TAX CASES (CHAPTER 2)

12 January 2017
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the
joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561,
dated 26 January 1983, which set aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal
years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under
the laws of the United Kingdom It is engaged in the international airline business and is
a member-signatory of the Interline Air Transport Association (IATA). As such it operates
air transportation service and sells transportation tickets over the routes of the other
airline members. During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and
was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales
agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways
which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970 for

the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which
claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had
already filed a petition for review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and
set aside. In a letter, dated 16 February 1972, however, the CIR not only denied the
BOAC request for refund in the First Case but also re-issued in the Second Case the
deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request
for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to
file the Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the
CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from Philippine sources "since
no service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place
where services are rendered determines the source. Thus, in the dispositive portion of
its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax assessments against BOAC in
the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,

constitute income of BOAC from Philippine sources, and, accordingly,

taxable.
2. Whether or not during the fiscal years in question BOAC s a resident
foreign corporation doing business in the Philippines or has an office or
place of business in the Philippines.
3. In the alternative that private respondent may not be considered a
resident foreign corporation but a non-resident foreign corporation, then it
is liable to Philippine income tax at the rate of thirty-five per cent (35%) of
its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident 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
It is our considered opinion that BOAC is a resident foreign corporation. 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 a 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. 2 "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. 3
BOAC, during the periods covered by the subject - assessments, maintained a general
sales agent in the Philippines, That general sales agent, from 1959 to 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) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." 4 Those activities were in exercise of the functions which are normally
incident 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 activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.

Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or
existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all sources within
the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of
tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.
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 transactions of any
business carried on for gain or profile, 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 ...; 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. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69
to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the
income. 8 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 site 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.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It 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 terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid contract, binding upon
the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (21) 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. " 10
BOAC, however, would impress upon this Court that income derived from transportation
is income for services, with the result that the place where the services are rendered
determines the source; and since BOAC's service of transportation is performed outside
the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in
the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived from a activity regularly pursued
within the Philippines. business a And even if the BOAC tickets sold covered the
"transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact
that income from the sale of tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the
fiscal years covered by the questioned deficiency income tax assessments in these
cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree

No. 69, promulgated on 24 November, 1972, international carriers are now taxed as
follows:
... Provided, however, That international carriers shall pay a tax of 2- per
cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory
definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income
from Philippine sources. The 2- % tax on gross Philippine billings is an income tax. If it
had been intended as an excise or percentage tax it would have been place under Title
V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by
this Court of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect 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. As elucidated by the Tax Court, however, 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. 14 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. The subject matter of the case under consideration 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 one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is
hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16,
1972 for a period not to exceed three (3) years in accordance with the Tax Code. The
BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.Fernan, J., took no
part.

Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion penned by
Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued
by its general sales agent in the Philippines gas become moot after November 24,
1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of
income tax on foreign corporations, international carriers such as respondent BOAC,
have since then been taxed at a reduced rate of 2-% on their gross Philippine billings.
There is, therefore, no longer ant source of substantial conflict between the two opinions
as to the present 2-% tax on their gross Philippine billings charged against such
international carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the
Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is
correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas
Airways Corporation (BOAC), a foreign airline company which does not maintain any
flight operations to and from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the
Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a
resident foreign corporation doing business in the Philippines or [had] an
office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of the
income here involved. The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in

the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or
business with in the Philippines (expect foreign life insurance companies)
shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and
a like tax shall be livied, collected, and paid annually upon the total net
income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under
the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. A corporation, organized, authorized
or existing under the laws of any foreign counrty, except foreign life
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all sources within
the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon nonresident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There
shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premium, annuities, compensations,
remunerations, emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty per centum of
such amount: provided, however, that premiums shall not include
reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and
therefore a resident foreign corporation, or not doing business in the Philippines and

therefore a non-resident foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part
of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the
receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
therefore whether of not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the "property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the
issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the
Philippines. The Court said:
The source of an income is the property, activity or services that produced
the income. The reinsurance premiums remitted to appellants by virtue of
the reinsurance contract, 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. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance
Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In
the Howden case, that underlying prestation was the indemnification of the local
insurance company. Such indemnification could take place only in the Philippines where
the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in the
1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as
amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to
refer to a standard U.S. text on federal income taxation:
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 (2) labor and/or (3) the sale of capital assets. While

the three elements of this attempt at definition need not be accepted as

all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an
investigation into the nature and location of the activities or property which
produce the income. If the income is from labor (services) the place where
the labor is done should be decisive; if it is done in this counrty, the
income should be from "source within the United States." If the income is
from capital, the place where the capital is employed should be decisive; if
it is employed in this country, the income should be from "source within the
United States". If the income is from the sale of capital assets, the place
where the sale is made should be likewise decisive. Much confusion will
be avoided by regarding the term "source" in this fundamental light. It is
not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the
activities or property which produce the income . . . . Thus, if income is to
taxed, the recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issue or is derived must be
situated within the jurisdiction so that the source of the income may be
said to have a situs in this country. The underlying theory is that the
consideration for taxation is protection of life and property and that the
income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property
protected by this Government or obtained by persons enjoying that
protection. 5
3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may
be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for 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:
xxx xxx xxx

(3) Services. Compensation for labor or personal

services performed in the Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following
items of gross income shall be treated as income from sources without the
Philippines:
(3) Compensation for labor or personal services performed without the
Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to services
rendered by or through the medium of a juridical person. 6 Further, a contract of carriage
or of transportation is assimilated in our Tax Code and Revenue Regulations to a
contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines.
Items of gross income, expenses, losses and deductions, other than those
specified in subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the rules
and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1) transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
was a service and that the source of the income derived therefrom was to be treated as
being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the
Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part
as follows:

Section 155. Compensation for labor or personnel services. Gross

income from sources within the Philippines includes compensation for
labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. The return of foreign
steamship companies whose vessels touch parts of the Philippines should
include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus
ascertained, the ratio existing between it and the gross income from all
ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:
Section 164. Telegraph and cable services. A foreign corporation
carrying on the business of transmission of telegraph or cable messages
between points in the Philippines and points outside the Philippines
derives income partly form source within and partly from sources without
the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property
by the producer or manufacturer of such personal property will be regarded as
sourced entirely within or entirely without the Philippines or as sourced partly within and
partly without the Philippines, depending upon two factors: (a) the place where the sale
of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or

manufactured and sold outside the Philippines, the income derived therefrom will be
regarded as sourced entirely outside the Philippines, although the personal property
had been produced outside the Philippines, or if the sale of the property takes place
outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the
Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the
Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may
be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ...
Gains, profits and income from (1) transportation or other services
rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part)
by the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ...
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines or from the purchase of personal
property without and its sale within the Philippines, shall be treated as
derived entirely from sources within the country in which sold. (Emphasis
supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase
and sale of personal property shall be treated as derived entirely from the
country in which sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the property is marketed.
This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the
Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162 of these regulations).
(Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized
either as sales of personal property (i. e., "sales of airline tickets") or as entering into a

lease of services or a contract of service or carriage. The applicable "source of income"

rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract
of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of
shoes of a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or
as purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged
in trading in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" its service. However, for the technical purposes of the law on
income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by the
grace of popular language. On a slighty more abstract level, BOAC's income is more
appropriately characterized as derived from a "service", rather than from an "activity" (a
broader term than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November
1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
following manner:
(2) Resident corporations. A corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceeding

taxable year from all sources within the Philippines: Provided,

however, That international carriers shall pay a tax of two and one-half per
cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail shall include the gross freight
charge up to final destination. Gross revenues from chartered flights
originating from the Philippines shall likewise form part of "gross Philippine
billings" regardless of the place of sale or payment of the passage
documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include
flight of passsengers who stay in the Philippines for more than forty-eight
(48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to any
other point in the world, are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines).
Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above
discussed, to transportation or other services rendered partly within and partly without
the Philippines, or wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the
Philippines regardless of where embarkation and debarkation would be taking place.
This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax
and not a tax on income. Thereby, the Government has done away with the difficulties
attending the allocation of income and related expenses, losses and deductions.
Because taxes are the very lifeblood of government, the resulting potential "loss" or
"gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to
point out that the determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets entails no down-the-road
loss of income tax revenues to the Government. In lieu thereof, the Government takes
in revenues generated by the 2- per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions
TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion penned by
Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued
by its general sales agent in the Philippines gas become moot after November 24,
1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of
income tax on foreign corporations, international carriers such as respondent BOAC,
have since then been taxed at a reduced rate of 2-% on their gross Philippine billings.
There is, therefore, no longer ant source of substantial conflict between the two opinions
as to the present 2-% tax on their gross Philippine billings charged against such
international carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the
Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is
correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas
Airways Corporation (BOAC), a foreign airline company which does not maintain any
flight operations to and from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the
Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a
resident foreign corporation doing business in the Philippines or [had] an
office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of the
income here involved. The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in
the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as

amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3

August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or
business with in the Philippines (expect foreign life insurance companies)
shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and
a like tax shall be livied, collected, and paid annually upon the total net
income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under
the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. A corporation, organized, authorized
or existing under the laws of any foreign counrty, except foreign life
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all sources within
the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon nonresident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There
shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premium, annuities, compensations,
remunerations, emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty per centum of
such amount: provided, however, that premiums shall not include
reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and
therefore a resident foreign corporation, or not doing business in the Philippines and
therefore a non-resident foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part
of its income is Philippine source income. Similarly, the non-resident status of a foreign

corporation does not imply that it has no Philippine source income. Conversely, the
receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
therefore whether of not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the "property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the
issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the
Philippines. The Court said:
The source of an income is the property, activity or services that produced
the income. The reinsurance premiums remitted to appellants by virtue of
the reinsurance contract, 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. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance
Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In
the Howden case, that underlying prestation was the indemnification of the local
insurance company. Such indemnification could take place only in the Philippines where
the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in the
1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as
amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to
refer to a standard U.S. text on federal income taxation:
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 (2) labor and/or (3) the sale of capital assets. While
the three elements of this attempt at definition need not be accepted as
all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an
investigation into the nature and location of the activities or property which

produce the income. If the income is from labor (services) the place where
the labor is done should be decisive; if it is done in this counrty, the
income should be from "source within the United States." If the income is
from capital, the place where the capital is employed should be decisive; if
it is employed in this country, the income should be from "source within the
United States". If the income is from the sale of capital assets, the place
where the sale is made should be likewise decisive. Much confusion will
be avoided by regarding the term "source" in this fundamental light. It is
not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the
activities or property which produce the income . . . . Thus, if income is to
taxed, the recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issue or is derived must be
situated within the jurisdiction so that the source of the income may be
said to have a situs in this country. The underlying theory is that the
consideration for taxation is protection of life and property and that the
income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property
protected by this Government or obtained by persons enjoying that
protection. 5
3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may
be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for 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:
xxx xxx xxx
(3) Services. Compensation for labor or personal
services performed in the Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following
items of gross income shall be treated as income from sources without the
Philippines:
(3) Compensation for labor or personal services performed without the
Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to services
rendered by or through the medium of a juridical person. 6 Further, a contract of carriage
or of transportation is assimilated in our Tax Code and Revenue Regulations to a
contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines.
Items of gross income, expenses, losses and deductions, other than those
specified in subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the rules
and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1) transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
was a service and that the source of the income derived therefrom was to be treated as
being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the
Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part
as follows:
Section 155. Compensation for labor or personnel services. Gross
income from sources within the Philippines includes compensation for
labor or personal services within the Philippines regardless of the

residence of the payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. The return of foreign
steamship companies whose vessels touch parts of the Philippines should
include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus
ascertained, the ratio existing between it and the gross income from all
ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:
Section 164. Telegraph and cable services. A foreign corporation
carrying on the business of transmission of telegraph or cable messages
between points in the Philippines and points outside the Philippines
derives income partly form source within and partly from sources without
the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property
by the producer or manufacturer of such personal property will be regarded as
sourced entirely within or entirely without the Philippines or as sourced partly within and
partly without the Philippines, depending upon two factors: (a) the place where the sale
of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or
manufactured and sold outside the Philippines, the income derived therefrom will be
regarded as sourced entirely outside the Philippines, although the personal property
had been produced outside the Philippines, or if the sale of the property takes place

outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the
Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the
Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may
be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ...
Gains, profits and income from (1) transportation or other services
rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part)
by the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ...
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines or from the purchase of personal
property without and its sale within the Philippines, shall be treated
as derived entirely from sources within the country in which sold.
(Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase
and sale of personal property shall be treated as derived entirely from the
country in which sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the property is marketed.
This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the
Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162 of these regulations).
(Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized
either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of

entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract
of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of
shoes of a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or
as purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged
in trading in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" its service. However, for the technical purposes of the law on
income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by the
grace of popular language. On a slighty more abstract level, BOAC's income is more
appropriately characterized as derived from a "service", rather than from an "activity" (a
broader term than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November
1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
following manner:
(2) Resident corporations. A corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceeding
taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per
cent on their gross Philippine billings. "Gross Philippines of passage

documents sold therein, whether for passenger, excess baggege or mail,

provide the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail shall include the gross freight
charge up to final destination. Gross revenues from chartered flights
originating from the Philippines shall likewise form part of "gross Philippine
billings" regardless of the place of sale or payment of the passage
documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include
flight of passsengers who stay in the Philippines for more than forty-eight
(48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to any
other point in the world, are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines).
Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above
discussed, to transportation or other services rendered partly within and partly without
the Philippines, or wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the
Philippines regardless of where embarkation and debarkation would be taking place.
This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax
and not a tax on income. Thereby, the Government has done away with the difficulties
attending the allocation of income and related expenses, losses and deductions.
Because taxes are the very lifeblood of government, the resulting potential "loss" or
"gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to
point out that the determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets entails no down-the-road
loss of income tax revenues to the Government. In lieu thereof, the Government takes
in revenues generated by the 2- per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.
G.R. No. L-46029 June 23, 1988
N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

GANCAYCO, J.:
The issue posed in this petition is the income tax liability of a foreign shipping
corporation which called on Philippine ports to load cargoes for foreign destination on
two occasions in 1963 and 1964, respectively, and which collected freight fees on these
transactions.
From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October
28, 1964, MV "Amstelkroon, " both of which are vessels of petitioner N.B. Reederij
"AMSTERDAM," called on Philippine ports to load cargoes for foreign destination. The
freight fees for these transactions were paid abroad in the amount of US $98,175.00 in
1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean
Lines acted as husbanding agent for a fee or commission on said vessels. No income
tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the freight
receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the
corresponding income tax returns for and in behalf of the former under Section 15 of the
National Internal Revenue Code. Applying the then prevailing market conversion rate of
P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij "Amsterdam" for
1963 and 1964 amounted to P382,882.50 and P535,052.00, respectively. On June 30,
1967, respondent Commissioner assessed said petitioner in the amounts of
P193,973.20 and P262,904.94 as deficiency income tax for 1963 and 1964,
respectively, as "a non-resident foreign corporation not engaged in trade or business in
the Philippines under Section 24 (b) (1) of the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade or
business in the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed
an income tax return of the aforementioned vessels computed at the exchange rate of
P2.00 to USs1.00 1 and paid the tax thereon in the amount of P1,835.52 and P9,448.94,
respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the
National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. On the
same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner
N.V. Reederij "AMSTERDAM" filed a written protest against the abovementioned
assessment made by the respondent Commissioner which protest was denied by said
respondent in a letter dated March 3, 1969: On March 31, 1969, petitioners filed a
petition for review with the respondent Court of Tax Appeals praying for the cancellation
of the subject assessment. After due hearing, the respondent court, on December 1,
1976, rendered a decision modifying said assessments by eliminating the 50% fraud
compromise penalties imposed upon petitioners. Petitioners filed a motion for
reconsideration of said decision but this was denied by the respondent court.
Hence, this petition for review where petitioners raised the following issues:
A. WHETHER N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY
OFFICE OR PLACE OF BUSINESS IN THE PHILIPPINES, WHOSE

VESSELS CALLED ON THE PHILIPPINE PORTS FOR THE PURPOSE

OF LOADING CARGOES ONLY TWICE-ONE IN 1963 AND ANOTHER IN
1964 SHOULD BE TAXED AS A FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER
SECTION 24(b) (1) OF THE TAX CODE OR SHOULD BE TAXED AS A
FOREIGN CORPORATION ENGAGED IN TRADE OR BUSINESS IN
THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION TO
SECTION 37 (e) OF THE SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V.
REEDERIJ "AMSTERDAM" SHOULD BE CONVERTED INTO PHILI PINE
PESOS AT THE OFFICIAL RATE OF P2.00 TO US $1.00, OR AT P3.90
TO US $1.00.
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij
"AMSTERDAM" is a non-resident foreign corporation because it allegedly disregarded
Section 163 of Revenue Regulations No. 2 (providing for the determination of the net
income of foreign corporations doing business in the Philippines) and in holding that the
foreign exchange ang e receipts of said petitioner for purposes of computing its income
tax should be converted into Philippine pesos at the rate of P3.90 to US $1.00 instead
of P2.00 to US $1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or
licensed to do business in the Philippines. It does not have a branch office in the
Philippines and it made only two calls in Philippine ports, one in 1963 and the other in
1964. In order that a foreign corporation may be considered engaged in trade or
business, its business transactions must be continuous. A casual business activity in the
Philippines by a foreign corporation, as in the present case, does not amount to
engaging in trade or business in the Philippines for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent court
A corporation is itself a taxpaying entity and speaking generally, for
purposes of income tax, corporations are classified into (a) domestic
corporations and (b) foreign corporations. (Sec. 24(a) and (b), Tax Code.)
Foreign corporations are further classified into (1) resident foreign
corporations and (2) non-resident foreign corporations. (Sec. 24(b) (1) and
(2). Tax Code.) A resident foreign corporation is a foreign corporation
engaged in trade or business within the Philippines or having an office or
place of business therein (Sec. 84(g), Tax Code) while a non- resident
foreign corporation is a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of
business therein. (Sec. 84(h), Tax Code.)

