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G.R. No.

76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.

FERNAN, C.J.:

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws with
branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal
of the decision of the Court of Tax Appeals 1dated February 12, 1986 denying its claim for refund or tax
credit in the amount of P229,424.40 representing alleged overpayment of branch profit remittance tax
withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).

The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P
of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of
the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but
also of the withheld 15% profit remittance tax based on the remittable amount after deducting the
final withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder
Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit
remittance tax paid thereon, is shown below:

1981 FIRST THIRD TOTAL OF


QUARTER QUARTER FIRST and
(three months (three months THIRD quarters
ended 3.31.81) ended 9.30.81)
(In Pesos)

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00


Withheld

Cash Dividend net of 764,748.00 764,748.00 1,529,496.00


10% Dividend Tax
Withheld

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Remittance Tax Withheld

Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60


Petitioner
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for
the first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981
under Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the
15% branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau
of Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No.
7905930. 4

Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the
total amount of P229,424.40 on April 20 and August 4, 1981. 5

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends
petitioner received from AG&P are effectively connected with its conduct or business in the Philippines
as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24
(b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and
1773.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its
trade or business in the Philippines are subject to the 15% profit remittance tax. To
be effectively connected it is not necessary that the income be derived from the actual
operation of taxpayer-corporation's trade or business; it is sufficient that the income
arises from the business activity in which the corporation is engaged. For example, if
a resident foreign corporation is engaged in the buying and selling of machineries in
the Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividends thus earned are not considered 'effectively
connected' with its trade or business in this country. (Revenue Memorandum Circular
No. 55-80).

In the instant case, the dividends received by Marubeni from AG&P are not income
arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the 15%
profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended . .
.6

Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal
Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of
P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by Atlantic
Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7

On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for
refund/credit of P229,424.40 on the following grounds:

While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of Marubeni
Corporation of Japan; and neither is it subject to the 10% intercorporate dividend tax,
the recipient of the dividends, being a non-resident stockholder, nevertheless, said
dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax
Treaty dated February 13, 1980 between the Philippines and Japan.

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is


subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend
tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets
the liability, hence, nothing is left to be refunded. 8

Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9

In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

Whatever the dialectics employed, no amount of sophistry can ignore the fact that the
dividends in question are income taxable to the Marubeni Corporation of Tokyo, Japan.
The said dividends were distributions made by the Atlantic, Gulf and Pacific Company
of Manila to its shareholder out of its profits on the investments of the Marubeni
Corporation of Japan, a non-resident foreign corporation. The investments in the
Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly
made by it and the dividends on the investments were likewise directly remitted to
and received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation
Philippine Branch has no participation or intervention, directly or indirectly, in the
investments and in the receipt of the dividends. And it appears that the funds invested
in the Atlantic Gulf & Pacific Company did not come out of the funds infused by the
Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a
matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni
Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific
Company based on the supporting documents submitted to it.

Subject to certain exceptions not pertinent hereto, income is taxable to the person
who earned it. Admittedly, the dividends under consideration were earned by the
Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it is
true that the Marubeni Corporation Philippine Branch is duly licensed to engage in
business under Philippine laws, such dividends are not the income of the Philippine
Branch and are not taxable to the said Philippine branch. We see no significance
thereto in the identity concept or principal-agent relationship theory of petitioner
because such dividends are the income of and taxable to the Japanese corporation in
Japan and not to the Philippine branch. 10

Hence, the instant petition for review.

It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate final
tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax
Code of 1977 which states:

Dividends received by a domestic or resident foreign corporation liable to tax under


this Code (1) Shall be subject to a final tax of 10% on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident
foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on income
earned from Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the
same Code which reads:

(b) Tax on foreign corporations (1) Non-resident corporations. A foreign


corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five per cent of the gross income received during each taxable year from all
sources within the Philippines as ... dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of
1980 concluded between the Philippines and Japan. 11 Thus:

Article 10 (1) Dividends paid by a company which is a resident of a Contracting State


to a resident of the other Contracting State may be taxed in that other Contracting
State.

(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that
Contracting State, but if the recipient is the beneficial owner of the dividends the tax
so charged shall not exceed;

(a) . . .

(b) 25 per cent of the gross amount of the dividends in all other cases.

Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is
therefore the determination of whether it is a resident or a non-resident foreign corporation under
Philippine laws.

Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within
the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines
through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner
reasons that since the Philippine branch and the Tokyo head office are one and the same entity,
whoever made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot
be both a resident and a non-resident corporation depending on the nature of the particular
transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed
through its local branch is of no moment for after all, the head office and the office branch constitute
but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and corporate
laws, is a resident foreign corporation because it is transacting business in the Philippines.

The Solicitor General has adequately refuted petitioner's arguments in this wise:

The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office, following
the principal agent relationship theory. It is understood that the branch becomes its
agent here. So that when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the branch or the resident foreign
corporation.

Corollarily, if the business transaction is conducted through the branch office, the latter
becomes the taxpayer, and not the foreign corporation. 12

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the
head office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly
germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in
the Philippines. It is thus clear that petitioner, having made this independent investment attributable
only to the head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither subject to
the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-
resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax
Convention pursuant to Article 10 (2) (b).

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends
received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit
actually remitted abroad." 13

Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of
the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by
Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any
tax imposable by the contracting state concerned should not exceed the 25 % limitation and that said
rate would apply only if the tax imposed by our laws exceeds the same. In other words, by reason of
our bilateral negotiations with Japan, we have agreed to have our right to tax limited to a certain
extent to attain the goals set forth in the Treaty.

Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980. Said section provides:

(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On


dividends received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends received, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the
tax due from the non-resident foreign corporation, taxes deemed to have been paid
in the Philippines equivalent to 20 % which represents the difference between the
regular tax (35 %) on corporations and the tax (15 %) on dividends as provided in
this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines.
[Section 24 (b) (1)].

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a
tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between
the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily
paid, and the 15 % special rate on dividends received from a domestic corporation.

Consequently, petitioner is entitled to a refund on the transaction in question to be computed as


follows:

Total cash dividend paid ................P1,699,440.00


less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------

Cash dividend net of 15 % tax


due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------

Amount to be refunded to petitioner


representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-
resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the
maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the
Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring
under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise
known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was
not perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal
from final orders, resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen
(15) days counted from the notice of the final order, resolution, award, judgment or decision appealed
from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which
has been created by virtue of a special law, Republic Act No. 1125. Respondent court is not among
those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.

Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom.
Otherwise, said order, ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim
for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner
filed a motion for reconsideration which respondent court subsequently denied on November 17, 1986,
and notice of which was received by petitioner on November 26, 1986. Two days later, or on November
28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition
for review with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal was
perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day period to appeal
having begun to run again from notice of the denial of petitioner's motion for reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986
which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni
Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered
to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing
overpayment of taxes on dividends received. No costs.

So ordered.

G.R. No. 137377 December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

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 dated July 29,
1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered 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 to have properly availed of the
tax amnesty under Executive Orders Nos. 41 and 64, as amended.

