Republic of the PhilippinesSUPREME COURTManilaEN BANCG.R. No.
L-65773-74 April 30, 1987COMMISSIONER OF INTERNAL
REVENUE,petitioner,vs.BRITISH OVERSEAS AIRWAYS CORPORATION and
COURT OF TAX APPEALS,respondents.Quasha, Asperilla, Ancheta, Pea,
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.1G.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 thereinIt 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.3BOAC, 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."4Those
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.5Sec. 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 fromall
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
thetransactions of any business carried on for gain or profile,or
gains, profits, andincome 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.6The
records show that the Philippine gross income of BOAC for the
fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00.7Did
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.8For 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.9True, 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. "10BOAC, 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.11Unquestionably, 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",12it 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.13It 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- 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- % 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 inJAL vs. Commissioner of Internal
Revenue(G.R. No. L-30041) on February 3, 1969, isres judicatato 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 beres judicatato 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.Separate OpinionsTEEHANKEE,C.J.,concurring:I
concur with the Court's majority judgment upholding the assessments
of deficiency income taxes against respondent BOAC for the fiscal
years 1959-1969 to 1970-1971 and therefore setting aside the
appealed joint decision of respondent Court of Tax Appeals. I just
wish to point out that the conflict between the majority opinion
penned by Mr. Justice Feliciano as to the proper characterization
of the taxable income derived by respondent BOAC from the sales in
the Philippines of tickets foe BOAC form the issued by its general
sales agent in the Philippines gas become moot after November 24,
1972. Booth opinions state that by amendment through P.D. No.69,
promulgated on November 24, 1972, of section 24(b) (2) of the Tax
Code providing dor the rate of income tax on foreign corporations,
international carriers such as respondent BOAC, have since then
been taxed at a reduced rate of 2-% on their gross Philippine
billings. There is, therefore, no longer ant source of substantial
conflict between the two opinions as to the present 2-% tax on
their gross Philippine billings charged against such international
carriers as herein respondent foreign
corporation.FELICIANO,J.,dissenting:With great respect and
reluctance, i record my dissent from the opinion of Mme. Justice
A.A. Melencio-Herrera speaking for the majority . In my opinion,
the joint decision of the Court of Tax Appeals in CTA Cases Nos.
2373 and 2561, dated 26 January 1983, is correct and should be
affirmed.The fundamental issue raised in this petition for review
is whether the British Overseas Airways Corporation (BOAC), a
foreign airline company which does not maintain any flight
operations 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.1. The Solicitor General has defined as one of the
issue in this case the question of:2. Whether or not during the
fiscal years in question1BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of
business in the Philippines.It is important to note at the outset
that the answer to the above-quoted issue is not determinative of
the lialibity of the BOAC to Philippine income taxation in respect
of the income here involved. The liability of BOAC to Philippine
income taxation in respect of such income depends, not on BOAC's
status as a "resident foreign corporation" or alternatively, as a
"non-resident foreign corporation," but rather on whether or not
such income is derived from "source within the Philippines."A
"residentforeign corporation" or foreign corporation engaged in
trade or business in the Philippines or having an office or place
of business in the Philippines is subject to Philippine income
taxationonlyin respect of income derivedfrom sources within the
Philippines.Section 24 (b) (2) of the National Internal Revenue
CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20
June 1959, as it existed up to 3 August 1969, read as follows:(2)
Resident corporations. A foreign corporation engaged in trade or
business with in the Philippines (expect foreign life insurance
companies) shall be taxable as provided in subsection (a) of this
section.Section 24 (a) of the Tax Code in turn provides:Rate of tax
on corporations. (a)Tax on domestic corporations. ... and a like
tax shall be livied, collected, and paid annually upon thetotal net
income receivedin the preceeding taxable yearfrom all sources
within the Philippinesby everycorporation organized,authorized, or
existingunder the laws of any foreign country: ... . (Emphasis
supplied)Republic Act No. 6110, which took effect on 4 August 1969,
made this even clearer when it amended once more Section 24 (b) (2)
of the Tax Code so as to read as follows:(2) Resident Corporations.
