CIR vs.

MARUBENI

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and contractors taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the
Manila branchs books of accounts for fiscal year ending March 1985, and found that respondent
had undeclared income from contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes.
CIR claims that the income respondent derived were income from Philippine sources, hence subject
to internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review with CTA: the first,
questioned the deficiency income, branch profit remittance and contractors tax assessments and
second questioned the deficiency commercial brokers assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty
return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate and donors taxes under Title 3
and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986
and stated those who already availed amnesty under EO 41 should file an amended return to avail of
the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency
taxes. CA affirmed on appeal.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws
of Japan. It is engaged in general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the Philippines and maintains a branch
office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of

authority to examine the books of accounts of the Manila branch office of respondent corporation
for the fiscal year ending March 1985. In the course of the examination, petitioner found
respondent to have undeclared income from two (2) contracts in the Philippines, both of which were
completed in 1984. One of the contracts was with the National Development Company (NDC) in
connection with the construction and installation of a wharf/port complex at the Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the
Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage
complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency

income, branch profit remittance, contractors and commercial brokers taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.
Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the
gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and installation of facilities in the
Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject
to internal revenue taxes.

Issue: Whether or not respondent is liable to pay the income, branch profit remittance, and
contractors taxes assessed by petitioner.

Held:

A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:
Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors tax of four
percent of the gross receipts is hereby imposed on proprietors or operators of the following business
establishments and/or persons engaged in the business of selling or rendering the following
services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No.
4566;

(q) Other independent contractors. The term independent contractors includes persons (juridical
or natural) not enumerated above (but not including individuals subject to the occupation tax under
the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their employees. It does not include regional or
area headquarters established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines and which
act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or
their employees. The word contractor refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details.

A contractors tax is a tax imposed upon the privilege of engaging in business. It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products; and is directly collectible from the person exercising the privilege. Being an excise tax, it
can be levied by the taxing authority only when the acts, privileges or business are done or
performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an
occupation or privilege outside the taxing district.

In the case at bar, it is undisputed that respondent was an independent contractor under the terms
of the two subject contracts.

Clearly, the service of design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordinationof the
two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the
Philippines. While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed and
engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for
the NDC project and the ammonia storage tanks and refrigeration units were made and completed
in Japan. They were already finished products when shipped to the Philippines. The other
construction supplies listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not finished products when shipped to
the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors
in Japan. All services for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to
contractors tax.

CIR vs. British Overseas Airways Corporation (BOAC)

Facts: British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation
engaged in international airline business and is a member of the Interline Air Transport
Association, and thus, it operates air transportation services and sells transportation tickets over
the routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did
not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent
in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for
selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue
assessed deficiency income taxes against BOAC.

Issue: Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute income
of BOAC from Philippine sources, and accordingly taxable.

Held: The source of an income is the property, activity, or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the
activity that produced the income. The tickets exchanged hands here and payment for fares were
also made here in the Philippine currency.

The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of
supporting the government. PD 68, in relation to PD 1355, ensures that international airlines are
taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If
it had been intended as an excise tax or percentage tax, it would have been placed under Title V of
the Tax Code covering taxes on business.

CIR vs. BOAC

SUMMARY: The CIR made an assessment of BOACs deficiency income taxes. The period covered by
the disputed assessments included the time when BOAC had no landing rights in the Philippines but
still maintained a general sales agent. BOAC protested the computed amounts. CIR then produced a
new assessment which BOAC paid under protest. BOAC then demanded a refund but was denied.
The Tax Court subsequently reversed the CIR decision on the ground that the sales of BOAC passage
tickets in the Philippines do not constitute income from the Philippines, and thus, is not subject to
Philippine income tax. This Tax Court decision is being assailed in the case at bar. The SC set aside
this Tax Court decision and concluded that since the source of income is made in the Philippines, it
is covered by our tax laws.

DOCTRINE: The tax imposed upon BOAC is an excise tax, and such can be levied by the State only
when the acts, privileges or businesses are done or performed within the jurisdiction of the
Philippines. The test of taxability is the source; and the source of an income is that activity which
produced the income.

FACTS:
1. BOAC 100% British Government-owned corporation; international airline business that
operates air transportation service & sells transportation tickets
2. CIR assessed BOAC
a. Included in the assessment periods when BOAC had no landing rights in the Philippines
because a Certificate of Public Convenience has not been granted by the Civil Aeronautics Board
3. But during that period when BOAC had no landing rights, they maintained a general sales
agent in the Philippines
a. BOAC was still able to sell tickets in the Philippines
4. 2 cases arise from the assessment
a. First case CIR protested the amount a new assessment amount was given BOAC paid
the new assessment under protest BOAC asked for refund CIR denied the petition for refund
b. Second case BOAC was assessed deficiency income taxes, interests, and penalty BOAC
requested that the assessment be countermanded & set aside CIR denied the request BOAC
filed the second case before the Tax court requesting to be absolved from liability
5. Tax Court decision
a. Reversed the CIR
b. Held that the sale of tickets in the Philippines is not subject to Philippine income tax because
the source of income is not the Philippines since BOAC had no service of carriage of passengers or
freight was performed in the country
6. Petition for Review on certiorari of the decision of the tax court

ISSUES: 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.

