Case Digest: G.R. No. L-28896 (Commissioner of Internal Revenue v. Algue, Inc.

and Court of Tax

Appeals)

Facts:

- The case involves a dispute over the deductibility of P75,000.00 claimed by Algue, Inc. as
legitimate business expenses in its income tax returns for the years 1958 and 1959.
- Algue, Inc. is a domestic corporation engaged in engineering, construction, and related activities.
- The Commissioner of Internal Revenue disallowed the deduction and assessed delinquency
income taxes against Algue, Inc.
- Algue, Inc. protested the assessment and filed a letter of protest on January 18, 1965.
- The Court of Tax Appeals (CTA) upheld the legitimacy of the claimed deduction and allowed the
appeal filed by Algue, Inc.

Issues:

- Whether the appeal of Algue, Inc. from the decision of the Commissioner of Internal Revenue
was timely filed.
- Whether the P75,000.00 deduction claimed by Algue, Inc. as legitimate business expenses should
be allowed.

Ruling:

The Court found that the appeal of Algue, Inc. was filed on time. The filing of the letter of protest by
Algue, Inc. on January 18, 1965, effectively suspended the reglementary period for filing an appeal. The
period started running again only on April 7, 1965, when Algue, Inc. was informed of the implied
rejection of the protest and the warrant of distraint and levy was finally served. The appeal filed on April
23, 1965, was within the 30-day period required by Rep. Act No. 1125.
The Court upheld the CTA's decision to allow the P75,000.00 deduction claimed by Algue, Inc. as
legitimate business expenses. The claimed amount was paid as promotional fees to individuals who
played significant roles in the formation of the Vegetable Oil Investment Corporation and its subsequent
purchase of properties from the Philippine Sugar Estate Development Company. The Court agreed with
the CTA that the payment was not excessive, considering the efforts exerted by the payees and the clear
profit earned by Algue, Inc. from the transaction. The Court held that the burden of proof was met by
Algue, Inc. to demonstrate the necessity and reasonableness of the deduction.
Case Digest: G.R. No. 115455 (Arturo v. The Secretary of Finance)

Facts:

The case involves motions for reconsideration of a decision that dismissed petitions seeking the
declaration of unconstitutionality of Republic Act (R.A.) No. 7716, also known as the Expanded
Value-Added Tax Law. Petitioners argue that applying the 10% value-added tax (VAT) to existing
contracts of the sale of real property by installment or on deferred payment basis would result in
substantial increases in the monthly amortizations to be paid and, therefore, impairs the obligation of
contracts.

Issue:

Whether R.A. No. 7716 impairs the obligations of contracts.

Ruling:

Authorities cited by the petitioners do not show that a lawful tax on a new subject or an increased tax on
an old one interferes with a contract or impairs its obligation within the meaning of the Constitution.
While such taxation may affect particular contracts and impose additional burdens, it does not necessarily
impair the obligations of contracts.

The court cited the case of La Insular v. Machuca Go-Tauco and Nubla Co-Siong (39 Phil. 567, 574,
1919), stating that a lawful tax does not impair the obligation of an existing contract in its true legal sense.
Contracts must be understood as having been made in reference to the possible exercise of the rightful
authority of the government, and no obligation of a contract can extend to the defeat of that authority.

In conclusion, the court found that the application of the 10% VAT to existing contracts does not impair
the obligations of contracts as understood within the context of constitutional limitations.
Case Digest: G.R. No. L-7859 (Lutz v. Araneta)

Facts:

This case involves the legality of the taxes imposed by Commonwealth Act No. 567, known as the Sugar
Adjustment Act, promulgated in 1940. The plaintiff, Walter Lutz, acting as the Judicial Administrator of
the Intestate Estate of Antonio Jayme Ledesma, seeks to recover taxes paid by the estate under section 3
of the Act for the crop years 1948-1949 and 1949-1950. The plaintiff argues that the tax is
unconstitutional and void since it is levied exclusively for the aid and support of the sugar industry, which
is not a legitimate public purpose for taxation.

Issue:

The main issue in this case is whether the tax imposed under Commonwealth Act No. 567, also known as
the Sugar Adjustment Act, is unconstitutional and void due to being levied solely for the aid and support
of the sugar industry, which the plaintiff argues is not a valid public purpose for taxation.

Ruling:

The Supreme Court ruled in favor of the defendant, upholding the constitutionality of the tax imposed
under Commonwealth Act No. 567. The Court held that the tax was not a pure exercise of the taxing
power, but rather an exercise of the state's police power with a regulatory purpose. The Court recognized
the significance of the sugar industry as a major national industry that contributes to the country's
economy, employment, and foreign exchange.