A corporation, organized, authorized orexisting under the laws of
any foreign counrty,except foreign life 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 yearfrom all sources
within the Philippines.(Emphasis supplied)Exactly the same rule is
provided by Section 24 (b) (1) of the Tax Code upon non-resident
foreign corporations. Section 24 (b) (1) as amended by Republic Act
No. 3825 approved 22 June 1963, read as follows:(b) Tax on foreign
corporations. (1) Non-resident corporations. There shall be levied,
collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received byevery
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines,as interest,
dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or
determinative annual or periodical gains, profits and income a tax
equal to thirty per centum of such amount: provided, however, that
premiums shall not include reinsurance premiums.2Clearly, whether
the foreign corporate taxpayer is doing business in the Philippines
and therefore a resident foreign corporation, or not doing business
in the Philippines and therefore a non-resident foreign
corporation, it is liable to income tax only to the extent that it
derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the
Philippines yields no inference that all or any part of its income
is Philippine source income. Similarly, the non-resident status of
a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income
creates no presumption that the recipient foreign corporation is a
resident of the Philippines. The critical issue, for present
purposes, is thereforewhether of not BOAC is deriving income from
sources within the Philippines.2. For purposes of income taxation,
it is well to bear in mind that the "source of income" relatesnot
to the physical sourcing of a flow of money or the physical situs
of paymentbut rather to the "property, activity or service which
produced the income." InHowden and Co., Ltd. vs. Collector of
Internal Revenue,3the court dealt with the issue of the applicable
source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of
risks located in the Philippines. The Court said:The source of an
income is the property, activity or services that produced the
income. The reinsurance premiums remitted to appellants by virtue
of the reinsurance contract, 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.
[T]he reinsurance, 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. 4The Court may be seen to be saying that it is
theunderlying prestationwhich is properly regarded as the activity
giving rise to the income that is sought to be taxed. In
theHowdencase, that underlying prestation was theindemnification of
the local insurance company.Such indemnification could take place
only in the Philippines where the risks were located and where
payment from the foreign reinsurance (in case the casualty insured
against occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies
constituted Philippine source income of the foreign
reinsurances.The concept of "source of income" for purposes of
income taxation originated in the United States income tax system.
The phrase "sources within the United States" was first introduced
into the U.S. tax system in 1916, and was subsequently embodied in
the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the 1939
U.S. Tax Code. It therefore seems useful to refer to a standard
U.S. text on federal income taxation:The Supreme Court has said, in
a definition much quoted but often debated, thatincome may be
derived from three possible sources only:(1)capitaland/or
(2)laborand/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 "source within the United States"
and suggest an investigation into thenature and location of the
activities or property which produce the income.If the income is
from labor (services)the place where the labor is doneshould be
decisive; if it is done in this counrty, the income should be from
"source within the United States." If the income is from
capital,the place where the capital is employedshould be decisive;
if it is employed in this country, the income should be from
"source 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 andto make the test of taxability the
"source", or situs of the activities or property which produce the
income . . . . Thus,if income is to taxed, the recipient thereof
must be resident within the jurisdiction, orthe property or
activities out of which the income issue 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 isprotection of life and
propertyand that the income rightly to be levied uponto defray the
burdens of the United States Governmentis that income which is
created by activities and property protected by this Government or
obtained by persons enjoying that protection.53. We turn now to the
question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income
rules that must be confronted; (a) the source rule applicable in
respect ofcontracts of service; and (b) the source rule applicable
in respect ofsales of personal property.Where a contract for the
rendition of service is involved, the applicable source rule may be
simply stated as follows: the income is sourced in the place where
the service contracted for is rendered. Section 37 (a) (3) of our
Tax Code reads as follows:Section 37. Income for 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:xxx xxx xxx(3) Services.
Compensation for labor or personal servicesperformed in the
Philippines;... (Emphasis supplied)Section 37 (c) (3) of the Tax
Code, on the other hand, deals with income from sources without the
Philippines in the following manner:(c) Gross income from sources
without the Philippines. The following items of gross income shall
be treated asincome from sources without the Philippines:(3)
Compensation for labor or personal servicesperformed without the
Philippines;... (Emphasis supplied)It should not be supposed that
Section 37 (a) (3) and (c) (3) of the Tax Code apply only in
respect of services rendered by individual natural persons; they
also apply to services rendered by or through the medium of a
juridical person.6Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the
Tax Code provides as follows:(e) Income form sources partly within
and partly without the Philippines. Items of gross income,
expenses, losses and deductions, other than those specified in
subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance. ...
Gains, profits, andincome from(1)transportation or other services
rendered partly within and partly without the Philippines, or(2)
from the sale of personnel property produced (in whole or in part)
by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall betreated as derived partly from
sources within and partly from sources without the Philippines. ...