RATIO: Yes, it is covered by the Philippine tax laws since the source of income is the Philippines.

RULING:
1. Due to the continuity of commercial dealings on BOAC in the Philippines, it is deemed a
resident foreign corporation. This is pursuant to Section 20 of the 1977 Tax Code.
2. The regular sale of tickets is the main income-generating activity of BOAC. This activity is
done in the Philippines. Hence, BOACs income was derived from the Philippines. Therefore, it is
taxable.
a. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. Inconsideration of such protection, the flow of
wealth should share the burden of supporting the government.
3. The absence of flight operations in the Philippines is not an element of BOACs income tax.

DISPOSITIVE: Wherefore, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the 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 of P858,307.79 is hereby denied. Without
costs.

DISSENTING OPINION: J. Feliciano

The statute presently applicable to international carriers is Section 24 (b)(2) of the Tax Code,
as amended by PD 69 & PD 1355
o international carriers shall pay a tax of 2 % of their gross Philippine billings
Under this statute, the basis of billings shall be the passengers & cargo originating from the
Philippines, regardless of their embarkation & debarkation place.
2 % is a tax on gross receipts and not an income tax
The Tax Court decision shall be affirmed

CONCURRING OPINION: CJ Teehankee

Agrees that the assessments of deficiency income taxes made by the CIR shall be upheld
 J. Felicianos dissent regarding the proper characterization of the taxable income is already
moot by PD 69, the rate of income tax on foreign corporations (BOAC included) has been reduced
to 2 % as well. There is no longer substantial difference.

Commissioner v. CTA and Smith Kline & French Overseas 127 SCRA 9

Facts:
This case is about the refund of a 1971 income tax amounting to P324+k. Smith Kline and French
Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is licensed to do
business in the Philippines. It is engaged in the importation, manufacture and sale of
pharmaceuticals, drugs and chemicals.

In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4+M and paid P511+k as
tax due. Among the deductions claimed from gross income was P501+k as its share of the head
office overhead expenses. However, in its amended return filed on March 1, 1973, there was an
overpayment of P324+k arising from underdeduction of home office overhead. It made a formal
claim for the refund of the alleged overpayment.

In October, 1972, Smith Kline received from its international independent auditors an
authenticated certification to the effect that the Philippine share in the unallocated overhead
expenses of the main office for the year ended December 31, 1971 was actually P1.4+M.On April 2,
1974, without awaiting the action of the Commissioner of Internal Revenue on its claim, Smith
Kline filed a petition for review with the CTA. The CTA ordered the CIR to refund the overpayment or
grant a tax credit to Smith Kline. The Commissioner appealed to the SC.

HELD: The governing law is found in section 37 of the old NIRC which reads:
Xxx (b) Net income from sources in the Philippines. From the items of gross income specified in
subsection (a) of this section there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other
deductions which cannot definitely be allocated to some item or class of gross income. The
remainder, if any, shall be included in full as net income from sources within the Philippines.

Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the
deductions to be made to determine the net income from Philippine sources: SEC. 160.
Apportionment of deductions. From the items specified in section 37(a), as being derived
specifically from sources within the Philippines there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the Philippines. The ratable
part is based upon the ratio of gross income from sources within the Philippines to the total gross
income.

"Example: A non-resident alien individual whose taxable year is the calendar year, derived gross
income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the Philippines 11,000

Total P36,000
========
that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of
the gross income was from sources without the Philippines, determined under section 37(c).
The expenses of the taxpayer for the year amounted to P78k.. Of these expenses the amount of P8k
is properly allocated to income from sources within the Philippines and the amount of P40k is
properly allocated to income from sources without the Philippines.

The remainder of the expense, P30k cannot be definitely allocated to any class of income. A ratable
part thereof, based upon the relation of gross income from sources within the Philippines to the total
gross income, shall be deducted in computing net income from sources within the Philippines. Thus,
there are deducted from the P36k of gross income from sources within the Philippines expenses
amounting to P14k [representing P8k properly apportioned to the income from sources within the
Philippines and P6k a ratable part (1/5) of the expenses which could not be allocated to any item or
class of gross income]. The remainder, P22k, is the net income from sources within the Philippines.
Thus, it is manifest that where an expense is clearly related to the production of Philippine-derived
income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in
the Philippines), that expense can be deducted from the gross income acquired in the Philippines
without resorting to apportionment.