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

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority
to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal
year ending March 1985. In the course of the examination, petitioner found respondent to have
undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984.
One of the contracts was with the National Development Company (NDC) in connection with the
construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in
the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate
Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte
Industrial Development Estate.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income,
branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this
assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes,
inclusive of surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX


FY ended March 31, 1985
Undeclared gross income (Philphos and
NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Undeclared gross income from Philphos
and NDC construction projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
TOTAL AMOUNT DUE P83,036,965.16
III. DEFICIENCY CONTRACTOR'S TAX
FY ended March 31, 1985
Undeclared gross receipts/gross income
from Philphos and NDC construction
projects P967,269,811.14
Contractor's tax due thereon (4%) 38,690,792.00
Add: 50% surcharge for non-declaration 19,345,396.00
20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46
TOTAL AMOUNT DUE P85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
FY ended March 31, 1985
Undeclared share from commission income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
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. 412 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.

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 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.18 For 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),21 and 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 ammonia31 and for the delivery of ammonia to an 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.41Accordingly, 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.

xxx xxx xxx43

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:

xxx xxx xxx50

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
& 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. L-22074 April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,


vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.

Josue H. Gustilo and Ramirez and Ortigas for petitioner.


Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts,
on various dates, with foreign insurance companies not doing business in the Philippines namely:
Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded
Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society
Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance it has
originally underwritten in the Philippines, in consideration for the assumption by the latter of liability
on an equivalent portion of the risks insured. Said reinsurrance contracts were signed by Philippine
Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract
with Swiss Reinsurance Company, which was signed by both parties in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that
of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered,
and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The
foreign reinsurers further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance
contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against
Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:

1953

Gross premium per investigation . . . . . . . . . . P768,580.00

Withholding tax due thereon at 24% . . . . . . . . P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00

Compromise for non-filing of withholding


100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00


==========
1954

Gross premium per investigation . . . . . . . . . . P780.880.68

Withholding tax due thereon at 24% . . . . . . . . P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00

Compromise for non-filing of withholding


100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00


==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax Appeals.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is


hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes
for the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs
against petitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to
the foreign reinsurers.

Petitioner maintain that the reinsurance premiums in question did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor
did they have office here.

The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances
in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced
simultaneously with the liability of Philippine Guaranty Co., Inc. under the original insurances.
Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign reinsurers.
Entries made in such register bound the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the reinsurance undertaking by the foreign
reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing
insurance business in the Philippines were payable by the foreign reinsurers when the same were not
recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an
amount equivalent to 5% of the ceded premiums, in consideration for administration and management
by the latter of the affairs of the former in the Philippines in regard to their reinsurance activities here.
Disputes and differences between the parties were subject to arbitration in the City of Manila. All the
reinsurance contracts, except that with Swiss Reinsurance Company, were signed by Philippine
Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad. Although the
contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both
parties in Switzerland, the same specifically provided that its provision shall be construed according
to the laws of the Philippines, thereby manifesting a clear intention of the parties to subject themselves
to Philippine law.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within
the Philippines. The word "sources" has been interpreted as the activity, property or service giving
rise to the income. 1 The reinsurance premiums were income created from the undertaking of the
foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under
original insurances. Such undertaking, as explained above, took place in the Philippines. These
insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to
corporate income tax.

The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may consist
of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax
Code does not require a foreign corporation to engage in business in the Philippines in subjecting its
income to tax. It suffices that the activity creating the income is performed or done in the Philippines.
What is controlling, therefore, is not the place of business but the place of activity that created an
income.

Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein
should be treated as income from sources within the Philippines but it does not require that other
kinds of income should not be considered likewise. 1wph 1.t

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a


necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvement designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to provide. Considering
that the reinsurance premiums in question were afforded protection by the government and the
recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining the state.

Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner
may free if from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents. 3

In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax
Code, suffice it to state that this question has already been answered in the affirmative in Alexander
Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit
any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:

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 twenty-four 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.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. All persons, corporations and general copartnerships


(compaias colectivas), in what ever capacity acting, including lessees or mortgagors of real
or personal property, trustees acting in any trust capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical 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 case provided for in subsection [a] of
this section) deduct and withhold from such annual or periodical gains, profits, and income a
tax equal to twelve per centum thereof: Provided That no deductions or withholding shall be
required in the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of business
therein, and (2) more than eighty-five per centum of the gross income of such corporation for
the three-year period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in existence)was
derived from sources within the Philippines as determined under the provisions of section
thirty-seven: Provided, further, That the Collector of Internal Revenue may authorize such tax
to be deducted and withheld from the interest upon any securities the owners of which are
not known to the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated in determining
the amount to be withheld. According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00,
or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the
amount of P375,345.00 is not paid within 30 days from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum amount that may
be collected as interest shall not exceed the amount corresponding to a period of three (3) years.
With costs againsts petitioner.

SO ORDERED.

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


N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

GANCAYCO, J.:

The issue posed in this petition is the income tax liability of a foreign shipping corporation which called
on Philippine ports to load cargoes for foreign destination on two occasions in 1963 and 1964,
respectively, and which collected freight fees on these transactions.

From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964, MV
"Amstelkroon, " both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on
Philippine ports to load cargoes for foreign destination. The freight fees for these transactions were
paid abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two
instances, petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission on
said vessels. No income tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on
the freight receipts.

Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding
income tax returns for and in behalf of the former under Section 15 of the National Internal Revenue
Code. Applying the then prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts
of petitioner N.V. Reederij "Amsterdam" for 1963 and 1964 amounted to P382,882.50 and
P535,052.00, respectively. On June 30, 1967, respondent Commissioner assessed said petitioner in
the amounts of P193,973.20 and P262,904.94 as deficiency income tax for 1963 and 1964,
respectively, as "a non-resident foreign corporation not engaged in trade or business in the Philippines
under Section 24 (b) (1) of the Tax Code.

On the assumption that the said petitioner is a foreign corporation engaged in trade or business in
the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of
the aforementioned vessels computed at the exchange rate of P2.00 to USs1.00 1 and paid the tax
thereon in the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation
to Section 37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue Regulations No.
2. On the same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner N.V.
Reederij "AMSTERDAM" filed a written protest against the abovementioned assessment made by the
respondent Commissioner which protest was denied by said respondent in a letter dated March 3, 1969:
On March 31, 1969, petitioners filed a petition for review with the respondent Court of Tax Appeals praying
for the cancellation of the subject assessment. After due hearing, the respondent court, on December 1,
1976, rendered a decision modifying said assessments by eliminating the 50% fraud compromise penalties
imposed upon petitioners. Petitioners filed a motion for reconsideration of said decision but this was denied
by the respondent court.

Hence, this petition for review where petitioners raised the following issues:

A. WHETHER N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY OFFICE OR PLACE OF


BUSINESS IN THE PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE
PORTS FOR THE PURPOSE OF LOADING CARGOES ONLY TWICE-ONE IN 1963 AND
ANOTHER IN 1964 SHOULD BE TAXED AS A FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (1)
OF THE TAX CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION ENGAGED
IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) IN
RELATION TO SECTION 37 (e) OF THE SAME CODE; AND

B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ "AMSTERDAM"


SHOULD BE CONVERTED INTO PHILI PINE PESOS AT THE OFFICIAL RATE OF P2.00
TO US $1.00, OR AT P3.90 TO US $1.00.

Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij "AMSTERDAM"
is a non-resident foreign corporation because it allegedly disregarded Section 163 of Revenue
Regulations No. 2 (providing for the determination of the net income of foreign corporations doing
business in the Philippines) and in holding that the foreign exchange ang e receipts of said petitioner
for purposes of computing its income tax should be converted into Philippine pesos at the rate of
P3.90 to US $1.00 instead of P2.00 to US $1.00.

The petition is devoid of merit.

Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do


business in the Philippines. It does not have a branch office in the Philippines and it made only two
calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may
be considered engaged in trade or business, its business transactions must be continuous. A casual
business activity in the Philippines by a foreign corporation, as in the present case, does not amount
to engaging in trade or business in the Philippines for income tax purposes.

The Court reproduces with approval the following disquisition of the respondent court

A corporation is itself a taxpaying entity and speaking generally, for purposes of


income tax, corporations are classified into (a) domestic corporations and (b) foreign
corporations. (Sec. 24(a) and (b), Tax Code.) Foreign corporations are further
classified into (1) resident foreign corporations and (2) non-resident foreign
corporations. (Sec. 24(b) (1) and (2). Tax Code.) A resident foreign corporation is a
foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein (Sec. 84(g), Tax Code) while a non- resident foreign
corporation is a foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein. (Sec. 84(h), Tax
Code.)

A domestic corporation is taxed on its income from sources within and without the
Philippines, but a foreign corporation is taxed only on its income from sources within
the Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However, while a
foreign corporation doing business in the Philippines is taxable on income solely from
sources within the Philippines, it is permitted to deductions from gross income but only
to the extent connected with income earned in the Philippines. (Secs. 24(b) (2) and
37, Tax Code.) On the other hand, foreign corporations not doing business in the
Philippines are taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits
and income and capital gains" The tax is 30% (now 35%) of such gross income. (Sec.
24 (b) (1), Tax Code.)
At the time material to this case, certain corporations were given special treatment,
namely, building and loan associations operating as such in accordance with Section
171 of the Corporation Law, educational institutions, domestic life insurance
companies and for" foreign life insurance companies doing business in the Philippines.
(Sec. 24(a) & (c), Tax Code.) It bears emphasis, however, that foreign life insurance
companies which were not doing business in the Philippines were taxable as other
foreign corporations not authorized to do business in the Philippines. (Sec. 24(c) Tax
Code.)

Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a non-resident
foreign corporation, organized and existing under the laws of The Netherlands with
principal office in Amsterdam and not licensed to do business in the Philippines. (pp.
8-81, CTA records.) As a non-resident foreign corporation, it is thus a foreign
corporation, not engaged in trade or business within the Philippines and not having
any office or place of business therein. (Sec. 84(h), Tax Code.) As stated above, it is
therefore taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical or
casual gains, profits and income and capital gains, and the tax is equal to thirty per
centum of such amount, under Section 24(b) (1) of the Tax Code. The accent is on
the words of--`such amount." Accordingly, petitioner N. V. Reederij "Amsterdam"
being a non-resident foreign corporation, its taxable income for purposes of our
income tax law consists of its gross income from all sources within the Philippines.

The law seems clear and specific. It thus calls for its application as worded as it leaves
no leeway for interpretation. The applicable provision imposes a tax on foreign
corporations falling under the classification of non-resident corporations without any
exceptions or conditions, unlike in the case of foreign corporations engaged in trade
or business within the Philippines which contained (at the time material to this case)
an exception with respect to foreign life insurance companies. Adherence to the
provision of the law, which specifies and determines the taxable income of, and the
rate of income tax applicable to, non-resident foreign corporations, without mentioning
any exceptions, would therefore lead to the conclusion that petitioner N.V. Reederij
"Amsterdam" is subject to income tax on gross income from all sources within the
Philippines.

A foreign corporation engaged in trade or business within the Philippines, or which has an office or
place of business therein, is taxed on its total net income received from all sources within the
Philippines at the rate of 25% upon the amount but which taxable net income does not exceed
P100,000.00, and 35% upon the amount but which taxable net income exceeds P100,000.00. 2 On
the other hand, a foreign corporation not engaged in trade or business within the Philippmes and which
does not have any office or place of business therein is taxed on income received from all sources within
the Philippines at the rate of 35% of the gross income. 3

Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing Section
163 of the Income Tax Regulations but these provisions refer to a foreign corporation engaged in
trade or business in the Philippines and not to a foreign corporation not engaged in trade or business
in the Philippines like petitioner-ship-owner herein. Thus, the respondent court aptly ruled:
It must be stressed, however, that Section 37 (e) of the Code, as implemented by
Section 163 of the Regulations, provides the rule of the determination of the net
income taxable in the Philippines of a foreign steamship company doing business in
the Philippines. To assure that non-resident foreign steamship companies not engaged
in business in the Philippines and not having any office or place of business herein are
not covered therein, the regulations explicitly and clearly provide that "the net income
of a foreign steamship co company doing business in or from this country is
ascertained," under the formula contained therein, "for the purpose of the income
tax.! The reason is easily discernible. As stated above, the taxable income of non-
resident foreign corporations consists of its gross income from all sources within the
Philippines. Accordingly, a foreign steamgship corporation derives income partly from
sources within and partly from sources without the Philippines if it is carrying on a
business of transportation service between points in the Philippines and points outside
the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.) Only then does Section 37
(e) of the Tax Code, are implemented by Section 163 of the Regulations, apply in
computing net income subject to tax. There is no basis therefore for an assertion "that
Section 37 (e) does not distinguish between a foreign corporation engaged in business
in the Philippines and a foreign corporation not engaged in business in the
Philippines."" (p. 84, CTA records.) (Decision, pp. 11-12.)

The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable to the income
of petitioners for income tax purposes instead of P3.90 to s1.00 is likewise untenable. The transactions
involved in this case are for the taxable years 1963 and 1964. Under Rep. Act No. 2609, the monetary
board was authorized to fix the legal conversion rate for foreign exchange. The free market conversion
rate during those years was P3.90 to US $1.00.