(Emphasis supplied)It should be noted that the above underscored
portion of Section 37 (e) was derived from the 1939 U.S. Tax Code
which "was based upon a recognition thattransportation was a
service and that the source of the income derived therefrom was to
be treated as being the place where the service of transportation
was rendered.7Section 37 (e) of the Tax Code quoted above carries a
strong well-nigh irresistible, implication that income derived from
transportation or other services rendered entirely outside the
Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a
consideration of certain provisions of Revenue Regulations No. 2
entitled "Income Tax Regulations" as amended, first promulgated by
the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:Section 155. Compensation for labor or
personnel services. Gross income from sources within the
Philippines includes compensation for labor or personal services
within the Philippinesregardless of the residence of the payer, of
the place in which the contract for services was made, or of the
place of payment (Emphasis supplied)Section 163 of Revenue
Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies
i.e., foreignsteamshipcompanies deriving income from sources partly
within and partly without the Philippines:Section 163 Foreign
steamship companies. The return of foreign steamship companieswhose
vessels touch parts of the Philippinesshould include as gross
income, the totalreceipts of all out-going businesswhether freight
or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both
within and without the Philippines of all vessels, whether touching
of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis
supplied)Another type of utility or service enterprise is dealt
with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as
follows:Section 164. Telegraph and cable services. A foreign
corporation carrying on the business of transmission of telegraph
or cable messages between points in the Philippines and points
outside the Philippines derives income partly form source within
and partly from sources without the Philippines.... (Emphasis
supplied)Once more, a very strong inference arises under Sections
163 and 164 of Revenue Regulations No. 2 that steamship and
telegraph and cable services renderedbetween points both outside
the Philippinesgive rise to incomewholly from sources outside the
Philippines,and therefore not subject to Philippine income
taxation.We turn to the "source of income" rules relating to the
sale of personal property, upon the one hand, and to the purchase
and sale of personal property, upon the other hand.We consider
firstsales of personal property. Income from the sale of personal
property by the producer or manufacturer of such personal property
will be regarded as sourcedentirely within or entirely withoutthe
Philippines or as sourcedpartly within and partly withoutthe
Philippines, depending upon two factors: (a) the place where the
sale of such personal property occurs; and (b) the place where such
personal property was produced or manufactured. If the personal
property involved was both produced or manufactured and sold
outside the Philippines, the income derived therefrom will be
regarded as sourced entirely outside the Philippines, although the
personal property had been produced outside the Philippines, or if
the sale of the property takes place outside the Philippines and
the personal was produced in the Philippines, then, the income
derived from the sale will be deemed partly as income sourced
without the Philippines. In other words, the income (and the
related expenses, losses and deductions) will be allocated between
sources within and sources without the Philippines. Thus, Section
37 (e) of the Tax Code, although already quoted above, may be
usefully quoted again:(e) Income from sources partly within and
partly without the Philippines. ... Gains, profits and income from
(1) transportation or other services rendered partly within and
partly without the Philippines; or (2)from the sale of personal
property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by
the taxpayer without and sold within the Philippines,shall be
treated as derived partly from sources within and partly from
sources without the Philippines. ... (Emphasis supplied)In
contrast, income derived from the purchase and sale of personal
property i. e., trading is, under the Tax Code, regarded as sourced
wholly in the placewhere the personal property is sold.Section 37
(e) of the Tax Code provides in part as follows:(e) Income from
sources partly within and partly without the Philippines ... Gains,
profits and income derived from thepurchase of personal property
within and its sale without the Philippines or from the purchase of
personal property without and its sale within the Philippines,
shall be treated as derived entirely from sources within the
country in which sold.(Emphasis supplied)Section 159 of Revenue
Regulations No. 2 puts the applicable rule succinctly:Section 159.
Sale of personal property. Income derived from the purchase and
sale of personal property shall be treated as derived entirely from
the country in which sold.The word "sold" includes "exchange." The
"country" in which "sold" ordinarily means the place where the
property is marketed. This Section does not apply to income from
the sale personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines or produced (in
whole or in part) by the taxpayer without and sold within the
Philippines. (See Section 162 of these regulations). (Emphasis
supplied)4. It will be seen that the basic problem is one of
characterization of the transactions entered into by BOAC in the
Philippines. Those transactions may be characterized either as
sales of personal property (i. e., "sales of airline tickets") oras
entering into a lease of services or a contract of service or
carriage.The applicable "source of income" rules differ depending
upon which characterization is given to the BOAC transactions.The
appropriate characterization, in my opinion, of the BOAC
transactions is that of entering into contracts of service, i.e.,
