Tax Income Tax Cases

G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994

Sec. 21. Tax on citizens or residents. —
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the
Practice of Profession. — A tax is hereby imposed upon the taxable net income as determined
in Section 27 received during each taxable year from all sources, other than income covered by
paragraphs (b), (c), (d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,
MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,
JR., petitioners,
Not over P10,000 3%
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U.
Over P10,000 P300 + 9%
ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
but not over P30,000 of excess over P10,000
VITUG, J.:

Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Over P120,000 P15,600 + 20%
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code
but not over P350,000 of excess over P120,000
and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by
public respondents pursuant to said law.
Over P350,000 P61,600 + 30%
of excess over P350,000
Petitioners claim to be taxpayers adversely affected by the continued implementation of the
amendatory legislation.
Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under
Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items
specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable
In G.R. No. 109289, it is asserted that the enactment of Republic Act
income subject to tax under Section 21 (f) in the case of individuals engaged in business or
No. 7496 violates the following provisions of the Constitution:
practice of profession, only the following direct costs shall be allowed as deductions:
Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject
(a) Raw materials, supplies and direct labor;
which shall be expressed in the title thereof.
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the
Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress
business or practice of their profession;
shall evolve a progressive system of taxation.
(c) Telecommunications, electricity, fuel, light and water;
Article III, Section 1 — No person shall be deprived of . . . property without due process of law,
nor shall any person be denied the equal protection of the laws.
(d) Business rentals;
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue
that public respondents have exceeded their rule-making authority in applying SNIT to general
(e) Depreciation;
professional partnerships.
The Solicitor General espouses the position taken by public respondents.

(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and

The Court has given due course to both petitions. The parties, in compliance with the Court's
(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial
directive, have filed their respective memoranda.
institutions which must be proven to have been incurred in connection with the conduct of a
taxpayer's profession, trade or business.
G.R. No. 109289
For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum
of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496,
business or professional expenses as the case may be.
is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation
Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
On the basis of the above language of the law, it would be difficult to accept petitioner's view
that the amendatory law should be considered as having now adopted a gross income, instead
of as having still retained the net income, taxation scheme. The allowance for deductible items,
The full text of the title actually reads:
it is true, may have significantly been reduced by the questioned law in comparison with that
which has prevailed prior to the amendment; limiting, however, allowable deductions from gross
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and income is neither discordant with, nor opposed to, the net income tax concept. The fact of the
Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 matter
of
is still that various deductions, which are by no means inconsequential, continue to be
the National Internal Revenue Code, as Amended.
well provided under the new law.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
Code, as now amended, provide:
legislation intended to unite the members of the legislature who favor any one of unrelated
subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature,
and (c) to fairly apprise the people, through such publications of its proceedings as are usually