The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which directly benefit its branches all over the
world, including the Philippines, fall under a different category however. These are items which
cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971,
the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and
section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch's gross income to the total gross income,
worldwide, of the multinational corporation.

The weight of evidence bolsters Smith Klines position that the amount of P1.4+M represents the
correct ratable share, the same having been computed pursuant to section 37(b) and section 160.
Therefore, it is entitled to a refund.

TOPIC: Cession of the premiums taxable as income from sources within the Philippines.
4) PHIL. GUARANTY CO. VS. CIR

FACTS: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the Philippines.
Petitioner thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance
it has originally underwritten in the Philippines, in consideration for the assumption by the latter of
liability on an equivalent portion of the risks insured.

Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by
the foreign reinsurers outside the Philippines.
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it
file its income tax returns. It did not withhold or pay tax on them. Consequently, the CIR assessed
against PETITIONER .withholding tax on the ceded reinsurance premiums.
Petitioner protested the assessment on the ground that reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines are not subject to withholding tax.
CTA: IN FAVOR OF RESPONDENT

ISSUE: Whether reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines are subject to tax

HELD: Yes. The reinsurance premiums are subject to tax.

The reinsurance contracts show that the transactions or activities that constituted the undertaking
to reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the
Philippines were performed in the Philippines.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within
the Philippine .Sources means the activity, property, or service giving rise to the income. The
original insurance undertakings took place in the Philippines. It is not required that the foreign
corporation be engaged in business in the Philippines. What is controlling is no the place of
business, but the place of activity that created the income. Thus, the income is subject to income tax.
NOTE: The foreign insurers' place of business should not be confused with their place of activity.
Business should not be continuity and progression of transactions while activity may consist of
only a single transaction. An activity may occur outside the place of business.

ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS vs CIR

FACTS:
1. In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance
contracts with 32 British insurance companies not engaged in trade or business in the Philippines,
whereby the former agreed to cede to them a portion of the premiums on insurances on fire, marine
and other risks it has underwritten in the Philippines.
2. The reinsurance contracts were prepared and signed by the foreign reinsurers in England
and sent to Manila where Commonwealth Insurance Co. signed them.
3. Alexander Howden & Co., Ltd., also a British corporation, represented the British insurance
companies.
4. Pursuant to the contracts, Commonwealth Insurance Co remitted P798,297.47 to Alexander
Howden & Co., Ltd., as reinsurance premiums.
5. In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed an income tax
return declaring the sum of P798,297.47, with accrued interest in the amount of P4,985.77, as
Alexander Howden & Co., Ltd.'s gross income for calendar year 1951. It also paid the BIR P66,112.00
income tax.
6. On May 12, 1954, Alexander Howden & Co., Ltd. filed with the BIR a claim for refund of the
P66,112.00, later reduced to P65,115.00, because it agreed to the payment of P977.00 as income tax
on the P4,985.77 accrued interest.
7. A ruling of the CIR was invoked, stating that it exempted from withholding tax reinsurance
premiums received from domestic insurance companies by foreign insurance companies not
authorized to do business in the Philippines.
8. Subsequently, petitioner. instituted an action in the CFI of Manila for the recovery of the
amount claimed. Tax Court denied the claim.

ISSUE#1: Are portions of premiums earned from insurances locally underwritten by a domestic
corporation, ceded to and received by non-resident foreign reinsurance companies, thru a non-
resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers
abroad but signed by the domestic corporation in the Philippines, subject to income tax or not?

HELD: YES. Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign
corporation's income from sources within the Philippines.

RATIO:
Appellants contends that the reinsurance premiums came from sources outside the
Philippines, for these reasons: (1) The contracts of reinsurance, out of which the reinsurance
premiums were earned, were prepared and signed abroad (2) The reinsurers, not being engaged in
business in the Philippines, received the reinsurance premiums as income from their business
conducted in England and, as such, taxable in England; and, (3) Section 37 of the Tax Code,
enumerating what are income from sources within the Philippines, does not include reinsurance
premiums.
The source of an income is the property, activity or service that produced the income The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, 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.
o In the first place, the reinsured, the liabilities insured and the risks originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were
based, were all situated in the Philippines.
o Secondly, contrary to appellants' view, the reinsurance contracts were perfected in the
Philippines, for Commonwealth Insurance Co. signed them last in Manila.
o Thirdly, the parties to the reinsurance contracts in question evidently intended Philippine
law to govern. Article 11 thereof provided for arbitration in Manila, and the contracts provided for
the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes.
Section 24 of the Tax Code does not require a foreign corporation to be engaged in business
in the Philippines in order for its income from sources within the Philippines to be taxable. It
subjects foreign corporations not doing business in the Philippines to tax for income from sources
within the Philippines. If by source of income is meant the business of the taxpayer, foreign
corporations not engaged in business in the Philippines would be exempt from taxation on their
income from sources within the Philippines.
"Income" refers to the flow of wealth. Such flow, proceeded from the Philippines. Such income
enjoyed the protection of the Philippine Government. As wealth flowing from within the taxing
jurisdiction of the Philippines and in consideration for protection accorded it by the Philippines, said
income should properly share the burden of maintaining the government.