carriage of passengers or cargo between points located outside the
Philippines.The phrase "sale of airline tickets," while widely used
in popular parlance, does not appear to be correct as a matter of
tax law. The airline ticket in and of itself has no monetary value,
even as scrap paper. The value of the ticket lies wholly in the
right acquired by the "purchaser" the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of
the "purchaser" or passenger from the one point to another outside
the Philippines. The ticket is really theevidence of the contract
of carriageentered into between BOAC and the passenger. The money
paid by the passenger changes hands in the Philippines. But the
passenger does not receive undertaken to be delivered by BOAC. The
"purchase price of the airline ticket" is quite different from the
purchase price of a physical good or commodity such as a pair of
shoes of a refrigerator or an automobile; it is really
thecompensation paid for the undertaking of BOACto transport the
passenger or cargo outside the Philippines.The characterization of
the BOAC transactions either as sales of personal property or as
purchases and sales of personal property, appear entirely
inappropriate from other viewpoint. Consider first purchases and
sales: is BOAC properly regarded as engaged in trading in the
purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling"
personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a
product" its service. However, for the technical purposes of the
law on income taxation, BOAC is in fact entering into contracts of
service or carriage. The very existance of "source rules"
specifically and precisely applicable to the rendition of services
must preclude the application here of "source rules" applying
generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a
slighty more abstract level, BOAC's income is more appropriately
characterized as derived from a "service", rather than from an
"activity" (a broader term than service and including the activity
of selling) or from the here involved isincometaxation, andnot a
salestax or anexciseorprivilegetax.5. The taxation of international
carriers is today effected under Section 24 (b) (2) of the Tax
Code, as amended by Presidential Decree No. 69, promulgated on 24
November 1972 and by Presidential Decree No. 1355, promulgated on
21 April 1978, in the following manner:(2) Resident corporations. A
corporation organized, authorized, or existing under the laws of
any foreign country, 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 preceeding
taxable year from all sources within the Philippines:Provided,
however,Thatinternational carriers shall pay a tax of two and
one-half per cent on their gross Philippine billings."Gross
Philippines of passage documents sold therein, whether for
passenger, excess baggege or mail, provide the cargo or mail
originates from the Philippines. The gross revenue realized from
the said cargo or mail shall include the gross freight charge up to
final destination. Gross revenues from chartered flights
originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of
the passage documents. For purposes of determining the taxability
to revenues from chartered flights, the term "originating from the
Philippines" shall include flight of passsengers who stay in the
Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)Under the above-quoted proviso
international carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the
world to any other point in the world, are not charged any
Philippineincometax on their Philippine billings (i.e., billings in
respect of passenger or cargo originating from the Philippines).
Under this new approach, international carriers who service port or
points in the Philippines are treated in exactly the same way as
international carriers not serving any port or point in the
Philippines. Thus, the source of income rule applicable, as above
discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the
Philippines, has been set aside. in place of Philippine income
taxation, the Tax Code now imposes this 2 per cent tax computed on
the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation
and debarkation would be taking place. This 2- per cent tax is
effectively a tax on grossreceiptsor an excise or privilege tax
andnota tax onincome. Thereby, the Government has done away with
the difficulties attending the allocation of income and related
expenses, losses and deductions. Because taxes are the very
lifeblood of government, the resulting potential "loss" or "gain"
in the amount of taxes collectible by the state is sometimes, with
varying degrees of consciousness, considered in choosing from among
competing possible characterizations under or interpretation of tax
statutes. It is hence perhaps useful to point out that the
determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets
entails no down-the-road loss of income tax revenues to the
Government. In lieu thereof, the Government takes in revenues
generated by the 2- per cent tax on the gross Philippine billings
or receipts of international carriers.I would vote to affirm the
decision of the Court of Tax Appeals.
Republic of the PhilippinesSUPREME COURTManilaSECOND
DIVISIONG.R. No. L-66838 April 15, 1988COMMISSIONER OF INTERNAL
REVENUE,petitioner,vs.PROCTER & GAMBLE PHILIPPINE MANUFACTURING
CORPORATION & THE COURT OF TAX
APPEALS,respondents.PARAS,J.:This is a petition for review on
certiorari filed by the herein petitioner, Commissioner of Internal
Revenue, seeking the reversal of the decision of the Court of Tax
Appeals dated January 31, 1984 in CTA Case No. 2883 entitled
"Procter and Gamble Philippine Manufacturing Corporation vs. Bureau
of Internal Revenue," which declared petitioner therein, Procter
and Gamble Philippine Manufacturing Corporation to be entitled to
the sought refund or tax credit in the amount of P4,832,989.00
representing the alleged overpaid withholding tax at source and
ordering payment thereof.The antecedent facts that precipitated the
instant petition are as follows:Private respondent, Procter and
Gamble Philippine Manufacturing Corporation (hereinafter referred