A domestic corporation is taxed on its income from sources within and

without the Philippines, but a foreign corporation is taxed only on its
income from sources within the Philippines. (Sec. 24(a), Tax Code; Sec.
16, Rev. Regs. No. 2.) However, while a foreign corporation doing
business in the Philippines is taxable on income solely from sources within
the Philippines, it is permitted to deductions from gross income but only to
the extent connected with income earned in the Philippines. (Secs. 24(b)
(2) and 37, Tax Code.) On the other hand, foreign corporations not doing
business in the Philippines are taxable on income from all sources within
the Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities Compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income and
capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24
(b) (1), Tax Code.)
At the time material to this case, certain corporations were given special
treatment, namely, building and loan associations operating as such in
accordance with Section 171 of the Corporation Law, educational
institutions, domestic life insurance companies and for" foreign life
insurance companies doing business in the Philippines. (Sec. 24(a) & (c),
Tax Code.) It bears emphasis, however, that foreign life insurance
companies which were not doing business in the Philippines were taxable
as other foreign corporations not authorized to do business in the
Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a
non-resident foreign corporation, organized and existing under the laws of
The Netherlands with principal office in Amsterdam and not licensed to do
business in the Philippines. (pp. 8-81, CTA records.) As a non-resident
foreign corporation, it is thus a foreign corporation, not engaged in trade or
business within the Philippines and not having any office or place of
business therein. (Sec. 84(h), Tax Code.) As stated above, it is therefore
taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital gains, and the
tax is equal to thirty per centum of such amount, under Section 24(b) (1) of
the Tax Code. The accent is on the words of--`such amount." Accordingly,
petitioner N. V. Reederij "Amsterdam" being a non-resident foreign
corporation, its taxable income for purposes of our income tax law
consists of its gross income from all sources within the Philippines.
The law seems clear and specific. It thus calls for its application as worded
as it leaves no leeway for interpretation. The applicable provision imposes
a tax on foreign corporations falling under the classification of non-resident
corporations without any exceptions or conditions, unlike in the case of

foreign corporations engaged in trade or business within the Philippines

which contained (at the time material to this case) an exception with
respect to foreign life insurance companies. Adherence to the provision of
the law, which specifies and determines the taxable income of, and the
rate of income tax applicable to, non-resident foreign corporations, without
mentioning any exceptions, would therefore lead to the conclusion that
petitioner N.V. Reederij "Amsterdam" is subject to income tax on gross
income from all sources within the Philippines.
A foreign corporation engaged in trade or business within the Philippines, or which has
an office or place of business therein, is taxed on its total net income received from all
sources within the Philippines at the rate of 25% upon the amount but which taxable net
income does not exceed P100,000.00, and 35% upon the amount but which taxable net
income exceeds P100,000.00. 2 On the other hand, a foreign corporation not engaged
in trade or business within the Philippmes and which does not have any office or place
of business therein is taxed on income received from all sources within the Philippines
at the rate of 35% of the gross income. 3
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and
implementing Section 163 of the Income Tax Regulations but these provisions refer to a
foreign corporation engaged in trade or business in the Philippines and not to a foreign
corporation not engaged in trade or business in the Philippines like petitioner-shipowner herein. Thus, the respondent court aptly ruled:
It must be stressed, however, that Section 37 (e) of the Code, as
implemented by Section 163 of the Regulations, provides the rule of the
determination of the net income taxable in the Philippines of a foreign
steamship company doing business in the Philippines. To assure that nonresident foreign steamship companies not engaged in business in the
Philippines and not having any office or place of business herein are not
covered therein, the regulations explicitly and clearly provide that "the net
income of a foreign steamship co company doing business in or from this
country is ascertained," under the formula contained therein, "for the
purpose of the income tax.! The reason is easily discernible. As stated
above, the taxable income of non-resident foreign corporations consists of
its gross income from all sources within the Philippines. Accordingly, a
foreign steamgship corporation derives income partly from sources within
and partly from sources without the Philippines if it is carrying on a
business of transportation service between points in the Philippines and
points outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.)
Only then does Section 37 (e) of the Tax Code, are implemented by
Section 163 of the Regulations, apply in computing net income subject to
tax. There is no basis therefore for an assertion "that Section 37 (e) does
not distinguish between a foreign corporation engaged in business in the
Philippines and a foreign corporation not engaged in business in the
Philippines."" (p. 84, CTA records.) (Decision, pp. 11-12.)

The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable
to the income of petitioners for income tax purposes instead of P3.90 to s1.00 is
likewise untenable. The transactions involved in this case are for the taxable years 1963
and 1964. Under Rep. Act No. 2609, the monetary board was authorized to fix the legal
conversion rate for foreign exchange. The free market conversion rate during those
years was P3.90 to US $1.00.
This conversion rate issue was definitely settled by this Court in the case
of Commissioner of Internal Revenue vs. Royal Interocean Lines and the Court of Tax
Appeals 4 to wit:
It should be noted that on July 1 6, 1959, the policy incorporated in
Circular No. 20 and implemented in subsequent circulars was relaxed with
the enactment of Republic Act No. 2609 which directed the monetary
authorities to take steps for the adoption of a four-year program of gradual
decontrol, during which the Monetary Board, with the approval of the
President, could and did fix the conversion rate of the Philippine peso to
the US dollar at a ratio other than that prescribed in Section 48 of Republic
Act 265. During the period involved in the case at bar, the free market
conversion rate ranged from P3.47 to P3.65 to a US dollar at which rate
the freight fees in question were computed in the contested assessment.
Inasmuch said frees were revenues derived from foreign exchange
transactions, it follows necessarily that the petitioner was fully justified in
computing the taxpayer's receipts at Id free market rates.
xxx xxx xxx
The case of the United States Lines, on which the appealed decision of
the Court of Tax Appeals is anchored, refers to transactions that took
place before the approval of Republic Act 2609 on July 16, 1959 when the
only legal rate of exchange obtaining in the Philippines was P2 to US $1,
and all foreign exchange had to be surrendered to the Central Bank
subject to its disposition pursuant to its own rules and regulations. Upon
the other hand, the present case refers to transactions that took place
during the effectivity of Republic Act 2609 when there was, apart from the
parity rate, a legal free market conversion rate for foreign exchange
transactions, which rate had been fixed in open trading, such as those
involved in the case at bar.
Indeed, in the course of the investigation conducted by the Commissioner on the
accounting records of petitioner Royal Interocean Lines, it was verified that when said
petitioner paid its agency fees for services rendered as husbanding agent of the said
vessels, it used the conversion rate of P3.90 to US $1.00. 5 It is now estopped from
claiming otherwise in this case. WHEREFORE, the petition is DENIED with costs
against petitioners. This decision is immediately executory and no extension of time to
file motion for reconsideration shall be entertained.

SO ORDERED. Narvasa, Cruz, Grio-Aquio and Medialdea JJ., concur.

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly
organized and existing under the laws of Japan and duly licensed to engage in business
under Philippine laws with branch office at the 4th Floor, FEEMI Building, Aduana
Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax
Appeals 1dated February 12, 1986 denying its claim for refund or tax credit in the
amount of P229,424.40 representing alleged overpayment of branch profit remittance
tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity
investments in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P
declared and paid cash dividends to petitioner in the amount of P849,720 and withheld
the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981
ending September 30, AG&P declared and paid P849,720 as cash dividends to
petitioner and withheld the corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan,
net not only of the 10% final dividend tax in the amounts of P764,748 for the first and
third quarters of 1981, but also of the withheld 15% profit remittance tax based on the
remittable amount after deducting the final withholding tax of 10%. A schedule of
dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan,
the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid
thereon, is shown below:

1981

Cash Dividends Paid

10% Dividend Tax Withheld

FIRST
QUARTER (three
months ended
3.31.81) (In
Pesos)

THIRD
QUARTER (three
months ended
9.30.81)

TOTAL OF FIRST
and THIRD
quarters

849,720.44

849,720.00

1,699,440.00

84,972.00

84,972.00

169,944.00

Cash Dividend net of 10%

Dividend Tax Withheld

764,748.00

764,748.00

1,529,496.00

15% Branch Profit

Remittance Tax Withheld

114,712.20

114,712.20

229,424.40 3

Net Amount Remitted to

Petitioner

650,035.80

650,035.80

1,300,071.60

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal Revenue by
AG&P on April 20, 1981 under Central Bank Receipt No. 6757880. Likewise, the 10%
final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for
the third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on
August 4, 1981 under Central Bank Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15%
branch profit remittance on cash dividends declared and remitted to petitioner at its
head office in Tokyo in the total amount of P229,424.40 on April 20 and August 4,
1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres,
Velayo and Company, sought a ruling from the Bureau of Internal Revenue on whether
or not the dividends petitioner received from AG&P are effectively connected with its
conduct or business in the Philippines as to be considered branch profits subject to the
15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits
remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the
15% profit remittance tax. To be effectively connected it is not necessary
that the income be derived from the actual operation of taxpayercorporation's trade or business; it is sufficient that the income arises from
the business activity in which the corporation is engaged. For example, if a
resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on

which dividends are subsequently received, the dividends thus earned are
not considered 'effectively connected' with its trade or business in this
country. (Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are
not income arising from the business activity in which Marubeni is
engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance tax
imposed by Section 24 (b) (2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of
Internal Revenue on September 24, 1981, petitioner claimed for the refund or issuance
of a tax credit of P229,424.40 "representing profit tax remittance erroneously paid on
the dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and
August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's
claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15%
profit remittance tax as the same were not income earned by a Philippine
Branch of Marubeni Corporation of Japan; and neither is it subject to the
10% intercorporate dividend tax, the recipient of the dividends, being a
non-resident stockholder, nevertheless, said dividend income is subject to
the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February
13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25 % tax, and that the taxes withheld of
10 % as intercorporate dividend tax and 15 % as profit remittance tax
totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing
is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund
by the Commissioner of Internal Revenue in its assailed judgment of February 12,
1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the
fact that the dividends in question are income taxable to the Marubeni
Corporation of Tokyo, Japan. The said dividends were distributions made
by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out
of its profits on the investments of the Marubeni Corporation of Japan, a
non-resident foreign corporation. The investments in the Atlantic Gulf &
Pacific Company of the Marubeni Corporation of Japan were directly

made by it and the dividends on the investments were likewise directly

remitted to and received by the Marubeni Corporation of Japan. Petitioner
Marubeni Corporation Philippine Branch has no participation or
intervention, directly or indirectly, in the investments and in the receipt of
the dividends. And it appears that the funds invested in the Atlantic Gulf &
Pacific Company did not come out of the funds infused by the Marubeni
Corporation of Japan to the Marubeni Corporation Philippine Branch. As a
matter of fact, the Central Bank of the Philippines, in authorizing the
remittance of the foreign exchange equivalent of (sic) the dividends in
question, treated the Marubeni Corporation of Japan as a non-resident
stockholder of the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the
person who earned it. Admittedly, the dividends under consideration were
earned by the Marubeni Corporation of Japan, and hence, taxable to the
said corporation. While it is true that the Marubeni Corporation Philippine
Branch is duly licensed to engage in business under Philippine laws, such
dividends are not the income of the Philippine Branch and are not taxable
to the said Philippine branch. We see no significance thereto in the identity
concept or principal-agent relationship theory of petitioner because such
dividends are the income of and taxable to the Japanese corporation in
Japan and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship
theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10
% intercorporate final tax on dividends received from a domestic corporation in
accordance with Section 24(c) (1) of the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to
tax under this Code (1) Shall be subject to a final tax of 10% on the
total amount thereof, which shall be collected and paid as provided in
Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a
non-resident foreign corporation and not engaged in trade or business in the
Philippines, is subject to tax on income earned from Philippine sources at the rate of 35
% of its gross income under Section 24 (b) (1) of the same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A
foreign corporation not engaged in trade or business in the Philippines
shall pay a tax equal to thirty-five per cent of the gross income received
during each taxable year from all sources within the Philippines as ...
dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax
Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be
taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident, and according to
the laws of that Contracting State, but if the recipient is the beneficial
owner of the dividends the tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from
Philippine sources is therefore the determination of whether it is a resident or a nonresident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or
business" within the Philippines. Petitioner contends that precisely because it is
engaged in business in the Philippines through its Philippine branch that it must be
considered as a resident foreign corporation. Petitioner reasons that since the Philippine
branch and the Tokyo head office are one and the same entity, whoever made the
investment in AG&P, Manila does not matter at all. A single corporate entity cannot be
both a resident and a non-resident corporation depending on the nature of the particular
transaction involved. Accordingly, whether the dividends are paid directly to the head
office or coursed through its local branch is of no moment for after all, the head office
and the office branch constitute but one corporate entity, the Marubeni Corporation,
which, under both Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as
its branch office in the Philippines cannot apply here. This rule is based on
the premise that the business of the foreign corporation is conducted
through its branch office, following the principal agent relationship theory.
It is understood that the branch becomes its agent here. So that when the
foreign corporation transacts business in the Philippines independently of
its branch, the principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the branch or the resident
foreign corporation.

Corollarily, if the business transaction is conducted through the branch

office, the latter becomes the taxpayer, and not the foreign corporation.

12

In other words, the alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct income taxpayer
from the branch in the Philippines. There can be no other logical conclusion considering
the undisputed fact that the investment (totalling 283.260 shares including that of
nominee) was made for purposes peculiarly germane to the conduct of the corporate
affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus
clear that petitioner, having made this independent investment attributable only to the
head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute were
neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend
tax, the recipient being a non-resident stockholder, they grossly erred in holding that no
refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25
% rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in
taxation that each tax has a different tax basis. While the tax on dividends is directly
levied on the dividends received, "the tax base upon which the 15 % branch profit
remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article
10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals
that the tax rates fixed by Article 10 are the maximum rates as reflected in the phrase
"shall not exceed." This means that any tax imposable by the contracting state
concerned should not exceed the 25 % limitation and that said rate would apply only if
the tax imposed by our laws exceeds the same. In other words, by reason of our
bilateral negotiations with Japan, we have agreed to have our right to tax limited to a
certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in
question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in
conjunction with the Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii)
On dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to
the condition that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20 % which represents the difference between the regular

tax (35 %) on corporations and the tax (15 %) on dividends as provided in

this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a nonresident foreign corporation, as a general rule, is taxed 35 % of its gross income from all
sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a
domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in
favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20
% represents the difference between the regular tax of 35 % on non-resident foreign
corporations which petitioner would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be
computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
-----------------Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
------------------Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a
foreign non-resident stockholder from a domestic corporation under Section 24 (b) (1)
(iii) is easily within the maximum ceiling of 25 % of the gross amount of the dividends as
decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal
Revenue is laboring under the impression that the Court of Tax Appeals is covered by
Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of
1980. He alleges that the instant petition for review was not perfected in accordance
with Batas Pambansa Blg. 129 which provides that "the period of appeal from final
orders, resolutions, awards, judgments, or decisions of any court in all cases shall be
fifteen (15) days counted from the notice of the final order, resolution, award, judgment
or decision appealed from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax
Appeals which has been created by virtue of a special law, Republic Act No. 1125.
Respondent court is not among those courts specifically mentioned in Section 2 of BP
Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an
order, ruling or decision of the Court of Tax Appeals is given thirty (30) days from notice
to appeal therefrom. Otherwise, said order, ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision
denying its claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the
last day for appeal), petitioner filed a motion for reconsideration which respondent court
subsequently denied on November 17, 1986, and notice of which was received by
petitioner on November 26, 1986. Two days later, or on November 28, 1986, petitioner
simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for
review with the Supreme Court. 14 From the foregoing, it is evident that the instant
appeal was perfected well within the 30-day period provided under R.A. No. 1125, the
whole 30-day period to appeal having begun to run again from notice of the denial of
petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated
February 12, 1986 which affirmed the denial by respondent Commissioner of Internal
Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED.
The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in
favor of petitioner the amount of P144,452.40 representing overpayment of taxes on
dividends received. No costs.
So ordered.

