2) for the improvement of living and working conditions in sugar great a portion of the population of the State is affected to such an extent by
mills and sugar plantations, authorizing him to organize the necessary agency public interests as to be within the police power of the sovereign." (128 So.
or agencies to take charge of the expenditure and allocation of said funds to 857)
carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary amount of Once it is conceded, as it must, that the protection and promotion of the sugar
amounts needed for salaries, wages, travelling expenses, equipment, and industry is a matter of public concern, it follows that the Legislature may
other sundry expenses or said agency or agencies."cralaw virtua1aw library determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed full
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate play, subject only to the test of reasonableness; and it is not contended that
Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of the means provided in section 6 of the law (above quoted) bear no relation to
Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under the objective pursued or are oppressive in character. If objective and methods
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that are alike constitutionally valid, no reason is seen why the state may not be levy
such tax is unconstitutional and void, being levied for the aid and support of taxes to raise funds for their prosecution and attainment. Taxation may be
the sugar industry exclusively, which in plaintiff’s opinion is not a public made the implement of the state’s police power (Great Atl. & Pac. Tea Co. v.
purpose for which a tax may be constitutionally levied. The action having been Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. v. Butler, 297 U. S. 1, 80 L. Ed.
dismissed by the Court of First Instance, the plaintiffs appealed the case 477; M’Culloch v. Maryland, 4 Wheat. 318, 4 L. Ed. 579).
directly to this Court (Judiciary Act, section 17).
That the tax to be levied should burden the sugar producers themselves can
The basic defect in the plaintiff’s position is his assumption that the tax hardly be a ground of complaint; indeed, it appears rational that the tax be
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing obtained precisely from those who are to be benefited from the expenditure of
power. Analysis of the Act, and particularly of section 6 (heretofore quoted in the funds derived from it. At any rate, it is inherent in the power to tax that a
full), will show that the tax is levied with a regulatory purpose, to provide means state be free to select the subjects of taxation, and it has been repeatedly held
for the rehabilitation and stabilization of the threatened sugar industry. In other that "inequalities which result from a singling out of one particular class for
words, the act is primarily an exercise of the police power. taxation, or exemption infringe no constitutional limitation" (Carmichael v.
Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
This Court can take judicial notice of the fact that sugar production in one of authorities, at p. 1251).
the great industries of our nation, sugar occupying a leading position among
its export products; that it gives employment to thousands of laborers in fields From the point of view we have taken it appears of no moment that the funds
and factories; that it is a great source of the state’s wealth, is one of the raised under the Sugar Stabilization Act, now in question, should be
important sources of foreign exchange needed by our government, and is thus exclusively spent in aid of the sugar industry, since it is that very enterprise
pivotal in the plans of a regime committed to a policy of currency stability. Its that is being protected. It may be that other industries are also in need of similar
promotion, protection and advancement, therefore redounds greatly to the protection; but the legislature is not required by the Constitution to adhere to a
general welfare. Hence it was competent for the legislature to find that the policy of "all or none." As ruled in Minnesota ex rel. Pearson v. Probate Court,
general welfare demanded that the sugar industry should be stabilized in turn; 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is
and in the wide field of its police power, the law-making body could provide most felt, it is not to be overthrown because there are other instances to which
it might have been applied;" and that the legislative authority, exerted within
its proper field, need not embrace all the evils within its reach" (N. L. R. B. v.
Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said
that the devotion of tax money to experimental stations to seek increase of
efficiency in sugar production, utilization of by- products and solution of allied
problems, as well as to the improvement of living and working conditions in
sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson v. Board of Education, 91 L. Ed. 472, 168 ALR
1392, 1400).
