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CIR vs.

Marubeni Corp


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

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and Commented [1]:
construction, is duly registered in the Philippines with Manila branch office. CIR examined the
Commented [2]:
Manila branch’s books of accounts for fiscal year ending March 1985, and found that respondent
had undeclared income from contracts with NDC and Philphos for construction of a wharf/port Commented [3]:
complex and ammonia storage complex respectively. Commented [4]:

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes.
CIR claims that the income respondent derived were income from Philippine sources, hence
subject to internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review with CTA: Commented [5]:
the first, questioned the deficiency income, branch profit remittance and contractor’s tax
Commented [6]:
assessments and second questioned the deficiency commercial broker’s assessment.
Commented [7]:
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that Commented [8]:
taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty
return on Oct 30, 1986. Commented [9]:
Commented [10]:
Commented [11]:
On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title
3 and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, Commented [12]:
1986 and stated those who already availed amnesty under EO 41 should file an amended return
Commented [13]:
to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.
Commented [14]:
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the
deficiency taxes.

CA affirmed on appeal.

Whether Marubeni is exempted from tax?


On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the
deficiency tax because the income from the projects came from the “Offshore Portion” as opposed
to “Onshore Portion”. It claims all materials and equipment in the contract under the Commented [15]:
“Offshore Portion” were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes. Commented [16]:
(BG: Marubeni won in the public bidding for projects with government corporations NDC and
Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II)
and Philippine Pesos Portion and financed either by OECF or by supplier’s credit. The Japanese
Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already
paid the Onshore Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials Commented [17]:
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. Accordingly, Commented [18]:
respondent’s entire receipts from the contracts, including its receipts from the Offshore Portion,
constitute income from Philippine sources. The total gross receipts covering both labor and
materials should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling
services or labor rather than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in
the Philippines because some of them were completed in Japan (and in fact subcontracted) in Commented [19]:
accordance with the provisions of the contracts. 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 Philippines’ taxing jurisdiction and are
therefore not subject to contractor’s tax. Commented [20]:

Petition denied.

CIR vs. Baier-Nickel

CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the

Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic

corporation engaged in the manufacturing, marketing and selling of embroidered textile products.
Through Jubanitex’s general manager, Marina Guzman, the company appointed respondent as
commission agent with 10% sales commission on all sales actually concluded and collected
through her efforts. Commented [21]:
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted
the 10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax
return but then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld
by Jubanitex and that her sales commission income was compensation for services rendered in
Germany not Philippines and thus not taxable here. Commented [22]:

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied 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.

Decision was reversed by CA on appeal, holding that the commission was received as sales
agent not as President and that the “source” of income arose from marketing activities in
Germany. Commented [23]:

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.

Whether respondent is entitled to refund?


No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business,
are subject to the Philippine income taxation on their income received from all sources in the
Philippines. In determining the meaning of “source”, the Court resorted to origin of Act 2833 (the Commented [24]:
first Philippine income tax law), the US Revenue Law of 1916, as amended in 1917.

US SC has said that income may be derived from three possible sources only: (1) capital and/or
(2) labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the
labor is done should be decisive; if it is done in this country, the income should be from “sources
within the United States.” If the income is from capital, the place where the capital is employed
should be decisive; if it is employed in this country, the income should be from “sources within
the United States.” If the income is from the sale of capital assets, the place where the sale is made
should be likewise decisive. “Source” is not a place, it is an activity or property. As such, it has a
situs or location, and if that situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations.

The source of an income is the property, activity or service that produced the income. For the Commented [25]:
source of income to be considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines.

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

In the instant case, 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

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

Petition granted.