G.R. No. 190102

July 11, 2012

ACCENTURE, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
SERENO, J.:
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for
the reversal of the Decision of the Court of Tax Appeals En Banc (CTA En Banc ) dated
22 September 2009 and its subsequent Resolution dated 23 October 2009. 1
Accenture, Inc. (Accenture) is a corporation engaged in the business of providing
management consulting, business strategies development, and selling and/or licensing
of software.2 It is duly registered with the Bureau of Internal Revenue (BIR) as a Value
Added Tax (VAT) taxpayer or enterprise in accordance with Section 236 of the National
Internal Revenue Code (Tax Code).3
On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to
31 August 2002 (1st period). Its Quarterly VAT Return for the fourth quarter of 2002,
which covers the 1st period, was filed on 17 September 2002; and an Amended
Quarterly VAT Return, on 21 June 2004.4 The following are reflected in Accentures VAT
Return for the fourth quarter of 2002:5
1wphi1
Purchases

Amount

Input VAT

Domestic Purchases- Capital Goods

P12,312,722.00

P1,231,272.20

Domestic Purchases- Goods other than

capital Goods

P64,789,507.90

P6,478,950.79

Domestic Purchases- Services

P16,455,868.10

P1,645,586.81

Total Input Tax

P9,355,809.80

Zero-rated Sales

P316,113,513.34

Total Sales

P335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October
2002; and that for October 2002, on 12 November 2002. These returns were amended
on 9 January 2003. Accentures Quarterly VAT Return for the first quarter of 2003, which
included the period 1 September 2002 to 30 November 2002 (2nd period), was filed on
17 December 2002; and the Amended Quarterly VAT Return, on 18 June 2004. The
latter contains the following information:6
Purchases
Domestic Purchases- Capital Goods
Domestic Purchases- Goods other than
capital Goods
Domestic Purchases-Services

Amount

Input VAT

P80,765,294.10

P8,076,529.41

P132,820,541.70

P13,282,054.17

P63,238,758.00

P6,323,875.80

Total Input Tax

P27,682,459.38

Zero-rated Sales

P545,686,639.18

Total Sales

P572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its
application of the input VAT credits earned from its zero-rated transactions against its
output VAT liabilities, it still had excess or unutilized input VAT credits. These VAT credits
are in the amounts of P9,355,809.80 for the 1st period and P27,682,459.38 for the 2nd
period, or a total of P37,038,269.18.7
Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on
Accentures "domestic purchases of taxable goods which cannot be directly attributed to
its zero-rated sale of services."8 This allocated input VAT was broken down to
P8,811,301.66 for the 1st period and P26,367,542.55 for the 2nd period. 9
The excess input VAT was not applied to any output VAT that Accenture was liable for in
the same quarter when the amount was earnedor to any of the succeeding quarters.
Instead, it was carried forward to petitioners 2nd Quarterly VAT Return for 2003. 10
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an
administrative claim for the refund or the issuance of a Tax Credit Certificate (TCC). The
DoF did not act on the claim of Accenture. Hence, on 31 August 2004, the latter filed a
Petition for Review with the First Division of the Court of Tax Appeals (Division), praying
for the issuance of a TCC in its favor in the amount of P35,178,844.21.
The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:

1. The sale by Accenture of goods and services to its clients are not zero-rated
transactions.
2. Claims for refund are construed strictly against the claimant, and Accenture
has failed to prove that it is entitled to a refund, because its claim has not been
fully substantiated or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for
failing to prove that the latters sale of services to the alleged foreign clients qualified for
zero percent VAT.13
In resolving the sole issue of whether or not Accenture was entitled to a refund or an
issuance of a TCC in the amount of P35,178,844.21, 14 the Division ruled that Accenture
had failed to present evidence to prove that the foreign clients to which the former
rendered services did business outside the Philippines. 15 Ruling that Accentures
services would qualify for zero-rating under the 1997 National Internal Revenue Code of
the Philippines (Tax Code) only if the recipient of the services was doing business
outside of the Philippines,16 the Division cited Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (Burmeister) 17 as basis.
Accenture appealed the Divisions Decision through a Motion for Reconsideration
(MR).18 In its MR, it argued that the reliance of the Division on Burmeister was
misplaced19 for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a
refund, given that the recipient of its service was doing business in the
Philippines; it was not an issue of failure of the applicant to present evidence to
prove the fact that the recipient of its services was a foreign corporation doing
business outside the Philippines.20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the
services should be doing business outside the Philippines, and Accenture had
successfully established that.21
3. Having been promulgated on 22 January 2007 or after Accenture filed its
Petition with the Division, Burmeister cannot be made to apply to this case. 22
Accenture also cited Commissioner of Internal Revenue v. American Express
(Amex)23 in support of its position. The MR was denied by the Division in its 12 March
2009 Resolution.24
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment
introduced by Republic Act No. (R.A.) 9337, 25 there was no requirement that the
services must be rendered to a person engaged in business conducted outside the
Philippines to qualify for zero-rating. The CTA En Banc agreed that because the case
pertained to the third and the fourth quarters of taxable year 2002, the applicable law

was the 1997 Tax Code, and not R.A. 9337. 26 Still, it ruled that even though the
provision used in Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the
pronouncement therein requiring recipients of services to be engaged in business
outside the Philippines to qualify for zero-rating was applicable to the case at bar,
because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of Section
102(b)(2) of the 1977 Tax Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving
the latters allegation that its clients were foreign-based. 27
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter
affirmed the Divisions Decision and Resolution.28 A subsequent MR was also denied in
a Resolution dated 23 October 2009.
Hence, the present Petition for Review29 under Rule 45.
In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to
submit the following issues for resolution:
1. Whether or not Petitioners sales of goods and services are zero-rated for VAT
purposes under Section 108(B)(2)(3) of the 1997 Tax Code.
2. Whether or not petitioners claim for refund/tax credit in the amount of
P35,178,884.21 represents unutilized input VAT paid on its domestic purchases
of goods and services for the period commencing from 1 July 2002 until 30
November 2002.
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s)
or year(s) the alleged unutilized input VAT paid on its domestic purchases of
goods and services for the period commencing from 1 July 2002 until 30
November 2002, and applied the same fully to its output VAT liability for the said
period.
4. Whether or not Petitioner is entitled to the refund of the amount of
P35,178,884.21, representing the unutilized input VAT on domestic purchases of
goods and services for the period commencing from 1 July 2002 until 30
November 2002, from its sales of services to various foreign clients.
5. Whether or not Petitioners claim for refund/tax credit in the amount of
P35,178,884.21, as alleged unutilized input VAT on domestic purchases of goods
and services for the period covering 1 July 2002 until 30 November 2002 are duly
substantiated by proper documents.30
For consideration in the present Petition are the following issues:

1. Should the recipient of the services be "doing business outside the

Philippines" for the transaction to be zero-rated under Section 108(B)(2) of the
1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business
outside the Philippines?
Recipient of services must be doing business outside the Philippines for the
transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which
allows the refund of unutilized input VAT earned from zero-rated or effectively zero-rated
sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against
output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also
in taxable or exempt sale of goods of properties or services, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the volume of sales.
Section 108(B) referred to in the foregoing provision was first seen when Presidential
Decree No. (P.D.) 199431 amended Title IV of P.D. 1158,32 which is also known as the
National Internal Revenue Code of 1977. Several Decisions have referred to this as the
1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 273 33 further
amended provisions of Title IV. E.O. 273 by transferring the old Title IV provisions to
Title VI and filling in the former title with new provisions that imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act No.
(R.A.) 7716.34 This law, which was approved on 5 May 1994, widened the tax base.
Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x

xxx

xxx

xxx

"(b) Transactions subject to zero-rate. The following services performed in the

Philippines by VAT-registered persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP).
"(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP)."
Essentially, Section 102(b) of the 1977 Tax Codeas amended by P.D. 1994, E.O. 273,
and R.A. 7716provides that if the consideration for the services provided by a VATregistered person is in a foreign currency, then this transaction shall be subjected to
zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section
108(B), to wit:
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed
in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(2) Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision,
became effective. It reads:
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read
as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of

Properties. (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
"(2) Services other than those mentioned in the preceding paragraph rendered to
a person engaged in business conducted outside the Philippines or to a
nonresident person not engaged in business who is outside the Philippines when
the services are performed, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied)
The meat of Accentures argument is that nowhere does Section 108(B) of the 1997 Tax
Code state that services, to be zero-rated, should be rendered to clients doing business
outside the Philippines, the requirement introduced by R.A. 9337. 35 Required by Section
108(B), prior to the amendment, is that the consideration for the services rendered be in
foreign currency and in accordance with the rules of the Bangko Sentral ng Pilipinas
(BSP). Since Accenture has complied with all the conditions imposed in Section 108(B),
it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that
Section 108(B) reveals a clear intent on the part of the legislators not to impose the
condition of being "consumed abroad" in order for the services performed in the
Philippines to be zero-rated.36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the
requirementthat the client must be doing business outside the Philippinescan be
disregarded, because this requirement is expressly provided in Article 108(2) of the Tax
Code.37
Accenture questions the Divisions application to this case of the pronouncements made
in Burmeister. According to petitioner, the provision applied to the present case was
Section 102(b) of the 1977 Tax Code, and not Section 108(B) of the 1997 Tax Code,
which was the law effective when the subject transactions were entered into and a
refund was applied for.
In refuting Accentures theory, the CTA En Banc ruled that since Section 108(B) of the
1997 Tax Code was a mere reproduction of Section 102(b) of the 1977 Tax Code, this
Courts interpretation of the latter may be used in interpreting the former, viz:

In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and
102(b)(2) of the 1977 Tax Code, as amended, pertaining to zero-rated transactions. A
parallel approach should be accorded to the renumbered provisions of Sections 108(B)
(2) and 108(B)(1) of the 1997 NIRC. This means that Section 108(B)(2) must be read in
conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a) services
other than processing, manufacturing or repacking rendered by VAT registered persons
in the Philippines; and b) the transaction paid for in acceptable foreign currency duly
accounted for in accordance with BSP rules and regulations. The same provision made
reference to Section 108(B)(1) further imposing the requisite c) that the recipient of
services must be performing business outside of Philippines. Otherwise, if both the
provider and recipient of service are doing business in the Philippines, the sale
transaction is subject to regular VAT as explained in the Burmeister case x x x.
xxx

xxx

xxx

Clearly, the Supreme Courts pronouncements in the Burmeister case requiring that the
recipient of the services must be doing business outside the Philippines as mandated by
law govern the instant case.38
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts
cannot be allowed to apply to Burmeister this Courts interpretation of Section 102(b) of
the 1977 Tax Code, because the Petition of Accenture had already been filed before the
case was even promulgated on 22 January 2007,39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same
authority as the statute itself, however, the same cannot be applied retroactively against
the Petitioner because to do so will be prejudicial to the latter.40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of
the rulings of the Supreme Court, whose interpretation of the law is part of that law as of
the date of its enactment.41
We rule that the recipient of the service must be doing business outside the Philippines
for the transaction to qualify for zero-rating under Section 108(B) of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B) of the
1997 Tax Code is a verbatim copy of Section 102(b) of the 1977 Tax Code, any
interpretation of the latter holds true for the former.
Moreover, even though Accentures Petition was filed before Burmeister was
promulgated, the pronouncements made in that case may be applied to the present one
without violating the rule against retroactive application. When this Court decides a
case, it does not pass a new law, but merely interprets a preexisting one. 42 When this
Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this interpretation
became part of the law from the moment it became effective. It is elementary that the
interpretation of a law by this Court constitutes part of that law from the date it was

originally passed, since this Court's construction merely establishes the

contemporaneous legislative intent that the interpreted law carried into effect. 43
Accenture questions the CTAs application of Burmeister, because the provision
interpreted therein was Section 102(b) of the 1977 Tax Code. In support of its position
that Section 108 of the 1997 Tax Code does not require that the services be rendered to
an entity doing business outside the Philippines, Accenture invokes this Courts
pronouncements in Amex. However, a reading of that case will readily reveal that the
provision applied was Section 102(b) of the 1977 Tax Code, and not Section 108 of the
1997 Tax Code. As previously mentioned, an interpretation of Section 102(b) of the
1977 Tax Code is an interpretation of Section 108 of the 1997 Tax Code, the latter being
a mere reproduction of the former.
This Court further finds that Accentures reliance on Amex is misplaced.
We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the
services be consumed abroad to be zero-rated. However, nowhere in that case did this
Court discuss the necessary qualification of the recipient of the service, as this matter
was never put in question. In fact, the recipient of the service in Amex is a nonresident
foreign client.
The aforementioned case explains how the credit card system works. The issuance of a
credit card allows the holder thereof to obtain, on credit, goods and services from
certain establishments. As proof that this credit is extended by the establishment, a
credit card draft is issued. Thereafter, the company issuing the credit card will pay for
the purchases of the credit card holders by redeeming the drafts. The obligation to
collect from the card holders and to bear the lossin case they do not payrests on
the issuer of the credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit
card drafts from establishments located in the Philippines and forwarding them to its
parent company's regional operating centers outside the country. It facilitated in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based
foreign client.
The Court explained how the services rendered in Amex were considered to have been
performed and consumed in the Philippines, to wit:
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to
services, the term means the performance or "successful completion of a contractual
duty, usually resulting in the performers release from any past or future liability x x x."
The services rendered by respondent are performed or successfully completed upon its
sending to its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.44

The effect of the place of consumption on the zero-rating of the transaction was not the
issue in Burmeister.1wphi1 Instead, this Court addressed the squarely raised issue of
whether the recipient of services should be doing business outside the Philippines for
the transaction to qualify for zero-rating. We ruled that it should. Thus, another essential
condition for qualification for zero-rating under Section 102(b)(2) of the 1977 Tax Code
is that the recipient of the business be doing that business outside the Philippines. In
clarifying that there is no conflict between this pronouncement and that laid down in
Amex, we ruled thus:
x x x. As the Court held in Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch), the place of payment is immaterial, much less is
the place where the output of the service is ultimately used. An essential condition for
entitlement to 0% VAT under Section 102 (b) (1) and (2) is that the recipient of the
services is a person doing business outside the Philippines. In this case, the recipient of
the services is the Consortium, which is doing business not outside, but within the
Philippines because it has a 15-year contract to operate and maintain NAPOCORs two
100-megawatt power barges in Mindanao. (Emphasis in the original) 45
In Amex we ruled that the place of performance and/or consumption of the service is
immaterial. In Burmeister, the Court found that, although the place of the consumption
of the service does not affect the entitlement of a transaction to zero-rating, the place
where the recipient conducts its business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)
(2) of the 1977 Tax Codeand consequently Section 108(B)(2) of the 1997 Tax Code
was intended to operate, the two aforementioned cases should be taken together. The
zero-rating of the services performed by respondent in Amex was affirmed by the Court,
because although the services rendered were both performed and consumed in the
Philippines, the recipient of the service was still an entity doing business outside the
Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to
qualify for zero-rating is the only logical interpretation of Section 102(b)(2) of the 1977
Tax Code, as we explained in Burmeister:
This can only be the logical interpretation of Section 102 (b) (2). If the provider and
recipient of the "other services" are both doing business in the Philippines, the payment
of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under
Section 102 (a) can avoid paying the VAT by simply stipulating payment in foreign
currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2)
to apply to a payer-recipient of services doing business in the Philippines is to make the
payment of the regular VAT under Section 102 (a) dependent on the generosity of the
taxpayer. The provider of services can choose to pay the regular VAT or avoid it by
stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102 (a) as a tax measure in the Tax Code, an

interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.
xxx

xxx

xxx

Further, when the provider and recipient of services are both doing business in the
Philippines, their transaction falls squarely under Section 102 (a) governing domestic
sale or exchange of services. Indeed, this is a purely local sale or exchange of services
subject to the regular VAT, unless of course the transaction falls under the other
provisions of Section 102 (b).
Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the
preceding subparagraph," the legislative intent is that only the services are different
between subparagraphs 1 and 2. The requirements for zero-rating, including the
essential condition that the recipient of services is doing business outside the
Philippines, remain the same under both subparagraphs. (Emphasis in the original) 46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had
already clarified the intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)
(2) of the 1997 Tax Code amending the earlier provision. R.A. 9337 added the following
phrase: "rendered to a person engaged in business conducted outside the Philippines
or to a nonresident person not engaged in business who is outside the Philippines when
the services are performed."
Accenture has failed to establish that the recipients of its services do business outside
the Philippines.
Accenture argues that based on the documentary evidence it presented, 47 it was able to
establish the following circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that
Accentures clients have not established any branch office in which to do
business in the Philippines.
2. For these services, Accenture bills another corporation, Accenture
Participations B.V. (APB), which is likewise a foreign corporation with no
"presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP
rules to pay in acceptable currency for their purchase of goods and services from
the Philippines. Thus, in a domestic transaction, where the provider and recipient
of services are both doing business in the Philippines, the BSP cannot require
any party to make payment in foreign currency.48
Accenture claims that these documentary pieces of evidence are supported by the
Report of Emmanuel Mendoza, the Court-commissioned Independent Certified Public

Accountant. He ascertained that Accentures gross billings pertaining to zero-rated sales

were all supported by zero-rated Official Receipts and Billing Statements. These
documents show that these zero-rated sales were paid in foreign exchange currency
and duly accounted for in the rules and regulations of the BSP.49
In the CTAs opinion, however, the documents presented by Accenture merely
substantiate the existence of the sales, receipt of foreign currency payments, and
inward remittance of the proceeds of these sales duly accounted for in accordance with
BSP rules. Petitioner presented no evidence whatsoever that these clients were doing
business outside the Philippines.50
Accenture insists, however, that it was able to establish that it had rendered services to
foreign corporations doing business outside the Philippines, unlike in Burmeister, which
allegedly involved a foreign corporation doing business in the Philippines. 51
We deny Accentures Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are
foreign.1wphi1 This fact does not automatically mean, however, that these clients were
doing business outside the Philippines. After all, the Tax Code itself has provisions for a
foreign corporation engaged in business within the Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx

xxx

xxx

(H) The term "resident foreign corporation" applies to a foreign corporation

engaged in trade or business within the Philippines.
(I) The term nonresident foreign corporation applies to a foreign corporation not
engaged in trade or business within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the
recipient of the service be proven to be a foreign corporation; rather, it must be
specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. We ruled thus in Commissioner of Internal Revenue v. British
Overseas Airways Corporation:52
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 a 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. "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." 53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual
basis of that claim.1wphi1 Tax refunds, like tax exemptions, are construed strictly
against the taxpayer.54
Accenture failed to discharge this burden. It alleged and presented evidence to prove
only that its clients were foreign entities. However, as found by both the CTA Division
and the CTA En Banc, no evidence was presented by Accenture to prove the fact that
the foreign clients to whom petitioner rendered its services were clients doing business
outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests,
Billing Statements, Memo Invoices-Receivable, Memo Invoices-Payable, and Bank
Statements presented by Accenture merely substantiated the existence of sales, receipt
of foreign currency payments, and inward remittance of the proceeds of such sales duly
accounted for in accordance with BSP rules, all of these were devoid of any evidence
that the clients were doing business outside of the Philippines. 55
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and
the 23 October 2009 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No.
477, dismissing the Petition for the refund of the excess or unutilized input VAT credits
of Accenture, Inc., are AFFIRMED.
SO ORDERED.