This conversion rate issue was definitely settled by this Court in the case of Commissioner of Internal
Revenue vs. Royal Interocean Lines and the Court of Tax Appeals 4 to wit:

It should be noted that on July 1 6, 1959, the policy incorporated in Circular No. 20
and implemented in subsequent circulars was relaxed with the enactment of Republic
Act No. 2609 which directed the monetary authorities to take steps for the adoption
of a four-year program of gradual decontrol, during which the Monetary Board, with
the approval of the President, could and did fix the conversion rate of the Philippine
peso to the US dollar at a ratio other than that prescribed in Section 48 of Republic
Act 265. During the period involved in the case at bar, the free market conversion rate
ranged from P3.47 to P3.65 to a US dollar at which rate the freight fees in question
were computed in the contested assessment. Inasmuch said frees were revenues
derived from foreign exchange transactions, it follows necessarily that the petitioner
was fully justified in computing the taxpayer's receipts at Id free market rates.

xxx xxx xxx

The case of the United States Lines, on which the appealed decision of the Court of
Tax Appeals is anchored, refers to transactions that took place before the approval of
Republic Act 2609 on July 16, 1959 when the only legal rate of exchange obtaining in the Philippines
was P2 to US $1, and all foreign exchange had to be surrendered to the Central Bank subject to its
disposition pursuant to its own rules and regulations. Upon the other hand, the present case refers
to transactions that took place during the effectivity of Republic Act 2609 when there was, apart
from the parity rate, a legal free market conversion rate for foreign exchange transactions, which
rate had been fixed in open trading, such as those involved in the case at bar.
Indeed, in the course of the investigation conducted by the Commissioner on the accounting records
of petitioner Royal Interocean Lines, it was verified that when said petitioner paid its agency fees for
services rendered as husbanding agent of the said vessels, it used the conversion rate of P3.90 to US
$1.00. 5 It is now estopped from claiming otherwise in this case. WHEREFORE, the petition is DENIED with
costs against petitioners. This decision is immediately executory and no extension of time to file motion for
reconsideration shall be entertained.

SO ORDERED.

G.R. No. 60714 March 6, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner


vs.
JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.

The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for respondents

PARAS, J.:

This petition for review seeks the reversal of the decision* of the Court of Tax Appeals in CTA Case
No. 2480 promulgated on January 15, 1982 which set aside petitioner's assessment of deficiency
income tax inclusive of interest and surcharge as well as compromise penalty for violation of
bookkeeping regulations charged against respondent.

The antecedental facts of the case are as follows:

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign corporation
engaged in the business of international air carriage. From 1959 to 1963, JAL did not have planes that
lifted or landed passengers and cargo in the Philippines as it had not been granted then by the Civil
Aeronautics Board (CAB) a certificate of public convenience and necessity to operate here. However,
since mid-July, 1957, JAL had maintained an officeat the Filipinas Hotel, Roxas Boulevard, Manila. Said
office did not sell tickets but was maintained merely for the promotion of the company's public
relations and to hand out brochures, literature and other information playing up the attractions of
Japan as a tourist spot and the services enjoyed in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the
Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and
reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter from
petitioner Commissioner of Internal Revenue (hereinafter referred to as Commissioner for brevity), all
dated February 28, 1972, for a total amount of P2,099,687.52 inclusive of 50% surcharge and interest,
for years 1959 through 1963, computed as follows:
1959 1960 1961

Net income per P472,025.16 P476,671.48 P734,812.77


investigation

Tax due thereon 133,608.00 135,001.00 212,444.00

Add: 50% surch. 66,804.00 67,500.50 106,222.00


1/2% mo. int.

(3 yrs.) 24,049.44 24,300.18 38,239.92

Total due P224,461.44 P226,801.68 P356,905.92

=========== =========== ===========

1962 1963 S U M M AR Y

Net income per P1,065,641.63 P1,550,230.48 P224,461.44

investigation

Tax due thereon 311,692.00 457,069.00 226,801.68

Add:50% surch. 155,846.00 228,534.50 356,905.92

1/2% mo. int. 523,642.56

(3 yrs.)

56,104.56 82,272.42 767,875.92

Total due P 523,642.56 P 767,875.92 P2,099,687.52

============= ============ =============

Compromise Penalty P 1,500.00

On June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign corporation,
it was taxable only on income from Philippine sources as determined under Section 37 of the Tax
Code, and there being no such income during the period in question, it was not liable for the deficiency
income tax liabilities assessed (Rollo, pp. 53-55). The Commissioner resolved otherwise and in a letter-
decision dated December 21, 1972, denied JAL's request for cancellaton of the assessment (Ibid., p.
29).
JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed the decision
(Ibid., pp. 51-76) and thereafter denied the motion for reconsideration filed by the Commissioner
(Ibid., p. 77). Hence, this petition.

Petitioner raises two issues in this wise:

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN THE
PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN TRADE OR


BUSINESS IN THE PHILIPPINES.

The petition is impressed with merit.

The issues in the case at bar have already been laid to rest in no less than three cases resolved by
this Court. Anent the first issue, the landmark case of Commissioner of Internal Revenue vs. British
Overseas Airways Corporation (G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has categorically
ruled:

"The Tax Code defines `gross income' thus:

`Gross income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether real
or personal, growing out of the ownership or use of or interest in such property; also from
interests, rents, dividends, securities, or the transaction of any business carried on for gain or
profit, or gains, profits and income derived from any source whatever" (Sec. 29(3);Emphasis
supplied)

"The definition is broad and comprehensive to include proceeds from sales of transport
documents. The words `income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our laws.
Income means `cash received or its equivalent'; it is the amount of money coming to a person
within a specific time x x x; it means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law, `income' refers to the flow
of wealth (Madrigal and Paternol vs. Rafferty and Concepcion, 38 Phil. 414 [1918]).

"x x x x x x

"x x x x x x

"The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. 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.

"x x x x x x

"True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources
within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties,
(5) sale of real property, and (6) sale of personal property, does not mention income from the
sale of tickets for international transportation. However, that does not render it less an income
from sources within the Philippines.

Section 37, by its language does not intend the enumeration to be exclusive. It merely directs that
the types of income listed therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive enumeration, and that
no other kind of income may be so considered (British Traders Insurance Co., Ltd. vs. Commissioner
of Internal Revenue, 13 SCRA 719 [1965]).

"x x x x x x

"The absence of flight operations to and from the Philippines is not determinative of the source
of income or the situs of income taxation. x x x The test of taxability is the `source'; and the
source of an income is that activity x x x which produced the income (Howden & Co., Ltd. vs.
Collector of Internal Revenue, 13 SCRA 601 [1965]). Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue therefrom was
derived from a business activity regularly pursued within the Philippines. x x x The word
`source' conveys one essential Idea, that of origin, and the origin of the income herein is the
Philippines (Manila Gas Corporation vs. Collector of Internal Revenue, 62 Phil. 895 [1935])."

The above ruling was adopted en toto in the subsequent case of Commissioner of Internal Revenue
vs. Air India and the Court of Tax Appeals (G.R. No. L-72443, January 29, 1988, 157 SCRA 648)
holding that the revenue derived from the sales of airplane tickets through its agent Philippine Air
Lines, Inc., here in the Philippines, must be considered taxable income, and more recently, in the case
of Commissioner of Internal Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No.
67938, December 19, 1989, 180 SCRA 274), it was likewise declared that for the source of income to
be considered as coming from the Philippines, it is sufficient that the income is derived from activities
within this country regardless of the absence of flight operations within Philippine territory.

Verily, JAL is a residentforeigncorporation under Section 84 (g) of the NationalInternalRevenue Code


of1939. Definitionofwhata resident foreign corpora-tion is was likewise reproduced under Section 20
of the 1977 Tax Code.

The BOAC Doctrine has expressed in unqualified terms:

"Under Section 20 of the 1977 Tax Code:

"(h) the term `resident foreign corporation' applies to a foreign corporation engaged in trade
or business within the Philippines or having an office or place of business therein.
"(i) the term `non-resident foreign corporation' applies to a foreign corporation not engaged
in trade or business within the Philippines and not having any office or place of business
therein."