to as PMC-Phil.), a corporation duly organized and existing under
and by virtue of the Philippine laws, is engaged in business in the
Philippines and is a wholly owned subsidiary of Procter and Gamble,
U.S.A. herein referred to as PMC-USA), a non-resident foreign
corporation in the Philippines, not engaged in trade and business
therein. As such PMC-U.S.A. is the sole shareholder or stockholder
of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock
of PMC Phil. and is entitled to receive income from PMC-Phil. in
the form of dividends, if not rents or royalties. In addition,
PMC-Phil has a legal personality separate and distinct from
PMC-U.S.A. (Rollo, pp. 122-123).For the taxable year ending June
30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00
and accordingly paid the corresponding income tax thereon
equivalent to P25%-35% or P19,765,116.00 as provided for under
Section 24(a) of the Philippine Tax Code, the pertinent portion of
which reads:SEC. 24. Rates of tax on corporation. a) Tax on
domestic corporations. A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every
corporation organized in, or geting under the laws of the
Philippines, and partnerships, no matter how created or organized,
but not including general professional partnerships, in accordance
with the following:Twenty-five per cent upon the amount by which
the taxable net income does not exceed one hundred thousand pesos;
andThirty-five per cent upon the amount by which the taxable net
income exceeds one hundred thousand pesos.After taxation its net
profit was P36,735,216.00. Out of said amount it declared a
dividend in favor of its sole corporate stockholder and parent
corporation PMC-U.S.A. in the total sum of P17,707,460.00 which
latter amount was subjected to Philippine taxation of 35% or
P6,197,611.23 as provided for in Section 24(b) of the Philippine
Tax Code which reads in full:SECTION 1. The first paragraph of
subsection (b) of Section 24 of the National Bureau Internal
Revenue Code, as amended, is hereby further amended to read as
follows:(b) Tax on foreign corporations. 41) Non-resident
corporation. A foreign corporation not engaged in trade or business
in the Philippines, including a foreign life insurance company not
engaged in the life insurance business in the Philippines, shall
pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest
(except interest on foreign loans which shall be subject to 15%
tax), dividends, rents, royalties, salaries, wages, premiums,
annuities, compensations, remunerations for technical services or
otherwise, emoluments or other fixed or determinable, annual,
periodical or casual gains, profits, and income, and capital gains:
Provided, however, That premiums shall not include re-insurance
premium Provided, further, That cinematograpy film owners, lessors,
or distributors, shall pay a tax of 15% on their gross income from
sources within the Philippines: Provided, still further That on
dividends received from a domestic corporation hable to tax under
this Chapter, the tax shall be 15% of the dividends received, which
shall be collected and paid as provided in Section 53(d) of this
Code, subject to the condition that the country in which the
non-resident foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation,
taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this
section: Provided, finally That regional or area headquarters
established in the Philippines by multinational corporations 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 shall not be subject to tax.For the
taxable year ending June 30, 1975 PMC-Phil. realized a taxable net
income of P8,735,125.00 which was subjected to Philippine taxation
at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net
profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil.
again declared a dividend in favor of PMC-U.S.A. at the tax rate of
35% or P6,457,485.00.In July, 1977 PMC-Phil., invoking the
tax-sparing credit provision in Section 24(b) as aforequoted, as
the withholding agent of the Philippine government, with respect to
the dividend taxes paid by PMC-U.S.A., filed a claim with the
herein petitioner, Commissioner of Internal Revenue, for the refund
of the 20 percentage-point portion of the 35 percentage-point whole
tax paid, arising allegedly from the alleged "overpaid withholding
tax at source or overpaid withholding tax in the amount of
P4,832,989.00," computed as follows:Dividend IncomeTax withheld15%
tax underAlleged of
PMC-U.S.A.at source attax sparingover
35%provisopayment
P17,707,460P6,196,611P2,656,119P3,541,492
6,457,4852,260,119968,6221,291,497
P24,164,946P8,457,731P3,624,941P4,832,989
There being no immediate action by the BIR on PMC-Phils'
letter-claim the latter sought the intervention of the CTA when on
July 13, 1977 it filed with herein respondent court a petition for
review docketed as CTA No. 2883 entitled "Procter and Gamble
Philippine Manufacturing Corporation vs. The Commissioner of
Internal Revenue," praying that it be declared entitled to the
refund or tax credit claimed and ordering respondent therein to
refund to it the amount of P4,832,989.00, or to issue tax credit in
its favor in lieu of tax refund. (Rollo, p. 41)On the other hand
therein respondent, Commissioner of qqqInterlaal Revenue, in his
answer, prayed for the dismissal of said Petition and for the
denial of the claim for refund. (Rollo, p. 48)On January 31, 1974
the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in
favor of the herein petitioner, the dispositive portion of the same
reading as follows:Accordingly, petitioner is entitled to the
sought refund or tax credit of the amount representing the overpaid
withholding tax at source and the payment therefor by the
respondent hereby ordered. No costs.SO ORDERED.Hence this
petition.The Second Division of the Court without giving due course
to said petition resolved to require the respondents to comment
(Rollo, p. 74). Said comment was filed on November 8, 1984 (Rollo,
pp. 83-90). Thereupon this Court by resolution dated December 17,
1984 resolved to give due course to the petition and to consider
respondents' comulent on the petition as Answer. (Rollo, p.
