*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 1 of 19
G.R. No. 48532 August 31, 1992 petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners, vs. THE HONORABLE
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-
LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO
A. RIALP and JAIME A. SOQUES, petitioners, vs. THE HONORABLE COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax
Appeals, promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order
the Commissioner of Internal Revenue to refund to them their income taxes which they claim to
have been erroneously or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is
a subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During
the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of
Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as
compensation for services in their foreign assignments. (Paragraphs III, Petitions for Review,
C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No.
2511 filed their income tax returns for the year 1970, they computed the tax due by applying the
dollar-to-peso conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-
027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting their
dollar income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973,
petitioners in said cases filed with the office of the respondent Commissioner, amended income
tax returns for the above-mentioned years, this time using the par value of the peso as
prescribed in Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act
No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of computing and paying the
corresponding income tax due from them. The aforesaid computation as shown in the amended
income tax returns resulted in the alleged overpayments, refund and/or tax credit. Accordingly,
claims for refund of said over-payments were filed with respondent Commissioner. Without
awaiting the resolution of the Commissioner of the Internal Revenue on their claims, petitioners
filed their petitioner for review in the above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No.
2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve common question of
law and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision dated
September 26, 1977, the respondent Court of Tax Appeals held that the proper conversion rate
for the purpose of reporting and paying the Philippine income tax on the dollar earnings of
71. Accordingly, the claim for refund and/or tax credit of petitioners in the above-entitled cases
was denied and the petitions for review dismissed, with costs against petitioners. Hence, this
petition for review oncertiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the
prevailing free market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax
purposes into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate
should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as
follows:
At the outset, it is submitted that the subject matter of these two cases are Philippine income tax
for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and,
therefore, should be governed by the provisions of the National Internal Revenue Code and its
implementing rules and regulations, and not by the provisions of Central Bank Circular No. 42
dated May 21, 1953, as contended by petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable year from
all sources by a citizen of the Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
employment. Thus, in their tax returns for the period involved herein, they gave their legal
residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "A-
8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should be converted into
Philippine pesos in computing the income tax due therefrom, in accordance with the provisions
of Revenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and
Revenue Memorandum Circular No. 41-71 dated December 21, 1971 for 1971 income, which
reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of conversion (Revenue Circulars Nos.
7-71 and 41-71) should be applied in order to determine the true and correct value in Philippine
pesos of the income of petitioners. 3
After a careful examination of the records, the laws involved and the jurisprudence on the
matter, We are inclined to agree with respondents Court of Tax Appeals and Commissioner of
Internal Revenue and thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these cases income may be
defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified,
it means cash or its equivalent. 4 Income can also be though of as flow of the fruits of one's
labor. 5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from
foreign exchange transactions. For a foreign exchange transaction is simply that a transaction
in foreign exchange, foreign exchange being "the conversion of an amount of money or currency
of one country into an equivalent amount of money or currency of another." 6 When petitioners
were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their
assigned nation's currency and were ALSO spending in said currency. There was no conversion,
therefore, from one currency to another.
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of
petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent of the
foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar
earnings do not fall within the classification of foreign exchange transactions, there occurred no
actual inward remittances, and, therefore, they are not included in the coverage of Central Bank
Circular No. 289 which provides for the specific instances when the par value of the peso
shall not be the conversion rate used. They conclude that their earnings should be converted for
income tax purposes using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export
products, receipts of sale of foreign exchange or foreign borrowings and investments but not
income tax. He also claims that he had to use the prevailing free market rate of exchange in
these cases because of the need to ascertain the true and correct amount of income in
Philippine peso of dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein
are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new
foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by
concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso
should be the guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of
Procter & Gamble. It was a definite amount of money which came to them within a specified
period of time of two yeas as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as
follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every individual, whether a citizen
of the Philippines residing therein or abroad or an alien residing in the Philippines, determined in
accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal Revenue Code,
Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued
to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars
were a valid exercise of the authority given to the Secretary of Finance by the Legislature which
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 2 of 19
enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said
code until revoked by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their salaries and
wages in US dollars into the Philippines, they are exempt from the coverage of such circulars.
Petitioners forget that they are citizens of the Philippines, and their income, within or without,
and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does
not brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason
for respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum
Circulars, being of long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of
the government" and one of the duties of a Filipino citizen is to pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent
Court of Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and
1971 is AFFIRMED. Costs against petitioners.SO ORDERED.
G.R. No. L-12287 August 7, 1918
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, vs. JAMES J.
RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.
MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law, a law of American origin, with
reference to the Civil Code, a law of Spanish origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnerships
(sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on
the prescribed form with the Collector of Internal Revenue, showing, as his total net income for
the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in fact the income of the
conjugal partnership existing between himself and his wife Susana Paterno, and that in
computing and assessing the additional income tax provided by the Act of Congress of October
3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-
half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. The
general question had in the meantime been submitted to the Attorney-General of the Philippine
Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue
officers being still unsatisfied, the correspondence together with this opinion was forwarded to
Washington for a decision by the United States Treasury Department. The United States
Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus
decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by
the Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana
Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue
and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged
to have been wrongfully and illegally collected by the defendants from the plaintiff, Vicente
Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The
burden of the complaint was that if the income tax for the year 1914 had been correctly and

lawfully computed there would have been due payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21,
erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that
plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum
lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings,
and the stipulation, sets forth the basis of defendants' stand in the following way: The income of
Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2)
P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the
profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is
P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914.
General deductions were claimed and allowed in the sum of P86,879.24. The resulting net
income was P296,302.73. For the purpose of assessing the normal tax of one per cent on the
net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon
which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente
Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum
upon which the normal tax of one per cent was assessed. The normal tax thus arrived at was
P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for
in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants,
without costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with the additional income tax, is
that is should be divided into two equal parts, because of the conjugal partnership existing
between them. The learned argument of counsel is mostly based upon the provisions of the Civil
Code establishing the sociedad de gananciales. The counter contentions of appellees are that
the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and
not upon capital and property; that the fact that Madrigal was a married man, and his marriage
contracted under the provisions governing the conjugal partnership, has no bearing on income
considered as income, and that the distinction must be drawn between the ordinary form of
commercial partnership and the conjugal partnership of spouses resulting from the relation of
marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given
the course of history. The final stage has been the selection of income as the norm of taxation.
(See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect on the part of the legislators to put
into statutory form this canon of taxation and of social reform. The aim has been to mitigate the
evils arising from inequalities of wealth by a progressive scheme of taxation, which places the
burden on those best able to pay. To carry out this idea, public considerations have demanded
an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the
income tax is supposed to reach the earnings of the entire non-governmental property of the
country. Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that capital by the payment of
money from it or any other benefit rendered by a fund of capital in relation to such fund through
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 3 of 19
a period of time is called an income. Capital is wealth, while income is the service of wealth.