"x x x. There is no specific criterion as to what constitutes `doing' or `engaging in' or


`transacting' business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization (The Mentholatum Co., Inc., et al. vs. Anacleto
Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A. No. 5455). In order that a foreign
corporation may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character (Pacific Micronesian Line, Inc. vs. Del Rosario
and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847
and Fisher's Philippine Law of Stock Corporation, p. 415).

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be
no conclusion other than that JAL is a resident foreign corporation, doing business in the Philippines.
Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being
the paramount objective (Commissioner of Internal Revenue vs. British Overseas Airways
Corporation, supra). The case of CIR vs. American Airlines, Inc. (supra) sums it up as follows:

"x x x, foreign airline companies which sold tickets in the Philippines through their local agents,
whether called liaison offices, agencies or branches, were considered resident foreign
corporations engaged in trade or business in the country. Such activities show continuity of
commercial dealings or arrangements and performance of acts or works or the exercise of
some functions normally incident to and in progressive prosecution of commercial gain or for
the purpose and object of the business organization."

Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National Internal Revenue
Code of 1939", the applicable law in the case at bar, resident foreign corporations are taxed thirty
percentum (30%) upon the amount by which their total net income exceed one hundred thousand
pesos. JAL is liable to pay 30% of its total net income for the years 1959 through 1963 as
contradistinguished from the computation arrived at by the Commissioner as shown in the assessment.
Apparently, the Commissioner failed to specify the tax base on the total net income of JAL in figuring
out the total income due, i.e., whether 25% or 30% level.

Having established the tax liability of respondent JAL, the only thing left to determine is the propriety
of the 50% surcharge imposed by petitioner. It appears that this must be answered in the negative.
As held in the case of CIR vs. Air India (supra):

"The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue
Code is imposed on a delinquent taxpayer who willfully neglects to file the required tax return
within the period prescribed by the law, or who willfully files a false or fraudulent tax return,
x x x.

"x x x x x x
"On the other hand, the same Section provides that if the failure to file the required tax return
is not due to willful neglect, a penalty of 25% is to be added to the amount of the tax due
from the taxpayer."

Nowhere in the records of the case can be found that JAL deliberately failed to file its income tax
returns for the years covered by the assessment. There was not even an attempt by petitioner to
prove the same or justify the imposition of the 50% surcharge. All that petitioner did was to cite the
provision of law upon which the surcharge was based without explaining why it was applicable to
respondent's case. Such cannot be countenanced for mere allegations are definitely not acceptable.
The willful neglect to file the required tax return or the fraudulent intent to evade the payment of
taxes, considering that the same is accompanied by legal consequences, cannot be presumed (CIR
vs. Air India, supra). The fraud contemplated by law is actual and constructive. It must be intentional
fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to evade the tax contemplated by the law. It must amount to intentional wrongdoing with the
sole object of evading the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58
SCRA 519). This was not proven to be so in the case of JAL as it believed in good faith that it need
not file the tax return for it had no taxable income then. The element of fraud is lacking. At most, only
negligence may be imputed to JAL for not ascertaining the dispensability of filing the tax returns. As
such, JAL may be subjected only to the 25% surcharge prescribed by the aforequoted law.

As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax Code then in
force which states:

(d) Interest on deficiency. Interest upon the amount determined as a deficiency shall be
assessed at the same time as the deficiency and shall be paid upon notice and demand from
the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate
of six per centum per annum from the date prescribed for the payment of the tax x x x;
PROVIDED, That the maximum amount that may be collected as interest on deficiency shall
in no case exceed the amount corresponding to a period of three years, the present provisions
regarding prescription to the contrary notwithstanding.

The 6% interest per annum is the same as 1/2% interest per month and petitioner correctly computed
such interest equivalent to three years which is the maximum set by the law.

On the other hand, the compromise penalty amounting to P1,500.00 for violation of bookkeeping
regulations appears to be without support. The particular provision in the said regulations allegedly
violated was not even specified. Furthermore, the term "compromise penalty" itself is not found among
the penal provisions of the Bookkeeping Regulations (Revenue Regulations No. V-1, as amended,
March 17, 1947, pp. 836-837, Revenue Regulations Updated by Prof. Eustaquio Ordono, 1984). The
compromise penalty is therefore, improperly imposed.

In sum, the following schedule as recomputed illustrates the total tax liability of the private respondent
for the years 1959 through 1963 -

Net Income 30% of Net Income as Add 25% surcharge Add 6% interest per Summary of Total Income
Tax Due under under Sec. 72 NIRC annum for a maximum Tax Due from the
Secs. 24(a) and (b) of 1939 of 3 years under Private Respondent
(2) NIRC of 1939 Sec. 51(d) NIRC of
1939
1959 P 472,025.16 P 141,607.54 P 35,401.88 P 25,489.35 P 202,498.77

1960 476,671.48 143,001.44 35,750.36 25,740.25 204,492.05

1961 734,812.77 220,443.83 55,110.95 39,679.88 315,234.66

1962 1,065,641.63 319,692.48 79,923.12 399,615.60

1963 1,550,230.48 465,069.14 116,267.28 581,336.42

P1,703,177.40

Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of ONE
MILLION SEVEN HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY SEVENAND FORTY
CENTAVOS (P1,703,177.40) The dismissal for lack of merit by this Court of the appeal in JAL v.
Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969 is not res judicata to the
present case. The Tax Court ruled in that case that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to the common
carrier's tax. The common carrier's tax is an excise tax, being a tax on the activity of transporting,
conveying or removing passengers and cargo from one place to another. It purports to tax the
business of transportation. Being an excise tax, the same can be levied by the State only when the
acts, privileges or businesses are done or performed within the jurisdiction of the Philippines
(Commissioner of Internal Revenue v. British Overseas Airways Corporation, supra).

The subject matter of the case underconsideration is income tax, a direct tax on the income of persons
and other entities "of whatever kind and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in G.R. No. L-30041 cannot be res judicata with
respect to this case.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of Tax Appeals in
CTA Case No. 2480 is SET ASIDE; and (c) private respondent JAL is ordered to pay the amount of
P1,703,177.40 as deficiency taxes for the fiscal years 1959 to 1963 inclusive of interest andsurcharges.

SO ORDERED.

G.R. Nos. 79926-27 October 17, 1991

STATE INVESTMENT HOUSE, INC. and STATE FINANCING CENTER, INC., petitioners,
vs.
CITIBANK, N.A., BANK OF AMERICA, NT & SA, HONGKONG & SHANGHAI BANKING
CORPORATION, and the COURT OF APPEALS, respondents.

Roco, Bunag, Kapunan & Migallos for petitioners.

Agcaoili & Associates for Citibank, N.A, and Bank of America NT & SA.

Belo, Abiera & Associates for Hongkong & Shanghai Banking Corp.
NARVASA, J.:p

The chief question in the appeal at bar is whether or not foreign banks licensed to do business in the
Philippines, may be considered "residents of the Philippine Islands" within the meaning of Section 20
of the Insolvency Law (Act No. 1956, as amended, eff. May 20, 1909) reading in part as follows: 1

An adjudication of insolvency may be made on the petition of three or more


creditors, residents of the Philippine Islands, whose credits or demands accrued in the
Philippine Islands, and the amount of which credits or demands are in the aggregate
not less than one thousand pesos: Provided, that none of said creditors has become a
creditor by assignment, however made, within thirty days prior to the filing of said
petition. Such petition must be filed in the Court of First Instance of the province or
city in which the debtor resides or has his principal place of business, and must be
verified by at least three (3) of the petitioners. . . .