made, of the subjects of legislation. 1 The above objectives of the fundamental law appear to
(See
us Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
to have been sufficiently met. Anything else would be to require a virtual compendium of the
law which could not have been the intendment of the constitutional mandate.
Other deliberations support this position, to wit:
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is
taxation "shall be uniform and equitable" in that the law would now attempt to tax single
intended to increase collections as far as individuals are concerned and to make collection of
proprietorships and professionals differently from the manner it imposes the tax on corporations
taxes equitable?
and partnerships. The contention clearly forgets, however, that such a system of income
taxation has long been the prevailing rule even prior to Republic Act No. 7496.
MR. PEREZ. That is correct, Mr. Speaker.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and
(Id. at 6:40 P.M.; Emphasis ours).
liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend
classification as long as: (1) the standards that are used therefor are substantial and not
arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the
SNITS, it is categorically stated, thus:
applies, all things being equal, to both present and future conditions, and (4) the classification
applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan
SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only
with respect to individuals and professionals. (Emphasis ours)
What may instead be perceived to be apparent from the amendatory law is the legislative intent
to increasingly shift the income tax system towards the schedular approach 2 in the incomeThe Court, first of all, should like to correct the apparent misconception that general
taxation of individual taxpayers and to maintain, by and large, the present global treatmentprofessional partnerships are subject to the payment of income tax or that there is a difference
taxable corporations. We certainly do not view this classification to be arbitrary and
in the tax treatment between individuals engaged in business or in the practice of their
inappropriate.
respective professions and partners in general professional partnerships. The fact of the matter
is that a general professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes and so subject to the corporate income tax), is
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the not itself an income taxpayer. The income tax is imposed not on the professional partnership,
amendatory law and those who are not. With the legislature primarily lies the discretion to which is tax exempt, but on the partners themselves in their individual capacity computed on
their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been
determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation. This court cannot freely delve into those matters which, by amended at all by Republic Act 7496, is explicit:
constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes
so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate
Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
to strike it down, for, despite all its plenitude, the power to tax cannot override constitutionalexercising a common profession in general partnership shall be liable for income tax only in
proscriptions. This stage, however, has not been demonstrated to have been reached within
their individual capacity, and the share in the net profits of the general professional partnership
any appreciable distance in this controversy before us.
to which any taxable partner would be entitled whether distributed or otherwise, shall be
returned for taxation and the tax paid in accordance with the provisions of this Title.
Having arrived at this conclusion, the plea of petitioner to have the law declared
unconstitutional for being violative of due process must perforce fail. The due process clause
(b) In determining his distributive share in the net income of the partnership, each partner —
may correctly be invoked only when there is a clear contravention of inherent or constitutional
limitations in the exercise of the tax power. No such transgression is so evident to us.
(1) Shall take into account separately his distributive share of the partnership's income, gain,
loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and
G.R. No. 109446
(2) Shall be deemed to have elected the itemized deductions, unless he declares his
The several propositions advanced by petitioners revolve around the question of whether ordistributive
not
share of the gross income undiminished by his share of the deductions.
public respondents have exceeded their authority in promulgating Section 6, Revenue
Regulations No. 2-93, to carry out Republic Act No. 7496.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or
The questioned regulation reads:
not) with others in the exercise of a common profession. Indeed, outside of the gross
compensation income tax and the final tax on passive investment income, under the present
income tax system all individuals deriving income from any source whatsoever are treated in
Sec. 6. General Professional Partnership — The general professional partnership (GPP) and
almost invariably the same manner and under a common set of rules.
the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net
profit of the partnership, only the direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by partners in their individual
We can well appreciate the concern taken by petitioners if perhaps we were to consider
capacities in the practice of their profession which are not reimbursed or paid by the
Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of
partnership but are not considered as direct cost, are not deductible from his gross income.legislation. The view can easily become myopic, however, when the law is understood, as it
should be, as only forming part of, and subject to, the whole income tax concept and precepts
The real objection of petitioners is focused on the administrative interpretation of public long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase
"income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all
respondents that would apply SNIT to partners in general professional partnerships. Petitioners
cite the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, persons
also who derive taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens,
quoted by the Honorable Hernando B. Perez, minority floor leader of the House of
Representatives, in the latter's privilege speech by way of commenting on the questioned regardless of residence, and resident aliens subject to income tax liability on their income from
implementing regulation of public respondents following the effectivity of the law, thusly: all sources) and of the generally accepted and internationally recognized income taxable base
(that can subject non-resident aliens and foreign corporations to income tax on their income
from Philippine sources). In the process, the Code classifies taxpayers into four main groups,
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we
namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
speak here of individuals who are earning, I mean, who earn through business enterprises Irrevocable
and
Trusts (irrevocable both as to corpus and as to income).
therefore, should file an income tax return?
Partnerships are, under the Code, either "taxable partnerships" or "exempt
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only
to
partnerships."
Ordinarily, partnerships, no matter how created or organized, are subject to
individuals.
income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above

categorization, are by law assimilated to be within the context of, and so legally contemplated
petition for review with the Tax Court on 27 January 1972, assailing the assessment and
as, corporations. Except for few variances, such as in the application of the "constructive praying for the refund of the amount paid.
receipt rule" in the derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover
corporations and partnerships which are independently subject to the payment of income tax.
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
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor
additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of
even considered as independent taxable entities for income tax purposes. A
Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the
general professional partnership is such an example. 4Here, the partners themselves, not the
National Internal Revenue Code (NIRC).
partnership (although it is still obligated to file an income tax return [mainly for administration
and data]), are liable for the payment of income tax in their individual capacity computed on
their respective and distributive shares of profits. In the determination of the tax liability, a On 25 November 1971, BOAC requested that the assessment be countermanded and set
partner does so as an individual, and there is no choice on the matter. In fine, under the Taxaside. In a letter, dated 16 February 1972, however, the CIR not only denied the BOAC request
Code on income taxation, the general professional partnership is deemed to be no more than
a
for refund
in the First Case but also re-issued in the Second Case the deficiency income tax
mere mechanism or a flow-through entity in the generation of income by, and the ultimate assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
distribution of such income to, respectively, each of the individual partners.
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.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above
standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual incomeThis case was subsequently tried jointly with the First Case.
taxpayers on their non-compensation income. There is no evident intention of the law, either
before or after the amendatory legislation, to place in an unequal footing or in significant
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The
variance the income tax treatment of professionals who practice their respective professions
Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner
individually and of those who do it through a general professional partnership.
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
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
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.
SO ORDERED.
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.
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,