(See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the
thought in the following figurative language: "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used,
can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C.,
26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See
further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs.Eisner,
decided by the United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband and
wife not living apart, contains the following:
The husband, as the head and legal representative of the household and general custodian of
its income, should make and render the return of the aggregate income of himself and wife, and
for the purpose of levying the income tax it is assumed that he can ascertain the total amount of
said income. If a wife has a separate estate managed by herself as her own separate property,
and receives an income of more than $3,000, she may make return of her own income, and if
the husband has other net income, making the aggregate of both incomes more than $4,000,
the wife's return should be attached to the return of her husband, or his income should be
included in her return, in order that a deduction of $4,000 may be made from the aggregate of
both incomes. The tax in such case, however, will be imposed only upon so much of the
aggregate income of both shall exceed $4,000. If either husband or wife separately has an
income equal to or in excess of $3,000, a return of annual net income is required under the law,
and such return must include the income of both, and in such case the return must be made
even though the combined income of both be less than $4,000. If the aggregate net income of
both exceeds $4,000, an annual return of their combined incomes must be made in the manner
stated, although neither one separately has an income of $3,000 per annum. They are jointly
and separately liable for such return and for the payment of the tax. The single or married status
of the person claiming the specific exemption shall be determined as one of the time of claiming
such exemption which return is made, otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine Islands,
we turn for a moment to consider the provisions of the Civil Code dealing with the conjugal
partnership. Recently in two elaborate decisions in which a long line of Spanish authorities were
cited, this court in speaking of the conjugal partnership, decided that "prior to the liquidation the
interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere
expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title
until there appears that there are assets in the community as a result of the liquidation and
settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband
Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate
property rights and in the ultimate ownership of property acquired as income after such income
has become capital. Susana Paterno has no absolute right to one-half the income of the
conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a
separate return in order to receive the benefit of the exemption which would arise by reason of
the additional tax. As she has no estate and income, actually and legally vested in her and
entirely distinct from her husband's property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax
Law does not look on the spouses as individual partners in an ordinary partnership. The
husband and wife are only entitled to the exemption of P8,000 specifically granted by the law.
The higher schedules of the additional tax directed at the incomes of the wealthy may not be

partially defeated by reliance on provisions in our Civil Code dealing with the conjugal
partnership and having no application to the Income Tax Law. The aims and purposes of the
Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of the
Philippine Islands and the United States Treasury Department. The decision of the latter
overruling the opinion of the Attorney-General is as follows:
TREASURY DEPARTMENT, Washington.
Income Tax.
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence
"from the Philippine authorities relative to the method of submission of income tax returns by
marred person."
You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that the
Insular Auditor has been authorized to suspend action on the warrants in question until an
authoritative decision on the points raised can be secured from the Treasury Department."
From the correspondence it appears that Gregorio Araneta, married and living with his wife, had
an income of an amount sufficient to require the imposition of the net income was properly
computed and then both income and deductions and the specific exemption were divided in half
and two returns made, one return for each half in the names respectively of the husband and
wife, so that under the returns as filed there would be an escape from the additional tax; that
Araneta claims the returns are correct on the ground under the Philippine law his wife is entitled
to half of his earnings; that Araneta has dominion over the income and under the Philippine law,
the right to determine its use and disposition; that in this case the wife has no "separate estate"
within the contemplation of the Act of October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and an
application for refund made, and that the application for refund was rejected, whereupon the
matter was submitted to the Attorney-General of the Islands who holds that the returns were
correctly rendered, and that the refund should be allowed; and thereupon the question at issue
is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the
advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be
administered as in the United States but by the appropriate internal-revenue officers of the
Philippine Government. You are therefore advised that upon the facts as stated, this office holds
that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case was
taxable to Gregorio Araneta, both for the normal and additional tax, and that the application for
refund was properly rejected.
The separate estate of a married woman within the contemplation of the Income Tax Law is that
which belongs to her solely and separate and apart from her husband, and over which her
husband has no right in equity. It may consist of lands or chattels.
The statute and the regulations promulgated in accordance therewith provide that each person
of lawful age (not excused from so doing) having a net income of $3,000 or over for the taxable
year shall make a return showing the facts; that from the net income so shown there shall be
deducted $3,000 where the person making the return is a single person, or married and not
living with consort, and $1,000 additional where the person making the return is married and
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 4 of 19
living with consort; but that where the husband and wife both make returns (they living together),
the amount of deduction from the aggregate of their several incomes shall not exceed $4,000.
The only occasion for a wife making a return is where she has income from a sole and separate
estate in excess of $3,000, but together they have an income in excess of $4,000, in which the
latter event either the husband or wife may make the return but not both. In all instances the
income of husband and wife whether from separate estates or not, is taken as a whole for the
purpose of the normal tax. Where the wife has income from a separate estate makes return
made by her husband, while the incomes are added together for the purpose of the normal tax
they are taken separately for the purpose of the additional tax. In this case, however, the wife
has no separate income within the contemplation of the Income Tax Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income
Tax Law was drafted by the Congress of the United States and has been by the Congress
extended to the Philippine Islands. Being thus a law of American origin and being peculiarly
intricate in its provisions, the authoritative decision of the official who is charged with enforcing it
has peculiar force for the Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law, whose meaning is doubtful, by
the department charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209
U.S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipality
of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude
that the judgment should be as it is hereby affirmed with costs against appellants. So ordered.
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner,
Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal
Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL
ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit,
and CESAR E. A. VIRATA, Minister of Finance, respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing
of its constitutional infirmity. The assailed provision further amends Section 21 of the National
Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a)
taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings,
(d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements, (e) dividends and share of individual partner in the
net profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3as taxpayer alleges that
by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of
tax upon his income arising from the exercise of his profession vis-a-vis those which are
imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction
as arbitrary amounting to class legislation, oppressive and capricious in character 5 For
petitioner, therefore, there is a transgression of both the equal protection and due process
clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10
days from notice. Such an answer, after two extensions were granted the Office of the Solicitor
General, was filed on May 28, 1982.8 The facts as alleged were admitted but not the allegations
which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner,

the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer
then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The
authorities and cases cited while correctly quoted or paraghraph do not support petitioner's
stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was
so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to
private enterprise and initiative and which the government was called upon to enter optionally,
and only 'because it was better equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake in its sovereign capacity if it is to
meet the increasing social challenges of the times." 11 Hence the need for more revenues. The
power to tax, an inherent prerogative, has to be availed of to assure the performance of vital
state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes
being the lifeblood of the government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It
is the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all
its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets
forth such limits . Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate
cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief
Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion
in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark
characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times
following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot
be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of
unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in
the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision as petitioner here alleges fails to
abide by its command, then this Court must so declare and adjudge it null. The injury thus is
centered on the question of whether the imposition of a higher tax rate on taxable net income
derived from business or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional
taint. Considering that petitioner here would condemn such a provision as void or its face, he
has not made out a case. This is merely to adhere to the authoritative doctrine that were the due
process and equal protection clauses are invoked, considering that they arc not fixed rules but
rather broad standards, there is a need for of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be
shown to amount to the confiscation of property. That would be a clear abuse of power. It then
becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an
authority not conferred. That properly calls for the application of the Holmes dictum. It has also
been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 5 of 19
for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is
subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of
this constitutional mandate whether the assailed act is in the exercise of the lice power or the
power of eminent domain is to demonstrated that the governmental act assailed, far from being
inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the
very least, discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in the privileges conferred
and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the
principle is that equal protection and security shall be given to every person under circumtances
which if not Identical are analogous. If law be looked upon in terms of burden or charges, those
that fall within a class should be treated in the same fashion, whatever restrictions cast on some
in the group equally binding on the rest." 20 That same formulation applies as well to taxation
measures. The equal protection clause is, of course, inspired by the noble concept of
approximating the Ideal of the laws benefits being available to all and the affairs of men being
governed by that serene and impartial uniformity, which is of the very essence of the Idea of law.
