G.R. No.

L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have carefully
studied it and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies
for the construction of twelve ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds
issued by the Central Bank. 2 Initial payments were made in cash and through irrevocable letters of credit. 3Fourteen
promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the
Republic of the Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in
due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the
purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of
P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy
to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00,
representing the compromise penalty. 7 The NDC then came to this Court in a petition for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines.
— The following items of gross income shall be treated as gross income from sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all
the related activities — the signing of the contract, the construction of the vessels, the payment of the stipulated price,
and their delivery to the NDC — were done in Tokyo. 8 The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on
interest received by foreign corporations not engaged in trade or business within the Philippines is not planted
upon the condition that 'the activity or labor — and the sale from which the (interest) income flowed had its
situs' in the Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest
on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there
speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where the contract is
signed. The residence of the obligor who pays the interest rather than the physical location of the securities,
bonds or notes or the place of payment, is the determining factor of the source of interest income. (Mertens,
Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd.,
19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co.,
Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him
can have no other source than within the Philippines. The interest is paid not by the bond, note or other
interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing
under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa,
Manila, Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14)
promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels
 purchased and acquired by it from the Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11,
Partial Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which are
duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in
Japan during the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00,
respectively, as interest on the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14,
& 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest
under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation
duly organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the
Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which is admittedly
a resident of the Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted
to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price
of the vessels acquired by petitioner is interest derived from sources within the Philippines subject to income
tax under the then Section 24(b)(1) of the National Internal Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax
Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

(b) Exclusion from gross income. — The following items shall not be included in gross income and shall be
exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. — Interest upon the obligations of the Government of the Republic of
the Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of
this Code, only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A.
No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on
this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does
not exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted
because of the undertaking signed by the Secretary of Finance in each of the promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby
absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and
punctual payment of both principal and interest of the above note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear
waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and
unmistakably expressed. 11 Any doubt concerning this question must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such
undertaking was made by the government in consonance with and certainly not against the following provisions of the
Tax Code:

Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership (companies
colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and employees of
the Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or categorical gains, profits and income of any nonresident alien individual, not engaged
in trade or business within the Philippines and not having any office or place of business therein, shall (except
in the cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical
gains, profits and income a tax to twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation
under this Title not engaged in trade or business within the Philippines and not having any office or place of
business therein, there shall be deducted and withheld at the source in the same manner and upon the same
items as is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and such tax shall
be returned and paid in the same manner and subject to the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but
without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner
closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only
by its charter but also by the Corporation Code and other pertinent laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the
Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject
to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same
from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this
section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or
before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the
Government of the Philippines authorized to receive it. Every such person is made personally liable for such
tax, and is indemnified against the claims and demands of any person for the amount of any payments made
in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

13
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, the Court
quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly
causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or
not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may
thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said
Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence,
an exempting provision should be construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so should
be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered
G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision 1 of the Court of
Appeals in CA-G.R. SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and reversed the
June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May
8, 2002 Resolution3 of the Court of Appeals denying its motion for reconsideration.

The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX,
Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring,
holding, importing and exporting, selling and disposing embroidered textile products." 4 Through JUBANITEX’s
General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as
commission agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded
and collected through her efforts.5

In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which
JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to
the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a
taxable income of P1,707,772.64 and a tax due of P170,777.26. 6

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly
withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not
taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore
considered as income from sources outside the Philippines.

The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by the
BIR on her claim for refund.7 On June 28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the performance of her duties as President of
JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income taxable
in the Philippines because JUBANITEX is a domestic corporation.

On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent received
the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income means
the activity or service that produce the income, the sales commission received by respondent is not taxable in the
Philippines because it arose from the marketing activities performed by respondent in Germany. The dispositive
portion of the appellate court’s Decision, reads:

WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is hereby
REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund in the amount
of Php 170,777.26.

SO ORDERED.8

Petitioner filed a motion for reconsideration but was denied. 9 Hence, the instant recourse.

Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source thereof is
JUBANITEX, a domestic corporation located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since respondent is the President of JUBANITEX,
any remuneration she received from said corporation should be construed as payment of her overall managerial
services to the company and should not be interpreted as a compensation for a distinct and separate service as a
sales commission agent.

Respondent, on the other hand, claims that the income she received was payment for her marketing services. She
contended that income of nonresident aliens like her is subject to tax only if the source of the income is within the
Philippines. Source, according to respondent is the situs of the activity which produced the income. And since the
source of her income were her marketing activities in Germany, the income she derived from said activities is not
subject to Philippine income taxation.