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:

MELENCIO-HERRERA, J.:

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
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the jointno landing rights here, constitute income of BOAC from Philippine sources, and, accordingly,
Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 taxable.
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 1967,2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation
1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying doing business in the Philippines or has an office or place of business in the Philippines.
reconsideration.
3. In the alternative that private respondent may not be considered a resident foreign
BOAC is a 100% British Government-owned corporation organized and existing under the corporation
laws
but a non-resident foreign corporation, then it is liable to Philippine income tax at
of the United Kingdom It is engaged in the international airline business and is a member- the rate of thirty-five per cent (35%) of its gross income received from all sources within the
signatory of the Interline Air Transport Association (IATA). As such it operates air transportation
Philippines.
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
Under Section 20 of the 1977 Tax Code:
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
(h) the term resident foreign corporation engaged in trade or business within the Philippines or
permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the having an office or place of business therein.
Philippines, although during the period covered by the assessments, it maintained a general
sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways
— which was responsible for selling BOAC tickets covering passengers and cargoes. 1 (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in
trade or business within the Philippines and not having any office or place of business therein
G.R. No. 65773 (CTA Case No. 2373, the First Case)

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific
criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed must be judged in the light of its peculiar environmental circumstances. The term implies a
BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes covering the years
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance
performance of acts or works or the exercise of some of the functions normally incident to, and
of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of in progressive prosecution of commercial gain or for the purpose and object of the business
P858,307.79. BOAC paid this new assessment under protest.
organization. 2 "In order that a foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary character. 3
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

BOAC, during the periods covered by the subject - assessments, maintained a general sales
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources
agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1)within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties,
selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in
(5) sale of real property, and (6) sale of personal property, does not mention income from the
the series corresponding to a different airline company; (3) receiving the fare from the whole
sale of tickets for international transportation. However, that does not render it less an income
trip; and (4) consequently allocating to the various airline companies on the basis of their from sources within the Philippines. Section 37, by its language, does not intend the
participation in the services rendered through the mode of interline settlement as prescribed
enumeration
by
to be exclusive. It merely directs that the types of income listed therein be treated
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise
as income from sources within the Philippines. A cursory reading of the section will show that it
of the functions which are normally incident to, and are in progressive pursuit of, the purpose
does not state that it is an all-inclusive enumeration, and that no other kind of income may be
and object of its organization as an international air carrier. In fact, the regular sale of tickets,
so its
considered. " 10
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
BOAC, however, would impress upon this Court that income derived from transportation is
the Philippines through a local agent during the period covered by the assessments.
income for services, with the result that the place where the services are rendered determines
Accordingly, it is a resident foreign corporation subject to tax upon its total net income received
the source; and since BOAC's service of transportation is performed outside the Philippines,
in the preceding taxable year from all sources within the Philippines. 5
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.
Sec. 24. Rates of tax on corporations. — ...
The absence of flight operations to and from the Philippines is not determinative of the source
of income or the site of income taxation. Admittedly, BOAC was an off-line international airline
at the time pertinent to this case. The test of taxability is the "source"; and the source of an
income is that activity ... which produced the income. 11 Unquestionably, the passage
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
documentations in these cases were sold in the Philippines and the revenue therefrom was
any foreign country, except a foreign fife insurance company, engaged in trade or business
derived from a activity regularly pursued within the Philippines. business a And even if the
within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
BOAC tickets sold covered the "transport of passengers and cargo to and from foreign
total net income received in the preceding taxable year from all sources within the
cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the
Philippines. (Emphasis supplied)
Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines. 13
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
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal
under our income tax laws.
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:
The Tax Code defines "gross income" thus:
(b) Tax on foreign corporations. — ...

... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross
"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 Philippine billings. (Sec. 24[b] [21, Tax Code).
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
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of
interests, rents, dividends, securities, or thetransactions of any business carried on for gain or
the term "gross Philippine billings," thus:
profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]; Emphasis
supplied)
... "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
The definition is broad and comprehensive to include proceeds from sales of transport
therein, whether for passenger, excess baggage or mail provided the cargo or mail originates
documents. "The words 'income from any source whatever' disclose a legislative policy to
from the Philippines. ...
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
The foregoing provision ensures that international airlines are taxed on their income from
is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If it had been
wealth. 6
intended as an excise or percentage tax it would have been place under Title V of the Tax Code
covering Taxes on Business.
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to
1970-71 amounted to P10,428,368 .00. 7
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, is res judicata to the present case. The ruling by the Tax Court in that case
Did such "flow of wealth" come from "sources within the Philippines",
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
The source of an income is the property, activity or service that produced the income. 8 elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on
source of income to be considered as coming from the Philippines, it is sufficient that the the activity of transporting, conveying or removing passengers and cargo from one place to
It purports to tax the business of transportation. 14 Being an excise tax, the same can
income is derived from activity within the Philippines. In BOAC's case, the sale of tickets inanother.
the
Philippines is the activity that produces the income. The tickets exchanged hands here andbe levied by the State only when the acts, privileges or businesses are done or performed
payments for fares were also made here in Philippine currency. The site of the source of 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
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 ofwhatever form derived from any source." Since the two cases treat of a different subject matter,
such protection, the flow of wealth should share the burden of supporting the government. the decision in one cannot be res judicata to the other.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it 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
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 carrierpay
to the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 197071 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket
three (3) years in accordance with the Tax Code. The BOAC claim for refund in the amount of
issued to members of the traveling public in general embraces within its terms all the elements
to constitute it a valid contract, binding upon the parties entering into the relationship. 9 P858,307.79 is hereby denied. Without costs.
SO ORDERED.

G.R. No. 48532 August 31, 1992

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. 2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, prevailing free market rate of exchange and not the par value of the peso; and
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
purposes into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate
REVENUE, respondents.
should be the rate used.
G.R. No. 48533 August 31, 1992

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims
as follows:
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DYLIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
At the outset, it is submitted that the subject matter of these two cases are Philippine income
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO
tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and,
A. RIALP and JAIME A. SOQUES, petitioners,
therefore, should be governed by the provisions of the National Internal Revenue Code and its
vs.
implementing rules and regulations, and not by the provisions of Central Bank Circular No. 42
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
dated May 21, 1953, as contended by petitioners.
REVENUE,
Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable year
Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax from all sources by a citizen of the Philippines, whether residing here or abroad.
Appeals, promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and
order the Commissioner of Internal Revenue to refund to them their income taxes which they
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
claim to have been erroneously or illegally paid or collected.
employment. Thus, in their tax returns for the period involved herein, they gave their legal
residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "AAs summarized by the Solicitor General, the facts of the cases are as follows:
8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511 and 2594).
NOCON, J.:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Petitioners being subject to Philippine income tax, their dollar earnings should be converted into
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal.Philippine pesos in computing the income tax due therefrom, in accordance with the provisions
Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati,
of Revenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and
Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for certain periods,
Revenue
to
Memorandum Circular No. 41-71 dated December 21, 1971 for 1971 income, which
other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitionersreiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
were paid U.S. dollars as compensation for services in their foreign assignments. (Paragraphs
III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When
For internal revenue tax purposes, the free marker rate of conversion (Revenue Circulars Nos.
petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year 1970, they
7-71 and 41-71) should be applied in order to determine the true and correct value in Philippine
computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate
pesos of the income of petitioners. 3
ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;

After a careful examination of the records, the laws involved and the jurisprudence on the
matter, We are inclined to agree with respondents Court of Tax Appeals and Commissioner of
Internal Revenue and thus vote to deny the petition.