The foreign banks involved in the controversy are Bank of America NT and SA, Citibank N.A. and
Hongkong and Shanghai Banking Corporation. On December 11, 1981, they jointly filed with the Court
of First Instance of Rizal a petition for involuntary insolvency of Consolidated Mines, Inc. (CMI), which
they amended four days later. 2 The case was docketed as Sp. Proc. No. 9263 and assigned to Branch 28 of the Court.

The petition for involuntary insolvency alleged:

1) that CMI had obtained loans from the three petitioning banks, and that as of November/December,
1981, its outstanding obligations were as follows:

a) In favor of Bank of America (BA) P15,297,367.67

(as of December 10, 1981) US$ 4,175,831.88

(b) In favor of Citibank US$ 4,920,548.85

(as of December 10, 1981)

c) In favor of Hongkong & Shanghai Bank US$ 5,389,434.12

(as of November 30, 1981); P6,233,969.24

2) that in November, 1981, State Investment House, Inc. (SIHI) and State Financing Center, Inc.
(SFCI) had separately instituted actions for collection of sums of money and damages in the Court of
First Instance of Rizal against CMI, docketed respectively as Civil Cases Numbered 43588 and 43677;
and that on application of said plaintiffs, writs of preliminary attachment had been issued which were
executed on "the royalty/profit sharing payments due CMI from Benguet Consolidated Mining, Inc;"
and

3) that CMI had "committed specific acts of insolvency as provided in Section 20 of the Insolvency
Law, to wit:
xxx xxx xxx

5. that he (CMI) has suffered his (CMI's) property to remain under attachment or legal
process for three days for the purpose of hindering or delaying or defrauding his
(CMI's) creditors;

xxx xxx xxx

11. that being a merchant or tradesman he (CMI) has generally defaulted in the
payment of his (CMI's) current obligations for a period of thirty days; . . .

The petition was opposed by State Investment House, Inc. (SIHI) and State Financing Center, Inc.
(SFCI). 3 It claimed that:

1) the three petitioner banks had come to court with unclean hands in that they filed the petition for
insolvency alleging the CMI was defrauding its creditors, and they wished all creditors to share in
its assets although a few days earlier, they had "received for the account of CMI substantial
payments aggregating P10,800,000.00;"

2) the Court had no jurisdiction because the alleged acts of insolvency were false: the writs of
attachment against CMI had remained in force because there were "just, valid and lawful grounds for
the(ir) issuance," and CMI was not a "merchant or tradesman" nor had it "generally defaulted in the
payment of (its) obligations for a period of thirty days . . . ;"

3) the Court had no jurisdiction to take cognizance of the petition for insolvency because petitioners
are not resident creditors of CMI in contemplation of the Insolvency Law; and

4) the Court has no power to set aside the attachment issued in favor of intervenors-oppositors SIHI
and SFCI.

CMI filed its Answer to the petition for insolvency, asserting in the main that it was not insolvent, 4 and
later filed a "Motion to Dismiss Based on Affirmative Defense of Petitioner's Lack of Capacity to Sue," echoing the theory of SIHI and SFCI that
the petitioner banks are not "Philippine residents." 5 Resolution on the motion was "deferred until after hearing of the case on the merits" it
appearing to the Court that the grounds therefor did not appear to be indubitable. 6

SIHI and SFCI filed their own Answer-in-Intervention, 7 and served on the three petitioner banks requests for admission
of certain facts in accordance with Rule 26 of the Rules of Court, 8 receiving a response only from Hongkong & Shanghai Bank. 9

SIHI and SFCI then filed a Motion for Summary Judgment dated May 23, 1983 "on the ground that,
based on the pleadings and admissions on record, the trial court had no jurisdiction to adjudicate CMI
insolvent since the petitioners (respondent foreign banks) are not "resident creditors" of CMI as
required under the Insolvency Law." 10 Oppositions to the motion were filed, 11 to which a reply was submitted. 12

The Regional Trial Court 13 found merit in the motion for summary judgment. By Order dated October 10, 1983, it rendered
"summary judgment dismissing the . . . petition for lack of jurisdiction over the subject matter, with costs against petitioners." 14 It ruled that
on the basis of the "facts on record, as shown in the pleadings, motions and admissions of the parties, an insolvency court could "not acquire
jurisdiction to adjudicate the debtor as insolvent if the creditors petitioning for adjudication of insolvency are not "residents" of the Philippines"
citing a decision of the California Supreme Court which it declared "squarely applicable especially considering that one of the sources of our
Insolvency Law is the Insolvency Act of California of 1895 . . . " And it declared that since petitioners had been merely licensed to do business
in the Philippines, they could not be deemed residents thereof.
The three foreign banks sought to take an appeal from the Order of October 10, 1983. They filed a
notice of appeal and a record on appeal. 15 SIHI and SFCI moved to dismiss their appeal claiming it was attempted out of
time. The Trial Court denied the motion.

SIHI and SFCI filed with this Court a petition for certiorari and prohibition (G.R. NO. 66449), impugning
that denial. The Court dismissed the petition and instead required the three banks to file a petition for
review in accordance with Rule 45 of the Rules of Court. 16 This the banks did (their petition was docketed as G.R. No.
66804). However, by Resolution dated May 16, 1984, the court referred the petition for review to the Intermediate Appellate Court, where it
was docketed as AC SP-03674. 17

In the meantime, the Trial Court approved on May 3, 1985 the banks' record on appeal and transmitted
it to this Court, where it was recorded as UDK-6866. As might have been expected, this Court required
the banks to file a petition for review under Rule 45, but they asked to be excused from doing so since
they had already filed such a petition, which had been referred to the Intermediate Appellate Court
and was there pending as AC-G.R. No. SP 03674, supra. This Court then also referred UDK-6866 to
the Intermediate Appellate Court where it was docketed as AC-G.R. No. CV 07830.