G.R. No. 169507

AIR CANADA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a
general sales agent, is a resident foreign corporation doing business in the Philippines.
As such, it is taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997
National Internal Revenue Code, subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the PhilippinesCanada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 % of its
gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of
Tax Appeals En Banc, which in turn affirmed the December 22, 2004 Decision 3 and April
8, 2005 Resolution4 of the Court of Tax Appeals First Division denying Air Canadas
claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of
Canada[.]"5 On April 24, 2000, it was granted an authority to operate as an offline carrier
by the Civil Aeronautics Board, subject to certain conditions, which authority would
expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not have flights
originating from or coming to the Philippines [and does not] operate any airplane [in] the
Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines.8 Aerotel "sells [Air Canadas] passage
documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount of 5,185,676.77, 10 detailed
as follows:
1wphi1
Applicable Quarter[/]Year

Date Filed/Paid

Amount of Tax

3rd Qtr 2000

November 29, 2000

P 395,165.00

Annual ITR

2000 April 16, 2001

381,893.59

1st Qtr 2001

May 30, 2001

522,465.39

2nd Qtr 2001

August 29, 2001

3rd Qtr 2001

November 29, 2001

765,021.28

Annual ITR 2001

April 15, 2002

328,193.93

1st Qtr 2002

May 30, 2002

594,850.13

2nd Qtr 2002

August 29, 2002

TOTAL

1,033,423.34

1,164,664.11
P 5,185,676.77

On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to 5,185,676.77 before the Bureau of
Internal Revenue,12 Revenue District Office No. 47-East Makati.13It found basis from the
revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997
National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. ....
(3) International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its
Gross Philippine Billings as defined hereunder:
(a) International Air Carrier. - Gross Philippine Billings refers to the
amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to another
international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines
on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)

11

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review
before the Court of Tax Appeals on November 29, 2002. 15 The case was docketed as
C.T.A. Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision
denying the Petition for Review and, hence, the claim for refund. 17 It found that Air
Canada was engaged in business in the Philippines through a local agent that sells
airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation
at the regular rate of 32%.18 Further, according to the Court of Tax Appeals First
Division, Air Canada was deemed to have established a "permanent establishment" 19 in
the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its
premises as an outlet where sales of [airline] tickets are made[.]" 21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in
the Court of Tax Appeals First Divisions Resolution dated April 8, 2005 for lack of
merit.22 The First Division held that while Air Canada was not liable for tax on its Gross
Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32%
corporate income tax on income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1).23
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc. 24 The
appeal was docketed as CTA EB No. 86.25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the
findings of the First Division.26 The En Banc ruled that Air Canada is subject to tax as a
resident foreign corporation doing business in the Philippines since it sold airline tickets
in the Philippines.27 The Court of Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE
COURSE, and accordingly, DISMISSED for lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage
documents through a general sales agent in the Philippines, is a resident foreign
corporation within the meaning of Section 28(A)(1) of the 1997 National Internal
Revenue Code;
Second, whether petitioner Air Canada is subject to the 2% tax on Gross Philippine
Billings pursuant to Section 28(A)(3). If not, whether an offline international carrier
selling passage documents through a general sales agent can be subject to the regular
corporate income tax of 32%30 on taxable income pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls
under the definition of "permanent establishment" under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of 5,185,676.77
pertaining allegedly to erroneously paid tax on Gross Philippine Billings from the third
quarter of 2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax
on resident foreign corporations provided under Section 28(A)(1) of the 1997 National
Internal Revenue Code does not apply to "international carriers," 31 which are especially
classified and taxed under Section 28(A)(3).32 It adds that the fact that it is no longer
subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals
Decision "does not render it ipso facto subject to 32% income tax on taxable income as
a resident foreign corporation."33 Petitioner argues that to impose the 32% regular
corporate income tax on its income would violate the Philippine governments covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a
tax higher than 1% of the carriers gross revenue derived from sources within the
Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and
off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the
Philippines was income from services and not income from sales of personal
property.36 Petitioner cites the deliberations of the Bicameral Conference Committee on
House Bill No. 9077 (which eventually became the 1997 National Internal Revenue
Code), particularly Senator Juan Ponce Enriles statement, 37 to reveal the "legislative
intent to treat the revenue derived from air carriage as income from services, and that
the carriage of passenger or cargo as the activity that generates the
income."38 Accordingly, applying the principle on the situs of taxation in taxation of
services, petitioner claims that its income derived "from services rendered outside the
Philippines [was] not subject to Philippine income taxation." 39
Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment" 40 in the
Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada Tax
Treaty.41 It points out that Aerotel is an "independent general sales agent that acts as
such for . . . other international airline companies in the ordinary course of its
business."42 Aerotel sells passage tickets on behalf of petitioner and receives a
commission for its services.43 Petitioner states that even the Bureau of Internal Revenue
through VAT Ruling No. 003-04 dated February 14, 2004has conceded that an
offline international air carrier, having no flight operations to and from the Philippines, is
not deemed engaged in business in the Philippines by merely appointing a general

sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously paid
Gross Philippine Billings cannot be denied on the ground that [it] is subject to income
tax under Section 28 (A) (1)"45 since it has not been assessed at all by the Bureau of
Internal Revenue for any income tax liability.46
On the other hand, respondent maintains that petitioner is subject to the 32% corporate
income tax as a resident foreign corporation doing business in the Philippines.
Petitioners total payment of 5,185,676.77 allegedly shows that petitioner was earning
a sizable income from the sale of its plane tickets within the Philippines during the
relevant period.47 Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases involving the
British Overseas Airways Corporation and Air India, had already settled that "foreign
airline companies which sold tickets in the Philippines through their local agents . . .
[are] considered resident foreign corporations engaged in trade or business in the
country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which
defined the phrase "doing business in the Philippines" as including "regular sale of
tickets in the Philippines by offline international airlines either by themselves or through
their agents."50
Respondent further contends that petitioner is not entitled to its claim for refund
because the amount of 5,185,676.77 it paid as tax from the third quarter of 2000 to the
second quarter of 2001 was still short of the 32% income tax due for the
period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right amount
of tax since the National Internal Revenue Code became operative on January 1, 1998
and by 2000, petitioner should have already been aware of the implications of Section
28(A)(3) and the decided cases of this courts ruling on the taxability of offline
international carriers selling passage tickets in the Philippines. 52
I
At the outset, we affirm the Court of Tax Appeals ruling that petitioner, as an offline
international carrier with no landing rights in the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations. ....
(3) International Carrier. - An international carrier doing business in the Philippines shall
pay a tax of two and one-half percent (2 1/2%) on its Gross Philippine Billings as
defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the
amount of gross revenue derived from carriage of persons, excess

baggage, cargo and mail originating from the Philippines in a continuous

and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That for a flight
which originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons,
excess baggage, cargo, and mail originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section 28(A)
(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32% 53 tax on
its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the preceding taxable
year from all sources within the Philippines: Provided, That effective January 1,
1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32% 54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout
the amendments of the National Internal Revenue Code. All versions refer to "a foreign
corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and
approved on June 15, 1939, defined "resident foreign corporation" as applying to "a

foreign corporation engaged in trade or business within the Philippines or having an

office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act
No. 6110, approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) Resident corporations. A corporation organized, authorized, or existing under the
laws of any foreign country, except a foreign life insurance company, engaged in trade
or business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all
sources within the Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections
of the 1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident
corporations was amended, but it still provides that "[a] corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all
sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas
Airways Corporation58declared British Overseas Airways Corporation, an international
air carrier with no landing rights in the Philippines, as a resident foreign corporation
engaged in business in the Philippines through its local sales agent that sold and issued
tickets for the airline company.59 This court discussed that:
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 a 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. "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.["]
BOAC, during the periods covered by the subject-assessments, maintained a general
sales agent in the Philippines. That general sales agent, from 1959 to 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) consequently allocating to the various airline

companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are normally
incident 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 activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance
with its definition of "doing business" with regard to foreign corporations. Section 3(d) of
the law enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing representatives
or distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate 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 of the
purpose and object of the business organization: Provided, however, That the
phrase "doing business" shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account" is not considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing business" includes
"appointing representatives or distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days or more[.]" 62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics]
Board, but who maintains office or who has designated or appointed agents or
employees in the Philippines, who sells or offers for sale any air transportation in behalf
of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation,

advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such

transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority." 64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on the tickets sold, such as
the origin and destination of the passengers, carriers involved, and commissions
received.65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the
Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial
to the purpose of petitioners business. The activities of Aerotel bring direct receipts or
profits to petitioner.66 There is nothing on record to show that Aerotel solicited orders
alone and for its own account and without interference from, let alone direction of,
petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]" 67 and it must
perform its functions according to the standards required by petitioner.68 Through
Aerotel, petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as
an offline carrier in the Philippines for a period of five years, or from April 24, 2000 until
April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income
derived from sources within the Philippines. Petitioners income from sale of airline
tickets, through Aerotel, is income realized from the pursuit of its business activities in
the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty
between the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this
court held that Section 28(A)(3)(a) does not categorically exempt all international air
carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable
to a taxpayer, then the general rule under Section 28(A)(1) does not apply. If, however,
Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax
under Section 28(A)(1).71
This court in South African Airways declared that the correct interpretation of these
provisions is that: "international air carrier[s] maintain[ing] flights to and from the
Philippines . . . shall be taxed at the rate of 2% of its Gross Philippine Billings[;] while

international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country [like sale of airline tickets]
will be taxed at the rate of 32% of such [taxable] income." 72
In this case, there is a tax treaty that must be taken into consideration to determine the
proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of
eliminating double taxation on income and capital, preventing fiscal evasion, promoting
mutual trade and investment, and according fair and equitable tax treatment to foreign
residents or nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow
of goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate.75 (Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is
anchored on the constitutional provision that the Philippines "adopts the generally
accepted principles of international law as part of the law of the land[.]" 76 Pacta sunt
servanda is a fundamental international law principle that requires agreeing parties to
comply with their treaty obligations in good faith. 77
Hence, the application of the provisions of the National Internal Revenue Code must be
subject to the provisions of tax treaties entered into by the Philippines with foreign
countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court
stressed the binding effects of tax treaties. It dealt with the issue of "whether the failure
to strictly comply with [Revenue Memorandum Order] RMO No. 1-2000 79 will deprive
persons or corporations of the benefit of a tax treaty." 80 Upholding the tax treaty over the
administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law
as part of the law of the land. The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the

states that enter into the agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax
conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are also known as
double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken." Thus, laws and issuances must ensure that the reliefs granted
under tax treaties are accorded to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the reliefs provided for under
international agreements. More so, when the RPGermany Tax Treaty does not provide
for any pre-requisite for the availment of the benefits under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement
to the relief as it would constitute a violation of the duty required by good faith in
complying with a tax treaty. The denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a tax treaty relief from the
BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications
on international relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve an administrative
procedure, these may be remedied through other system management processes, e.g.,
the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief. 81 (Emphasis supplied, citations omitted)

On March 11, 1976, the representatives82 for the government of the Republic of the
Philippines and for the government of Canada signed the Convention between the
Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada
Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is
wholly or partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State is
deemed to have a permanent establishment in the other Contracting State if under
certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that
"[a] person acting in a Contracting State on behalf of an enterprise of the other
Contracting State (other than an agent of independent status to whom paragraph 6
applies) shall be deemed to be a permanent establishment in the first-mentioned State if
. . . he has and habitually exercises in that State an authority to conclude contracts on
behalf of the enterprise, unless his activities are limited to the purchase of goods or
merchandise for that enterprise[.]" The provision seems to refer to one who would be
considered an agent under Article 186885 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall
not be deemed to have a permanent establishment in the other Contracting State
merely because it carries on business in that other State through a broker, general
commission agent or any other agent of an independent status, where such persons
are acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services,
the term "dependent" would imply a relationship between the principal and the agent
that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter
exercises comprehensive control and detailed instructions over the means and results
of the activities of the agent.87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics
Act of the Philippines, defines a general sales agent as "a person, not a bonafide
employee of an air carrier, who pursuant to an authority from an airline, by itself or
through an agent, sells or offers for sale any air transportation, or negotiates for, or
holds himself out by solicitation, advertisement or otherwise as one who sells, provides,
furnishes, contracts or arranges for, such air transportation." 88 General sales agents and
their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board. 89 A permit or authorization issued

by the Civil Aeronautics Board is required before a general sales agent may engage in
such an activity.90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to
have created a "permanent establishment" in the Philippines as defined under the
Republic of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Associationapproved and petitioner-approved sales agents,
including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following
services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of
AC in every matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory
of the GSA [Philippines], of traffic documents issued by AC outside the said territory of
the GSA [Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets,
tariffs and publicity material provided by AC in accordance with the reasonable
requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any
press or public relations inquiries to AC;
....
o) Submission for ACs approval, of an annual written sales plan on or before a date to
be determined by AC and in a form acceptable to AC;

....
q) Submission of proposals for ACs approval of passenger sales agent incentive plans
at a reasonable time in advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and other
authorities, offices and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints
and, unless otherwise stated in the guidelines, refer all such claims and complaints to
AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will
"provide at its own expense and acceptable to [petitioner Air Canada], adequate and
suitable premises, qualified staff, equipment, documentation, facilities and supervision
and in consideration of the remuneration and expenses payable[,] [will] defray all costs
and expenses of and incidental to the Agency." 92 "[I]t is the sole employer of its
employees and . . . is responsible for [their] actions . . . or those of any
subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner a
commission on sales of transportation plus override commission on flown
revenues.94 Aerotel would also be reimbursed "for all authorized expenses supported by
original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including
supporting documents, regarding all transactions at, through or in any way connected
with [petitioner Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an
unbiased way."97 Aerotel cannot "accept additional appointments as General Sales
Agent of any other carrier without the prior written consent of [petitioner Air Canada]." 98
The Passenger General Sales Agency Agreement "may be terminated by either party
without cause upon [no] less than 60 days prior notice in writing[.]" 99 In case of breach
of any provisions of the Agreement, petitioner may require Aerotel "to cure the breach in
30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]" 100
The following terms are indicative of Aerotels dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or
takes control of another entity or merges with or is acquired or controlled by another
person or entity[.]"101 Except with the written consent of petitioner, Aerotel must not
acquire a substantial interest in the ownership, management, or profits of a passenger
sales agent affiliated with the International Air Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated passenger sales agent acquire a

substantial interest in Aerotel as to influence its commercial policy and/or management

decisions.102 Aerotel must also provide petitioner "with a report on any interests held by
[it], its owners, directors, officers, employees and their immediate families in companies
and other entities in the aviation industry or . . . industries related to it[.]" 103 Petitioner
may require that any interest be divested within a set period of time. 104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of
petitioner without the express written consent of the latter; 105 it must act according to the
standards required by petitioner; 106 "follow the terms and provisions of the [petitioner Air
Canada] GSA Manual [and all] written instructions of [petitioner Air Canada;]" 107 and "[i]n
the absence of an applicable provision in the Manual or instructions, [Aerotel must]
carry out its functions in accordance with [its own] standard practices and
procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for
all transportation over [its] services[.]" 109 All use of petitioners name, logo, and marks
must be with the written consent of petitioner and according to petitioners corporate
standards and guidelines set out in the Manual. 110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotel are for the account of petitioner, except in the case of
negligence of Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger
General Sales Agency Agreement executed between the parties. It has the authority or
power to conclude contracts or bind petitioner to contracts entered into in the
Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal,
and not to Aerotel, and liability to such third party is enforceable against petitioner. While
Aerotel maintains a certain independence and its activities may not be devoted wholly to
petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it must
carry out its functions solely for the benefit of petitioner and according to the latters
Manual and written instructions. Aerotel is required to submit its annual sales plan for
petitioners approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner.
It is a conduit or outlet through which petitioners airline tickets are sold. 112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax
Treaty, the "business profits" of an enterprise of a Contracting State is "taxable only in
that State[,] unless the enterprise carries on business in the other Contracting State
through a permanent establishment[.]"113 Thus, income attributable to Aerotel or from
business activities effected by petitioner through Aerotel may be taxed in the
Philippines. However, pursuant to the last paragraph 114 of Article VII in relation to Article
VIII115 (Shipping and Air Transport) of the same Treaty, the tax imposed on income
derived from the operation of ships or aircraft in international traffic should not exceed
1% of gross revenues derived from Philippine sources.

IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of
the 1997 National Internal Revenue Code on its taxable income 116 from sale of airline
tickets in the Philippines, it could only be taxed at a maximum of 1% of gross
revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty
that applies to petitioner as a "foreign corporation organized and existing under the laws
of Canada[.]"117
Tax treaties form part of the law of the land, 118 and jurisprudence has applied the
statutory construction principle that specific laws prevail over general ones. 119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977
and became valid and effective on that date. On the other hand, the applicable
provisions120 relating to the taxability of resident foreign corporations and the rate of
such tax found in the National Internal Revenue Code became effective on January 1,
1998.121 Ordinarily, the later provision governs over the earlier one. 122 In this case,
however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more
specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not
simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless
concurred in by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations
become binding. Article II, Section 2 of the Constitution deals with international
obligations that are incorporated, while Article VII, Section 21 deals with international
obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as
definite prestations have effects equivalent to a statute. Thus, these specific treaty
provisions may amend statutory provisions. Statutory provisions may also amend these
types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes. We are also not required to rule in this case on the effect of
international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State from the
operation of ships or aircraft in international traffic may be taxed in the first-mentioned
State but the tax so charged shall not exceed the lesser of a) one and one-half per cent

of the gross revenues derived from sources in that State; and b) the lowest rate of
Philippine tax imposed on such profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the
government of Canada on Air Transport, entered into on January 14, 1997, reiterates
the effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the
Convention between the Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at
Manila on March 31, 1976 and entered into force on December 21, 1977, and any
amendments thereto, in respect of the operation of aircraft in international traffic. 123
Petitioners income from sale of ticket for international carriage of passenger is income
derived from international operation of aircraft. The sale of tickets is closely related to
the international operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our
right to tax limited to a certain extent[.]" 124 Thus, we are bound to extend to a Canadian
air carrier doing business in the Philippines through a local sales agent the benefit of a
lower tax equivalent to 1% on business profits derived from sale of international air
transportation.
V
Finally, we reject petitioners contention that the Court of Tax Appeals erred in denying
its claim for refund of erroneously paid Gross Philippine Billings tax on the ground that it
is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code
because (a) it has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability;125 and (b) internal revenue taxes cannot be the subject of set-off or
compensation,126citing Republic v. Mambulao Lumber Co., et al.127 and Francia v.
Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we
have ruled that "[i]n an action for the refund of taxes allegedly erroneously paid, the
Court of Tax Appeals may determine whether there are taxes that should have been
paid in lieu of the taxes paid."130 The determination of the proper category of tax that
should have been paid is incidental and necessary to resolve the issue of whether a
refund should be granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6%
capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no
power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating
that petitioners transactions are subject to capital gains tax, however, the Court of Tax
Appeals was not making an assessment. It was merely determining the proper category
of tax that petitioner should have paid, in view of its claim that it erroneously imposed
upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.
The issue of petitioners claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that the
tax returns filed were correct. If the tax return filed was not proper, the correctness of
the amount paid and, therefore, the claim for refund become questionable. In that case,
the court must determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways
claimed for refund of its erroneously paid 2% taxes on its gross Philippine billings.
This court did not immediately grant South Africans claim for refund. This is because
although this court found that South African Airways was not subject to the 2% tax on
its gross Philippine billings, this court also found that it was subject to 32% tax on its
taxable income.
In this case, petitioners claim that it erroneously paid the 5% final tax is an admission
that the quarterly tax return it filed in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the
duty to determine if petitioner was indeed not liable for the 5% final tax and, instead,
liable for taxes other than the 5% final tax. As in South African Airways, petitioners
request for refund can neither be granted nor denied outright without such
determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the
amount of the taxpayers liability should be computed and deducted from the refundable
amount.
Any liability in excess of the refundable amount, however, may not be collected in a
case involving solely the issue of the taxpayers entitlement to refund. The question of
tax deficiency is distinct and unrelated to the question of petitioners entitlement to
refund. Tax deficiencies should be subject to assessment procedures and the rules of
prescription. The court cannot be expected to perform the BIRs duties whenever it fails
to do so either through neglect or oversight. Neither can court processes be used as a
tool to circumvent laws protecting the rights of taxpayers. 132
Hence, the Court of Tax Appeals properly denied petitioners claim for refund of
allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was

liable instead for the regular 32% tax on its taxable income received from sources within
the Philippines. Its determination of petitioners liability for the 32% regular income tax
was made merely for the purpose of ascertaining petitioners entitlement to a tax refund
and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the
cases cited are based on different circumstances. In both cited cases, 133 the taxpayer
claimed that his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended
that the amounts it paid to the government as reforestation charges from 1947 to 1956,
not having been used in the reforestation of the area covered by its license, may be set
off or applied to the payment of forest charges still due and owing from it. 134Rejecting
Mambulaos claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their
own right are creditors and debtors of each other. With respect to the forest charges
which the defendant Mambulao Lumber Company has paid to the government, they are
in the coffers of the government as taxes collected, and the government does not owe
anything to defendant Mambulao Lumber Company. So, it is crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and
debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction
sued on. * * *. (80 C.J.S. 7374.)
The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are the
positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse
to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate
and necessary expenditure must be curtailed. If the taxpayers claim is disputed, the

collection of the tax must await and abide the result of a lawsuit, and meanwhile the
financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766
767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present. 136 In that case, a portion of
Francias property in Pasay was expropriated by the national government, 137 which did
not immediately pay Francia. In the meantime, he failed to pay the real property tax due
on his remaining property to the local government of Pasay, which later on would
auction the property on account of such delinquency.138 He then moved to set aside the
auction sale and argued, among others, that his real property tax delinquency was
extinguished by legal compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;
xxx

xxx

xxx

xxx

xxx

(3) that the two debts be due.

xxx

This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
....
There are other factors which compel us to rule against the petitioner. The tax was due
to the city government while the expropriation was effected by the national
government. Moreover, the amount of 4,116.00 paid by the national government for
the 125 square meter portion of his lot was deposited with the Philippine National Bank
long before the sale at public auction of his remaining property. Notice of the deposit
dated September 28, 1977 was received by the petitioner on September 30, 1977. The
petitioner admitted in his testimony that he knew about the 4,116.00 deposited with the
bank but he did not withdraw it. It would have been an easy matter to withdraw
2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale
at public auction.140

The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit141 and Philex Mining Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off. 143 (Citations
omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity."144 Rejecting Philex Minings assertion that the
imposition of surcharge and interest was unjustified because it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it still had pending
claims for VAT input credit/refund with the Bureau of Internal Revenue, this court
explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government which
has not yet been granted. It must be noted that a distinguishing feature of a tax is that it
is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect
the government revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the government.
Moreover, Philexs theory that would automatically apply its VAT input credit/refund
against its tax liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit and offset their tax
liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply
refuse to pay tax on the ground that the tax liabilities were off-set against any alleged
claim the taxpayer may have against the government. Such would merely be in keeping
with the basic policy on prompt collection of taxes as the lifeblood of the
government.1wphi1
Here, what is involved is a denial of a taxpayers refund claim on account of the Court of
Tax Appeals finding of its liability for another tax in lieu of the Gross Philippine Billings
tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar
arguments on the denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the

offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners
supplemental motion for reconsideration alleging bringing to said courts attention the
existence of the deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and inextricably intertwined
with the right of respondent bank to claim for a tax refund for the same year. To award
such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to refund
and at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved. This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden
on and a drain of government funds, and impede or delay the collection of muchneeded revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due
or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to

avail of remedies under the law to defeat each others claim and to determine all
matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it
would [be] necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC.
The above pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal
Revenue, 147 this court upheld the denial of the claim for refund based on the Court of
Tax Appeals' finding that the taxpayer had, through erroneous deductions on its gross
income, underpaid its Gross Philippine Billing tax on cargo revenues for 1999, and the
amount of underpayment was even greater than the refund sought for erroneously paid
Gross Philippine Billings tax on passenger revenues for the same taxable period. 148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 % of its gross revenues amounting to
P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is
quite apparent that the tax imposable under Section 28(A)(l) of the 1997 National
Internal Revenue Code [32% of t.axable income, that is, gross income less deductions]
will exceed the maximum ceiling of 1 % of gross revenues as decreed in Article VIII of
the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and
Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.

G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal
Revenue the sum of P1,863.44, with legal interest thereon, which they paid under
protest by way of income tax. They appealed from the decision rendered in the case on
October 23, 1936 by the Court of First Instance of the City of Manila, which dismissed
the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective
undersigned attorneys, and hereby agree to respectfully submit to this Honorable
Court the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that
defendant is the Collector of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase
one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor
the amounts as follows:
1. Jose
Gatchalian ....................................................................................................

P0.18

2. Gregoria
Cristobal ...............................................................................................

.18

3. Saturnina
Silva ....................................................................................................

.08

4. Guillermo
Tapia ...................................................................................................

.13

5. Jesus
Legaspi ......................................................................................................

.15

6. Jose
Silva .............................................................................................................

.07

7. Tomasa
Mercado ................................................................................................

.08

8. Julio
Gatchalian ...................................................................................................

.13

9. Emiliana
Santiago ................................................................................................

.13

10. Maria C.
Legaspi ...............................................................................................

.16

11. Francisco
Cabral ...............................................................................................

.13

12. Gonzalo
Javier ....................................................................................................

.14

13. Maria
Santiago ...................................................................................................

.17

14. Buenaventura
Guzman ......................................................................................

.13

15. Mariano
Santos .................................................................................................

.14

Total ........................................................................................................

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs

purchased, in the ordinary course of business, from one of the duly authorized
agents of the National Charity Sweepstakes Office one ticket bearing No. 178637
for the sum of two pesos (P2) and that the said ticket was registered in the name
of Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the
above-mentioned ticket bearing No. 178637 won one of the third prizes in the
amount of P50,000 and that the corresponding check covering the abovementioned prize of P50,000 was drawn by the National Charity Sweepstakes
Office in favor of Jose Gatchalian & Company against the Philippine National
Bank, which check was cashed during the latter part of December, 1934 by Jose
Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax
examiner Alfredo David to file the corresponding income tax return covering the
prize won by Jose Gatchalian & Company and that on December 29, 1934, the

said return was signed by Jose Gatchalian, a copy of which return is enclosed as
Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose
Gatchalian & Company requesting the payment of the sum of P1,499.94 to the
deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian &
Company until January 20, 1935 within which to pay the said amount of
P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part
hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to
defendant a reply, a copy of which marked Exhibit C is attached and made a part
hereof, requesting exemption from payment of the income tax to which reply
there were enclosed fifteen (15) separate individual income tax returns filed
separately by each one of the plaintiffs, copies of which returns are attached and
marked Exhibit D-1 to D-15, respectively, in order of their names listed in the
caption of this case and made parts hereof; a statement of sale signed by Jose
Gatchalian showing the amount put up by each of the plaintiffs to cover up the
attached and marked as Exhibit E and made a part hereof; and a copy of the
affidavit signed by Jose Gatchalian dated December 29, 1934 is attached and
marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which
marked Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for
exemption from the payment of tax and reiterated his demand for the payment of
the sum of P1,499.94 as income tax and gave plaintiffs until February 10, 1935
within which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded
by the defendant, notwithstanding subsequent demand made by defendant upon
the plaintiffs through their attorney on March 23, 1935, a copy of which marked
Exhibit H is enclosed, defendant on May 13, 1935 issued a warrant of distraint
and levy against the property of the plaintiffs, a copy of which warrant marked
Exhibit I is enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the
plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria
C. Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of
the tax and penalties to the municipal treasurer of Pulilan, Bulacan, as evidenced
by official receipt No. 7454879 which is attached and marked Exhibit J and made
a part hereof, and requested defendant that plaintiffs be allowed to pay under
protest the balance of the tax and penalties by monthly installments;
11. That plaintiff's request to pay the balance of the tax and penalties was
granted by defendant subject to the condition that plaintiffs file the usual bond

secured by two solvent persons to guarantee prompt payment of each

installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K
is enclosed and made a part hereof, to guarantee the payment of the balance of
the alleged tax liability by monthly installments at the rate of P118.70 a month,
the first payment under protest to be effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the
payment of the sum of P602.51, a copy of which protest is attached and marked
Exhibit L, but that defendant in his letter dated August 1, 1935 overruled the
protest and denied the request for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in
accordance with the terms and conditions of bond filed by them, the defendant in
his letter dated July 23, 1935, copy of which is attached and marked Exhibit M,
ordered the municipal treasurer of Pulilan, Bulacan to execute within five days
the warrant of distraint and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of
their property, the plaintiffs on August 28, 1936, through Jose Gatchalian,
Guillermo Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the
municipal treasurer of Pulilan, Bulacan the sum of P1,260.93 representing the
unpaid balance of the income tax and penalties demanded by defendant as
evidenced by income tax receipt No. 35811 which is attached and marked Exhibit
N and made a part hereof; and that on September 3, 1936, the plaintiffs formally
protested to the defendant against the payment of said amount and requested
the refund thereof, copy of which is attached and marked Exhibit O and made
part hereof; but that on September 4, 1936, the defendant overruled the protest
and denied the refund thereof; copy of which is attached and marked Exhibit P
and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one
thousand eight hundred and sixty three pesos and forty-four centavos
(P1,863.44) paid under protest by them but that defendant refused and still
refuses to refund the said amount notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence
if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify,
that on the 11th day of August, 1934, I sold parts of my shares on ticket No.

178637 to the persons and for the amount indicated below and the part of may
share remaining is also shown to wit:
Purchaser

Amount

Address

1. Mariano Santos ...........................................

P0.14

Pulilan, Bulacan.

2. Buenaventura Guzman ...............................

.13

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

8. Julio Gatchalian ............................................

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose Gatchalian ............................................

.18

- Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of
whatever prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934
ALL DATED JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF
INTERNAL REVENUE.

Name

Exhibit
No.

Purchase
Price

1. Jose
Gatchalian ..................................
........

D-1

2. Gregoria
Cristobal .....................................
.

D-2

.18

3. Saturnina
Silva ...........................................
..

D-3

4. Guillermo
Tapia ..........................................

Price
Won

P0.18 P4,425

Expenses

Net
prize

P 480

3,945

4,575

2,000

2,575

.08

1,875

360

1,515

D-4

.13

3,325

360

2,965

5. Jesus Legaspi by Maria

Cristobal .........

D-5

.15

3,825

720

3,105

6. Jose
Silva ...........................................
.........

D-6

.08

1,875

360

1,515

7. Tomasa
Mercado .....................................
..

D-7

.07

1,875

360

1,515

8. Julio Gatchalian by Beatriz

Guzman .......

D-8

.13

3,150

240

2,910

9. Emiliana
Santiago .....................................
.

D-9

.13

3,325

360

2,965

10. Maria C.
Legaspi ......................................

D-10

.16

4,100

960

3,140

11. Francisco
Cabral ......................................

D-11

.13

3,325

360

2,965

12. Gonzalo
D-12
Javier ..........................................

.14

3,325

360

2,965

13. Maria
Santiago .....................................
.....

D-13

.17

4,350

360

3,990

14. Buenaventura

D-14

.13

3,325

360

2,965

Guzman ...........................
15. Mariano
Santos ........................................

D-15

.14

2.00

3,325

360

2,965

<="" td=""
style="fontsize: 14px;
textdecoration:
none; color:
50,000
rgb(0, 0,
128); fontfamily:
arial,
verdana;">

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be
reduced to the two following: (1) Whether the plaintiffs formed a partnership, or merely a
community of property without a personality of its own; in the first case it is admitted that
the partnership thus formed is liable for the payment of income tax, whereas if there
was merely a community of property, they are exempt from such payment; and (2)
whether they should pay the tax collectively or whether the latter should be prorated
among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as
last amended by section 2 of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding calendar year from all sources by
every corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association or insurance company, organized in the Philippine
Islands, no matter how created or organized, but not including duly registered
general copartnership (compaias colectivas), a tax of three per centum upon
such income; and a like tax shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding calendar year from
all sources within the Philippine Islands by every corporation, joint-stock
company, partnership, joint account (cuenta en participacion), association, or
insurance company organized, authorized, or existing under the laws of any
foreign country, including interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise: Provided, however, That nothing
in this section shall be construed as permitting the taxation of the income derived
from dividends or net profits on which the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a
corporation, joint-stock company, partnership, joint account (cuenta en

participacion), association, or insurance company, or property, real, personal, or

mixed, shall be ascertained in accordance with subsections (c) and (d) of section
two of Act Numbered Two thousand eight hundred and thirty-three, as amended
by Act Numbered Twenty-nine hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable
corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association, or insurance company in the calendar year nineteen
hundred and twenty and in each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is
exempt from the payment of income tax under the law. But according to the stipulation
facts the plaintiffs organized a partnership of a civil nature because each of them put up
money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize
which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil
Code). The partnership was not only formed, but upon the organization thereof and the
winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines
Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the
office issued the check for P50,000 in favor of Jose Gatchalian and company, and the
said partner, in the same capacity, collected the said check. All these circumstances
repel the idea that the plaintiffs organized and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the
one bound to pay the income tax which the defendant collected under the aforesaid
section 10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no
merit in plaintiff's contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this
instance to the plaintiffs appellants. So ordered.