Ernesto J. Gonzaga for appellant. Second, to readjust the benefits derived from the sugar industry by all of the
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor component elements thereof - the mill, the landowner, the planter of the sugar
General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee. cane, and the laborers in the factory and in the field - so that all might continue
profitably to engage therein;chanrobles virtual law library
REYES, J.B L., J.:
Third, to limit the production of sugar to areas more economically suited to the
This case was initiated in the Court of First Instance of Negros Occidental to production thereof; andchanrobles virtual law library
test the legality of the taxes imposed by Commonwealth Act No. 567,
otherwise known as the Sugar Adjustment Fourth, to afford labor employed in the industry a living wage and to improve
Act.chanroblesvirtualawlibrary chanrobles virtual law library their living and working conditions: Provided, That the President of the
Philippines may, until the adjourment of the next regular session of the
National Assembly, make the necessary disbursements from the fund herein
Promulgated in 1940, the law in question opens (section 1) with a declaration
of emergency, due to the threat to our industry by the imminent imposition of created (1) for the establishment and operation of sugar experiment station or
export taxes upon sugar as provided in the Tydings-McDuffe Act, and the stations and the undertaking of researchers (a) to increase the recoveries of
"eventual loss of its preferential position in the United States market"; the centrifugal sugar factories with the view of reducing manufacturing costs,
wherefore, the national policy was expressed "to obtain a readjustment of the (b) to produce and propagate higher yielding varieties of sugar cane more
adaptable to different district conditions in the Philippines, (c) to lower the costs
benefits derived from the sugar industry by the component elements thereof"
of raising sugar cane, (d) to improve the buying quality of denatured alcohol
and "to stabilize the sugar industry so as to prepare it for the eventuality of the
from molasses for motor fuel, (e) to determine the possibility of utilizing the
loss of its preferential position in the United States market and the imposition
other by-products of the industry, (f) to determine what crop or crops are
of the export taxes."chanrobles virtual law library
suitable for rotation and for the utilization of excess cane lands, and (g) on
other problems the solution of which would help rehabilitate and stabilize the
In section 2, Commonwealth Act 567 provides for an increase of the existing industry, and (2) for the improvement of living and working conditions in sugar
tax on the manufacture of sugar, on a graduated basis, on each picul of sugar mills and sugar plantations, authorizing him to organize the necessary agency
manufactured; while section 3 levies on owners or persons in control of lands or agencies to take charge of the expenditure and allocation of said funds to
devoted to the cultivation of sugar cane and ceded to others for a carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
consideration, on lease or otherwise - disbursement from the fund herein created of the necessary amount or
amounts needed for salaries, wages, travelling expenses, equipment, and
a tax equivalent to the difference between the money value of the rental or other sundry expenses of said agency or agencies.
consideration collected and the amount representing 12 per centum of the
assessed value of such land. Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate
Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of
According to section 6 of the law - Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that
SEC. 6. All collections made under this Act shall accrue to a special fund in such tax is unconstitutional and void, being levied for the aid and support of
the Philippine Treasury, to be known as the 'Sugar Adjustment and the sugar industry exclusively, which in plaintiff's opinion is not a public
Stabilization Fund,' and shall be paid out only for any or all of the following purpose for which a tax may be constitutioally levied. The action having been
purposes or to attain any or all of the following objectives, as may be provided dismissed by the Court of First Instance, the plaintifs appealed the case
by law.chanroblesvirtualawlibrary chanrobles virtual law library directly to this Court (Judiciary Act, section
17).chanroblesvirtualawlibrary chanrobles virtual law library
The basic defect in the plaintiff's position is his assumption that the tax That the tax to be levied should burden the sugar producers themselves can
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing hardly be a ground of complaint; indeed, it appears rational that the tax be
power. Analysis of the Act, and particularly of section 6 (heretofore quoted in obtained precisely from those who are to be benefited from the expenditure of
full), will show that the tax is levied with a regulatory purpose, to provide means the funds derived from it. At any rate, it is inherent in the power to tax that a
for the rehabilitation and stabilization of the threatened sugar industry. In other state be free to select the subjects of taxation, and it has been repeatedly held
words, the act is primarily an exercise of the police that "inequalities which result from a singling out of one particular class for
power.chanroblesvirtualawlibrary chanrobles virtual law library taxation, or exemption infringe no constitutional limitation" (Carmichael vs.
Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
This Court can take judicial notice of the fact that sugar production is one of authorities, at p. 1251).chanroblesvirtualawlibrary chanrobles virtual law
the great industries of our nation, sugar occupying a leading position among library
its export products; that it gives employment to thousands of laborers in fields
and factories; that it is a great source of the state's wealth, is one of the From the point of view we have taken it appears of no moment that the funds
important sources of foreign exchange needed by our government, and is thus raised under the Sugar Stabilization Act, now in question, should be
pivotal in the plans of a regime committed to a policy of currency stability. Its exclusively spent in aid of the sugar industry, since it is that very enterprise
promotion, protection and advancement, therefore redounds greatly to the that is being protected. It may be that other industries are also in need of similar
general welfare. Hence it was competent for the legislature to find that the protection; that the legislature is not required by the Constitution to adhere to
general welfare demanded that the sugar industry should be stabilized in turn; a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate
and in the wide field of its police power, the lawmaking body could provide that Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where
the distribution of benefits therefrom be readjusted among its components to it is most felt, it is not to be overthrown because there are other instances to
enable it to resist the added strain of the increase in taxes that it had to sustain which it might have been applied;" and that "the legislative authority, exerted
(Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. within its proper field, need not embrace all the evils within its reach" (N. L. R.
Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed.
121).chanroblesvirtualawlibrary chanrobles virtual law library 893).chanroblesvirtualawlibrary chanrobles virtual law library
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus Even from the standpoint that the Act is a pure tax measure, it cannot be said
industry in Florida - that the devotion of tax money to experimental stations to seek increase of
efficiency in sugar production, utilization of by-products and solution of allied
The protection of a large industry constituting one of the great sources of the problems, as well as to the improvements of living and working conditions in
state's wealth and therefore directly or indirectly affecting the welfare of so sugar mills or plantations, without any part of such money being channeled
great a portion of the population of the State is affected to such an extent by directly to private persons, constitutes expenditure of tax money for private
public interests as to be within the police power of the sovereign. (128 Sp. purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR
857). 1392, 1400).chanroblesvirtualawlibrary chanrobles virtual law library
Once it is conceded, as it must, that the protection and promotion of the sugar The decision appealed from is affirmed, with costs against appellant. So
industry is a matter of public concern, it follows that the Legislature may ordered.chanroblesvirtualawlibrary chanrobles virtual law library
determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed
fully play, subject only to the test of reasonableness; and it is not contended
that the means provided in section 6 of the law (above quoted) bear no relation
to the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the state may
not levy taxes to raise funds for their prosecution and attainment. Taxation may
be made the implement of the state's police power (Great Atl. & Pac. Tea Co.
vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80
L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed.
579).chanroblesvirtualawlibrary chanrobles virtual law library
G.R. No. L-29059 December 15, 1987 such, it was exempted from sales taxes under Section 188 of the Tax Code
after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with
COMMISSIONER OF INTERNAL REVENUE, petitioner, Cebu Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968.
vs. Here Justice Eugenio Angeles declared that "before the effectivity of Rep. Act
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX No. 1299, amending Section 246 of the National Internal Revenue Code,
APPEALS, respondents. cement was taxable as a manufactured product under Section 186, in
connection with Section 194(4) of the said Code," thereby implying that it was
CRUZ, J.: not considered a manufactured product afterwards. Also, the alleged sales tax
deficiency could not as yet be enforced against it because the tax assessment
was not yet final, the same being still under protest and still to be definitely
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, resolved on the merits. Besides, the assessment had already prescribed, not
as modified on appeal by the Supreme Court on February 27, 1965, the having been made within the reglementary five-year period from the filing of
Commissioner of Internal Revenue was ordered to refund to the Cebu Portland the tax returns. 10
Cement Company the amount of P 359,408.98, representing overpayments
of ad valorem taxes on cement produced and sold by it after October 1957. 1
Our ruling is that the sales tax was properly imposed upon the private
respondent for the reason that cement has always been considered a
On March 28, 1968, following denial of motions for reconsideration filed by manufactured product and not a mineral product. This matter was extensively
both the petitioner and the private respondent, the latter moved for a writ of discussed and categorically resolved in Commissioner of Internal Revenue v.