The Court emphasized that the protection, promotion, and advancement of the sugar industry are matters
of public concern and that the Legislature has the authority to determine what measures are necessary and
expedient for its protection and promotion. The Court noted that as long as the means provided for in the
law are reasonably related to the objective pursued and are not oppressive in character, the state can levy
taxes to raise funds for their implementation.

Even from the perspective of a pure tax measure, the Court ruled that the allocation of tax money to
experimental stations for increasing efficiency in sugar production, utilizing by-products, and improving
living and working conditions in sugar mills or plantations did not constitute expenditures for private
purposes.

In conclusion, the Court affirmed the decision of the lower court, ruling that the tax imposed under
Commonwealth Act No. 567 is constitutional and valid.
Case Digest: G.R. No. 158540 (Southern Cross Cement Corporation v. Cement Manufacturers
Association Of The Philippines)

Facts:

This case revolves around the interpretation of provisions of Republic Act No. 8800, the Safeguard
Measures Act (SMA), which was enacted after the Philippines ratified the General Agreement on Tariff
and Trade (GATT) and the World Trade Organization (WTO) Agreement. The SMA provides the
structure for imposing emergency measures, including tariffs, to protect domestic industries from
increased imports that may cause serious injury.

Issue:

Whether the Department of Trade and Industry (DTI) Secretary may impose general safeguard measures
in the absence of a positive final determination by the Tariff Commission.

Ruling:

The Court ruled that the DTI Secretary cannot impose general safeguard measures without a positive final
determination by the Tariff Commission. Section 5 of the SMA clearly indicates legislative intent to
restrict the DTI Secretary's power by requiring a positive determination by the Tariff Commission before
imposing such measures. This legislative intent is consistent with the Constitution's delegation of the
taxation power from the legislative to the executive, subject to limitations and restrictions set by the
former. The limitations imposed by Section 5 are absolute, as they are backed by a constitutional mandate.
The DTI Secretary's power to impose safeguard measures is derived from the SMA, not from inherent
executive power, making the limitations imposed by Section 5 binding.

The safeguards that the DTI Secretary may impose under the SMA essentially involve tariff imposts,
which fall within the delegated power granted by the Constitution. However, the law does not give the
DTI Secretary unrestricted discretion to impose these measures. Therefore, the limitations set by Section
5 of the SMA must be observed, as they are supported by constitutional command.

In summary, the Court held that the DTI Secretary cannot impose general safeguard measures without a
positive final determination by the Tariff Commission, as prescribed by Section 5 of the Safeguard
Measures Act.
Case Digest: G.R. No. L-22074 (Phil. Guaranty Co. Inc. v. CIR)

Facts:

The Philippine Guaranty Co., Inc. entered into reinsurance contracts with foreign insurance companies for
a portion of the premiums on insurance it originally underwrote in the Philippines. The contracts required
Philippine Guaranty to cede a portion of the risks and were signed in the Philippines. A proportionate
amount of taxes on premiums not recovered from original insurance was to be paid by the foreign
reinsurers. The foreign reinsurers also agreed to compensate Philippine Guaranty for managing their
affairs in the Philippines. The Commissioner of Internal Revenue assessed withholding income tax on
these ceded reinsurance premiums. Philippine Guaranty protested, arguing that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines were not subject to withholding tax.

Issue:

Whether the reinsurance premiums ceded to foreign reinsurers constitute income from sources within the
Philippines subject to withholding tax.

Ruling:

The reinsurance premiums ceded to foreign reinsurers constitute income from sources within the
Philippines subject to withholding tax. The reinsurance contracts' transactions or activities that constituted
the undertaking to reinsure took place in the Philippines. The term "sources" refers to the activity,
property, or service giving rise to the income. The reinsurance premiums were income created from the
undertaking of foreign reinsurers to reinsure Philippine Guaranty against liability under original
insurances, which took place in the Philippines.

The place of business should not be confused with the place of activity. Section 24 of the Tax Code does
not require a foreign corporation to engage in business in the Philippines to subject its income to tax. It
suffices that the activity creating the income is performed or done in the Philippines. What matters is the
place of activity that created the income, not the place of business.

The power to tax is an attribute of sovereignty, necessary to preserve the State's sovereignty and provide
public facilities and protection. Given that the reinsurance premiums and foreign reinsurers were afforded
protection by the government and enjoyed rights and privileges guaranteed by laws, they should share the
burden of maintaining the state.

The Court also ruled that the withholding tax should be computed from the total amount ceded without
deductions, as allowed by Section 54 of the Tax Code.