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture
for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino,
et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan
Roque. The first two parcels of land were sold by petitioners in 1968 toMarenir
Development Corporation, while the three parcels of land were sold by petitioners to
Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in
the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid
by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said
years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I.
Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as
alleged deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that
they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the
years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an
unregistered partnership or joint venture taxable as a corporation under Section 20(b)
and its income was subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code 1 that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the partnership by them
which is subject to individual income tax; and that the availment of tax amnesty under
P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability of the unregistered

partnership. Hence, the petitioners were required to pay the deficiency income tax
assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed
as CTA Case No. 3045. In due course, the respondent court by a majority decision of
March 30, 1987, 2 affirmed the decision and action taken by respondent commissioner
with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered
partnership was in fact formed by petitioners which like a corporation was subject to
corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that
considering the circumstances of this case, although there might in fact be a coownership between the petitioners, there was no adequate basis for the conclusion that
they thereby formed an unregistered partnership which made "hem liable for corporate
income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged
errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE
DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE
EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO
RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED
THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE
EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE
PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD
COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together
with their own personal funds they used in buying several real properties. They
appointed their brother to manage their properties with full power to lease, collect, rent,
issue receipts, etc. They had the real properties rented or leased to various tenants for
several years and they gained net profits from the rental income. Thus, the Collector of
Internal Revenue demanded the payment of income tax on a corporation, among
others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the
terms corporation and partnership as used in sections 24 and 84 of said
Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied,
assessed, collected, and paid annually upon the total net income received
in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general copartnerships (companies collectives), a tax upon such income equal to the
sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not include
duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to their intent
in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their

purpose was to engage in real estate transactions for monetary gain and
then divide the same among themselves, because:
1. Said common fund was not something they found already in existence.
It was not a property inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a substantial portion thereof
in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series
of transactions. On February 2, 1943, they bought a lot for P100,000.00.
On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon
followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transcations
undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other
personal uses, of petitioners herein. The properties were leased
separately to several persons, who, from 1945 to 1948 inclusive, paid the
total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any
change in the utilization thereof.
4. Since August, 1945, the properties have been under the management
of one person, namely, Simeon Evangelists, with full power to lease, to
collect rents, to issue receipts, to bring suits, to sign letters and contracts,
and to indorse and deposit notes and checks. Thus, the affairs relative to
said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or,
to be exact, over fifteen (15) years, since the first property was acquired,
and over twelve (12) years, since Simeon Evangelists became the
manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of
said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to
divide the profits among themselves. Respondent commissioner and/ or his
representative just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twentyfour (24) lots showing that the purpose was not limited to the conservation or
preservation of the common fund or even the properties acquired by them. The
character of habituality peculiar to business transactions engaged in for the purpose of
gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell
the same nor make any improvements thereon. In 1966, they bought another three (3)
parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of
land after which they did not make any additional or new purchase. The remaining three
(3) parcels were sold by them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The
business was under the management of one of the partners. Such condition existed for
over fifteen (15) years. None of the circumstances are present in the case at bar. The
co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new
Civil Code lays down the rule for determining when a transaction should
be deemed a partnership or a co-ownership. Said article paragraphs 2 and
3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a coownership share or do not share any profits made by the use of the
property held in common does not convert their venture into a partnership.
Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. This only means that, aside from
the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership,
the existence of a juridical personality different from that of the individual
partners, and the freedom to transfer or assign any interest in the property
by one with the consent of the others (Padilla, Civil Code of the Philippines
Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a
partnership.
Persons who contribute property or funds for a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common
stock or capital, and no community of interest as principal proprietors in
the business itself which the proceeds derived. (Elements of the Law of
Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in
respect thereto; nor does an agreement to share the profits and losses on
the sale of land create a partnership; the parties are only tenants in
common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a
single tract of realty, holding as tenants in common, and to divide the
profits of disposing of it, the brother and the other not being entitled to
share in plaintiffs commission, no partnership existed as between the
three parties, whatever their relation may have been as to third parties.
(Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent
to form the same; (b) generally participating in both profits and losses; (c)
and such a community of interest, as far as third persons are concerned
as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P.
1067, 50 III 470.)

The common ownership of property does not itself create a partnership

between the owners, though they may use it for the purpose of making
gains; and they may, without becoming partners, agree among themselves
as to the management, and use of such property and the application of the
proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App.
14.) 6
The sharing of returns does not in itself establish a partnership whether or not the
persons sharing therein have a joint or common right or interest in the property. There
must be a clear intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party to transfer or assign
the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners.
There is no adequate basis to support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions whereby they purchased
properties and sold the same a few years thereafter did not thereby make them
partners. They shared in the gross profits as co- owners and paid their capital gains
taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent commissioner
proposes.
And even assuming for the sake of argument that such unregistered partnership
appears to have been formed, since there is no such existing unregistered partnership
with a distinct personality nor with assets that can be held liable for said deficiency
corporate income tax, then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership p. 7 However, as petitioners have availed of the
benefits of tax amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent
Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and
another decision is hereby rendered relieving petitioners of the corporate income tax
liability in this case, without pronouncement as to costs.
SO ORDERED.

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to
set aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP
No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the
Philippine laws, entered into a license agreement with SC Johnson and
Son, United States of America (USA), a non-resident foreign corporation
based in the U.S.A. pursuant to which the [respondent] was granted the
right to use the trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the products
covered by the Agreement and secure assistance in management,
marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology
Transfer Board of the Bureau of Patents, Trade Marks and Technology
Transfer under Certificate of Registration No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent] was obliged to
pay SC Johnson and Son, USA royalties based on a percentage of net
sales and subjected the same to 25% withholding tax on royalty payments
which [respondent] paid for the period covering July 1992 to May 1993 in
the total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs
Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on
royalties arguing that, "the antecedent facts attending [respondent's] case
fall squarely within the same circumstances under which said MacGeorge
and Gillete rulings were issued. Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10% should apply
to the [respondent]. We therefore submit that royalties paid by the

[respondent] to SC Johnson and Son, USA is only subject to 10%

withholding tax pursuant to the most-favored nation clause of the RP-US
Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West
Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the
Court of Appeals], par. 12). [Respondent's] claim for there fund of
P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance

July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C.
Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of

Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a
refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C.
Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid withholding tax on
royalty payments, beginning July, 1992 to May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of
Appeals which rendered the decision subject of this appeal on November 7, 1996
finding no merit in the petition and affirming in toto the CTA ruling. 3
This petition for review was filed by the Commissioner of Internal Revenue raising the
following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON
AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX
RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX
TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is
known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10%
may be imposed on royalties derived by a resident of the United States from sources
within the Philippines only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains
no "matching credit" provision as that provided under Article 24 of the RP-West
Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even
assuming that the phrase "paid under similar circumstances" refers to the payment of
royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation"
clause cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for that matter,
these must necessarily refer to circumstances that are tax-related. Finally, petitioner
argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the
nature of a claim for exemption from the application of the regular tax rate of 25% for
royalties, the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should
be denied (1) because it contains a defective certification against forum shopping as
required under SC Circular No. 28-91, that is, the certification was not executed by the
petitioner herself but by her counsel; and (2) that the "most favored nation" clause under
the RP-US Tax Treaty refers to royalties paid under similar circumstances as those
royalties subject to tax in other treaties; that the phrase "paid under similar
circumstances" does not refer to payment of the tax but to the subject matter of the tax,
that is, royalties, because the "most favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal provisions contained in another tax treaty

wherein the country of residence of such taxpayer is also a party thereto, subject to the
basic condition that the subject matter of taxation in that other tax treaty is the same as
that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax
Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C.
Johnson also contends that the Commissioner is estopped from insisting on her
interpretation that the phrase "paid under similar circumstances" refers to the manner in
which the tax is paid, for the reason that said interpretation is embodied in Revenue
Memorandum Circular ("RMC") 39-92 which was already abandoned by the
Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No.
052-95 which stated that royalties paid to an American licensor are subject only to 10%
withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the
RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if
such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal
Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping
was signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this
petition since Circular No. 28-91 applies only to original actions and not to appeals, as
in the instant case. Moreover, the requirement that the certification should be signed by
petitioner and not by counsel does not apply to petitioner who has only the Office of the
Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paid
under similar circumstances" embodied in the most favored nation clause of the RP-US
Tax Treaty refers to the payment of royalties and not taxes, still the presence or
absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute
a material circumstance to such payment and would be determinative of the said
clause's application.1wphi1.nt
We address first the objection raised by private respondent that the certification against
forum shopping was not executed by the petitioner herself but by her counsel, the Office
of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL
REQUISITES FOR PETITIONS
FILED WITH THE SUPREME
COURT AND THE COURT OF
APPEALS TO PREVENT
FORUM SHOPPING OR
MULTIPLE FILING OF
PETITIONS AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions
and complaints involving the same issues in the Supreme Court, the Court

of Appeals or other tribunals or agencies, with the result that said courts,
tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or
the Court of Appeals, the petitioner aside from complying with pertinent
provisions of the Rules of Court and existing circulars, must certify under
oath to all of the following facts or undertakings: (a) he has not theretofore
commenced any other action or proceeding involving the same issues in
the Supreme Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions:
(a) it shall be a cause for the summary dismissal of the multiple petitions
or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be
attached to petitions filed before this Court and the Court of Appeals. Petitioner's
allegation that Circular No. 28-91 applies only to original actions and not to appeals as
in the instant case is not supported by the text nor by the obvious intent of the Circular
which is to prevent multiple petitions that will result in the same issue being resolved by
different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has
not commenced any other action involving the same issues in this Court or the Court of
Appeals or any other tribunal or agency, we are inclined to accept petitioner's
submission that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title III, Book IV of the
1987 Administrative Code 4 to be represented only by the Solicitor General, the
certification executed by the OSG in this case constitutes substantial compliance with
Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is
the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of
tax to be imposed by the Philippines upon royalties received by a non-resident foreign
corporation. The provision states insofar as pertinent
that
1) Royalties derived by a resident of one of the Contracting
States from sources within the other Contracting State may
be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall
not exceed.
a) In the case of the United States, 15 percent
of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross
amount of the royalties;
(ii) 15 percent of the gross
amount of the royalties, where
the royalties are paid by a
corporation registered with the
Philippine Board of Investments
and engaged in preferred areas
of activities; and
(iii) the lowest rate of Philippine
tax that may be imposed on
royalties of the same kind paid
under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted
provision, it is entitled to the concessional tax rate of 10 percent on royalties based on
Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the
Contracting State in which they arise, and according to the
law of that State, but the tax so charged shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties
arising from the use of, or the right to use, any
patent, trademark, design or model, plan,
secret formula or process, or from the use of or
the right to use, industrial, commercial, or
scientific equipment, or for information
concerning industrial, commercial or scientific
experience.
For as long as the transfer of technology, under Philippine law, is subject
to approval, the limitation of the tax rate mentioned under b) shall, in the
case of royalties arising in the Republic of the Philippines, only apply if the

contract giving rise to such royalties has been approved by the Philippine
competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20
percent of the gross amount of such royalties against German income and corporation
tax for the taxes payable in the Philippines on such royalties where the tax rate is
reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty
states
1) Tax shall be determined in the case of a resident of the
Federal Republic of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law
regarding credit for foreign tax, there shall be
allowed as a credit against German income
and corporation tax payable in respect of the
following items of income arising in the
Republic of the Philippines, the tax paid under
the laws of the Philippines in accordance with
this Agreement on:
xxx xxx xxx
dd) royalties, as defined in
paragraph 3 of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in
subparagraph; b) the Philippine tax shall be
deemed to be
xxx xxx xxx
cc) in the case of royalties for
which the tax is reduced to 10 or
15 per cent according to
paragraph 2 of Article 12, 20
percent of the gross amount of
such royalties.
xxx xxx xxx

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not
paid under circumstances similar to those in the RP-West Germany Tax Treaty since
there is no provision for a 20 percent matching credit in the former convention and
private respondent cannot invoke the concessional tax rate on the strength of the most
favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the
Philippine tax paid on income from sources within the Philippines is
allowed as a credit against German income and corporation tax on the
same income. In the case of royalties for which the tax is reduced to 10 or
15 percent according to paragraph 2 of Article 12 of the RP-West
Germany Tax Treaty, the credit shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a German resident from sources
within the Philippines arising from the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, is
taxed at 10% of the gross amount of said royalty under certain conditions.
The rate of 10% is imposed if credit against the German income and
corporation tax on said royalty is allowed in favor of the German resident.
That means the rate of 10% is granted to the German taxpayer if he is
similarly granted a credit against the income and corporation tax of West
Germany. The clear intent of the "matching credit" is to soften the impact
of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that
provided under the RP-West Germany Tax Treaty. Hence, the tax on
royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax Treaty.
Therefore, the "most favored nation" clause in the RP-West Germany Tax
Treaty cannot be availed of in interpreting the provisions of the RP-US Tax
Treaty. 5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by
the Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2)
(b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and
not to the payment of the tax, for the reason that the phrase "paid under similar
circumstances" is followed by the phrase "to a resident of a third state". The respondent
court held that "Words are to be understood in the context in which they are used", and
since what is paid to a resident of a third state is not a tax but a royalty "logic instructs"
that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to
take into account the purpose animating the treaty provisions in point. To begin with, we
are not aware of any law or rule pertinent to the payment of royalties, and none has

been brought to our attention, which provides for the payment of royalties under
dissimilar circumstances. The tax rates on royalties and the circumstances of payment
thereof are the same for all the recipients of such royalties and there is no disparity
based on nationality in the circumstances of such payment. 6 On the other hand, a
cursory reading of the various tax treaties will show that there is no similarity in the
provisions on relief from or avoidance of double taxation 7 as this is a matter of
negotiation between the contracting parties. 8 As will be shown later, this dissimilarity is
true particularly in the treaties between the Philippines and the United States and
between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines
has entered into for the avoidance of double taxation. 9 The purpose of these
international agreements is to reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. 10More precisely, the tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods. 11 The apparent rationale for doing away with
double taxation is of encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of residence. In this
case, the treaties make it incumbent upon the state of residence to allow relief in order
to avoid double taxation. There are two methods of relief the exemption method and
the credit method. In the exemption method, the income or capital which is taxable in
the state of source or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax applicable to the
taxpayer's remaining income or capital. On the other hand, in the credit method,
although the income or capital which is taxed in the state of source is still taxable in the
state of residence, the tax paid in the former is credited against the tax levied in the
latter. The basic difference between the two methods is that in the exemption method,
the focus is on the income or capital itself, whereas the credit method focuses upon the
tax. 15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under
similar circumstances" in the most favored nation clause of the US-RP Tax Treaty
necessarily contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid
for the right to use property or rights, i.e. trademarks, patents and technology, located
within the Philippines. 17 The United States is the state of residence since the taxpayer,
S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state
of residence and the state of source are both permitted to tax the royalties, with a
restraint on the tax that may be collected by the state of source. 18 Furthermore, the
method employed to give relief from double taxation is the allowance of a tax credit to
citizens or residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but such amount
shall not exceed the limitations provided by United States law for the taxable
year. 19 Under Article 13 thereof, the Philippines may impose one of three rates 25
percent of the gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation
clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax
Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty
and in the RP-Germany Tax Treaty are paid under similar circumstances. This would
mean that private respondent must prove that the RP-US Tax Treaty grants similar tax
reliefs to residents of the United States in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on
tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting
against German income and corporation tax of 20% of the gross amount of royalties
paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to relief for double taxation, does
not provide for similar crediting of 20% of the gross amount of royalties paid. Said Article
23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the

limitations of the law of the United States (as it may be
amended from time to time without changing the general
principle thereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United
States tax the appropriate amount of taxes paid or accrued
to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of
a Philippine corporation from which it receives dividends in
any taxable year, shall allow credit for the appropriate
amount of taxes paid or accrued to the Philippines by the
Philippine corporation paying such dividends with respect to
the profits out of which such dividends are paid. Such
appropriate amount shall be based upon the amount of tax
paid or accrued to the Philippines, but the credit shall not
exceed the limitations (for the purpose of limiting the credit to
the United States tax on income from sources within the
Philippines or on income from sources outside the United
States) provided by United States law for the taxable year. . .
.
The reason for construing the phrase "paid under similar circumstances" as used in
Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a
logical reading of the text in the light of the fundamental purpose of such treaty which is
to grant an incentive to the foreign investor by lowering the tax and at the same time
crediting against the domestic tax abroad a figure higher than what was collected in the
Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions,
but have ends to be achieved and that the general purpose is a more important aid to
the meaning of a law than any rule which grammar may lay down. 20 It is the duty of the
courts to look to the object to be accomplished, the evils to be remedied, or the purpose
to be subserved, and should give the law a reasonable or liberal construction which will
best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that
a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be
given to the terms of the treaty in their context and in the light of its object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage
foreign investors to invest in the Philippines a crucial economic goal for developing
countries. 23 The goal of double taxation conventions would be thwarted if such treaties
did not provide for effective measures to minimize, if not completely eliminate, the tax
burden laid upon the income or capital of the investor. Thus, if the rates of tax are
lowered by the state of source, in this case, by the Philippines, there should be a
concomitant commitment on the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax

which could have been collected by the Philippine government will simply be collected
by another state, defeating the object of the tax treaty since the tax burden imposed
upon the investor would remain unrelieved. If the state of residence does not grant
some form of tax relief to the investor, no benefit would redound to the Philippines, i.e.,
increased investment resulting from a favorable tax regime, should it impose a lower tax
rate on the royalty earnings of the investor, and it would be better to impose the regular
rate rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on "relief from
double taxation" in the two tax treaties in question should be considered in light of the
purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the "most
favored" among other countries. 25 The most favored nation clause is intended to
establish the principle of equality of international treatment by providing that the citizens
or subjects of the contracting nations may enjoy the privileges accorded by either party
to those of the most favored nation. 26 The essence of the principle is to allow the
taxpayer in one state to avail of more liberal provisions granted in another tax treaty to
which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under
which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2)
(b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for
the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S.
firms despite the absence of a matching credit (20% for royalties) would derogate from
the design behind the most grant equality of international treatment since the tax burden
laid upon the income of the investor is not the same in the two countries. The similarity
in the circumstances of payment of taxes is a condition for the enjoyment of most
favored nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a
matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as
allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed
entitled to the 10 percent rate granted under the latter treaty for the reason that there is
no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption. 27 The burden of proof is upon
him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law. 28 Private respondent is claiming for a refund of
the alleged overpayment of tax on royalties; however, there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax Treaty is paid under
similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision
dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7,
1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.