Appellants further contend that reinsurance premiums not being among those mentioned in
Section 37 of the Tax Code as income from sources within the Philippines, the same should not be
treated as such. Section 37, however, is not an all-inclusive enumeration. It states that "the following
items of gross income shall be treated as gross income from sources within the Philippines." It does
not state or imply that an income not listed therein is necessarily from sources outside the
Philippines.
As to appellants' contention that reinsurance premiums constitute "gross receipts" instead of
"gross income", not subject to income tax, suffice it to say that, "gross receipts" of amounts that do not
constitute return of capital, such as reinsurance premiums, are part of the gross income of a
taxpayer. At any rate, the tax actually collected in this case was computed not on the basis of gross
premium receipts but on the net premium income, that is, after deducting general expenses,
payment of policies and taxes.
ISSUE#2: whether or not reinsurance premiums are subject to withholding tax under Section 54 in
relation to Section 53 of the Tax Code.
HELD: Yes
RATIO:
Subsection (b) of Section 53 subjects to withholding tax the following: interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income of any non-resident alien individual
not engaged in trade or business within the Philippines and not having any office or place of
business therein. Section 54, by reference, applies this provision to foreign corporations not
engaged in trade or business in the Philippines.
Appellants maintain that reinsurance premiums are not "premiums" at all and that they are
not within the scope of "other fixed or determinable annual or periodical gains, profits, and income";
that, therefore, they are not items of income subject to withholding tax.
SC disagrees with the contention. Since Section 53 subjects to withholding tax various
specified income, among them, "premiums", the generic connotation of each and every word or
phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word
"premiums", which is neither qualified nor defined by the law itself, should mean income and should
include all premiums constituting income, whether they be insurance or reinsurance premiums.
Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still
they may be classified as determinable and periodical income under the same provision of law.
Section 199 of the Income Tax Regulations defines fixed, determinable, annual and periodical
income:
 Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand,
it is determinable whenever there is a basis of calculation by which the amount to be paid may be
ascertained.The income need not be paid annually if it is paid periodically. That the length of time
during which the payments are to be made may be increased or diminished in accordance with
someone's will or with the happening of an event does not make the payments any the less
determinable or periodical. ...
Reinsurance premiums, therefore, are determinable and periodical income: determinable,
because they can be calculated accurately on the basis of the reinsurance contracts; periodical,
inasmuch as they were earned and remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of the CIR cited rulings attempting to
show that the prevailing administrative interpretation of Sections 53 and 54 of the Tax Code
exempted from withholding tax reinsurance premiums ceded to non-resident foreign insurance
companies. It is asserted that since Sections 53 and 54 were "substantially re-enacted" by Republic
Acts 1065 , 1291, 1505, and 2343, when the said administrative rulings prevailed, the rulings
should be given the force of law under the principle of legislative approval by re-enactment.

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC., ET AL., v. HON. COURT OF TAX
APPEALS, AND THE COMMISSIONER OF INTERNAL REVENUE
CA-G.R. SP No. 31283 25 April 1995

Doctrine:

The test of taxability is the source, and the source of an income is that activity which produced the
income.

Facts:

Petitioner Philippine American Life Insurance Co., Inc. (PHILAMLIFE), a domestic corporation
entered into a Management Services Agreement with American International Reinsurance Co., Inc.
(AIRCO), a non-resident foreign corporation with principal place of business in Pembroke, Bermuda
whereby, effective January 1, 1972, for a fee of not exceeding $250,000.00 per annum, AIRCO shall
perform for PHILAMLIFE various management services.

On September 30, 1978, AIRCO merged with petitioner American International Group, Inc. (AIGI)
with the latter as the surviving corporation and successor-in-interest in AIRCOs Management
Services Agreement with PHILAMLIFE.

On November 18, 1980, respondent Commission of Internal Revenue (CIR) issued in favour of
PHILAMLIFE Tax Credit Memo in the amount of Php643,125.00 representing erroneous payment of
withholding tax at source on remittances to AIGI for services rendered abroad in 1979.

On the basis of the said issuance of tax credit, PHILAMLIFE, through a letter dated March 21, 1981,
filed with CIR a claim for refund of the second erroneous tax payment of Php643,125.00 which was
made on December 16, 1980. Another letter dated July 6, 1982 was sent wherein PHILAMLIFE
alleged that the claim for refund of the amount paid in 1980 is exactly the same subject matter as in
the previous claim for refund in 1979.

Without waiting for CIR to resolve the claim, petitioners filed with the Court of Tax Appeals (CTA) on
July 29, 1982 the petition docketed as CTA Case No. 3540, seeking said refund.