execution to enforce the said judgment . 2 Republic Cement Corporation, 11 decided on August 10, 1983, where Justice
Efren L. Plana, after an exhaustive review of the pertinent cases, declared for
The motion was opposed by the petitioner on the ground that the private a unanimous Court:
respondent had an outstanding sales tax liability to which the judgment debt
had already been credited. In fact, it was stressed, there was still a balance From all the foregoing cases, it is clear that
owing on the sales taxes in the amount of P 4,789,279.85 plus 28% cement qua cement was never considered as a mineral
surcharge. 3 product within the meaning of Section 246 of the Tax Code,
notwithstanding that at least 80% of its components are
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that minerals, for the simple reason that cement is the product of
the alleged sales tax liability of the private respondent was still being a manufacturing process and is no longer the mineral product
questioned and therefore could not be set-off against the refund. 4 contemplated in the Tax Code (i.e.; minerals subjected to
simple treatments) for the purpose of imposing the ad
In his petition to review the said resolution, the Commissioner of Internal valorem tax.
Revenue claims that the refund should be charged against the tax deficiency
of the private respondent on the sales of cement under Section 186 of the Tax What has apparently encouraged the herein respondents to
Code. His position is that cement is a manufactured and not a mineral product maintain their present posture is the case of Cebu Portland
and therefore not exempt from sales taxes. He adds that enforcement of the Cement Co. v. Collector of Internal Revenue, L-20563, Oct.
said tax deficiency was properly effected through his power of distraint of 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles.
personal property under Sections 316 and 318 5 of the said Code and, For some portions of that decision give the impression that
moreover, the collection of any national internal revenue tax may not be Republic Act No. 1299, which amended Section 246,
enjoined under Section 305, 6 subject only to the exception prescribed in Rep. reclassified cement as a mineral product that was not subject
Act No. 1125. 7 This is not applicable to the instant case. The petitioner also to sales tax. ...
denies that the sales tax assessments have already prescribed because the
prescriptive period should be counted from the filing of the sales tax returns, xxx xxx xxx
which had not yet been done by the private respondent.
After a careful study of the foregoing, we conclude that
For its part, the private respondent disclaims liability for the sales taxes, on the reliance on the decision penned by Justice Angeles is
ground that cement is not a manufactured product but a mineral product. 8 As
misplaced. The said decision is no authority for the Collector of Internal Revenue, L-20563, October 29, 1968 (28
proposition that after the enactment of Republic Act No. 1299 SCRA 789) penned by Justice Eugenio Angeles, the Court
in 1955 (defining mineral product as things with at least 80% has expressly overruled it insofar as it may conflict with the
mineral content), cement became a 'mineral product," as decision of August 10, 1983, now subject of these motions for
distinguished from a "manufactured product," and therefore reconsideration.
ceased to be subject to sales tax. It was not necessary for the
Court to so rule. It was enough for the Court to say in effect On the question of prescription, the private respondent claims that the five-
that even assuming Republic Act No. 1299 had reclassified year reglementary period for the assessment of its tax liability started from the
cement was a mineral product, the reclassification could not time it filed its gross sales returns on June 30, 1962. Hence, the assessment
be given retrospective application (so as to justify the refund for sales taxes made on January 16, 1968 and March 4, 1968, were already
of sales taxes paid before Republic Act 1299 was adopted) out of time. We disagree. This contention must fail for what CEPOC filed was
because laws operate prospectively only, unless the not the sales returns required in Section 183(n) but the ad valorem tax returns
legislative intent to the contrary is manifest, which was not so required under Section 245 of the Tax Code. As Justice Irene R. Cortes
in the case of Republic Act 1266. [The situation would have emphasized in the aforestated resolution:
been different if the Court instead had ruled in favor of refund,
in which case it would have been absolutely necessary (1) to In order to avail itself of the benefits of the five-year
make an unconditional ruling that Republic Act 1299 re- prescription period under Section 331 of the Tax Code, the
classified cement as a mineral product (not subject to sales taxpayer should have filed the required return for the tax
tax), and (2) to declare the law retroactive, as a basis for involved, that is, a sales tax return. (Butuan Sawmill, Inc. v.
granting refund of sales tax paid before Republic Act 1299.] CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277).