There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The
equality at which the 'equal protection' clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract
propositions. They do not relate to abstract units A, B and C, but are expressions of policy
arising out of specific difficulties, address to the attainment of specific ends by the use of specific
remedies. The Constitution does not require things which are different in fact or opinion to be
treated in law as though they were the same." 21 Hence the constant reiteration of the view that
classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V.
Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is
inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution:
"The rule of taxation shag be uniform and equitable." 24 This requirement is met according to
Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates
with the same force and effect in every place where the subject may be found. " 26 He likewise
added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this
is hardly attainable." 27 The problem of classification did not present itself in that case. It did not
arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same class shall be taxed at the same
rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation" complained
of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the
standard of equal protection for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration
the distinction between a tax rate and a tax base. There is no legal objection to a broader tax
base or taxable income by eliminating all deductible items and at the same time reducing the
applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough
that the classification must rest upon substantial distinctions that make real differences. In the
case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis
of classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced tax
rates to be applied to all of them. Taxpayers who are recipients of compensation income are set
 *Conwi v CIR toCIT v Smart* Taxation Set IX*Page 6 of 19

apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled I. DEFICIENCY INCOME TAX
to make deductions for income tax purposes because they are in the same situation more or
less. On the other hand, in the case of professionals in the practice of their calling and FY ended March 31, 1985
businessmen, there is no uniformity in the costs or expenses necessary to produce their income. Undeclared gross income (Philphos and NDC
It would not be just then to disregard the disparities by giving all of them zero deduction and construction projects) P967,269,811.14
indiscriminately impose on all alike the same tax rates on the basis of gross income. There is
ample justification then for the Batasang Pambansa to adopt the gross system of income Less: Cost and expenses (50%) 483,634,905.57
taxation to compensation income, while continuing the system of net income taxation as regards Net undeclared income 483,634,905.57
professional and business income.
Income tax due thereon 169,272,217.00
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) Add: 50% surcharge 84,636,108.50
lack of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force
of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the 20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90
reasonableness of the distinction between compensation and taxable net income of TOTAL AMOUNT DUE P290,583,972.40
professionals and businessman certainly not a suspect classification,
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
WHEREFORE, the petition is dismissed. Costs against petitioner.
FY ended March 31, 1985
G.R. No. 137377 December 18, 2001 Undeclared gross income from Philphos and NDC
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI construction projects P483,634,905.57
CORPORATION, respondent.
PUNO, J.: Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision Tax due thereon 47,154,403.00
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered Add: 50% surcharge 23,577,201.50
the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income,
branch profit remittance and contractor's taxes from Marubeni Corporation after finding the latter 20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as TOTAL AMOUNT DUE P83,036,965.16
amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the III. DEFICIENCY CONTRACTOR'S TAX
laws of Japan. It is engaged in general import and export trading, financing and the construction FY ended March 31, 1985
business. It is duly registered to engage in such business in the Philippines and maintains a
branch office in Manila. Undeclared gross receipts/gross income from Philphos
and NDC construction projects P967,269,811.14
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of Contractor's tax due thereon (4%) 38,690,792.00
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 Add: 50% surcharge for non-declaration 19,345,396.00
respondent to have undeclared income from two (2) contracts in the Philippines, both of which 20% surcharge for late payment 9,672,698.00
were completed in 1984. One of the contracts was with the National Development Company
Sub-total 67,708,886.00
(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 Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46
was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an
TOTAL AMOUNT DUE P85,563,625.46
ammonia storage complex also at the Leyte Industrial Development Estate.
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency FY ended March 31, 1985
income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986. Undeclared share from commission income
(denominated as "subsidy from Home Office") P24,683,114.50
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from Tax due thereon 1,628,569.00
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows: Add: 50% surcharge for non-declaration 814,284.50
20% surcharge for late payment 407,142.25

Sub-total 2,849,995.75
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 751,539.98
TOTAL AMOUNT DUE P3,600,535.68
The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid
taxable revenues while the 25% surcharge was imposed because of your client's failure to pay
on time the above deficiency percentage taxes.
xxx xxx xxx"1
Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that
the gross income from the two projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction and installation of facilities in the
Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the same was
petitioner's final decision and that if respondent disagreed with it, respondent may file an appeal
with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31, 1986:
(a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified
true copy of his statement declaring his net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of said net worth
subject to verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent
(10%) of the increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth
as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3,
1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its
net worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years
1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on
business under Chapter II, Title V of the National Internal Revenue Code, also covering the
years 1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O.
No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer
could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already
filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an amended return and paying
an additional 5% on the increase in net worth to cover business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 7 of 19
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of
E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent
(5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly
availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to
DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the
same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper
availment by petitioner of the amnesty under Executive Order No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court
of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of
the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax
Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income
tax, branch profit remittance tax and contractor's tax. These taxes are covered by the amnesties
granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in Section 4 (b) of
E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:
"Sec. 4. Exceptions. The following taxpayers may not avail themselves of the amnesty herein
granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue
Code, as amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of
the effectivity hereof as a result of information furnished under Section 316 of the
National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth
before the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986,
CTA Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases
already filed in court as of the effectivity hereof." The point of reference is the date of effectivity
of E.O. No. 41. The filing of income tax cases in court must have been made before and as of
the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4
(b) there must have been no income tax cases filed in court against him when E.O. No. 41 took
effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course
he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractor's tax assessments was filed by respondent with
the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on
August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation
did not fall under the said exception in Section 4 (b), hence, respondent was not disqualified
from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch
profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the
National Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is
a tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and respondent's
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41
by including estate and donor's taxes and tax on business. Estate and donor's taxes fall under
Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The
contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on business.7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No.
64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or
inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No.