The issue here is whether respondent’s sales commission income is taxable in the Philippines.

Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual. –

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. –

(1) In General. – A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed
a ‘nonresident alien doing business in the Philippines,’ Section 22(G) of this Code notwithstanding.

xxxx

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. – There shall be levied,
collected and paid for each taxable year upon the entire income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or business within the Philippines x x x a tax equal to twenty-
five percent (25%) of such income. x x x

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business,
are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the income’s "source." In construing the meaning of
"source" in Section 25 of the NIRC, resort must be had on the origin of the provision.

The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833, 10 which took effect on
January 1, 1920.11 Under Section 1 thereof, nonresident aliens are likewise subject to tax on income "from all sources
within the Philippine Islands," thus –

SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received in
the preceding calendar year from all sources by every individual, a citizen or resident of the Philippine Islands, a tax
of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the
entire net income received in the preceding calendar year from all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.

Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue
Law of 1917.12 Being a law of American origin, the authoritative decisions of the official charged with enforcing it in
the U.S. have peculiar persuasive force in the Philippines. 13

The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within the
U.S. and specifies when similar types of income are to be treated as from sources outside the U.S. 14 Under the said
Code, compensation for labor and personal services performed in the U.S., is generally treated as income from U.S.
sources; while compensation for said services performed outside the U.S., is treated as income from sources outside
the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:

SEC. 42. x x x

(A) Gross Income From Sources Within the Philippines. x x x

xxxx

(3) Services. – Compensation for labor or personal services performed in the Philippines;

xxxx

(C) Gross Income From Sources Without the Philippines. x x x

xxxx

(3) Compensation for labor or personal services performed without the Philippines;

The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:

The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of
this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether
a particular item is from "sources within the United States" and suggest an investigation into the nature and location
of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income
should be from "sources within the United States." If the income is from capital, the place where the capital is employed
should be decisive; if it is employed in this country, the income should be from "sources within the United States." If
the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.

Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an activity
or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting
income is taxable to nonresident aliens and foreign corporations.

The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the activities or
property which produce the income. The result is that, on the one hand, nonresident aliens and nonresident foreign
corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there
is no undue imposition of a tax when the activities do not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction,
or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in this country.

The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly
to be levied upon to defray the burdens of the United States Government is that income which is created by activities
and property protected by this Government or obtained by persons enjoying that protection. 16

The important factor therefore which determines the source of income of personal services is not the residence of the
payor, or the place where the contract for service is entered into, or the place of payment, but the place where the
services were actually rendered.17

In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the Court addressed the issue on the applicable
source rule relating to reinsurance premiums paid by a local insurance company to a foreign insurance company in
respect of risks located in the Philippines. It was held therein that the undertaking of the foreign insurance company
to indemnify the local insurance company is the activity that produced the income. Since the activity took place in the
Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law of Federal Income
Taxation, the Court emphasized that the technical meaning of source of income is the property, activity or service that
produced the same. Thus:

The source of an income is the property, activity or service that produced the income. The reinsurance premiums
remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the
reinsurance premiums, and the same took place in the Philippines. x x x the reinsured, the liabilities insured and the
risk originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity
were based, were all situated in the Philippines. x x x 19

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the issue was whether
BOAC, a foreign airline company which does not maintain any flight to and from the Philippines is liable for Philippine
income taxation in respect of sales of air tickets in the Philippines, through a general sales agent relating to the
carriage of passengers and cargo between two points both outside the Philippines. Ruling in the affirmative, the Court
applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule that the
source of income is that "activity" which produced the income. It was held that the "sale of tickets" in the Philippines
is the "activity" that produced the income and therefore BOAC should pay income tax in the Philippines because it
undertook an income producing activity in the country.

Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways
Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of
respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The
conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying principle
of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is to be construed as
the "activity" that produced the income, as viewed by the majority, or merely the physical source of the income, as
ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-
Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC.
Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of the
money earned. If such was the interpretation of the majority, the Court would have simply stated that source of income
is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where
BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its
conclusion that BOAC is subject to Philippine income taxation. Thus –

BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines.
That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier.
In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments. x x x 21

xxxx

The source of an income is the property, activity or service that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines.
In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged
hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments
is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden
of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare
and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into the relationship. 22

The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the
income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is therefore no merit in petitioner’s
interpretation which equates source of income in labor or personal service with the residence of the payor or the place
of payment of the income.

Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to
establish the factual circumstances showing that her income is exempt from Philippine income taxation.

The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency
of evidence to prove that the services she rendered were performed in Germany. Though not raised as an issue, the
Court is clothed with authority to address the same because the resolution thereof will settle the vital question posed
in this controversy.23

The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi jurisagainst
the taxpayer.24 To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax
is actually exempt from taxation.

In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the
service which would entitle her to 10% commission income, are "sales actually concluded and collected through [her]
efforts."25 What she presented as evidence to prove that she performed income producing activities abroad, were
copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and
fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients.
However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and
whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she
establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to
have transpired in Germany.

The paucity of respondent’s evidence was even noted by Atty. Minerva Pacheco, petitioner’s counsel at the hearing
before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders signed by the
customers in Germany to prove the sale transactions therein. 26 Likewise, in her Comment to the Formal Offer of
respondent’s evidence, she objected to the admission of the faxed documents bearing instruction/orders marked as
Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by petitioner’s counsel as to the
absence of substantial evidence that would constitute proof that the sale transactions for which respondent was paid
commission actually transpired outside the Philippines, is relevant because respondent stayed in the Philippines for
89 days in 1995. Except for the months of July and September 1995, respondent was in the Philippines in the months
of March, May, June, and August 1995, 30 the same months when she earned commission income for services
allegedly performed abroad. Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her appointment as commission agent is exclusivelyfor Germany
and other European markets.

In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as adequate to support the conclusion31 that it was in Germany
where she performed the income producing service which gave rise to the reported monthly sales in the months of
March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund
should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case for refund of income
withheld from respondent’s remunerations for services rendered abroad, the Court in a Minute Resolution dated
February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld
from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy because
the subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with her income
in 1995. Otherwise, stated, res judicata has no application here. Its elements are: (1) there must be a final judgment
or order; (2) the court that rendered the judgment must have jurisdiction over the subject matter and the parties; (3) it
must be a judgment on the merits; (4) there must be between the two cases identity of parties, of subject matter, and
of causes of action. 34 The instant case, however, did not satisfy the fourth requisite because there is no identity as to
the subject matter of the previous and present case of respondent which deals with income earned and activities
performed for different taxable years.

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the Court
of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of
Tax Appeals in C.T.A. Case No. 5633, which denied respondent’s claim for refund of income tax paid for the year
1995 is REINSTATED.

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

DECISION
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 contractors 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, petitioners revenue examiners recommended an assessment for deficiency income, branch profit
remittance, contractors and commercial brokers taxes. Respondent questioned this assessment in a letter dated June 5, 1986.
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

and NDC construction projects). . . . . . . . . . . . P 967,269,811.14

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

to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90

TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

FY ended March 31, 1985

Undeclared net income from

Philphos and NDC construction projects . . . . . P 483,634,905.57

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 . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16

III. DEFICIENCY CONTRACTORS TAX

FY ended March 31, 1985

Undeclared gross receipts/ gross income from

Philphos and NDC construction projects . . . . P 967,269,811.14

Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00

Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00

25% surcharge for late payment . . . . . . . . . 9,672,698.00

Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00

Add: 20% int. p.a. fr. 4-21-85 to

to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46

TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKERS TAX

FY ended March 31, 1985

Undeclared share from commission income

(denominated as subsidy from Home

Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50

Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00

Add: 50% surcharge for non-declaration. . . . . . . 814,284.50

25% 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 . . . . . . . . . . . . . . . . . . . P 3,600,535.68

The 50% surcharge was imposed for your clients failure to report for tax purposes the aforesaid taxable revenues while the 25%
surcharge was imposed because of your clients failure to pay on time the above deficiency percentage taxes.