During pendency of said case, respondent denied PHILAMLIFEs claim for refund of Php643,125.00
as withholding tax at source for 1980. Respondent also cancelled the tax credit memo in the amount
of Php643,125.00 previously issued to PHILAMLIFE on November 18, 1980 and requested the latter
to pay the amount of Php643,125.00 as deficiency withholding tax at source for 1979 plus
increments.
Without protesting the assessment, petitioners filed a petition with CTA on June 14, 1985, docketed
as CTA Case No. 3943, seeking the annulment of said assessment.

After trial on the merits, respondent tax court rendered the decision dated March 10, 1993 denying
both petitions for review and subsequent motions for reconsiderations.

Both parties filed motion for reconsideration on the March 10, 1993 decision wherein the
respondent tax court issued a resolution dated May 19, 1993 which modified the dispositive portion
of the said decision ordering the PHILAMLIFE to pay respondent the amount of Php643,125.00 with
interest at the rate of twenty per centum (20%) per annum from March 9, 1981 until paid.

Issues:

1. Whether or not compensation for advisory services admittedly performed abroad by the
personnel of a non-resident foreign corporation not doing business in the Philippines are subject to
Philippine withholding income tax YES

2. Whether or not respondent CIR is barred by prescription, laches, estoppel, or equitable

considerations in cancelling the previous approval of petitioners claim for refund more than 5 years
thereafter, after it has determined, after investigation, that the advisory services were rendered or
performed abroad by the personnel of AIGI, a non-resident foreign corporation not doing business
in the Philippines NO

3. Whether or not respondent tax court can amend its decision on a motion for reconsideration
by respondent Commissioner, ordering petitioner PHILAMLIFE to pay Php643,125.00 with interest
at 20% per annum until paid on the presumption that it has utilized the tax credit memo already
issued and without evidence being presented of actual usage of the tax credit memo YES

Ratio:

1. In our jurisprudence, the test of taxability is the source, and the source of an income is that
activity which produced the income. It is not the presence of any property from which one derives
rentals and royalties that is controlling, but rather as expressed under the expanded meaning of
royalties in Section 37 (a) of National Internal Revenue Code, it includes royalties for the supply
of scientific, technical, industrial, or commercial knowledge or information; and the technical
advice, assistance or services rendered in connection with the technical management and
administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

The Management Services Agreement falls under the expanded meaning of royalties as it
provides for the supply of a non-resident foreign corporation of technical and commercial
information, knowledge, advice, assistance or services in connection with technical management or
administration of an insurance business a commercial undertaking. Therefore, the income
derived for the services performed by AIGI for PHILAMLIFE under the said agreement contract
shall be considered as income from services within the Philippines. AIGI, being a non-resident
foreign corporation not engage in trade and business in the Philippines shall pay tax equal to 35% of
the gross income received during each taxable year from all sources within the Philippines as
interest, dividends, rents, royalties (including remuneration for technical services), salaries,
premiums, annuities, emoluments, or other fixed or determinable annual, periodical or casual
gains, profits and income.

On the second issue, this Court believes that the rule on prescription of assessment and the filing of
formal protest will not apply.

Pursuant to Section 229 of NIRC, no such suit or proceeding shall be begun after the expiration of
two years from the date of payment of tax penalty regardless of any supervening cause that may
arise after payment. Although counting from the original date of payment of the tax on December 3,
1979, the filing of the instant Petition for Review on June 14, 1985 would appear to have been filed
out of time, nevertheless, justice and equity demand that the period during which respondent
approved the herein claim for refund up to the time it was subsequently cancelled should be
deducted from the counting of the two years prescriptive period. By deducting the period when
Petitioner received the tax credit memo on March 9, 1981 to May 15, 1985 when the same was
cancelled by the respondent only one year and four months had elapsed from the two year period of
prescription when petitioner filed CTA 3943 on June 4, 1985.

In like manner, CIRs failure to raise before the CTA the issue relating to the real party in interest to
claim the refund cannot, and should not, prejudice the government. It is axiomatic that the
government can never be in estoppel, particularly in matters involving taxes. The errors or
omissions of certain administrative officers should never be allowed to jeopardize the governments
financial position.

On the third issue, this Court finds no error on the part of respondent tax court in amending its
March 10, 1993 decision acting upon timely motion for reconsiderations filed by both petitioner and
respondent. Said decision having not attained its finality, the same may still be amended, corrected
or modified by the respondent court.

Moreover, it has been the long standing policy and practice of this Court to respect the conclusions
of quasi-judicial agencies, such as the Court of tax Appeals which, by nature of its function, is
dedicated exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject, unless there has been an abuse or improvident exercise of authority or
discretion, the decision of respondent court, affirming the decision of the Court of Tax Appeals, must
consequently be upheld.