93)Petitioner was required to file brief on January 21, 1985
(Rollo, p. 96). Petitioner filed his brief on May 13, 1985 (Rollo,
p. 107), while private respondent PMC Phil filed its brief on
August 22, 1985.Petitioner raised the following assignments of
errors:ITHE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS
IN FACT AND IN LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE
PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT)IS
ENTITLED TO THE SOUGHT REFUND OR TAX CREDIT OF P4,832,989.00,
REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL.
UPON REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF
P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA FOR
SHORT).IITHE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY
BASIS IN FACT AND IN LAW, THAT PMC-USA, A NON-RESIDENT FOREIGN
CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND
A DOMESTIC CORPORATION DOMICILED IN THE UNITED STATES, IS ENTITLED
UNDER THE U.S. TAX CODE AGAINST ITS U.S. FEDERAL TAXES TO A UNITED
STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20
PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX) SPARED OR
WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE PHILIPPINE
GOVERNMENT.The sole issue in this case is whether or not private
respondent is entitled to the preferential 15% tax rate on
dividends declared and remitted to its parent corporation.From this
issue two questions are posed by the petitioner Commissioner of
Internal Revenue, and they are (1) Whether or not PMC-Phil. is the
proper party to claim the refund and (2) Whether or not the U. S.
allows as tax credit the "deemed paid" 20% Philippine Tax on such
dividends?The petitioner maintains that it is the PMC-U.S.A., the
tax payer and not PMC-Phil. the remitter or payor of the dividend
income, and a mere withholding agent for and in behalf of the
Philippine Government, which should be legally entitled to receive
the refund if any. (Rollo, p. 129)It will be observed at the outset
that petitioner raised this issue for the first time in the Supreme
Court. He did not raise it at the administrative level, nor at the
Court of Tax Appeals. As clearly ruled by Us "To allow a litigant
to assume a different posture when he comes before the court and
challenges the position he had accepted at the administrative
level," would be to sanction a procedure whereby the Court-which is
supposed to review administrative determinations would not review,
but determine and decide for the first time, a question not raised
at the administrative forum." Thus it is well settled that under
the same underlying principle of prior exhaustion of administrative
remedies, on the judicial level, issues not raised in the lower
court cannot generally be raised for the first time on appeal.
(Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia
v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726
[1981]),Nonetheless it is axiomatic that the State can never be in
estoppel, and this is particularly true in matters involving
taxation. The errors of certain administrative officers should
never be allowed to jeopardize the government's financial
position.The submission of the Commissioner of Internal Revenue
that PMC-Phil. is but a withholding agent of the government and
therefore cannot claim reimbursement of the alleged over paid
taxes, is completely meritorious. The real party in interest being
the mother corporation in the United States, it follows that
American entity is the real party in interest, and should have been
the claimant in this case.Closely intertwined with the first
assignment of error is the issue of whether or not PMC-U.S.A. a
non-resident foreign corporation under Section 24(b)(1) of the Tax
Code (the subsidiary of an American) a domestic corporation
domiciled in the United States, is entitled under the U.S. Tax Code
to a United States Foreign Tax Credit equivalent to at least the 20
percentage paid portion (of the 35% dividend tax) spared or waived
as otherwise considered or deemed paid by the government. The law
pertinent to the issue is Section 902 of the U.S. Internal Revenue
Code, as amended by Public Law 87-834, the law governing tax
credits granted to U.S. corporations on dividends received from
foreign corporations, which to the extent applicable reads:SEC. 902
- CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN
CORPORATION.(a)Treatment of Taxes Paid by Foreign Corporation- For
purposes of this subject, a domestic corporation which owns at
least 10 percent of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall-(1) to the
extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (a)] of a
year for which such foreign corporation is not a less developed
country corporation, be deemed to have paid the same proportion of
any income, war profits, or excess profits taxes paid or deemed to
be paid by such foreign corporation to any foreign country or to
any possession of the United States on or with respect to such
accumulated profits, which the amount of such dividends (determined
without regard to Section 78) bears to the amount of such
accumulated profits in excess of such income, war profits, and
excess profits taxes (other than those deemed paid); and(2) to the
extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a
year for which such foreign corporation is a less-developed country
corporation, be deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such
accumulated profits, which the amount of such dividends bears to
the amount of such accumulated profits.xxx xxx xxx(c) Applicable
Rules(1)Accumulated profits defined- For purpose of this section,
the term 'accumulated profits' means with respect to any foreign
corporation.(A) for purposes of subsections (a) (1) and (b) (1),
the amount of its gains, profits, or income computed without
reduction by the amount of the income, war profits, and excess
profits taxes imposed on or with respect to such profits or income
by any foreign country.... ; and(B) for purposes of subsections (a)
(2) and (b) (2), the amount of its gains, profits, or income in
excess of the income, was profits, and excess profits taxes imposed
on or with respect to such profits or income.The Secretary or his
delegate shall have full power to determine from the accumulated
profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid
from the accumulated profits of the preceding year or years (unless
to his satisfaction shows otherwise), and in other respects
treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings. .. (Rollo, pp. 55-56)To
Our mind there is nothing in the aforecited provision that would
justify tax return of the disputed 15% to the private respondent.