41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4
(b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has "income
tax cases already filed in court as of the effectivity hereof." As to what Executive Order the
exception refers to, respondent argues that because of the words "income" and "hereof," they
refer to Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer
to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original
act as if it had always been contained therein, 10 it may not be given a retroactive effect unless it
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 8 of 19
is so provided expressly or by necessary implication and no vested right or obligations of
contract are thereby impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of
E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or
any of its provisions should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements
the original act by adding other taxes not covered in the first. 12 It has been held that where a
statute amending a tax law is silent as to whether it operates retroactively, the amendment will
not be given a retroactive effect so as to subject to tax past transactions not subject to tax under
the original act.13 In an amendatory act, every case of doubt must be resolved against its
retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give tax evaders who wish to
relent a chance to start with a clean slate. 16 A tax amnesty, much like a tax exemption, is never
favored nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax exemption,
must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 18For
the right of taxation is inherent in government. The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest grant of organic or state law. It cannot be
allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax cases" should be read
as to refer to estate and donor's taxes and taxes on business while the word "hereof," to E.O.
No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar
as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of
E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent
already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified
from availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty under the
two Executive Orders, it is still not liable for the deficiency contractor's tax because the income
from the projects came from the "Offshore Portion" of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-
scale manufacture of phosphatic fertilizer for the local and foreign markets. 20 The Philphos plant
complex which was envisioned to be the largest phosphatic fertilizer operation in Asia, and
among the largest in the world, covered an area of 180 hectares within the 435-hectare Leyte
Industrial Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at the
Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling
of phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of
Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar), 21and other
industrial plants within the Estate. The bidding was participated in by Marubeni Head Office in
Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation." 22 The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities,
harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities. 23 The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and
know-how,24 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Wharf-Port Complex as
set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and
schedule of the use of a part or the whole of the Wharf/Port Complex through the Owner, with
the design and construction of other facilities around the site. The scope of works shall also
include any activity, work and supply necessary for, incidental to or appropriate under present
international industrial port practice, for the timely and successful implementation of the object of
this Contract, whether or not expressly referred to in the abovementioned Annex I."25
The contract price for the wharf/port complex was 12,790,389,000.00 and P44,327,940.00. In
the contract, the price in Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency
was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were
financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic Cooperation
Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-Import Bank of
Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote economic development.26 The
OECF extended to the Philippine Government a loan of 7,560,000,000.00 for the Leyte
Industrial Estate Port Development Project and authorized the NDC to implement the
same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni,
obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-
contractors.28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment and
services rendered on the project. The price breakdown and the corresponding materials,
equipment and services were contained in a list attached as Annex III to the contract. 29
A few months after execution of the NDC contract, Philphos opened for public bidding a project
to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982,
Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract for
Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni
Corporation."30 The object of the contract was to establish and place in operating condition a
modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia 31 and for the delivery of ammonia to an
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 9 of 19
integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. 32 The
storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading
system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare
parts, and other related facilities.33 The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses and transfer of
technology and know-how,34 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Ammonia Storage
Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the Ammonia Storage Complex
through the Owner with the design and construction of other facilities at and around the Site. The
scope of works shall also include any activity, work and supply necessary for, incidental to or
appropriate under present international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."35
The contract price for the project was 3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken
down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine
currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II
were financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the
three portions were further broken down into the corresponding materials, equipment and
services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III. 36
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were classified
the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the
Japanese Yen Portion I corresponds to the Foreign Offshore Portion. 37 Japanese Yen Portion II
and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.38
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's
tax on the income from the two projects. In fact respondent claims, which petitioner has not
denied, that the income it derived from the Onshore Portion of the two projects had been
declared for tax purposes and the taxes thereon already paid to the Philippine government. 39 It is
with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the
liabilities involved in the assessments subject of this case arose. Petitioner argues that since the
two agreements are turn-key,40 they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in
the Philippines, and the materials provided and services rendered were all done and completed
within the territorial jurisdiction of the Philippines.41 Accordingly, respondent's entire receipts from
the contracts, including its receipts from the Offshore Portion, constitute income from Philippine
sources. The total gross receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
four percent of the gross receipts is hereby imposed on proprietors or operators of the following
business establishments and/or persons engaged in the business of selling or rendering the
following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act
No. 4566;
xxx xxx xxx
(q) Other independent contractors. The term "independent contractors" includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the service calls for
the exercise or use of the physical or mental faculties of such contractors or their employees. It
does not include regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not earn or derive
income from the Philippines and which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.
Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of
such contractors or their employees. The word "contractor" refers to a person who, in the pursuit
of independent business, undertakes to do a specific job or piece of work for other persons,
using his own means and methods without submitting himself to control as to the petty details.44
A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 It is generally in
the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a
sale on products;46 and is directly collectible from the person exercising the privilege. 47 Being an
excise tax, it can be levied by the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority.48 Like property taxes, it cannot be
imposed on an occupation or privilege outside the taxing district.49
In the case at bar, it is undisputed that respondent was an independent contractor under the
terms of the two subject contracts. Respondent, however, argues that the work therein were not
all performed in the Philippines because some of them were completed in Japan in accordance
with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be
made and the works and services to be performed by respondent are indeed classified into two.
The first part, entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under Article
19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as follows:
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan. 51 The machines and
equipment were designed, engineered and fabricated by Japanese firms sub-contracted by
Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel
Corporation which did the design, fabrication, engineering and manufacture thereof; 53 Yashima &
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 10 of 19
Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment;54 and B.S. Japan for the supply of radio equipment. 55 The
engineering and design works made by Kawasaki Steel Corporation included the lay-out of the
plant facility and calculation of the design in accordance with the specifications given by
respondent.56 All sub-contractors and manufacturers are Japanese corporations and are based
in Japan and all engineering and design works were performed in that country.57
The materials and equipment under Portion I of the NDC Port Project is primarily composed of
two (2) sets of ship unloader and loader; several boats and mobile equipment. 58 The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top of
each is a large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the specifications of the project.
After manufacture, they were rolled on to a barge and transported to Isabel, Leyte. 59 Upon
reaching Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the
spot where they were installed.60 Their installation simply consisted of bolting them onto the
pier.61
Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment,
consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also
manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once
unloaded at the port, they were ready to be driven and perform what they were designed to do.62
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to
the NDC contract. These other items consist of supplies and materials for five (5) berths, two (2)
roads, a causeway, a warehouse, a transit shed, an administration building and a security
building. Most of the materials consist of steel sheets, steel pipes, channels and beams and
other steel structures, navigational and communication as well as electrical equipment. 63
In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units. 64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and specifications and then shipped to
Isabel. Once there, respondent's employees put the steel plates together to form the storage
tank. As to the refrigeration units, they were completed and assembled in Japan and thereafter
shipped to Isabel. The units were simply installed there. 65 Annex III to the Philphos contract
lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material
and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts. 66 The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests on the
machines and equipment67 while Philphos sent a representative to Japan to inspect the storage
equipment.68
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid
by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly
the Assistant General Manager and Manager of the Steel Plant Marketing Department,
Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment
and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid
by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese
and English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of
respondent through the Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's
submission of pertinent documents, released the amount in the letters of credit in favor of
respondent and credited the amount therein to respondent's account within the same bank. 71
Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . .
"72 of the two projects involved two taxing jurisdictions. These acts occurred in two countries
Japan and the Philippines. While the construction and installation work were completed within
the Philippines, the evidence is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The two sets of ship unloader and loader, the
boats and mobile equipment for the NDC project and the ammonia storage tanks and
refrigeration units were made and completed in Japan. They were already finished products
when shipped to the Philippines. The other construction supplies listed under the Offshore
Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus,
these were not finished products when shipped to the Philippines. They, however, were likewise
fabricated and manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered outside the taxing
jurisdiction of the Philippines and are therefore not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering
Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported some
items for the system it designed and installed. 74 The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed. SO ORDERED.
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of
respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision 2 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002 Resolution 3 of
the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the
President of JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing
on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and
disposing embroidered textile products."4Through JUBANITEXs General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent as commission
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 11 of 19
agent. It was agreed that respondent will receive 10% sales commission on all sales actually
concluded and collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17,
1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 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 and therefore considered as income from
sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no
action was taken by the BIR on her claim for refund. 7 On June 28, 2000, the CTA rendered a
decision denying her claim. It held that the commissions received by respondent were actually
her remuneration in the performance of her duties as President of JUBANITEX and not as a
mere sales agent thereof. The income derived by respondent is therefore an income taxable in
the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that
respondent received the commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or service that produce the income,
the sales commission received by respondent is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in Germany. The dispositive portion of the
appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated
June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby
directed to grant petitioner a tax refund in the amount of Php 170,777.26.SO ORDERED. 8
Petitioner filed a motion for reconsideration but was denied.9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because
the source thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus
implied that source of income means the physical source where the income came from. It further
argued that since respondent is the President of JUBANITEX, any remuneration she received
from said corporation should be construed as payment of her overall managerial services to the
company and should not be interpreted as a compensation for a distinct and separate service as
a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her
marketing services. She contended that income of nonresident aliens like her is subject to tax
only if the source of the income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the source of her income were her
marketing activities in Germany, the income she derived from said activities is not subject to
Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines
shall be subject to an income tax in the same manner as an individual citizen and a resident
alien individual, on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines.
There shall be levied, collected and paid for each taxable year upon the entire income received
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income.
xxx
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the incomes "source." In construing the meaning of "source" in Section 25 of the NIRC,
resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No.
2833,10 which took effect on January 1, 1920. 11 Under Section 1 thereof, nonresident aliens are
likewise subject to tax on income "from all sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire
net income received in the preceding calendar year from all sources by every individual, a
citizen or resident of the Philippine Islands, a tax of two per centum upon such income; and a
like tax shall be levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as
amended by U.S. Revenue Law of 1917.12 Being a law of American origin, the authoritative
decisions of the official charged with enforcing it in the U.S. have peculiar persuasive force in the
Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as
from sources within the U.S. and specifies when similar types of income are to be treated as
from sources outside the U.S. 14 Under the said Code, compensation for labor and personal
services performed in the U.S., is generally treated as income from U.S. sources; while
compensation for said services performed outside the U.S., is treated as income from sources
outside the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the Philippines;
xxxx
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 12 of 19
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S.,
are instructive:
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
"sources 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 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.
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. The result
is that, on the one hand, nonresident aliens and nonresident foreign corporations are prevented
from deriving income from the United States free from tax, and, on the other hand, there is no
undue imposition of a tax when the activities do not take place in, and the property producing
income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must
be resident within the jurisdiction, or the property or activities out of which the income issues 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. 16
The important factor therefore which determines the source of income of personal services is not
the residence of the payor, or the place where the contract for service is entered into, or the
place of payment, but the place where the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the Court addressed the
issue on the applicable source rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks located in the Philippines. It was
held therein that the undertaking of the foreign insurance company to indemnify the local
insurance company is the activity that produced the income. Since the activity took place in the
Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law
of Federal Income Taxation, the Court emphasized that the technical meaning of source of
income is the property, activity or service that produced the same. Thus:

The source of an income is the property, activity or service that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took
place in the Philippines. x x x the reinsured, 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. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the
issue was whether BOAC, a foreign airline company which does not maintain any flight 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. Ruling in the affirmative, the Court applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule
that the source of income is that "activity" which produced the income. It was held that the "sale
of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC
should pay income tax in the Philippines because it undertook an income producing activity in
the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British
Overseas Airways Corporation in support of their arguments, but the correct interpretation of the
said case favors the theory of respondent that it is the situs of the activity that determines
whether such income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying principle of the law on
sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the
Philippines is to be construed as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P.
Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente,
interpreted the sale of tickets as a business activity that gave rise to the income of BOAC.
Petitioner cannot therefore invoke said case to support its view that source of income is the
physical source of the money earned. If such was the interpretation of the majority, the Court
would have simply stated that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located or where BOAC physically
received the same. But such was not the import of the ruling of the Court. It even explained in
detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable
activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus
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. x x x21
xxxx
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
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 13 of 19
is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.
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.22
The Court reiterates the rule that "source of income" relates to the property, activity or service
that produced the income. With respect to rendition of labor or personal service, as in the instant
case, it is the place where the labor or service was performed that determines the source of the
income. There is therefore no merit in petitioners interpretation which equates source of income
in labor or personal service with the residence of the payor or the place of payment of the
income.
Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is exempt
from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were performed
in Germany. Though not raised as an issue, the Court is clothed with authority to address the
same because the resolution thereof will settle the vital question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi jurisagainst the taxpayer.24 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, the appointment letter of respondent as agent of JUBANITEX stipulated that
the activity or the service which would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts."25 What she presented as evidence to prove that
she performed income producing activities abroad, were copies of documents she allegedly
faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be
used in the finished products as well as samples of sales orders purportedly relayed to her by
clients. However, these documents do not show whether the instructions or orders faxed ripened
into concluded or collected sales in Germany. At the very least, these pieces of evidence show
that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to
whether these instructions/orders gave rise to consummated sales and whether these sales
were truly concluded in Germany, respondent presented no such evidence. Neither did she
establish reasonable connection between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners
counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent
presented no contracts or orders signed by the customers in Germany to prove the sale
transactions therein.26 Likewise, in her Comment to the Formal Offer of respondents evidence,
she objected to the admission of the faxed documents bearing instruction/orders marked as
Exhibits "R,"27 "V," "W", and "X,"28 for being self serving. 29 The concern raised by petitioners
counsel as to the absence of substantial evidence that would constitute proof that the sale

transactions for which respondent was paid commission actually transpired outside the
Philippines, is relevant because respondent stayed in the Philippines for 89 days in 1995.