CIR vs. BAIER-NICKEL

Facts:

CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the
CTA. Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic
corporation engaged in the manufacturing, marketing and selling of embroidered textile products.
Through Jubanitexs general manager, Marina Guzman, the company appointed respondent as
commission agent with 10% sales commission on all sales actually concluded and collected through
her efforts.

In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted
the 10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax
return but then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by
Jubanitex and that her sales commission income was compensation for services rendered in
Germany not Philippines and thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but
decision was reversed by CA on appeal, holding that the commission was received as sales agent not
as President and that the source of income arose from marketing activities in Germany.

Issue: W/N respondent is entitled to refund

Held:

No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business,
are subject to the Philippine income taxation on their income received from all sources in the
Philippines. In determining the meaning of source, the Court resorted to origin of Act 2833 (the
first Philippine income tax law), the US Revenue Law of 1916, as amended in 1917.

US SC has said that income may be derived from three possible sources only: (1) capital and/or (2)
labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is
done should be decisive; if it is done in this country, the income should be from sources within the
United States. If the income is from capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be from sources 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. Source 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 source of an income is the property, activity or service that produced the income. For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed
strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of
proving that the transaction subjected to tax is actually exempt from taxation.

In the instant case, respondent failed to give substantial evidence to prove that she performed the
incoming producing service in Germany, which would have entitled her to a tax exemption for
income from sources outside the Philippines. Petition granted.

Commissioner of Internal Revenue vs. Juliane Baier-nickel

Respondent Juliane Baier-nickle, a non-resident German citizen, is the President of JUBANITEX, a
domestic corporation engaged in manufacturing, marketing on wholesale only embroided textile
products. The corporation appointed and engaged the service of respondent as commission agent.
It was agreed that respondent will receive 10% sales commission on all sales actually concluded and
collected through her efforts.

In 1995, respondent received the amount of PhP1,707,772.64 representing her sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to
PhP170,777.26 and remitted the same to the BIR. Respondent filed a claim to refund the amount
PhP170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR.
Respondent contended that her sales commission income is not taxable in the Philippines because
the same was a compensation for her services rendered in Germany considered as income from
source outside the Philippines.

ISSUE: WON respondent's sales commission income is taxable in the Philippines?

HELD:

YES. Commission received by respondent were actually her remuneration in the performance of
her duties as President of JUBANITEX and not as a mere sales agent. The income derived by
respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic
corporation.

Pursuant to the foregoing provision of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from all
sources within the Philippines.

Respondent failed to discharge the burden of proving that her income was from sources outside the
Philippines and exempt from the application of our income tax law.
Quill Corp. v. North Dakota

Quill Corp. v. North Dakota, 504 U.S. 298 (1992), was a United States Supreme Court ruling
concerning use tax. Quill Corporation is an office supply retailer. Quill had no physical presence in
North Dakota (neither a sales force, nor a retail outlet),[1] but it had a licensed computer software
program that some of its North Dakota customers used for checking Quill's current inventories and
placing orders directly. North Dakota attempted to impose a use tax on Quill, which was struck down
by the Supreme Court.

Background[edit]
The North Dakota Office of State Tax Commissioner attempted to require Quill to collect and pay use
tax on sales shipped into the state.[2] The North Dakota Supreme Court upheld the statute.

Quill, incorporated in Delaware, did not have a physical location in North Dakota. None of its
workers were located there. Quill sold office equipment and stationery in North Dakota by using
catalogues, flyers, advertisements in national periodicals, and telephone calls. Deliveries were made
by post and common carrier from out-state-locations.[3]

Opinion of the Court[edit]

North Dakota argued that under due process, Quill had established a presence, as the floppy disks
were physically located in their state.[further explanation needed] The Supreme Court based its
reasoning on analysis of the Commerce Clause rather than due process.[3]

The Commerce Clause gives the federal government power to regulate interstate commerce and
prohibits certain state actions, such as applying duties, that interfere with trade among the states. In
National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), it was held that a
business whose only contacts with the taxing state are by mail or by common carrier lacks the
"substantial nexus" required under the Dormant Commerce Clause.[3]

The Court determined that Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), did not limit or
undo the Bellas Hess rule. A corporation, the court ruled, may have the minimum contacts required
by the due process clause and still fall short of the substantial nexus required by the Dormant
Commerce Clause. The court noted that the bright-line rule of National Bellas Hess "furthers the
ends" of the Dormant Commerce Clause. The Court thus reversed the decision of the North Dakota
Supreme Court that required Quill to collect and remit "use" taxes on purchases made by customers
from that state.[3]

Effect on taxation of online sales[edit]

In Quill Corp. v. North Dakota, the Supreme Court ruled that a business must have a physical
presence in a state for that state to require it to collect sales taxes. However, the Court explicitly
stated that Congress can overrule the decision through legislation.[1]