The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the
construction of its 12 ocean-going vessels. The purchase price was to come from the proceeds of Commented [26]:
bonds issued by the Central Bank. Initial payments were made in cash and through irrevocable
letter of credit. Fourteen (14) promissory notes were signed for the balance by the NDC
guaranteed by Republic of the Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by
the NDC to Tokyo. The NDC remitted to the ship builders in Tokyo the total amount of Commented [27]:
US$4,066,580 as interest on the balance of the purchase price. No tax was withheld.
Commented [28]:
The Commissioner then held the NDC liable on such tax in the total sum of
PhP5,115,234.74. The BIR thereupon served on the NDC a warrant of distraint and levy to Commented [29]:
enforce collection of the claimed amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the
Tax Code 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. Commented [30]:
ISSUE: WON the Tokyo shipbuilders are subject to tax?


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

The law, 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.

The law specifies: interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligation of resident, corporate or otherwise. Nothing there
speak of the 'acts or activity' of non-residential corporation 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. 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.

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.

CIR vs. Smart Communications

Smart Communication (Smart for brevity), is a domestic corporation and duly registered with
the Board of Investment.

Respondent Smart entered into three agreements for Programming and Consultancy Services Commented [31]:
with PRISM Transactive, a non-resident corporation duly organized and existing under the law
Commented [32]:
of Malaysia. Under the agreement, PRISM was to provide programming and consultancy
service for the installation of SDM and CM, for the implementation of SIM. Commented [33]:

PRISM billed respondent of US$547822.45 and respondent withheld the 25% royalty tax of
US$136,955.61.r or P7M

Respondent filed a claim of refund with the BIR of the amount PhP7,008,840. Respondent
claim that it is entitled to a refund because the payment made to PRISM are not royalties but
business profits pursuant to the definition of royalties under the RP-Malaysia Tax Treaty.

Petitioner’s Arguments
Petitioner contends that the cases relied upon by the CTA in upholding respondent’s right to
claim the refund are inapplicable since the withholding agents therein are wholly owned
subsidiaries of the principal taxpayers, unlike in the instant case where the withholding agent
and the taxpayer are unrelated entities. Petitioner further claims that since respondent did not
file the claim on behalf of Prism, it has no legal standing to claim the refund. To rule otherwise
would result to the unjust enrichment of respondent, who never shelled-out any amount to pay
the royalty taxes. Petitioner, thus, posits that the real party-in-interest to file a claim for refund
of the erroneously withheld taxes is Prism. He cites as basis the case of Silkair (Singapore) Pte,
Ltd. v. Commissioner of Internal Revenue,38 where it was ruled that the proper party to file a
refund is the statutory taxpayer.39 Finally, assuming that respondent is the proper party,
petitioner counters that it is still not entitled to any refund because the payments made to Prism
are taxable as royalties, having been made in consideration for the use of the programs owned
by Prism.

Respondent’s Arguments
Respondent, on the other hand, maintains that it is the proper party to file a claim for refund as
it has the statutory and primary responsibility and liability to withhold and remit the taxes to
the BIR. It points out that under the withholding tax system, the agent-payor becomes a payee
by fiction of law because the law makes the agent personally liable for the tax arising from the
breach of its duty to withhold. Thus, the fact that respondent is not in any way related to Prism
is immaterial.
Moreover, respondent asserts that the payments made to Prism do not fall under the definition
of royalties since the agreements are for programming and consultancy services only, wherein
Prism undertakes to perform services for the creation, development or the bringing into
existence of software applications solely for the satisfaction of the peculiar needs and
requirements of respondent.


Whether the payment made to PRISM constitite "business profits" or royalties?


SDM Agreement read, "The SDM shall be installed by PRISM, inlcuding the SDM libraries, the
Intellectual Property Right (IPR) of which shall be retained by PRISM.

SIM agreement provides, " The client shall own the IPR for the specification and the source code
for the SIM application.

PRISM has intellectual property right over the SDM program, but not over the CM and SIM
application programs as the proprietary rights of these programs belong to respondent. In other
words, out of the payments made to PRISM, only the payment for the SDM program is a royalty
subject to a 25% withholding tax.

A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and
SIM application agreement is therefore in order.