Thus CEPOC should have filed sales tax returns of its gross
In any event, we overrule the CEPOC decision of October 29, sales for the subject periods. Both parties admit that returns
1968 (G.R. No. L-20563) insofar as its pronouncements or were made for the ad valorem mining tax. CEPOC argues that
any implication therefrom conflict with the instant decision. said returns contain the information necessary for the
assessment of the sales tax. The Commissioner does not
The above views were reiterated in the resolution 12 denying reconsideration consider such returns as compliance with the requirement for
of the said decision, thus: the filing of tax returns so as to start the running of the five-
year prescriptive period.
The nature of cement as a "manufactured product" (rather
than a "mineral product") is well-settled. The issue has We agree with the Commissioner. It has been held in Butuan
repeatedly presented itself as a threshold question for Sawmill Inc. v. CTA, supra, that the filing of an income tax
determining the basis for computing the ad valorem mining return cannot be considered as substantial compliance with
tax to be paid by cement Companies. No pronouncement was the requirement of filing sales tax returns, in the same way
made in these cases that as a "manufactured product" cement that an income tax return cannot be considered as a return for
is subject to sales tax because this was not at issue. compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land
The decision sought to be reconsidered here referred to the Transportation Co., Inc. v. Collector of Internal Revenue, G.R.
legislative history of Republic Act No. 1299 which introduced Nos. L-12100 and L-11812, May 29, 1959). There being no
a definition of the terms "mineral" and "mineral products" in sales tax returns filed by CEPOC, the statute of stations in
Sec. 246 of the Tax Code. Given the legislative intent, the Sec. 331 did not begin to run against the government. The
holding in the CEPOC case (G.R. No. L-20563) that cement assessment made by the Commissioner in 1968 on CEPOC's
was subject to sales tax prior to the effectivity •f Republic Act cement sales during the period from July 1, 1959 to December
No. 1299 cannot be construed to mean that, after the law took 31, 1960 is not barred by the five-year prescriptive period.
effect, cement ceased to be so subject to the tax. To erase Absent a return or when the return is false or fraudulent, the
any and all misconceptions that may have been spawned by applicable period is ten (10) days from the discovery of the
reliance on the case of Cebu Portland Cement Co. v. fraud, falsity or omission. The question in this case is: When
was CEPOC's omission to file tha return deemed discovered
by the government, so as to start the running of said
period? 13
The argument that the assessment cannot as yet be enforced because it is still
being contested loses sight of the urgency of the need to collect taxes as "the
lifeblood of the government." If the payment of taxes could be postponed by
simply questioning their validity, the machinery of the state would grind to a
halt and all government functions would be paralyzed. That is the reason why,
save for the exception already noted, the Tax Code provides:
It goes without saying that this injunction is available not only when the
assessment is already being questioned in a court of justice but more so if, as
in the instant case, the challenge to the assessment is still-and only-on the
administrative level. There is all the more reason to apply the rule here
because it appears that even after crediting of the refund against the tax
deficiency, a balance of more than P 4 million is still due from the private
respondent.
WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968,
in CTA Case No. 786 is SET ASIDE, without any pronouncement as to costs.
SO ORDERED.
The facts show that respondent Juliane Baier-Nickel, a non-resident German SO ORDERED.8
citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged
in "[m]anufacturing, marketing on wholesale only, buying or otherwise Petitioner filed a motion for reconsideration but was denied.9 Hence, the
acquiring, holding, importing and exporting, selling and disposing embroidered instant recourse.
textile products."4 Through JUBANITEX’s General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent Petitioner maintains that the income earned by respondent is taxable in the
as commission agent. It was agreed that respondent will receive 10% sales Philippines because the source thereof is JUBANITEX, a domestic corporation
commission on all sales actually concluded and collected through her efforts.5 located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since
In 1995, respondent received the amount of P1,707,772.64, representing her respondent is the President of JUBANITEX, any remuneration she received
sales commission income from which JUBANITEX withheld the corresponding from said corporation should be construed as payment of her overall
10% withholding tax amounting to P170,777.26, and remitted the same to the managerial services to the company and should not be interpreted as a
Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her compensation for a distinct and separate service as a sales commission agent.