Except for the months of July and September 1995, respondent was in the Philippines in the
months of March, May, June, and August 1995,30 the same months when she earned
commission income for services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell embroidered products in the
Philippines and that her appointment as commission agent is exclusively for Germany and
other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to support
the conclusion31 that it was in Germany where she performed the income producing service
which gave rise to the reported monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our income tax law. Hence, the claim
for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case for
refund of income withheld from respondents remunerations for services rendered abroad, the
Court in a Minute Resolution dated February 17, 2003, 33 sustained the ruling of the Court of
Appeals that respondent is entitled to refund the sum withheld from her sales commission
income for the year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the instant case
deals with her income in 1995. Otherwise, stated, res judicata has no application here. Its
elements are: (1) there must be a final judgment or order; (2) the court that rendered the
judgment must have jurisdiction over the subject matter and the parties; (3) it must be a
judgment on the merits; (4) there must be between the two cases identity of parties, of subject
matter, and of causes of action. 34 The instant case, however, did not satisfy the fourth requisite
because there is no identity as to the subject matter of the previous and present case of
respondent which deals with income earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002
Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE.
The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which denied
respondents claim for refund of income tax paid for the year 1995 is REINSTATED.SO
ORDERED.
G.R. No. L-53961 June 30, 1987
NATIONAL DEVELOPMENT COMPANY, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is
erroneous. We have carefully studied it and find it is not; on the contrary, it is supported by law
and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase
price was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments
were made in cash and through irrevocable letters of credit. 3 Fourteen promissory notes were
signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the
Republic of the Philippines.4 Pursuant thereto, the remaining payments and the interests thereon
were remitted in due time by the NDC to Tokyo. The vessels were eventually completed and
delivered to the NDC in Tokyo. 5
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 14 of 19
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest
on the balance of the purchase price. No tax was withheld. The Commissioner then held the
NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The
BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the
claimed amount. 6 The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum
of P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a
petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37
of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. (a) Gross income from sources within
the Philippines. The following items of gross income shall be treated as gross income from
sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and interest on bonds, notes,
orother interest-bearing obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy and collect
income tax on interest received by foreign corporations not engaged in trade or business within
the Philippines is not planted upon the condition that 'the activity or labor and the sale from
which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest
derived from sources within the Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or
activity' of non-resident corporations in the Philippines, or place where the contract is signed.
The residence of the obligorwho pays the interest rather than the physical location of the
securities, bonds or notes or the place of payment, is the determining factor of the source of
interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk &
Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the
obligor is a resident of the Philippines the interest payment paid by him can have no other
source than within the Philippines. The interest is paid not by the bond, note or other interest-
bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development Company, a corporation duly organized
and existing under the laws of the Republic of the Philippines, with address and principal office
at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese
shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the
contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the
Japanese corporations, including the interest on the principal sum at the rate of five per cent

(5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial
Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which
are duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese
shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17,
$1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the
purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid
the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it
is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue
Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is on the
promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese
shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the
vessels acquired by petitioner is interest derived from sources within the Philippines subject to
income tax under the then Section 24(b)(1) of the National Internal Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:
SEC. 29. Gross Income. xxxx xxx xxx xxx
(b) Exclusion from gross income. The following items shall not be included in gross income
and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. Interest upon the obligations of the Government of the
Republic of the Philippines or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent provided in the act authorizing
the issue thereof.(As amended by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407,
which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such
authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such
securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of the
Philippines, the due and punctual payment of both principal and interest of the above note. 10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this
question must be resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by the government in consonance with and certainly
not against the following provisions of the Tax Code:
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 15 of 19
Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of real or
personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers,
and all officers and employees of the Government of the Philippines having control, receipt,
custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or
categorical gains, profits and income of any nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or place of business therein, shall
(except in the cases provided for in subsection (a) of this section) deduct and withhold from such
annual or periodical gains, profits and income a tax to twenty (now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in section fifty-three a tax
equal to thirty (now 35%)per centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it
is governed in its proprietary activities not only by its charter but also by the Corporation Code
and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not
the Republic of the Philippines that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of
the Tax Code, thus:
Section 53(c). Return and Payment. Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of
each year, and, on or before the time fixed by law for the payment of the tax, shall pay the
amount withheld to the officer of the Government of the Philippines authorized to receive it.
Every such person is made personally liable for such tax, and is indemnified against the claims
and demands of any person for the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the
responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and
promptly causing a query to be addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not subject to withholding. In
case the Commissioner of Internal Revenue decides that the income paid to an individual is not
subject to withholding, the withholding agent may thereupon remit the amount of a tax withheld.
(2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be released
from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law
 *Conwi v CIR toCIT v Smart* Taxation Set IX*Page 16 of 19

frowns upon exemption from taxation; hence, an exempting provision should be Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act on the claim
construed strictissimi juris." 14 for refund, respondent filed a Petition for Review 9 with the CTA, docketed as CTA Case No. 6782
which was raffled to its Second Division.
The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.WHEREFORE, the appealed decision is In its Petition for Review, respondent claimed that it is entitled to a refund because the payments
AFFIRMED, without any pronouncement as to costs. It is so ordered made to Prism are not royalties10 but "business profits,"11 pursuant to the definition of royalties
under the RP-Malaysia Tax Treaty,12 and in view of the pertinent Commentaries of the
G.R. Nos. 179045-46 August 25, 2010 Organization for Economic Cooperation and Development (OECD) Committee on Fiscal Affairs
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SMART COMMUNICATION, through the Technical Advisory Group on Treaty Characterization of Electronic Commerce
INC., Respondent. Payments.13 Respondent further averred that since under Article 7 of the RP-Malaysia Tax
DECISION Treaty, "business profits" are taxable in the Philippines "only if attributable to a permanent
DEL CASTILLO, J.: establishment in the Philippines, the payments made to Prism, a Malaysian company with no
permanent establishment in the Philippines,"14 should not be taxed.15
The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes
comes with the responsibility to return the same to the principal taxpayer. On December 1, 2003, petitioner filed his Answer 16 arguing that respondent, as withholding
agent, is not a party-in-interest to file the claim for refund, 17 and that assuming for the sake of
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the argument that it is the proper party, there is no showing that the payments made to Prism
Decision1 dated June 28, 2007 and the Resolution2 dated July 31, 2007 of the Court of Tax constitute "business profits."18
Appeals (CTA) En Banc.