Furthermore, as ably argued by the petitioner, the private
respondent failed to meet certain conditions necessary in order
that the dividends received by the non-resident parent company in
the United States may be subject to the preferential 15% tax
instead of 35%. Among other things, the private respondent failed:
(1) to show the actual amount credited by the U.S. government
against the income tax due from PMC-U.S.A. on the dividends
received from private respondent; (2) to present the income tax
return of its mother company for 1975 when the dividends were
received; and (3) to submit any duly authenticated document showing
that the U.S. government credited the 20% tax deemed paid in the
Philippines.PREMISES CONSIDERED, the petition is GRANTED and the
decision appealed from, is REVERSED and SET ASIDE.SO ORDERED.
Republic of the PhilippinesSUPREME COURTManilaFIRST DIVISIONG.R.
No. 78133 October 18, 1988MARIANO P. PASCUAL and RENATO P.
DRAGON,petitioners,vs.THE COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS,respondents.De la Cuesta, De las Alas and
Callanta Law Offices for petitioners.The Solicitor General for
respondentsGANCAYCO,J.:The distinction between co-ownership and an
unregistered partnership or joint venture for income tax purposes
is the issue in this petition.On June 22, 1965, petitioners bought
two (2) parcels of land from Santiago Bernardino, et al. and on May
28, 1966, they bought another three (3) parcels of land from Juan
Roque. The first two parcels of land were sold by petitioners in
1968 toMarenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria Samson on
March 19,1970. Petitioners realized a net profit in the sale made
in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by
availing of the tax amnesties granted in the said years.However, in
a letter dated March 31, 1979 of then Acting BIR Commissioner Efren
I. Plana, petitioners were assessed and required to pay a total
amount of P107,101.70 as alleged deficiency corporate income taxes
for the years 1968 and 1970.Petitioners protested the said
assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.In a reply of August 22,
1979, respondent Commissioner informed petitioners that in the
years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture
taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code1that the unregistered partnership
was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual
income tax; and that the availment of tax amnesty under P.D. No.
23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the
tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax
assessed.Petitioners filed a petition for review with the
respondent Court of Tax Appeals docketed as CTA Case No. 3045. In
due course, the respondent court by a majority decision of March
30, 1987,2affirmed the decision and action taken by respondent
commissioner with costs against petitioners.It ruled that on the
basis of the principle enunciated inEvangelista3an unregistered
partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct from that
imposed on the partners.In a separate dissenting opinion, Associate
Judge Constante Roaquin stated that considering the circumstances
of this case, although there might in fact be a co-ownership
between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax
Code.Hence, this petition wherein petitioners invoke as basis
thereof the following alleged errors of the respondent court:A. IN
HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON
THE PETITIONERS.B. IN MAKING A FINDING, SOLELY ON THE BASIS OF
ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP
EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.C. IN
FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE
AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.D.
IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp.
12-13, Rollo.)The petition is meritorious.The basis of the subject
decision of the respondent court is the ruling of this Court
inEvangelista.4In the said case, petitioners borrowed a sum of
money from their father which together with their own personal
funds they used in buying several real properties. They appointed
their brother to manage their properties with full power to lease,
collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector of
Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.In resolving the issue, this
Court held as follows:The issue in this case is whether petitioners
are subject to the tax on corporations provided for in section 24
of Commonwealth Act No. 466, otherwise known as the National
Internal Revenue Code, as well as to the residence tax for
corporations and the real estate dealers' fixed tax. With respect
to the tax on corporations, the issue hinges on the meaning of the
terms corporation and partnership as used in sections 24 and 84 of
said Code, the pertinent parts of which read:Sec. 24.Rate of the
tax on corporations.There shall be levied, assessed, collected, and
paid annually upon the total net income received in the preceding
taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created
or organized but not including duly registered general
co-partnerships (companies collectives), a tax upon such income
equal to the sum of the following: ...Sec. 84(b). The term
"corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not
include duly registered general co-partnerships (companies
colectivas).Article 1767 of the Civil Code of the Philippines
provides:By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among
themselves.Pursuant to this article,the essential elements of a
partnership are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the
profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property
to a common fund.Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and
circumstances surrounding the case,we are fully satisfied that
their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because:1.