G.R. Nos. L-24020-21

July 29, 1968

FLORENCIO REYES and ANGEL REYES, petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX
APPEALS, respondents.
Jose W. Diokno and Domingo Sandoval for petitioners.
Office of the Solicitor General for respondents.
FERNANDO, J.:
Petitioners in this case were assessed by respondent Commissioner of Internal
Revenue the sum of P46,647.00 as income tax, surcharge and compromise for the
years 1951 to 1954, an assessment subsequently reduced to P37,528.00. This
assessment sought to be reconsidered unsuccessfully was the subject of an appeal to
respondent Court of Tax Appeals. Thereafter, another assessment was made against
petitioners, this time for back income taxes plus surcharge and compromise in the total
sum of P25,973.75, covering the years 1955 and 1956. There being a failure on their
part to have such assessments reconsidered, the matter was likewise taken to the
respondent Court of Tax Appeals. The two cases1 involving as they did identical issues
and ultimately traceable to facts similar in character were heard jointly with only one
decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years
1951 to 1954 was reduced to P37,128.00 and for the years 1955 and 1956, to
P20,619.00 as income tax due "from the partnership formed" by petitioners. 2 The
reduction was due to the elimination of surcharge, the failure to file the income tax

return being accepted as due to petitioners honest belief that no such liability was
incurred as well as the compromise penalties for such failure to file. 3 A reconsideration
of the aforesaid decision was sought and denied by respondent Court of Tax Appeals.
Hence this petition for review.
The facts as found by respondent Court of Tax Appeals, which being supported by
substantial evidence, must be respected4 follow: "On October 31, 1950, petitioners,
father and son, purchased a lot and building, known as the Gibbs Building, situated at
671 Dasmarias Street, Manila, for P835,000.00, of which they paid the sum of
P375,000.00, leaving a balance of P460,000.00, representing the mortgage obligation
of the vendors with the China Banking Corporation, which mortgage obligations were
assumed by the vendees. The initial payment of P375,000.00 was shared equally by
petitioners. At the time of the purchase, the building was leased to various tenants,
whose rights under the lease contracts with the original owners, the purchasers,
petitioners herein, agreed to respect. The administration of the building was entrusted to
an administrator who collected the rents; kept its books and records and rendered
statements of accounts to the owners; negotiated leases; made necessary repairs and
disbursed payments, whenever necessary, after approval by the owners; and performed
such other functions necessary for the conservation and preservation of the building.
Petitioners divided equally the income of operation and maintenance. The gross income
from rentals of the building amounted to about P90,000.00 annually." 5
From the above facts, the respondent Court of Tax Appeals applying the appropriate
provisions of the National Internal Revenue Code, the first of which imposes an income
tax on corporations "organized in, or existing under the laws of the Philippines, no
matter how created or organized but not including duly registered general copartnerships (companias colectivas), ...,"6 a term, which according to the second
provision cited, includes partnerships "no matter how created or organized, ...," 7 and
applying the leading case of Evangelista v. Collector of Internal Revenue,8 sustained the
action of respondent Commissioner of Internal Revenue, but reduced the tax liability of
petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the
situation is dissimilar.1wph1.t Consequently they allege that the reliance by
respondent Court of Tax Appeals was unwarranted and the decision should be set
aside. If their interpretation of the authoritative doctrine therein set forth commands
assent, then clearly what respondent Court of Tax Appeals did fails to find shelter in the
law. That is the crux of the matter. A perusal of the Evangelista decision is therefore
unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was
whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, ..."9 After referring to another section of the National Internal Revenue Code,
which explicitly provides that the term corporation "includes partnerships" and then to
Article 1767 of the Civil Code of the Philippines, defining what a contract of partnership

is, the opinion goes on to state that "the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to and
did, contribute money and property to a common fund. Hence, the issue narrows down
to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same among
themselves, ..."10
In support of the above conclusion, reference was made to the following circumstances,
namely, the common fund being created purposely not something already found in
existence, the investment of the same not merely in one transaction but in a series of
transactions; the lots thus acquired not being devoted to residential purposes or to other
personal uses of petitioners in that case; such properties having been under the
management of one person with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts and to endorse notes and checks; the above
conditions having existed for more than 10 years since the acquisition of the above
properties; and no testimony having been introduced as to the purpose "in creating the
set up already adverted to, or on the causes for its continued existence." 11 The
conclusion that emerged had all the imprint of inevitability. Thus: "Although, taken singly,
they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein." 12
It may be said that there could be a differentiation made between the circumstances
above detailed and those existing in the present case. It does not suffice though to
preclude the applicability of the Evangelista decision. Petitioners could harp on these
being only one transaction. They could stress that an affidavit of one of them found in
the Bureau of Internal Revenue records would indicate that their intention was to house
in the building acquired by them the respective enterprises, coupled with a plan of
effecting a division in 10 years. It is a little surprising then that while the purchase was
made on October 31, 1950 and their brief as petitioners filed on October 20, 1965,
almost 15 years later, there was no allegation that such division as between them was
in fact made. Moreover, the facts as found and as submitted in the brief made clear that
the building in question continued to be leased by other parties with petitioners dividing
"equally the income ... after deducting the expenses of operation and
maintenance ..."13 Differences of such slight significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling
cannot be deemed successful. Respondent Court of Tax Appeals acted correctly. It
yielded to the command of an authoritative decision; it recognized its binding character.
There is clearly no merit to the second error assigned by petitioners, who would deny its
applicability to their situation.

The first alleged error committed by respondent Court of Tax Appeals in holding that
petitioners, in acquiring the Gibbs Building, established a partnership subject to income
tax as a corporation under the National Internal Revenue Code is likewise untenable. In
their discussion in their brief of this alleged error, stress is laid on their being co-owners
and not partners. Such an allegation was likewise made in the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This
pretense was correctly rejected by the Court of Tax Appeals." 14 Then came the
explanation why: "To begin with, the tax in question is one imposed upon "corporations",
which, strictly speaking, are distinct and different from "partnerships". When our Internal
Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance, section
24 of said Code exempts from the aforementioned tax "duly registered general
partnerships", which constitute precisely one of the most typical forms of partnerships in
this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporations. Again,
pursuant to said section 84(b), the term "corporation" includes, among others, "joint
accounts, (cuentas en participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" which are possessed of the aforementioned personality - have been
expressly excluded by law (sections 24 and 84[b]) from the connotation of the term
"corporation"."15 The opinion went on to summarize the matter aptly: "For purposes of
the tax on corporations, our National Internal Revenue Code, include these
partnerships with the exception only of duly registered general co-partnerships within
the purview of the term "corporation." It is, therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said Code is concerned, and are subject to
the income tax for corporations."16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals
decided the matter incorrectly. There is no warrant for the assertion that it failed to apply
the settled law to uncontroverted facts. Its decision cannot be successfully assailed.
Moreover, an observation made in Alhambra Cigar & Cigarette Manufacturing Co. v.
Commissioner of Internal Revenue,17 is well-worth recalling. Thus: "Nor as a matter of
principle is it advisable for this Court to set aside the conclusion reached by an agency
such as the Court of Tax Appeals which is, by the very nature of its functions, dedicated
exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless, as did not happen here, there has been
an abuse or improvident exercise of its authority."

WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners
"to pay the sums of P37,128.00 as income tax due from the partnership formed by
herein petitioners for the years 1951 to 1954 and P20,619.00 for the years 1955 and
1956 within thirty days from the date this decision becomes final, plus the corresponding
surcharge and interest in case of delinquency," is affirmed. With costs against
petitioners.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and
Angeles, JJ., concur.
G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA

EVANGELISTA, petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo
Umali and Solicitor Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca
Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive part of
which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the
income tax, real estate dealer's tax and the residence tax for the years 1945 to
1949, inclusive, in accordance with the respondent's assessment for the same in
the total amount of P6,878.34, which is hereby affirmed and the petition for
review filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which
amount together with their personal monies was used by them for the purpose of
buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with
an area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of
land with an aggregate area of 3,718.40 sq. m. including improvements thereon
for P130,000.00; this property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot
of 4,353 sq. m. including improvements thereon for P108,825.00. This property
has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq.
m. including improvements thereon for P237,234.34. This property has an
assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother
Simeon Evangelista to 'manage their properties with full power to lease; to collect
and receive rents; to issue receipts therefor; in default of such payment, to bring
suits against the defaulting tenants; to sign all letters, contracts, etc., for and in
their behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners
had the same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the
total amount collected as rents on their real properties was P9,599.00 while the
expenses amounted to P3,650.00 thereby leaving them a net rental income of
P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30,
out of which amount was deducted in the sum of P16,288.27 for expenses
thereby leaving them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the
which amount was deducted the sum of P4,837.65 as expenses, thereby leaving
them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949, computed, according to assessment
made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on

December 3, 1954, whereupon they instituted the present case in the Court of Tax
Appeals, with a prayer that "the decision of the respondent contained in his letter of
demand dated September 24, 1954" be reversed, and that they be absolved from the
payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision
for the respondent, and a petition for reconsideration and new trial having been

subsequently denied, the case is now before Us for review at the instance of the
petitioners.
The issue in this case whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms "corporation" and "partnership," as used in section
24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed,
collected, and paid annually upon the total net income received in the preceding
taxable year from all sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or organized but not including
duly registered general co-partnerships (compaias colectivas), a tax upon such
income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations or insurance companies, but does not include duly registered
general copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute
money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute
money and property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was
not property inherited by them pro indiviso. They created it purposely. What is
more they jointly borrowed a substantial portion thereof in order to establish said
common fund.
2. They invested the same, not merely not merely in one transaction, but in
a series of transactions. On February 2, 1943, they bought a lot for P100,000.00.
On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed
on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five

(5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number
of lots (24) acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of the property
acquired by the petitioners in February, 1943. In other words, one cannot but
perceive a character of habitually peculiar to business transactions engaged in
the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely Simeon Evangelista, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise
operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over
twelve (12) years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to leave
no room for doubt on the existence of said intent in petitioners herein. Only one or two
of the aforementioned circumstances were present in the cases cited by petitioners
herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality
independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",

said Code must allude, therefore, to organizations which are not necessarily
"partnerships", in the technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly registered general partnerships which
constitute precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly
indicates that a joint venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations. Again, pursuant to
said section 84(b), the term "corporation" includes, among other, joint accounts,
(cuentas en participation)" and "associations," none of which has a legal personality of
its own, independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, "duly registered general copartnerships"
which are possessed of the aforementioned personality have been expressly
excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation" It
may not be amiss to add that petitioners' allegation to the effect that their liability in
connection with the leasing of the lots above referred to, under the management of one
person even if true, on which we express no opinion tends to increase the
similarity between the nature of their venture and that corporations, and is, therefore, an
additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed
differently from "partnerships". By specific provisions of said laws, such "corporations"
include "associations, joint-stock companies and insurance companies." However, the
term "association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the
transaction of designed affairs, or the attainment of some object, which like a
corporation, continues notwithstanding that its members or participants change,
and the affairs of which, like corporate affairs, are conducted by a single
individual, a committee, a board, or some other group, acting in a representative
capacity. It is immaterial whether such organization is created by an agreement,
a declaration of trust, a statute, or otherwise. It includes a voluntary association,
a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a
'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney
in fact, a partnership association, and any other type of organization (by
whatever name known) which is not, within the meaning of the Code, a trust or
an estate, or a partnership. (7A Mertens Law of Federal Income Taxation, p. 788;
emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it
includes not only a partnership as known at common law but, as well, a

syndicate, group, pool, joint venture or other unincorporated organizations which

carries on any business financial operation, or venture, and which is not, within
the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of
Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal
Income Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes
these partnerships with the exception only of duly registered general copartnerships
within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned and are
subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No.
465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or
organized, whether domestic or resident foreign, engaged in or doing business in
the Philippines shall pay an annual residence tax of five pesos and an annual
additional tax which in no case, shall exceed one thousand pesos, in accordance
with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock
company, partnership, joint account (cuentas en participacion), association or
insurance company, no matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24
and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and
that the latter was approved on June 15, 1939, the day immediately after the approval of
said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes with substantially the same
meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the
properties above mentioned for a period of over twelve years, and that the yearly gross
rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453.
Thus, they are subject to the tax provided in section 193 (q) of our National Internal
Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s)
thereof:
'Real estate dealer' includes any person engaged in the business of buying,
selling, exchanging, leasing, or renting property or his own account as

principal and holding himself out as a full or part time dealer in real estate or as
an owner of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . . (emphasis
supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with
costs against the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix,
JJ., concur.

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common
fund with express purpose of engaging in real estate business for profit. The series of
transactions which they had undertaken attest to this. This appears in the following
portion of the decision:
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000. On April 3,
1944, they purchase 21 lots for P18,000. This was soon followed on April 23,
1944, by the acquisition of another real state for P108,825. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transactions undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioner
in February, 1943, In other words, we cannot but perceive a character
of habitually peculiar to business transactions engaged in for purposes of gain.
I wish however to make to make the following observation:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides:
(2) Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made
by the use of the property;
(3) The sharing of gross returns does not of itself establish partnership, whether
or not the person sharing them have a joint or common right or interest in any
property from which the returns are derived;

From the above it appears that the fact that those who agree to form a co-ownership
shared or do not share any profits made by the use of property held in common does
not convert their venture into a partnership. Or the sharing of the gross returns does not
of itself establish a partnership whether or not the persons sharing therein have a joint
or common right or interest in the property. This only means that, aside from the
circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a judicial
personality different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635- 636).
It is evident that an isolated transaction whereby two or more persons contribute funds
to buy certain real estate for profit in the absence of other circumstances showing a
contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but
who severally retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital, and no community of
interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p.
74.)
A joint venture purchase of land, by two, does not constitute a copartnership in
respect thereto; nor does not agreement to share the profits and loses on the
sale of land create a partnership; the parties are only tenants in common. (Clark
vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single
tract of reality, holding as tenants in common, and to divide the profits of
disposing of it, the brother and the other not being entitled to share in plaintiff's
commissions, no partnership existed as between the parties, whatever relation
may have been as to third parties. (Magee vs. Magee, 123 N. E. 6763, 233
Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form
the same; (b) generally a participating in both profits and losses; (c) and such a
community of interest, as far as third persons are concerned as enables each
party to make contract, manage the business, and dispose of the whole property.
(Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)
The common ownership of property does not itself create a partnership between
the owners, though they may use it for purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S. W. 363, 160 No. App. 14.)

This is impliedly recognized in the following portion of the decision: "Although, taken
singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances (referring to the series of
transactions) such as to leave no room for doubt on the existence of said intent in
petitioners herein."

G.R. No. L-46029 June 23, 1988

N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
GANCAYCO, J.:
The issue posed in this petition is the income tax liability of a foreign shipping
corporation which called on Philippine ports to load cargoes for foreign destination on
two occasions in 1963 and 1964, respectively, and which collected freight fees on these
transactions.