Both referred cases, AC-G.R. No. SP 03674 and AC-G.R. No. CV 07830, were consolidated by
Resolution of the Court of Appeals dated April 9, 1986, and Decision thereon was promulgated on July
14, 1987 by the Fifteenth Division of said Court. 18

The Appellate Court reversed the Trial Court's Order of October 10, 1983 and remanded the case to
it for further proceedings. It ruled:

1) that the purpose of the Insolvency Law was "to convert the assets of the bankrupt in cash for
distribution among creditors, and then to relieve the honest debtor from the weight of oppressive
indebtedness and permit him to start life anew, free from the obligations and responsibilities
consequent upon business misfortunes;" 19 and that it was "crystal clear" that the law was "designed not only for the benefit
of the creditors but more importantly for the benefit of the debtor himself," the object being "to provide not only for the suspension of
payments and the protection of creditors but also the discharge of insolvent honest debtors to enable them to have a fresh start;"

2) that the Trial Court had placed "a very strained and restrictive interpretation of the term "resident,"
as to exclude foreign banks which have been operating in this country since the early part of the
century," and "the better approach . . . would have been to harmonize the provisions . . . (of the
Insolvency Law) with similar provisions of other succeeding laws, like the Corporation Code of the
Philippines, the General Banking Act, the Offshore Banking Law and the National Internal Revenue
Code in connection with or related to their doing business in the Philippines;"

3) that in light of said statutes, the three banks "are in truth and in fact considered as "residents" of
the Philippines for purposes of doing business in the Philippines and even for taxation matters;"

4) that the banks had "complied with all the laws, rules and regulations (for doing business in the
country) and have been doing business in the Philippines for many years now;" that the authority
granted to them by the Securities and Exchange Commission upon orders of the Monetary Board
"covers not only transacting banking business . . . but likewise maintaining suits "for recovery of any
debt, claims or demand whatsoever," and that their petition for involuntary insolvency was "nothing
more than a suit aimed at recovering a debt granted by them to Consolidated Mines, Inc., or at least
a portion thereof;"

4) that to deprive the foreign banks of their right to proceed against their debtors through insolvency
proceedings would "contravene the basic standards of equity and fair play, . . . would discourage their
operations in economic development projects that create not only jobs for our people but also
opportunities for advancement as a nation;" and

5) that the terms "residence" and "domicile" do not mean the same thing, and that as regards a
corporation, it is generally deemed an "inhabitant" of the state under whose law it is incorporated,
and has a "residence" wherever it conducts its ordinary business, and may have its legal "domicile" in
one place and "residence" in another.

SIHI and SFCI moved for reconsideration and then, when rebuffed, took an appeal to this Court. Here,
they argue that the Appellate Court's judgment should be reversed because it failed to declare that

1) the failure of the three foreign banks to allege under oath in their petition for involuntary insolvency
that they are Philippine residents, wishing only to "be considered Philippine residents," is fatal to their
cause;

2) also fatal to their cause is their failure to prove, much less allege, that under the domiciliary laws
of the foreign banks, a Philippine corporation is allowed the reciprocal right to petition for a debtor's
involuntary insolvency;

3) in fact and in law, the three banks are not Philippine residents because:

a) corporations have domicile and residence only in the state of their


incorporation or in the place designated by law, although for limited
and exclusive purposes, other states may consider them as residents;

b) juridical persons may not have residence separate from their


domicile;

4) actually, the non-resident status of the banks within the context of the Insolvency Law is confirmed
by other laws;

5) the license granted to the banks to do business in the Philippines does not make them residents;

6) no substantive law explicitly grants foreign banks the power to petition for the adjudication of the
Philippine corporation as a bankrupt;

7) the Monetary Board can not appoint a conservator or receiver for a foreign bank or orders its
liquidation having only the power to revoke its license, subject to such proceedings as the Solicitor
General may thereafter deem proper to protect its creditors;

8) the foreign banks are not denied the right to collect their credits against Philippine debtors, only
the right to "petition for the harsh remedy of involuntary insolvency" not being conceded to them;

9) said banks have come to court with unclean hands, their filing of the petition for involuntary
insolvency being an attempt to defeat validly acquired rights of domestic corporations.

The concept of a foreign corporation under Section 123 of the Corporation Code is of "one formed,
organized or existing under laws other than those of the Philippines and . . . (which) laws allow Filipino
citizens and corporations to do business . . . ." There is no question that the three banks are foreign
corporations in this sence, with principal offices situated outside of the Philippines. There is no question
either that said banks have been licensed to do business in this country and have in fact been doing
business here for many years, through branch offices or agencies, including "foreign currency deposit
units;" in fact, one of them, Hongkong & Shanghai Bank has been doing business in the Philippines
since as early as 1875.

The issue is whether these Philippine branches or units may be considered "residents of the Philippine
Islands" as that term is used in Section 20 of the Insolvency Law, supra, 20 or residents of the state under the
laws of which they were respectively incorporated. The answer cannot be found in the Insolvency Law itself, which contains no definition of
the term, resident, or any clear indication of its meaning. There are however other statutes, albeit of subsequent enactment and effectivity,
from which enlightening notions of the term may be derived.

The National Internal Revenue Code declares that the term "'resident foreign corporation' applies to
a foreign corporation engaged in trade or business within the Philippines," as distinguished from a "
"non-resident foreign corporation" . . . (which is one) not engaged in trade or business within the
Philippines." 21

The Offshore Banking Law, Presidential Decree No. 1034, states "that branches, subsidiaries,
affiliation, extension offices or any other units of corporation or juridical person organized under the
laws of any foreign country operating in the Philippines shall be considered residents of the
Philippines." 22

The General Banking Act, Republic Act No. 337, places "branches and agencies in the Philippines of
foreign banks . . . (which are) called Philippine branches," in the same category as "commercial banks,
savings associations, mortgage banks, development banks, rural banks, stock savings and loan
associations" (which have been formed and organized under Philippine laws), making no distinction
between the former and the later in so far, as the terms "banking institutions" and "bank" are used in
the Act, 23 declaring on the contrary that in "all matters not specifically covered by special provisions applicable only to foreign banks, or
their branches and agencies in the Philippines, said foreign banks or their branches and agencies lawfully doing business in the Philippines
"shall be bound by all laws, rules, and regulations applicable to domestic banking corporations of the same class, except such laws, rules and
regulations as provided for the creation, formation, organization, or dissolution of corporations or as fix the relation, liabilities, responsibilities,
or duties of members, stockholders or officers or corporations." 24

This Court itself has already had occasion to hold 25 that a foreign corporation licitly doing business in the Philippines,
which is a defendant in a civil suit, may not be considered a non-resident within the scope of the legal provision authorizing attachment against
a defendant not residing in the Philippine Islands;" 26 in other words, a preliminary attachment may not be applied for and granted solely on
the asserted fact that the defendant is a foreign corporation authorized to do business in the Philippines and is consequently and necessarily,
"a party who resides out of the Philippines." Parenthetically, if it may not be considered as a party not residing in the Philippines, or as a party
who resides out of the country, then, logically, it must be considered a party who does reside in the Philippines, who is a resident of the
country. Be this as it may, this Court pointed out that:

. . . Our laws and jurisprudence indicate a purpose to assimilate foreign corporations,


duly licensed to do business here, to the status of domestic corporations. (Cf. Section
73, Act No. 1459, and Marshall Wells Co. vs. Henry W. Elser & Co., 46 Phil. 70, 76;
Yu; Cong Eng vs. Trinidad, 47 Phil. 385, 411) We think it would be entirely out of line
with this policy should we make a discrimination against a foreign corporation, like the
petitioner, and subject its property to the harsh writ of seizure by attachment when it
has complied not only with every requirement of law made specially of foreign
corporations, but in addition with every requirement of law made of domestic
corporations. . . . .