1995 income tax return reporting a taxable income of P1,707,772.64 and a tax
due of P170,777.26.6 Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of
On April 14, 1998, respondent filed a claim to refund the amount of nonresident aliens like her is subject to tax only if the source of the income is
P170,777.26 alleged to have been mistakenly withheld and remitted by within the Philippines. Source, according to respondent is the situs of the
JUBANITEX to the BIR. Respondent contended that her sales commission activity which produced the income. And since the source of her income were
income is not taxable in the Philippines because the same was a her marketing activities in Germany, the income she derived from said
compensation for her services rendered in Germany and therefore considered activities is not subject to Philippine income taxation.
as income from sources outside the Philippines.
The issue here is whether respondent’s sales commission income is taxable
The next day, April 15, 1998, she filed a petition for review with the CTA in the Philippines.
contending that no action was taken by the BIR on her claim for refund. 7 On
June 28, 2000, the CTA rendered a decision denying her claim. It held that the Pertinent portion of the National Internal Revenue Code (NIRC), states:
commissions received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. – The Internal Revenue Code of the U.S. enumerates specific types of income
to be treated as from sources within the U.S. and specifies when similar types
(1) In General. – A nonresident alien individual engaged in trade or business of income are to be treated as from sources outside the U.S.14 Under the said
in the Philippines shall be subject to an income tax in the same manner as an Code, compensation for labor and personal services performed in the U.S., is
individual citizen and a resident alien individual, on taxable income received generally treated as income from U.S. sources; while compensation for said
from all sources within the Philippines. A nonresident alien individual who shall services performed outside the U.S., is treated as income from sources outside
come to the Philippines and stay therein for an aggregate period of more than the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
one hundred eighty (180) days during any calendar year shall be deemed a
‘nonresident alien doing business in the Philippines,’ Section 22(G) of this SEC. 42. x x x
Code notwithstanding.
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. – There shall be levied, collected and paid for each taxable year (3) Services. – Compensation for labor or personal services performed in the
upon the entire income received from all sources within the Philippines by Philippines;
every nonresident alien individual not engaged in trade or business within the
Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x
xxxx
x
(C) Gross Income From Sources Without the Philippines. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether
or not engaged in trade or business, are subject to Philippine income taxation
on their income received from all sources within the Philippines. Thus, the xxxx
keyword in determining the taxability of non-resident aliens is the income’s
"source." In construing the meaning of "source" in Section 25 of the NIRC, (3) Compensation for labor or personal services performed without the
resort must be had on the origin of the provision. Philippines;
The first Philippine income tax law enacted by the Philippine Legislature was The following discussions on sourcing of income under the Internal Revenue
Act No. 2833,10 which took effect on January 1, 1920.11 Under Section 1 Code of the U.S., are instructive:
thereof, nonresident aliens are likewise subject to tax on income "from all
sources within the Philippine Islands," thus – The Supreme Court has said, in a definition much quoted but often debated,
that income may be derived from three possible sources only: (1) capital and/or
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually (2) labor; and/or (3) the sale of capital assets. While the three elements of this
upon the entire net income received in the preceding calendar year from all attempt at definition need not be accepted as all-inclusive, they serve as useful
sources by every individual, a citizen or resident of the Philippine Islands, a guides in any inquiry into whether a particular item is from "sources within the
tax of two per centum upon such income; and a like tax shall be levied, United States" and suggest an investigation into the nature and location of the
assessed, collected, and paid annually upon the entire net income received in activities or property which produce the income.
the preceding calendar year from all sources within the Philippine Islands by
every individual, a nonresident alien, including interest on bonds, notes, or If the income is from labor the place where the labor is done should be
other interest-bearing obligations of residents, corporate or otherwise. decisive; if it is done in this country, the income should be from "sources within
the United States." If the income is from capital, the place where the capital is
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law employed should be decisive; if it is employed in this country, the income
of 1916 as amended by U.S. Revenue Law of 1917.12 Being a law of American should be from "sources within the United States." If the income is from the
origin, the authoritative decisions of the official charged with enforcing it in the sale of capital assets, the place where the sale is made should be likewise
U.S. have peculiar persuasive force in the Philippines.13 decisive.