Ruling of the CTA Second Division
Factual Antecedents
In a Decision19 dated February 23, 2006, the Second Division of the CTA upheld respondents
Respondent Smart Communications, Inc. is a corporation organized and existing under right, as a withholding agent, to file the claim for refund citing the cases of Commissioner of
Philippine law. It is an enterprise duly registered with the Board of Investments. Internal Revenue v. Wander Philippines, Inc., 20 Commissioner of Internal Revenue v. Procter &
Gamble Philippine Manufacturing Corporation 21 and Commissioner of Internal Revenue v. The
On May 25, 2001, respondent entered into three Agreements for Programming and Consultancy Court of Tax Appeals.22
Services3 with Prism Transactive (M) Sdn. Bhd. (Prism), a non-resident corporation duly
organized and existing under the laws of Malaysia. Under the agreements, Prism was to provide However, as to the claim for refund, the Second Division found respondent entitled only to a
programming and consultancy services for the installation of the Service Download Manager partial refund. Although it agreed with respondent that the payments for the CM and SIM
(SDM) and the Channel Manager (CM), and for the installation and implementation of Smart Application Agreements are "business profits,"23 and therefore, not subject to tax24 under the RP-
Money and Mobile Banking Service SIM Applications (SIM Applications) and Private Text Malaysia Tax Treaty, the Second Division found the payment for the SDM Agreement a royalty
Platform (SIM Application). subject to withholding tax.25 Accordingly, respondent was granted refund in the amount
of P3,989,456.43, computed as follows:26
On June 25, 2001, Prism billed respondent in the amount of US$547,822.45, broken down as
follows: Particulars Amount (in US$)
SDM Agreement US$236,000.00
1. CM 296,000.00
CM Agreement 296,000.00
2. SIM Application 15,822.45
SIM Application Agreement 15,822.45
Total US$311,822.45

4
Particulars Amount
Total US$547,822.45
Thinking that these payments constitute royalties, respondent withheld the amount of Tax Base US$311,822.45
US$136,955.61 orP7,008,840.43,5 representing the 25% royalty tax under the RP-Malaysia Tax
Multiply by: Withholding Tax Rate 25%
Treaty.6
On September 25, 2001, respondent filed its Monthly Remittance Return of Final Income Taxes Final Withholding Tax US$ 77,955.61
Withheld (BIR Form No. 1601-F)7 for the month of August 2001.
Multiply by: Prevailing Exchange Rate 51.176
On September 24, 2003, or within the two-year period to claim a refund, respondent filed with
the Bureau of Internal Revenue (BIR), through the International Tax Affairs Division (ITAD), an Tax Refund Due P3,989,456.43
administrative claim for refund8of the amount of P7,008,840.43. The dispositive portion of the Decision of the CTA Second Division reads:
WHEREFORE, premises considered, the instant petition is partially GRANTED. Accordingly,
Proceedings before the CTA Second Division respondent Commissioner of Internal Revenue is hereby ORDERED to REFUND or ISSUE a

TAX CREDIT CERTIFICATE to petitioner Smart Communications, Inc. in the amount of
P3,989,456.43, representing overpaid final withholding taxes for the month of August 2001.SO
ORDERED.27
Both parties moved for partial reconsideration 28 but the CTA Second Division denied the motions
in a Resolution29 dated July 18, 2006.
Ruling of the CTA En Banc
Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions for
Review,30 which were consolidated per Resolution31 dated February 8, 2007.
On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial refund granted to
respondent. In sustaining respondents right to file the claim for refund, the CTA En Banc said
that although respondent "and Prism are unrelated entities, such circumstance does not affect
the status of [respondent] as a party-in-interest [as its legal interest] is based on its direct and
independent liability under the withholding tax system." 32 The CTAEn Banc also concurred with
the Second Divisions characterization of the payments made to Prism, specifically that the
payments for the CM and SIM Application Agreements constitute "business profits," 33 while the
payment for the SDM Agreement is a royalty.34
The dispositive portion of the CTA En Banc Decision reads:
WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision
and Resolution are hereby AFFIRMED.SO ORDERED.35
Only petitioner sought reconsideration 36 of the Decision. The CTA En Banc, however, found no
cogent reason to reverse its Decision, and thus, denied petitioners motion for reconsideration in
a Resolution37 dated July 31, 2007.
Unfazed, petitioner availed of the present recourse.
Issues
The two issues to be resolved are: (1) whether respondent has the right to file the claim for
refund; and (2) if respondent has the right, whether the payments made to Prism constitute
"business profits" or royalties.
Petitioners Arguments
Petitioner contends that the cases relied upon by the CTA in upholding respondents right to
claim the refund are inapplicable since the withholding agents therein are wholly owned
subsidiaries of the principal taxpayers, unlike in the instant case where the withholding agent
and the taxpayer are unrelated entities. Petitioner further claims that since respondent did not
file the claim on behalf of Prism, it has no legal standing to claim the refund. To rule otherwise
would result to the unjust enrichment of respondent, who never shelled-out any amount to pay
the royalty taxes. Petitioner, thus, posits that the real party-in-interest to file a claim for refund of
the erroneously withheld taxes is Prism. He cites as basis the case of Silkair (Singapore) Pte,
Ltd. v. Commissioner of Internal Revenue,38 where it was ruled that the proper party to file a
refund is the statutory taxpayer.39 Finally, assuming that respondent is the proper party, petitioner
counters that it is still not entitled to any refund because the payments made to Prism are
taxable as royalties, having been made in consideration for the use of the programs owned by
Prism.
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 17 of 19
Respondents Arguments
Respondent, on the other hand, maintains that it is the proper party to file a claim for refund as it
has the statutory and primary responsibility and liability to withhold and remit the taxes to the
BIR. It points out that under the withholding tax system, the agent-payor becomes a payee by
fiction of law because the law makes the agent personally liable for the tax arising from the
breach of its duty to withhold. Thus, the fact that respondent is not in any way related to Prism is
immaterial.
Moreover, respondent asserts that the payments made to Prism do not fall under the definition of
royalties since the agreements are for programming and consultancy services only, wherein
Prism undertakes to perform services for the creation, development or the bringing into
existence of software applications solely for the satisfaction of the peculiar needs and
requirements of respondent.
Our Ruling
The petition is bereft of merit.
Withholding agent may file a claim for refund
Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes.
The Commissioner may
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good condition
by the purchaser, and, in his discretion, redeem or change unused stamps that have been
rendered unfit for use and refund their value upon proof of destruction. No credit or refund of
taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a
claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided,
however, That a return filed showing an overpayment shall be considered as a written claim for
credit or refund.
xxxx
Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner;
but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)
Pursuant to the foregoing, the person entitled to claim a tax refund is the taxpayer. However, in
case the taxpayer does not file a claim for refund, the withholding agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation,40 a withholding agent was considered a proper party to file a claim for refund of the
withheld taxes of its foreign parent company. Pertinent portions of the Decision read:
The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by
the Title [on Tax on Income]." It thus becomes important to note that under Section 53(c) 41 of the
NIRC, the withholding agent who is "required to deduct and withhold any tax" is made
"personally liable for such tax" and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-
Phil., is directly and independently liable for the correct amount of the tax that should be withheld
from the dividend remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax withheld be
finally found to be less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to
pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is
statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a person having sufficient legal interest,
to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed
out that a withholding agent is in fact the agent both of the government and of the taxpayer, and
that the withholding agent is not an ordinary government agent:
"The law sets no condition for the personal liability of the withholding agent to attach. The reason
is to compel the withholding agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is concentrated upon
the person over whom the Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Governments agent. In regard to the filing of the
necessary income tax return and the payment of the tax to the Government, he is the agent of
the taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas the Commissioner and his deputies are not made liable by law."