From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00
This basically an income tax case. For the proper resolution of these cases income may be
Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting defined
their as an amount of money coming to a person or corporation within a specified time,
dollar income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973,
whether as payment for services, interest or profit from investment. Unless otherwise specified,
petitioners in said cases filed with the office of the respondent Commissioner, amended income
it means cash or its equivalent. 4 Income can also be though of as flow of the fruits of one's
tax returns for the above-mentioned years, this time using the par value of the peso as labor. 5
prescribed in Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act
No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from
respective dollar income into Philippine pesos for purposes of computing and paying the
foreign exchange transactions. For a foreign exchange transaction is simply that — a
corresponding income tax due from them. The aforesaid computation as shown in the amended
transaction in foreign exchange, foreign exchange being "the conversion of an amount of
income tax returns resulted in the alleged overpayments, refund and/or tax credit. Accordingly,
money or currency of one country into an equivalent amount of money or currency of
claims for refund of said over-payments were filed with respondent Commissioner. Without
another." 6 When petitioners were assigned to the foreign subsidiaries of Procter & Gamble,
awaiting the resolution of the Commissioner of the Internal Revenue on their claims, petitioners
they were earning in their assigned nation's currency and were ALSO spending in said
filed their petitioner for review in the above-mentioned cases.
currency. There was no conversion, therefore, from one currency to another.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No.
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of
2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.
petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
Upon joint motion of the parties on the ground that these two cases involve common question
The issue now is, what exchange rate should be used to determine the peso equivalent of the
of law and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision
foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar
dated September 26, 1977, the respondent Court of Tax Appeals held that the proper
earnings do not fall within the classification of foreign exchange transactions, there occurred no
conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar
actual inward remittances, and, therefore, they are not included in the coverage of Central Bank
earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7Circular No. 289 which provides for the specific instances when the par value of the peso
71 and 41-71. Accordingly, the claim for refund and/or tax credit of petitioners in the aboveshall not be the conversion rate used. They conclude that their earnings should be converted
entitled cases was denied and the petitions for review dismissed, with costs against petitioners.
for income tax purposes using the par value of the Philippine peso.
2
Hence, this petition for review on certiorari.
Petitioners claim that public respondent Court of Tax Appeals erred in holding:

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export Central in this controversy is the issue as to whether or not a taxpayer who merely states as a
products, receipts of sale of foreign exchange or foreign borrowings and investments but not
footnote in his income tax return that a sum of money that he erroneously received and already
income tax. He also claims that he had to use the prevailing free market rate of exchange in
spent is the subject of a pending litigation and there did not declare it as income is liable to pay
these cases because of the need to ascertain the true and correct amount of income in the 50% penalty for filing a fraudulent return.
Philippine peso of dollar earners for Philippine income tax purposes.
This question is the subject of the petition for review before the Court of the portion of the
A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein
Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393,
are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new
entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of
foreign borrowing and
Internal Revenue," which orders the deletion of the 50% surcharge from Javier's deficiency
investments — nothing by way of income tax payments. Thus, petitioners are in error by income tax assessment on his income for 1977.
concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso
should be the guiding rate used for income tax purposes.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion
for Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of assessment or imposition.
Procter & Gamble. It was a definite amount of money which came to them within a specified
period of time of two yeas as payment for their services.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the
CTA and incorporated in the assailed decision now under review, read as follows:
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as
follows:
xxx xxx xxx
Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the taxable net
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private
income received during each taxable year from all sources by every individual, whether a
respondent herein), received from the Prudential Bank and Trust Company in Pasay City the
citizen of the Philippines residing therein or abroad or an alien residing in the Philippines,
amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in
determined in accordance with the following schedule:
the United States, among which is Mellon Bank, N.A.
xxx xxx xxx

3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First
Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the
And in the implementation for the proper enforcement of the National Internal Revenue Code,
petitioner (private respondent herein), his wife and other defendants, claiming that its
Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and
remittance of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only,
regulations" to effectively enforce its provisions. 9
and praying that the excess amount of US$999,000.00 be returned on the ground that the
defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear,
immediate, and continuing duty to return the said amount from the moment it was received.
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were
issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for
INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said 4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with
revenue circulars were a valid exercise of the authority given to the Secretary of Finance bythethethen Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private
Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid
respondent herein) and his wife with the crime of estafa, alleging that they misappropriated,
interpretation of said code until revoked by the Secretary of Finance himself. 12
misapplied, and converted to their own personal use and benefit the amount of US$999,000.00
which they received under an implied trust for the benefit of Mellon Bank and as a result of the
mistake in the remittance by the latter.
Petitioners argue that since there were no remittances and acceptances of their salaries and
wages in US dollars into the Philippines, they are exempt from the coverage of such circulars.
Petitioners forget that they are citizens of the Philippines, and their income, within or without,
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax
and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, Return
does for the taxable year 1977 showing a gross income of P53,053.38 and a net income of
not brook any exemption.
P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some
money received from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation."
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no
reason for respondent Commissioner to refund any taxes to petitioner as said Revenue 6. That on or before December 15, 1980, the petitioner (private respondent herein) received a
Memorandum Circulars, being of long standing and not contrary to law, are valid. 13
letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together
with income assessment notices for the years 1976 and 1977, demanding that petitioner
(private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of
P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. . . .
the government" and one of the duties of a Filipino citizen is to pay his income tax.
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent
Internal Revenue that he was paying the deficiency income assessment for the year 1976 but
Court of Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970
denying that he had any undeclared income for the year 1977 and requested that the
and 1971 is AFFIRMED. Costs against petitioners.
assessment for 1977 be made to await final court decision on the case filed against him for
filing an allegedly fraudulent return. . . .
SO ORDERED.
G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS
SARMIENTO, J.:p