Obviously, the assimilation of foreign corporations authorized to do business in the Philippines "to the
status of domestic corporations," subsumes their being found and operating as corporations,
hence, residing, in the country.
The same principle is recognized in American law: that the "residence of a corporation, if it can be
said to have a residence, is necessarily where it exercises corporate functions . . . ;" that it is
.considered as dwelling "in the place where its business is done . . . ," as being "located where its
franchises are exercised . . . ," and as being "present where it is engaged in the prosecution of the
corporate enterprise;" that a "foreign corporation licensed to do business in a state is a resident of
any country where it maintains an office or agent for transaction of its usual and customary business
for venue purposes;" and that the "necessary element in its signification is locality of
existence." 27 Courts have held that "a domestic corporation is regarded as having a residence within the state at any place where it is
engaged in the particulars of the corporate enterprise, and not only at its chief place or home office;" 28 that "a corporation may be domiciled
in one state and resident in another; its legal domicil in the state of its creation presents no impediment to its residence in a real and practical
sense in the state of its business activities." 29

The foregoing propositions are in accord with the dictionary concept of residence as applied to juridical
persons, a term which appears to comprehend permanent as well as temporary residence.

The Court cannot thus accept the petitioners' theory that corporations may not have a residence (i.e.,
the place where they operate and transact business) separate from their domicile (i.e., the state of
their formation or organization), and that they may be considered by other states as residents only
for limited and exclusive purposes. Of course, as petitioners correctly aver, it is not really the grant of
a license to a foreign corporation to do business in this country that makes it a resident; the license
merely gives legitimacy to its doing business here. What effectively makes such a foreign corporation
a resident corporation in the Philippines is its actually being in the Philippines and licitly doing business
here, "locality of existence" being, to repeat, the "necessary element in . . . (the) signification" of the
term, resident corporation.

Neither can the Court accept the theory that the omission by the banks in their petition for involuntary
insolvency of an explicit and categorical statement that they are "residents of the Philippine Islands,"
is fatal to their cause. In truth, in light of the concept of resident foreign corporations just expounded,
when they alleged in that petition that they are foreign banking corporations, licensed to do business
in the Philippines, and actually doing business in this Country through branch offices or agencies, they
were in effect stating that they are resident foreign corporations in the Philippines.

There is, of course, as petitioners argue, no substantive law explicitly granting foreign banks the power
to petition for the adjudication of a Philippine corporation as a bankrupt. This is inconsequential, for
neither is there any legal provision expressly giving domestic banks the same power, although their
capacity to petition for insolvency can scarcely be disputed and is not in truth disputed by petitioners.
The law plainly grants to a juridical person, whether it be a bank or not or it be a foreign or domestic
corporation, as to natural persons as well, such a power to petition for the adjudication of bankruptcy
of any person, natural or juridical, provided that it is a resident corporation and joins at least two
other residents in presenting the petition to the Bankruptcy Court.

The petitioners next argue that "Philippine law is emphatic that only foreign corporations whose own
laws give Philippine nationals reciprocal rights may do business in the Philippines." As basis for the
argument they invoke Section 123 of the Corporation Code which, however, does not formulate the
proposition in the same way. Section 123 does not say, as petitioners assert, that it is required that
the laws under which foreign corporations are formed "give Philippine nationals, reciprocal rights."
What it does say is that the laws of the country or state under which a foreign corporation is "formed,
organized or existing . . . allow Filipino citizens and corporations to do business in its own country or
state," which is not quite the same thing. Now, it seems to the Court that there can be no serious
debate about the fact that the laws of the countries under which the three (3) respondent banks were
formed or organized (Hongkong and the United States) do "allow Filipino citizens and corporations to
do business" in their own territory and jurisdiction. It also seems to the Court quite apparent that the
Insolvency Law contains no requirement that the laws of the state under which a foreign corporation
has been formed or organized should grant reciprocal rights to Philippine citizens to apply for
involuntary insolvency of a resident or citizen thereof. The petitioners' point is thus not well taken and
need not be belabored.

That the Monetary Board can not appoint a conservator or receiver for a foreign bank or order its
liquidation having only the power to revoke its license, subject to such proceedings as the Solicitor
General may thereafter deem proper to protect its creditors, which is another point that petitioners
seek to make, is of no moment. It has no logical connection to the matter of whether or not the
foreign bank may properly ask for a judicial declaration of the involuntary insolvency of a domestic
corporation, which is the issue at hand. The fact is, in any event, that the law is not lacking in sanctions
against foreign banks or powerless to protect the latter's creditors.

The petitioners contend, too, that the respondent banks have come to court with unclean hands, their
filing of the petition for involuntary insolvency being an attempt to defeat validly acquired rights of
domestic corporations. The Court wishes to simply point out that the effects of the institution of
bankruptcy proceedings on all the creditors of the alleged bankrupt are clearly spelled out by the law,
and will be observed by the Insolvency Court regardless of whatever motives apart from the desire
to share in the assets of the insolvent in satisfying its credits that the party instituting the
proceedings might have.

Still another argument put forth by the petitioners is that the three banks' failure to incorporate their
branches in the Philippines into new banks in accordance with said Section 68 of the General Banking
Act connotes an intention on their part to continue as residents of their respective states of
incorporation and not to be regarded as residents of the Philippines. The argument is based on an
incomplete and inaccurate quotation of the cited Section. What Section 68 required of a "foreign bank
presently having branches and agencies in the Philippines, . . . within one year from the effectivity"
of the General Banking Act, was to comply with any of three (3) options, not merely with one sole
requirement. These three (3) options are the following:

1) (that singled out and quoted by the petitioners, i.e.:) "incorporate its branch or
branches into a new bank in accordance with Philippine laws . . . ; or

2) "assign capital permanently to the local branch with the concurrent maintenance of
a 'net due to' head office account which shall include all net amounts due to other
branches outside the Philippines in an amount which when added to the assigned
capital shall at all times be not less than the minimum amount of capital accounts
required for domestic commercial banks under section twenty-two of this Act;" or

3) "maintain a "net due to" head office account which shall include all net amounts
due to other branches outside the Philippines, in an amount which shall not be less
than the minimum amount of capital accounts required for domestic commercial banks
under section twenty-two of this Act."

The less said about this argument then, the better.

The petitioners allege that three days before respondent banks filed their petition for involuntary
insolvency against CMI, they received from the latter substantial payments on account in the
aggregate amount of P6,010,800.00, with the result that they were "preferred in the distribution of
CMI's assets thereby defrauding other creditors of CMI." Non sequitur. It is in any case a circumstance
that the Bankruptcy Court may well take into consideration in determining the manner and proportion
by which the assets of the insolvent company shall be distributed among its creditors; but it should
not be considered a ground for giving the petition for insolvency short shrift. Moreover, the payment
adverted to does not appear to be all that large. The total liabilities of CMI to the three respondent
banks as of December, 1981 was P21,531,336.91, and US$14,485,814.85. Converted into Philippine
currency at the rate of P7.899 to the dollar, the average rate of exchange during December,
1981,30 the dollar account would be P114,423,451.50. Thus, the aggregate liabilities of CMI to the banks, expressed
in Philippine currency, was P135,954,788.41 as of December, 1981, and therefore the payment to them of
P6,010,800.00 constituted only some 4.42% of the total indebtedness.

WHEREFORE, the petition is DENIED and the challenged Decision of the Court of Appeals is
AFFIRMED in toto, with costs against the petitioners.

SO ORDERED.