x x x x x x x x x. [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 petitioners 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 contractors tax assessments in petitioners
assessment letter. The second, CTA Case No. 4110, questioned the deficiency commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring a one-time amnesty covering unpaid income taxes
for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of the income tax amnesty should, on or
before October 31, 1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true copy
of his statement declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no
such record exists, file a statement of said net worth subject to verification by the BIR; and (c) file a return and pay a tax equivalent
to ten per cent (10%) of the increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30, 1986 and attached
thereto its sworn statement of assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was
received by the BIR on November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of
its net worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986 by E.O. No. 54
dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In addition
to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 [3] included estate and donors 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 donors 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
respondents deficiency tax liabilities were extinguished upon respondents 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 contractors 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 contractors 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.
Petitioners 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 contractors 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 contractors tax assessment and respondents 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 donors taxes and tax on business. Estate and
donors taxes fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The contractors
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 donors 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 donors 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 respondents 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 contractors 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 respondents 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:

x x x 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 Y12,790,389,000.00 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 suppliers 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 Y7,560,000,000.00 for the Leyte Industrial Estate Port Development Project and authorized
the NDC to implement the same.[27] The other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a
loan from the Export-Import Bank of Japan to advance payment to its sub-contractors.[28]
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were further broken down
and subdivided according to the materials, equipment and services rendered on the project. The price breakdown and the
corresponding materials, equipment and services were contained in a list attached as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened for public bidding a project to construct and install two
ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that participated in and won the
bidding. Thus, on May 2, 1982, Philphos and respondent corporation entered into an agreement entitled Turn-Key Contract for
Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation. [30] The object of
the contract was to establish and place in operating condition a modern, reliable, efficient and integrated ammonia storage complex
adapted to the site for the receipt and storage of liquid anhydrous ammonia [31]and for the delivery of ammonia to an 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:

x x x 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 Y3,255,751,000.00 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 suppliers 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 classifiedthe 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 contractors tax on the income from the
two projects. In fact respondent claims, which petitioner has not denied, that the income it derived from the Onshore Portion of
the two projects had been declared for tax purposes and the taxes thereon already paid to the Philippine government. [39] It is with
regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments
subject of this case arose. Petitioner argues that since the two agreements are turn-key,[40] they call for the supply of both materials
and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of
the Philippines.[41] Accordingly, respondents 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
contractors tax in accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:

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

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

xxxxxxxxx
(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.
x x x x x x x x x.[43]
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 contractors 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:

x x x x x x x x x. [50]

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, respondents 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 equipment[67]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 respondents submission of pertinent documents, released
the amount in the letters of credit in favor of respondent and credited the amount therein to respondents 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 contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal Revenue v. Engineering Equipment & Supply Co [73]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-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of
Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's
assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the
fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration.

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United
Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport
Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of
the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had
no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not
carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it
maintained a general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways
— which was responsible for selling BOAC tickets covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate
amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by
BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the
years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the
CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the Tax Court on
27 January 1972, assailing the assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years
1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated
16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case but also re-
issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71
plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was
denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court praying
that it be absolved of liability for deficiency income tax for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that
the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later
by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said
income is not subject to Philippine income tax. The CTA position was that income from transportation is income from
services so that the place where services are rendered determines the source. Thus, in the dispositive portion of its
Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency
income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
 1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights
here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.

2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing
business in the Philippines or has an office or place of business in the Philippines.

3. In the alternative that private respondent may not be considered a resident foreign corporation but
a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five
per cent (35%) of its gross income received from all sources within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein.

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

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what
constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and
not one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies
on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline
business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was
"engaged in" business in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding
taxable year from all sources within the Philippines. 5

Sec. 24. Rates of tax on corporations. — ...

(b) Tax on foreign corporations. — ...

(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign fife insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.

The Tax Code defines "gross income" thus:

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

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words
'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within
the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the amount of
money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to
P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8 For the source of income to
be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare
and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines,
namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for international transportation. However, that
does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend
the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-
inclusive enumeration, and that no other kind of income may be so considered. " 10

BOAC, however, would impress upon this Court that income derived from transportation is income for services, with
the result that the place where the services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under
review.

The absence of flight operations to and from the Philippines is not determinative of the source of income or the site
of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test
of taxability is the "source"; and the source of an income is that activity ... which produced the income. 11 Unquestionably,
the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the
Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact that
income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein
is the Philippines. 13

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments
in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers
are now taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross
Philippine billings. (Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross
Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo or mail originates from the
Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2-
½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would
have been place under Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal
in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present
case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax.
As elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business
of transportation. 14 Being an excise tax, the same can be levied by the State only when the acts, privileges or
businesses are done or performed within the jurisdiction of the Philippines. The subject matter of the case under
consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind and in
whatever form derived from any source." Since the two cases treat of a different subject matter, the decision in one
cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent,
the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as
deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April
16, 1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for refund in
the amount of P858,307.79 is hereby denied. Without costs.

SO ORDERED.

Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

Fernan, J., took no part.