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial
owner of the dividends with respect to the filing of the necessary income tax return and with
respect to actual payment of the tax to the government, such authority may reasonably be held
to include the authority to file a claim for refund and to bring an action for recovery of such claim.
This implied authority is especially warranted where, as in the instant case, the withholding
agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under
the effective control of such parent-stockholder. In the circumstances of this case, it seems
particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence
an action for such refund.
xxxx
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of Section 309, 42 NIRC, and as impliedly authorized
to file the claim for refund and the suit to recover such claim. (Emphasis supplied.)
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 18 of 19
Petitioner, however, submits that this ruling applies only when the withholding agent and the
taxpayer are related parties, i.e., where the withholding agent is a wholly owned subsidiary of
the taxpayer.
We do not agree.
Although such relation between the taxpayer and the withholding agent is a factor that increases
the latters legal interest to file a claim for refund, there is nothing in the decision to suggest that
such relationship is required or that the lack of such relation deprives the withholding agent of
the right to file a claim for refund. Rather, what is clear in the decision is that a withholding agent
has a legal right to file a claim for refund for two reasons. First, he is considered a "taxpayer"
under the NIRC as he is personally liable for the withholding tax as well as for deficiency
assessments, surcharges, and penalties, should the amount of the tax withheld be finally found
to be less than the amount that should have been withheld under law. Second, as an agent of
the taxpayer, his authority to file the necessary income tax return and to remit the tax withheld to
the government impliedly includes the authority to file a claim for refund and to bring an action
for recovery of such claim.
In this connection, it is however significant to add that while the withholding agent has the right
to recover the taxes erroneously or illegally collected, he nevertheless has the obligation to remit
the same to the principal taxpayer. As an agent of the taxpayer, it is his duty to return what he
has recovered; otherwise, he would be unjustly enriching himself at the expense of the principal
taxpayer from whom the taxes were withheld, and from whom he derives his legal right to file a
claim for refund.
As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue 43 cited by the petitioner,
we find the same inapplicable as it involves excise taxes, not withholding taxes. In that case, it
was ruled that the proper party to question, or seek a refund of, an indirect tax "is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts
the burden thereof to another."
In view of the foregoing, we find no error on the part of the CTA in upholding respondents right
as a withholding agent to file a claim for refund.
The payments for the CM and the SIM Application Agreements constitute
"business profits"
Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kind
received as consideration for: "(i) the use of, or the right to use, any patent, trade mark, design
or model, plan, secret formula or process, any copyright of literary, artistic or scientific work, or
for the use of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or scientific experience; (ii) the use of, or the right
to use, cinematograph films, or tapes for radio or television broadcasting." 44 These are taxed at
the rate of 25% of the gross amount.45
Under the same 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.46The term "permanent establishment" is defined as a fixed
place of business where the enterprise is wholly or partly carried on. 47 However, even if 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 it carries on supervisory activities in that other
State for more than six months in connection with a construction, installation or assembly project
which is being undertaken in that other State.48

In the instant case, it was established during the trial that Prism does not have a permanent
establishment in the Philippines. Hence, "business profits" derived from Prisms dealings with
respondent are not taxable. The question is whether the payments made to Prism under the
SDM, CM, and SIM Application agreements are "business profits" and not royalties.
Paragraph 1.3 of the Programming Services (Schedule A) of the SDM Agreement, 49 reads:
1.3 Intellectual Property Rights (IPR)
The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of which shall be
retained by PRISM. PRISM, however, shall provide the Client the APIs for the SDM at no cost to
the Client. The Client shall be permitted to develop programs to interface with the SDM or the
SDM Libraries, using the related APIs as appropriate.50 (Emphasis supplied.)
Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM Agreement and
paragraph 1.3 of the Programming Services (Schedule A) of the SIM Agreement provide:
1.4 Intellectual Property Rights (IPR)
The IPR of all components of the CM belong to the Client with the exception of the following
components, which are provided, without technical or commercial restraints or obligations:
ConfigurationException.java
DataStructures (DblLinkedListjava, DbIListNodejava, List
EmptyException.java, ListFullException.java, ListNodeNotFoundException.java,
QueueEmptyException.java, QueueFullException.java, QueueList.java, QueuListEx.java, and
QueueNodeNotFoundException.java)
FieldMappedObjeet.java
LogFileEx.java
Logging (BaseLogger.java and Logger.java)
PrismGeneric Exception.java
PrismGenericObject.java
ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.
java, DeliverMessage.java, Login.java, Logout.java, Nack.java, SubmitMessage.java,
*Conwi v CIR toCIT v Smart* Taxation Set IX*Page 19 of 19
TemplateManagement (FileTemplateDataBag.java, Template
DataBag.java, TemplateManagerExBag.java, and TemplateParserExBag.java)
TemplateManager.class
TemplateServer.class
TemplateServer$RequestThread.class
Template Server_skel.class
TemplateServer_stub.class
TemplateService.class
Prism Crypto Server module for PHP451
xxxx
1.3 Intellectual Property Rights (IPR)
The Client shall own the IPR for the Specifications and the Source Code for the SIM
Applications. PRISM shall develop an executable compiled code (the "Executable Version") of
the SIM Applications for use on the aSIMetric card which, however, shall only be for the Clients
use. The Executable Version may not be provided by PRISM to any third [party] without the prior
written consent of the Client. It is further recognized that the Client anticipates licensing the use
of the SIM Applications, but it is agreed that no license fee will be charged to PRISM or to a
licensee of the aSIMetrix card from PRISM when SIMs are supplied to the Client. 52 (Emphases
supplied.)
The provisions in the agreements are clear. Prism has intellectual property right over the SDM
program, but not over the CM and SIM Application programs as the proprietary rights of these
programs belong to respondent. In other words, out of the payments made to Prism, only the
payment for the SDM program is a royalty subject to a 25% withholding tax. A refund of the
erroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application
Agreements is therefore in order.
Indeed, the government has no right to retain what does not belong to it. 1wphi1 "No one, not
even the State, should enrich oneself at the expense of another."53
WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007 and the
Resolution dated July 31, 2007 of the Court of Tax Appeals En Banc are
hereby AFFIRMED. The Bureau of Internal Revenue is herebyordered to issue a Tax Credit
Certificate to Prism Transactive (M) Sdn. Bhd. in the amount of P3,989,456.43 representing the
overpaid final withholding taxes for the month of August 2001.
SO ORDERED.