Much confusion will be avoided by regarding the term "source" in this in the Philippines. x x x the reinsured, the liabilities insured and the risk
fundamental light. It is not a place, it is an activity or property. As such, it has originally underwritten by Commonwealth Insurance Co., upon which the
a situs or location, and if that situs or location is within the United States the reinsurance premiums and indemnity were based, were all situated in the
resulting income is taxable to nonresident aliens and foreign corporations. Philippines. x x x19
The intention of Congress in the 1916 and subsequent statutes was to discard In Commissioner of Internal Revenue v. British Overseas Airways
the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations Corporation (BOAC),20 the issue was whether BOAC, a foreign airline
and to make the test of taxability the "source," or situs of the activities or company which does not maintain any flight to and from the Philippines is liable
property which produce the income. The result is that, on the one hand, for Philippine income taxation in respect of sales of air tickets in the
nonresident aliens and nonresident foreign corporations are prevented from Philippines, through a general sales agent relating to the carriage of
deriving income from the United States free from tax, and, on the other hand, passengers and cargo between two points both outside the Philippines. Ruling
there is no undue imposition of a tax when the activities do not take place in, in the affirmative, the Court applied the case of Alexander Howden & Co., Ltd.
and the property producing income is not employed in, this country. Thus, if v. Collector of Internal Revenue, and reiterated the rule that the source of
income is to be taxed, the recipient thereof must be resident within the income is that "activity" which produced the income. It was held that the "sale
jurisdiction, or the property or activities out of which the income issues or is of tickets" in the Philippines is the "activity" that produced the income and
derived must be situated within the jurisdiction so that the source of the income therefore BOAC should pay income tax in the Philippines because it undertook
may be said to have a situs in this country. an income producing activity in the country.
The underlying theory is that the consideration for taxation is protection of life Both the petitioner and respondent cited the case of Commissioner of Internal
and property and that the income rightly to be levied upon to defray the Revenue v. British Overseas Airways Corporation in support of their
burdens of the United States Government is that income which is created by arguments, but the correct interpretation of the said case favors the theory of
activities and property protected by this Government or obtained by persons respondent that it is the situs of the activity that determines whether such
enjoying that protection. 16 income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying
The important factor therefore which determines the source of income of principle of the law on sourcing of income. In fact, both applied the case of
personal services is not the residence of the payor, or the place where the Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The
contract for service is entered into, or the place of payment, but the place divergence in opinion centered on whether the sale of tickets in the Philippines
where the services were actually rendered.17 is to be construed as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by
Justice Florentino P. Feliciano in his dissent. The majority, through Justice
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18 the Court
Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a
addressed the issue on the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign insurance company business activity that gave rise to the income of BOAC. Petitioner cannot
therefore invoke said case to support its view that source of income is the
in respect of risks located in the Philippines. It was held therein that the
physical source of the money earned. If such was the interpretation of the
undertaking of the foreign insurance company to indemnify the local insurance
majority, the Court would have simply stated that source of income is not the
company is the activity that produced the income. Since the activity took place
in the Philippines, the income derived therefrom is taxable in our jurisdiction. business activity of BOAC but the place where the person or entity disbursing
Citing Mertens, The Law of Federal Income Taxation, the Court emphasized the income is located or where BOAC physically received the same. But such
that the technical meaning of source of income is the property, activity or was not the import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to pinpoint the
service that produced the same. Thus:
taxable activity and to justify its conclusion that BOAC is subject to Philippine
income taxation. Thus –
The source of an income is the property, activity or service that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contracts, accordingly, had for their source the undertaking to BOAC, during the periods covered by the subject assessments, maintained a
indemnify Commonwealth Insurance Co. against liability. Said undertaking is general sales agent in the Philippines. That general sales agent, from 1959 to
the activity that produced the reinsurance premiums, and the same took place 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips — each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4) The decisive factual consideration here is not the capacity in which respondent
consequently allocating to the various airline companies on the basis of their received the income, but the sufficiency of evidence to prove that the services
participation in the services rendered through the mode of interline settlement she rendered were performed in Germany. Though not raised as an issue, the
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Court is clothed with authority to address the same because the resolution
Those activities were in exercise of the functions which are normally incident thereof will settle the vital question posed in this controversy.23
to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main The settled rule is that tax refunds are in the nature of tax exemptions and are
activity, is the very lifeblood of the airline business, the generation of sales to be construed strictissimi juris against the taxpayer.24 To those therefore,
being the paramount objective. There should be no doubt then that BOAC was who claim a refund rest the burden of proving that the transaction subjected to
"engaged in" business in the Philippines through a local agent during the tax is actually exempt from taxation.