Said common fund was not something they found already in existence.
It was not a property inherited by them pro indiviso. Theycreated
it purposely. What is more they jointly borrowed a substantial
portion thereof in order to establish said common fund.2.
Theyinvested the same, not merely in one transaction, but in a
series of transactions. On February 2, 1943, they bought a lot for
P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days
later (April 28, 1944), they got a fourth lot for P237,234.14.The
number of lots (24) acquired and transcations undertaken, as well
as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design
that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but
perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.3. The aforesaid lots
were not devoted to residential purposes or to other personal uses,
of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total
sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has
been any change in the utilization thereof.4. Since August,
1945,the properties have been under the management of one person,
namely, Simeon Evangelists, with full power to lease, to collect
rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks.Thus, the
affairs relative to said properties have been handled as if the
same belonged to a corporation or business enterprise operated for
profit.5. The foregoing conditions have existed for more than ten
(10) years, or, to be exact, over fifteen (15) years, since the
first property was acquired, and over twelve (12) years, since
Simeon Evangelists became the manager.6. Petitioners have not
testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation
therefor.Although, taken singly, they might not suffice to
establish the intent necessary to constitute a partnership,the
collective effect of these circumstances is such as to leave no
room for doubt on the existence of said intent in petitioners
herein. Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence, those
cases are not in point.5In the present case, there is no evidence
that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to
divide the profits among themselves. Respondent commissioner and/
or his representative just assumed these conditions to be present
on the basis of the fact that petitioners purchased certain parcels
of land and became co-owners thereof.In Evangelists,there was a
series of transactions where petitioners purchased twenty-four (24)
lotsshowing that the purpose was not limited to the conservation or
preservation of the common fund or even the properties acquired by
them.The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.In the instant case,
petitioners bought two (2) parcels of land in 1965. They did not
sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was
only 1968 when they sold the two (2) parcels of land after which
they did not make any additional or new purchase. The remaining
three (3) parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.InEvangelista,
the properties were leased out to tenants for several years. The
business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership
started only in 1965 and ended in 1970.Thus, in the concurring
opinion of Mr. Justice Angelo Bautista inEvangelistahe said:I wish
however to make the following observation Article 1769 of the new
Civil Code lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;(2) Co-ownership or co-possession does
not itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the
property;(3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which
the returns are derived;From the above it appears that the fact
that those who agree to form a co- ownership share or do not share
any profits made by the use of the property held in common does not
convert their venture into a partnership. Or the sharing of the
gross returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right or
interest in the property. This only means that, aside from the
circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a
partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer
or assign any interest in the property by one with the consent of
the others(Padilla, Civil Code of the Philippines Annotated, Vol.
I, 1953 ed., pp. 635-636)It is evident that an isolated transaction
whereby two or more persons contribute funds to buy certain real
estate for profit in the absence of other circumstances showing a
contrary intention cannot be considered a partnership.Persons who
contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They
have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds
derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd
Ed., section 83, p. 74.)A joint purchase of land, by two, does not
constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common.
(Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)Where
plaintiff, his brother, and another agreed to become owners of a
single tract of realty, holding as tenants in common, and to divide
the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed
as between the three parties, whatever their relation may have been
as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass.
341.)In order to constitute a partnership inter sese there must be:
(a) An intent to form the same; (b) generally participating in both
profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract,
manage the business, and dispose of the whole property.-Municipal
Paving Co. vs. Herring 150 P. 1067, 50 III 470.)The common
ownership of property does not itself create a partnership between
the owners, though they may use it for the purpose of making gains;
and they may, without becoming partners, agree among themselves as
to the management, and use of such property and the application of
the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No.
App. 14.)6The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein have a joint
or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom
of each party to transfer or assign the whole property.In the
present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition
that they thereby formed an unregistered partnership. The two
isolated transactions whereby they purchased properties and sold
the same a few years thereafter did not thereby make them partners.
They shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered
to have formed an unregistered partnership which is thereby liable
for corporate income tax, as the respondent commissioner
proposes.And even assuming for the sake of argument that such
unregistered partnership appears to have been formed, since there
is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said
deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the
partnership p.7However, as petitioners have availed of the benefits
of tax amnesty as individual taxpayers in these transactions, they
are thereby relieved of any further tax liability arising
therefrom.WHEREFROM, the petition is hereby GRANTED and the
decision of the respondent Court of Tax Appeals of March 30, 1987
is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax
liability in this case, without pronouncement as to costs.SO
ORDERED.Cruz, Grio-Aquino and Medialdea, JJ., concur.Narvasa, J.,
took no part.