Amazon.com used this ruling in order to justify not charging sales tax on its online sales, which give
it a competitive advantage over retailers from 1995 until 2012, when pressure from states made
Amazon collect sales tax in some of the states.[4]

Vodafone International Holding vs Union of India

The Supreme Court of India pronounced the landmark judgment in Vodafone International Holding
(VIH) v. Union of India (UOI). The Bench consisting of Chief Justice S.H Kapadia, K. S. Radha
krishnan and Swatanter Kumar quashed the order of High Court of demand of Rs 12000 crores as
capital gain tax and absolved VIH from liability of payment of Rs 12000 crores as capital gain tax in
the transaction dated 11.2.2007 between VIH and Hutchinson Telecommunication International
Limited or HTIL (non-resident company for tax purposes).
The court held that in Indian revenue authorities do not have jurisdiction to impose tax on an
offshore transaction between two non-residents companies where in controlling interest in a
(Indian) resident company is acquired by the non-resident company in the transaction.
Facts leading to the Dispute

Vodafone International Holding (VIH) and Hutchison telecommunication international limited or

HTIL are two non-resident companies. These companies entered into transaction by which HTIL
transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP
international or CGP to VIH.

VIH or Vodafone by virtue of this transaction acquired a controlling interest of 67 percent in Hutch
is on Essar Limited or HEL that was an Indian Joint venture company (between Hutchinson and
Essar) because CGP was holding the above 67 percent interest prior to the above deal.

The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be
considered as assesse in default and thereby sought an explanation as to why the tax was not
deducted on the sale consideration of this transaction.

The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of
share capital of CGP on the ground that CGP had underlying Indian Assets.

VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue authorities.
This writ petition was dismissed by the High Court and VIH appealed to the Supreme Court which
sent the matter to Revenue authorities to decide whether the revenue had the jurisdiction over the
matter. The revenue authorities decided that it had the jurisdiction over the matter and then matter
went to High Court which was also decided in favour of Revenue and then finally Special Leave
petition was filed in the Supreme Court.
Issue before the Supreme Court

The issue before the Apex court was whether the Indian revenue authorities had the jurisdiction to
tax an offshore transaction of transfer of shares between two non-resident companies whereby the
controlling interest of an Indian resident company is acquired by virtue of this transaction.
Arguments of Revenue

The revenue submitted that this entire transaction of sale of CGP by HTIL to VIH was in substance
transfer of capital assets in India and thus attracted capital gain taxes transaction led to
transferring of all direct/indirect rights in HEL to VIH and this entire sale of CGP was a tax
avoidance scheme and the court must use a dissecting approach and look into the substance and not
at look at form of transaction as a whole.
Observations made by the Supreme Court