period covered by the assessments. x x x 21
In the instant case, the appointment letter of respondent as agent of
xxxx JUBANITEX stipulated that the activity or the service which would entitle her
to 10% commission income, are "sales actually concluded and collected
The source of an income is the property, activity or service that produced the through [her] efforts."25 What she presented as evidence to prove that she
income. For the source of income to be considered as coming from the performed income producing activities abroad, were copies of documents she
Philippines, it is sufficient that the income is derived from activity within the allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity designs and fabrics to be used in the finished products as well as samples of
that produces the income. The tickets exchanged hands here and payments sales orders purportedly relayed to her by clients. However, these documents
for fares were also made here in Philippine currency. The situs of the source do not show whether the instructions or orders faxed ripened into concluded
of payments is the Philippines. The flow of wealth proceeded from, and or collected sales in Germany. At the very least, these pieces of evidence show
occurred within, Philippine territory, enjoying the protection accorded by the that while respondent was in Germany, she sent instructions/orders to
Philippine government. In consideration of such protection, the flow of wealth JUBANITEX. As to whether these instructions/orders gave rise to
should share the burden of supporting the government. consummated sales and whether these sales were truly concluded in
Germany, respondent presented no such evidence. Neither did she establish
A transportation ticket is not a mere piece of paper. When issued by a common reasonable connection between the orders/instructions faxed and the reported
carrier, it constitutes the contract between the ticket-holder and the carrier. It monthly sales purported to have transpired in Germany.
gives rise to the obligation of the purchaser of the ticket to pay the fare and the
corresponding obligation of the carrier to transport the passenger upon the The paucity of respondent’s evidence was even noted by Atty. Minerva
terms and conditions set forth thereon. The ordinary ticket issued to members Pacheco, petitioner’s counsel at the hearing before the Court of Tax Appeals.
of the traveling public in general embraces within its terms all the elements to She pointed out that respondent presented no contracts or orders signed by
constitute it a valid contract, binding upon the parties entering into the the customers in Germany to prove the sale transactions therein.26 Likewise,
relationship.22 in her Comment to the Formal Offer of respondent’s evidence, she objected to
the admission of the faxed documents bearing instruction/orders marked as
The Court reiterates the rule that "source of income" relates to the property, Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised
activity or service that produced the income. With respect to rendition of labor by petitioner’s counsel as to the absence of substantial evidence that would
or personal service, as in the instant case, it is the place where the labor or constitute proof that the sale transactions for which respondent was paid
service was performed that determines the source of the income. There is commission actually transpired outside the Philippines, is relevant because
therefore no merit in petitioner’s interpretation which equates source of income respondent stayed in the Philippines for 89 days in 1995. Except for the
in labor or personal service with the residence of the payor or the place of months of July and September 1995, respondent was in the Philippines in the
payment of the income. months of March, May, June, and August 1995,30 the same months when she
earned commission income for services allegedly performed abroad.
Having disposed of the doctrine applicable in this case, we will now determine Furthermore, respondent presented no evidence to prove that JUBANITEX
whether respondent was able to establish the factual circumstances showing does not sell embroidered products in the Philippines and that her appointment
as commission agent is exclusively for Germany and other European
that her income is exempt from Philippine income taxation.
markets.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable
mind might accept as adequate to support the conclusion31 that it was in
Germany where she performed the income producing service which gave rise
to the reported monthly sales in the months of March and May to September
of 1995. She thus failed to discharge the burden of proving that her income
was from sources outside the Philippines and exempt from the application of
our income tax law. Hence, the claim for tax refund should be denied.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision
and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794,
are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of
Tax Appeals in C.T.A. Case No. 5633, which denied respondent’s claim for
refund of income tax paid for the year 1995 is REINSTATED.
SO ORDERED.