From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October
28, 1964, MV "Amstelkroon, " both of which are vessels of petitioner N.B. Reederij
"AMSTERDAM," called on Philippine ports to load cargoes for foreign destination. The
freight fees for these transactions were paid abroad in the amount of US $98,175.00 in
1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean
Lines acted as husbanding agent for a fee or commission on said vessels. No income
tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the freight
receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the
corresponding income tax returns for and in behalf of the former under Section 15 of the
National Internal Revenue Code. Applying the then prevailing market conversion rate of
P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij "Amsterdam" for
1963 and 1964 amounted to P382,882.50 and P535,052.00, respectively. On June 30,
1967, respondent Commissioner assessed said petitioner in the amounts of
P193,973.20 and P262,904.94 as deficiency income tax for 1963 and 1964,
respectively, as "a non-resident foreign corporation not engaged in trade or business in
the Philippines under Section 24 (b) (1) of the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade or
business in the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed
an income tax return of the aforementioned vessels computed at the exchange rate of
P2.00 to USs1.00 1 and paid the tax thereon in the amount of P1,835.52 and P9,448.94,
respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the
National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. On the
same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner
N.V. Reederij "AMSTERDAM" filed a written protest against the abovementioned
assessment made by the respondent Commissioner which protest was denied by said
respondent in a letter dated March 3, 1969: On March 31, 1969, petitioners filed a
petition for review with the respondent Court of Tax Appeals praying for the cancellation
of the subject assessment. After due hearing, the respondent court, on December 1,
1976, rendered a decision modifying said assessments by eliminating the 50% fraud
compromise penalties imposed upon petitioners. Petitioners filed a motion for
reconsideration of said decision but this was denied by the respondent court.
Hence, this petition for review where petitioners raised the following issues:
A. WHETHER N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY
OFFICE OR PLACE OF BUSINESS IN THE PHILIPPINES, WHOSE
VESSELS CALLED ON THE PHILIPPINE PORTS FOR THE PURPOSE
OF LOADING CARGOES ONLY TWICE-ONE IN 1963 AND ANOTHER IN
1964 SHOULD BE TAXED AS A FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER
SECTION 24(b) (1) OF THE TAX CODE OR SHOULD BE TAXED AS A
FOREIGN CORPORATION ENGAGED IN TRADE OR BUSINESS IN

THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION TO

SECTION 37 (e) OF THE SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V.
REEDERIJ "AMSTERDAM" SHOULD BE CONVERTED INTO PHILI PINE
PESOS AT THE OFFICIAL RATE OF P2.00 TO US $1.00, OR AT P3.90
TO US $1.00.
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij
"AMSTERDAM" is a non-resident foreign corporation because it allegedly disregarded
Section 163 of Revenue Regulations No. 2 (providing for the determination of the net
income of foreign corporations doing business in the Philippines) and in holding that the
foreign exchange ang e receipts of said petitioner for purposes of computing its income
tax should be converted into Philippine pesos at the rate of P3.90 to US $1.00 instead
of P2.00 to US $1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or
licensed to do business in the Philippines. It does not have a branch office in the
Philippines and it made only two calls in Philippine ports, one in 1963 and the other in
1964. In order that a foreign corporation may be considered engaged in trade or
business, its business transactions must be continuous. A casual business activity in the
Philippines by a foreign corporation, as in the present case, does not amount to
engaging in trade or business in the Philippines for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent court
A corporation is itself a taxpaying entity and speaking generally, for
purposes of income tax, corporations are classified into (a) domestic
corporations and (b) foreign corporations. (Sec. 24(a) and (b), Tax Code.)
Foreign corporations are further classified into (1) resident foreign
corporations and (2) non-resident foreign corporations. (Sec. 24(b) (1) and
(2). Tax Code.) A resident foreign corporation is a foreign corporation
engaged in trade or business within the Philippines or having an office or
place of business therein (Sec. 84(g), Tax Code) while a non- resident
foreign corporation is a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of
business therein. (Sec. 84(h), Tax Code.)
A domestic corporation is taxed on its income from sources within and
without the Philippines, but a foreign corporation is taxed only on its
income from sources within the Philippines. (Sec. 24(a), Tax Code; Sec.
16, Rev. Regs. No. 2.) However, while a foreign corporation doing
business in the Philippines is taxable on income solely from sources within
the Philippines, it is permitted to deductions from gross income but only to

the extent connected with income earned in the Philippines. (Secs. 24(b)
(2) and 37, Tax Code.) On the other hand, foreign corporations not doing
business in the Philippines are taxable on income from all sources within
the Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities Compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income and
capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24
(b) (1), Tax Code.)
At the time material to this case, certain corporations were given special
treatment, namely, building and loan associations operating as such in
accordance with Section 171 of the Corporation Law, educational
institutions, domestic life insurance companies and for" foreign life
insurance companies doing business in the Philippines. (Sec. 24(a) & (c),
Tax Code.) It bears emphasis, however, that foreign life insurance
companies which were not doing business in the Philippines were taxable
as other foreign corporations not authorized to do business in the
Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a
non-resident foreign corporation, organized and existing under the laws of
The Netherlands with principal office in Amsterdam and not licensed to do
business in the Philippines. (pp. 8-81, CTA records.) As a non-resident
foreign corporation, it is thus a foreign corporation, not engaged in trade or
business within the Philippines and not having any office or place of
business therein. (Sec. 84(h), Tax Code.) As stated above, it is therefore
taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital gains, and the
tax is equal to thirty per centum of such amount, under Section 24(b) (1) of
the Tax Code. The accent is on the words of--`such amount." Accordingly,
petitioner N. V. Reederij "Amsterdam" being a non-resident foreign
corporation, its taxable income for purposes of our income tax law
consists of its gross income from all sources within the Philippines.
The law seems clear and specific. It thus calls for its application as worded
as it leaves no leeway for interpretation. The applicable provision imposes
a tax on foreign corporations falling under the classification of non-resident
corporations without any exceptions or conditions, unlike in the case of
foreign corporations engaged in trade or business within the Philippines
which contained (at the time material to this case) an exception with
respect to foreign life insurance companies. Adherence to the provision of
the law, which specifies and determines the taxable income of, and the
rate of income tax applicable to, non-resident foreign corporations, without
mentioning any exceptions, would therefore lead to the conclusion that

petitioner N.V. Reederij "Amsterdam" is subject to income tax on gross

income from all sources within the Philippines.
A foreign corporation engaged in trade or business within the Philippines, or which has
an office or place of business therein, is taxed on its total net income received from all
sources within the Philippines at the rate of 25% upon the amount but which taxable net
income does not exceed P100,000.00, and 35% upon the amount but which taxable net
income exceeds P100,000.00. 2 On the other hand, a foreign corporation not engaged
in trade or business within the Philippmes and which does not have any office or place
of business therein is taxed on income received from all sources within the Philippines
at the rate of 35% of the gross income. 3
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and
implementing Section 163 of the Income Tax Regulations but these provisions refer to a
foreign corporation engaged in trade or business in the Philippines and not to a foreign
corporation not engaged in trade or business in the Philippines like petitioner-shipowner herein. Thus, the respondent court aptly ruled:
It must be stressed, however, that Section 37 (e) of the Code, as
implemented by Section 163 of the Regulations, provides the rule of the
determination of the net income taxable in the Philippines of a foreign
steamship company doing business in the Philippines. To assure that nonresident foreign steamship companies not engaged in business in the
Philippines and not having any office or place of business herein are not
covered therein, the regulations explicitly and clearly provide that "the net
income of a foreign steamship co company doing business in or from this
country is ascertained," under the formula contained therein, "for the
purpose of the income tax.! The reason is easily discernible. As stated
above, the taxable income of non-resident foreign corporations consists of
its gross income from all sources within the Philippines. Accordingly, a
foreign steamgship corporation derives income partly from sources within
and partly from sources without the Philippines if it is carrying on a
business of transportation service between points in the Philippines and
points outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.)
Only then does Section 37 (e) of the Tax Code, are implemented by
Section 163 of the Regulations, apply in computing net income subject to
tax. There is no basis therefore for an assertion "that Section 37 (e) does
not distinguish between a foreign corporation engaged in business in the
Philippines and a foreign corporation not engaged in business in the
Philippines."" (p. 84, CTA records.) (Decision, pp. 11-12.)
The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable
to the income of petitioners for income tax purposes instead of P3.90 to s1.00 is
likewise untenable. The transactions involved in this case are for the taxable years 1963
and 1964. Under Rep. Act No. 2609, the monetary board was authorized to fix the legal

conversion rate for foreign exchange. The free market conversion rate during those
years was P3.90 to US $1.00.
This conversion rate issue was definitely settled by this Court in the case
of Commissioner of Internal Revenue vs. Royal Interocean Lines and the Court of Tax
Appeals 4 to wit:
It should be noted that on July 1 6, 1959, the policy incorporated in
Circular No. 20 and implemented in subsequent circulars was relaxed with
the enactment of Republic Act No. 2609 which directed the monetary
authorities to take steps for the adoption of a four-year program of gradual
decontrol, during which the Monetary Board, with the approval of the
President, could and did fix the conversion rate of the Philippine peso to
the US dollar at a ratio other than that prescribed in Section 48 of Republic
Act 265. During the period involved in the case at bar, the free market
conversion rate ranged from P3.47 to P3.65 to a US dollar at which rate
the freight fees in question were computed in the contested assessment.
Inasmuch said frees were revenues derived from foreign exchange
transactions, it follows necessarily that the petitioner was fully justified in
computing the taxpayer's receipts at Id free market rates.
xxx xxx xxx
The case of the United States Lines, on which the appealed decision of
the Court of Tax Appeals is anchored, refers to transactions that took
place before the approval of Republic Act 2609 on July 16, 1959 when the
only legal rate of exchange obtaining in the Philippines was P2 to US $1,
and all foreign exchange had to be surrendered to the Central Bank
subject to its disposition pursuant to its own rules and regulations. Upon
the other hand, the present case refers to transactions that took place
during the effectivity of Republic Act 2609 when there was, apart from the
parity rate, a legal free market conversion rate for foreign exchange
transactions, which rate had been fixed in open trading, such as those
involved in the case at bar.
Indeed, in the course of the investigation conducted by the Commissioner on the
accounting records of petitioner Royal Interocean Lines, it was verified that when said
petitioner paid its agency fees for services rendered as husbanding agent of the said
vessels, it used the conversion rate of P3.90 to US $1.00. 5 It is now estopped from
claiming otherwise in this case. WHEREFORE, the petition is DENIED with costs
against petitioners. This decision is immediately executory and no extension of time to
file motion for reconsideration shall be entertained.
SO ORDERED.

G.R. No. L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA,
MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R.
Rosete, and Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617,
similarly entitled as above, holding that petitioners have constituted an unregistered
partnership and are, therefore, subject to the payment of the deficiency corporate
income taxes assessed against them by respondent Commissioner of Internal Revenue
for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1%
monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2)
of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and
the costs of the suit, 1 as well as the resolution of said court denying petitioners' motion
for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving
spouse, Lorenzo T. Oa and her five children. In 1948, Civil Case No.
4519 was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was
appointed administrator of the estate of said deceased (Exhibit 3, pp. 3441, BIR rec.). On April 14, 1949, the administrator submitted the project of
partition, which was approved by the Court on May 16, 1949 (See Exhibit
K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oa, were still minors when the project of partition was
approved, Lorenzo T. Oa, their father and administrator of the estate,
filed a petition in Civil Case No. 9637 of the Court of First Instance of
Manila for appointment as guardian of said minors. On November 14,
1949, the Court appointed him guardian of the persons and property of the
aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that
the heirs have undivided one-half (1/2) interest in ten parcels of land with
a total assessed value of P87,860.00, six houses with a total assessed
value of P17,590.00 and an undetermined amount to be collected from the
War Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among
them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two
were acquired after the death of the decedent with money borrowed from
the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24;
Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with
Lorenzo T. Oa, the administrator thereof, in the obligation of P94,973.00,
consisting of loans contracted by the latter with the approval of the Court
(see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16,
1949, no attempt was made to divide the properties therein listed. Instead,
the properties remained under the management of Lorenzo T. Oa who
used said properties in business by leasing or selling them and investing
the income derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 as can be gleaned from the following year-end
balances:

Year

Investment

Land

Building

Account

Account

Account

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as
profits from installment sales of subdivided lots, profits from sales of
stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR
rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of
account kept by Lorenzo T. Oa where the corresponding shares of the
petitioners in the net income for the year are also known. Every year,
petitioners returned for income tax purposes their shares in the net income
derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did
not actually receive their shares in the yearly income. (t.s.n., pp. 25-26,
40, 98, 100). The income was always left in the hands of Lorenzo T. Oa
who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal
Revenue) decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and P13,899.00 as

corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested
against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86,
BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated
in line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously
referring to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said years. (See
Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE

PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED
AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM
(sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES FOR
1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS
ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN
COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS
AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF
THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the
facts found by the Court of Tax Appeals, should petitioners be considered as co-owners
of the properties inherited by them from the deceased Julia Buales and the profits
derived from transactions involving the same, or, must they be deemed to have formed
an unregistered partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered partnership,
should this not be only in the sense that they invested as a common fund the profits
earned by the properties owned by them in common and the loans granted to them
upon the security of the said properties, with the result that as far as their respective
shares in the inheritance are concerned, the total income thereof should be considered
as that of co-owners and not of the unregistered partnership? And (3) assuming again
that they are taxable as an unregistered partnership, should not the various amounts
already paid by them for the same years 1955 and 1956 as individual income taxes on
their respective shares of the profits accruing from the properties they owned in

common be deducted from the deficiency corporate taxes, herein involved, assessed
against such unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project of
partition of her estate was judicially approved as early as May 16, 1949, and
presumably petitioners have been holding their respective shares in their inheritance
since those dates admittedly under the administration or management of the head of the
family, the widower and father Lorenzo T. Oa, the assessment in question refers to the
later years 1955 and 1956. We believe this point to be important because, apparently, at
the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only
from 1955 that he considered them as having formed an unregistered partnership. At
least, there is nothing in the record indicating that an earlier assessment had already
been made. Such being the case, and We see no reason how it could be otherwise, it is
easily understandable why petitioners' position that they are co-owners and not
unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased
among themselves pursuant to the project of partition approved in 1949, "the properties
remained under the management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the income derived therefrom and the
proceed from the sales thereof in real properties and securities," as a result of which
said properties and investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment
account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
And all these became possible because, admittedly, petitioners never actually received
any share of the income or profits from Lorenzo T. Oa and instead, they allowed him to
continue using said shares as part of the common fund for their ventures, even as they
paid the corresponding income taxes on the basis of their respective shares of the
profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during
the material years herein involved, some of the said properties were sold at
considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oa,
in the purchase and sale of corporate securities. It is likewise admitted that all the profits
from these ventures were divided among petitioners proportionately in accordance with
their respective shares in the inheritance. In these circumstances, it is Our considered
view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be
used by Lorenzo T. Oa as a common fund in undertaking several transactions or in
business, with the intention of deriving profit to be shared by them proportionally, such
act was tantamonut to actually contributing such incomes to a common fund and, in

effect, they thereby formed an unregistered partnership within the purview of the abovementioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can
be considered as co-owners rather than unregistered co-partners within the
contemplation of our corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof does belong commonly
to all the heirs, obviously, without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners continues until the
inheritance is actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they might decide
to continue holding said shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business on that basis. Withal, if
this were to be allowed, it would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the
reasons for holding the appellants therein to be unregistered co-partners for tax
purposes, that their common fund "was not something they found already in existence"
and that "it was not a property inherited by them pro indiviso," but it is certainly far
fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances
where an inheritance is not actually divided, there can be no unregistered copartnership. As already indicated, for tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered partnership the moment the
said common properties and/or the incomes derived therefrom are used as a common
fund with intent to produce profits for the heirs in proportion to their respective shares in
the inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition,
the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used
with the intent of making profit thereby in proportion to his share, there can be no doubt
that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived," and, for that matter, on any other provision
of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of unregistered

partnerships which are considered as "corporations" under Sections 24 and 84(b) of the
National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations",
which, strictly speaking, are distinct and different from "partnerships".
When our Internal Revenue Code includes "partnerships" among the
entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of
said Code, "the term corporation includes partnerships, no matter how
created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in
confirmity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section 84(b),the term "corporation"
includes, among others, "joint accounts,(cuentas en participacion)" and
"associations", none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of
the partnerships therein referred to. In fact, as above stated, "duly
registered general co-partnerships" which are possessed of the
aforementioned personality have been expressly excluded by law
(sections 24 and 84[b]) from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term
"partnership" it includes not only a partnership as known in
common law but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization which carries
on any business, financial operation, or venture, and which
is not, within the meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal Income
Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group,
pool, joint venture or other unincorporated organization,
through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)

For purposes of the tax on corporations, our National Internal Revenue

Code includes these partnerships with the exception only of duly
registered general copartnerships within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of
Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the
Court ruled against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the
purposes of the corporate taxes in question, of their inherited properties from those
acquired by them subsequently, We consider as justified the following ratiocination of
the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business
engaged in apart from the properties inherited by petitioners. In other
words, the taxable income of the partnership should be limited to the
income derived from the acquisition and sale of real properties and
corporate securities and should not include the income derived from the
inherited properties. It is admitted that the inherited properties and the
income derived therefrom were used in the business of buying and selling
other real properties and corporate securities. Accordingly, the partnership
income must include not only the income derived from the purchase and
sale of other properties but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may
be considered as individual income of the respective heirs only so long as the
inheritance or estate is not distributed or, at least, partitioned, but the moment their
respective known shares are used as part of the common assets of the heirs to be used
in making profits, it is but proper that the income of such shares should be considered
as the part of the taxable income of an unregistered partnership. This, We hold, is the
clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by
the Tax Court in the aforementioned resolution denying petitioners' motion for
reconsideration of the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable
Court that the herein petitioners have formed an
unregistered partnership and, therefore, have to be taxed as
such, it might be recalled that the petitioners in their

individual income tax returns reported their shares of the

profits of the unregistered partnership. We think it only fair
and equitable that the various amounts paid by the individual
petitioners as income tax on their respective shares of the
unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against
the unregistered partnership. (page 7, Memorandum for the
Petitioner in Support of Their Motion for Reconsideration,
Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of
the partnership must be reduced by the amounts of income tax paid by
each petitioner on his share of partnership profits. This is not correct;
rather, it should be the other way around. The partnership profits
distributable to the partners (petitioners herein) should be reduced by the
amounts of income tax assessed against the partnership. Consequently,
each of the petitioners in his individual capacity overpaid his income tax
for the years in question, but the income tax due from the partnership has
been correctly assessed. Since the individual income tax liabilities of
petitioners are not in issue in this proceeding, it is not proper for the Court
to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they
might have paid as individual income tax cannot be credited as part payment of the
taxes herein in question. It is argued that to sanction the view of the Tax Court is to
oblige petitioners to pay double income tax on the same income, and, worse,
considering the time that has lapsed since they paid their individual income taxes, they
may already be barred by prescription from recovering their overpayments in a separate
action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the
failure to pay the corporate taxes in question was not deliberate. Of course, such
taxpayer has the right to be reimbursed what he has erroneously paid, but the law is
very clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the
case of herein petitioners has already lapsed, it would not seem right to virtually
disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate
taxes legally due from them. In principle, it is but proper not to allow any relaxation of
the tax laws in favor of persons who are not exactly above suspicion in their conduct
vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals
appealed from is affirm with costs against petitioners.