Corporate structures
Multinational companies often establish corporate structures or affiliate subsidiaries or joint
ventures for various business and commercial purposes and these are primarily aimed to yield
better returns to the investors and help in progress of the company.
And therefore the burden is entirely upon the revenue to show that such incorporation,
consolidation, restructuring has been affected for fraudulent purpose so as to defeat the law or
evade the taxes.
Even Ministry of Corporate affairs recognize such structures that consist of Holding and subsidiary
companies wherein Holding company may include enough voting stock in the subsidiary to control
the management and also hinted that many transnational investments are made in tax neutral
/investor friendly nations primarily so as to avoid double taxation or plan activities in manner to
yield best returns to investors.
Overseas companies
Many overseas companies invest in countries like Mauritius, Cayman Island due to better
opportunities of investment and these are undertaken for sound commercial and sound legitimate
tax planning and not to conceal their income or assets from home country tax jurisdiction and India
have recognised such structures.
These offshore transactions or these offshore financial centres do not necessarily lead to the
conclusion that these are involved in tax evasion.
Holding and Subsidiary Companies
The companies act have recognized that subsidiary company is a separate legal entity and though
holding company control the subsidiary companies and respective business of the company within a
group but it is settled principle that business of subsidiary is separate from the Holding company.
The assets of subsidiary companies can be kept as collateral by the parent company but still these
two are distinct entities and the holding company is not legally liable for the acts of subsidiaries
except in few circumstances where the subsidiary company is a sham.
The Holding company and subsidiary companies may form pyramid of structures whereby the
subsidiary company may hold controlling interest in other companies forming parent company.
Shares and controlling interest
The transfer of shares and shifting of controlling interest cannot be seen as two separate
transactions of transfer of shares and transfer of controlling interest.
The controlling interest is not an identifiable or a distinct capital asset independent of holding of
shares and is inherently a contractual right and not property right and cannot be considered as
transfer of property and capital assets unless the Statue stipulates otherwise.
The acquisition of shares may carry acquisition of controlling interest which is purely commercial
concept and tax is levied on transaction and not on its effect.
Corporate veil
The principle of lifting of corporate veil can also be applied in relationship of Holding and subsidiary
company in spite of their separate legal personalities if facts reveal that dubious methods were
adopted to evade tax.
The revenue authorities should look at transaction in a holistic manner and should not start with
the question that the impugned transaction is tax deferment/saving device.
The revenue authorities may invoke the principle of piecing of the corporate veil only after it is able
to establish on the facts and circumstances surrounding the transaction that the impugned
transaction is a sham or tax avoidant.
Tax planning/ tax evasion/tax avoidance
It is cornerstone law that a tax payer is enabled to arrange his affairs so as to reduce the liability of
tax and the fact that the motive for the transaction is to avoid tax does not invalidate it unless a
particular enactment so provided.
It is essential that the transaction should have some economic or commercial substance in order to
be effective.
The revenue cannot tax a subject without a statute to support and every tax payer is entitled to
arrange his affairs so that his taxes shall be as low as possible and he is not bound to choose that
pattern which will replenish the treasury.
All tax planning is not illegitimate and observed that the majority in McDowell case held that tax
planning is legitimate provided it is within the framework of law and colourable devices cannot be
part of tax planning.
Role of CGP
CGP was already part of HTIL corporate structure and sale of CGP share was a genuine business
transaction and commercial decision taken interest of investors and corporate entity and not a
dubious one.
The site of shares of CGP
Shares of CGP were registered in Cayman Island and law of Cayman also does not recognize
multiplicity of registers and hence site of shares and transfer of shares is situated in Cayman and
shall not shift to India.
Extinguishment of rights of HTIL in HEL
The transfer of CGP share automatically resulted in host of consequences that included transfer of
controlling interest.
And controlling interest cannot be dissected from CGP share without legislative intervention.
Upon transfer of shares of the holding Company, the controlling interest may also pass on to the
purchaser along with the shares and this Controlling interest might have percolated down the line
to the operating companies but that controlling interest is still inherently remains contractual and
not a property right unless otherwise is provided by the statue.
The acquisition of shares may carry the acquisition of controlling interest and this is purely a
commercial concept and the tax can be levied only on the transaction and not on its effect and
hence, consequently, on transfer of CGP share to Vodafone, Vodafone got control over eight
Mauritian Company and this does not mean that the site of CGP share has shifted to India for the
purpose of charging capital gains tax.
Section 9 of the income tax act
The tax is imposed on the basis of source and this source in relation to income is the place where the
transaction of sale takes place and not where the item of value which was subject of the transaction
is derived or acquired from.
HTIL and VIH are both offshore companies and the sale also took place outside India thereby source
of income is outside India unless legislation ropes in this transaction.
The revenue statutes are to be reasonably construed and tax cannot be imposed without clear words
indicating the intention to lay the burden.
The charging section is to be strictly construed and section 9 (1) (i) cannot be extended to cover
indirect transfer of capital assets in India by interpretation.
A specific nexus is required to exist between the earning of the income and the territory that seeks
to impose tax for the imposition of tax.
Section 9 has no inbuilt look in mechanism and look through principle shall not shift the site of
assets. This can be done only by express provision in this regard.
The Legislature in case wanted to tax income which arises indirectly from the assets; the same
must have been specifically provided so. The court cited the example of Section 64.
Section 195
The tax presence has to be viewed in context of the transaction in question and not with reference
to unrelated matter.
The section 195 shall apply in case payments are made by resident to non-resident and not between
two non-resident companies.
The legal nature of transaction is to be examined.
The present transaction was between two non-residents entities through a contract executed
outside India where the consideration was also passed outside India and hence VIH is not legally
obliged to respond to the notice under section 163 which relates to the treatment of purchaser as a
representative assesses.
Decision of the Court

Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets within
the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and entitlements that
flow from shareholder agreement etc. that form integral part of share of CGP do not attract capital
gains tax.

The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains tax would
amount to imposing capital punishment for capital investment and it lacks authority of law and
therefore is quashed.
Conclusion

The apex court pronounced a landmark judgment in Vodafone International Holding v. Union of
India and cleared the uncertainty with respect to imposition of taxes. The apex court through this
judgment recognized:
The principles of tax planning.
Business entities or individual may arrange the affairs of their business so as to reduce their tax
liability in absence of any statutory stipulation prohibiting the same.
The multinational companies often establish corporate structures and all these structures should be
established for business and commercial purposes only.
The corporate veil may be lifted in case facts and circumstances reveal that the transaction or
corporate structure is sham and intended to evade taxes.
The transactions should be looked holistic manner and not in a dissecting manner and the presence
of corporate structures in tax neutral/investor friendly nations should not lead to the conclusion
that these are meant to avoid taxes.
In the end, it can be said that this judgment has helped in removing uncertainties with respect to
imposition of taxes and recognized the principle the if motive of the transaction is to avoid tax does
not necessarily lead to assumption of evasion of taxes and the supreme court has endorsed the view
of legitimate tax planning.