8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply
to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance
which you were able to dispose, is definitely taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December
10, 1981.

The respondent CTA, after the proper proceedings, rendered the challenged decision. We The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50
quote the concluding portion:
F [2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which would
be sufficient to sustain a judgment on the issue of correctness of the deficiency itself apart from
the fraud penalty. (Frank A. Neddas, 40 BTA 672). The following circumstances attendant to the
We note that in the deficiency income tax assessment under consideration, respondent
case at bar show that in filing the questioned return, the private respondent was guided, not by
(petitioner here) further requested petitioner (private respondent here) to pay 50% surcharge as
that "willful and deliberate intent to prevent the Government from making a proper assessment"
provided for in Section 72 of the Tax Code, in addition to the deficiency income tax of
which constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance"
P4,888,615.00 and interest due thereon. Since petitioner (private respondent) filed his income
was subject to tax.
tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by
respondent (petitioner) because he considered the return filed false or fraudulent. This
additional requirement, to our mind, is much less called for because petitioner (private
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case"
respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was was given very, very wide publicity by media; and only one who is not in his right mind would
recipient of some money received from abroad which he presumed to be gift but turned outhave
to entertained the idea that the BIR would not make an assessment if the amount in
be an error and is now subject of litigation."
question was indeed subject to the income tax.
From this, it can hardly be said that there was actual and intentional fraud, consisting of Second, as the respondent Court ruled, "the question involved in this case is of first impression
deception willfully and deliberately done or resorted to by petitioner (private respondent) inin this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the
order to induce the Government to give up some legal right, or the latter, due to a false return,
authorities are not unanimous in holding that similar receipts are subject to the income tax. It
was placed at a disadvantage so as to prevent its lawful agents from proper assessment ofshould
tax be noted that the decision in the Rutkin case is a five-to-four decision; and in the very
liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519), case before this Honorable Court, one out of three Judges of the respondent Court was of the
because petitioner literally "laid his cards on the table" for respondent to examine. Error or opinion that the amount in question is not taxable. Thus, even without the footnote, the failure
mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). to declare the "mistaken remittance" is not fraudulent.
Besides, Section 29 is not too plain and simple to understand. Since the question involved in
this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge
Third, when the private respondent filed his income tax return on March 15, 1978 he was being
imposed in the deficiency assessment should be deleted. 7
sued by the Mellon Bank for the return of the money, and was being prosecuted by the
Government for estafa committed allegedly by his failure to return the money and by converting
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated
it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition)
the matter to us, by the present petition, raising the main issue as to:
and could not have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax return that the amount
received was still under litigation. If he had paid the tax, would that not constitute estafa for
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY?
using the funds for his own personal benefit? and would the Government refund it to him if the
courts ordered him to refund the money to the Mellon Bank? 12
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the
decision which held him liable for the basic deficiency income tax (excluding the 50% surcharge
xxx xxx xxx
for fraud)." However, he submitted in the samememorandum "that the issue may be raised in
the case not for the purpose of correcting or setting aside the decision which held him liable for
deficiency income tax, but only to show that there is no basis for the imposition of the
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal
surcharge." This subsequent disavowal therefore renders moot and academic the posturings
Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of
10
articulated in as Comment on the non-taxability of the amount he erroneously received and
the tax due from him or of the deficiency tax in case payment has been made on the basis of
the bulk of which he had already disbursed. In any event, an appeal at that time (of the filing
theofreturn filed before the discovery of the falsity or fraud.
the Comments) would have been already too late to be seasonable. The petitioner, through the
office of the Solicitor General, stresses that:
We are persuaded considerably by the private respondent's contention that there is no fraud in
the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's
xxx xxx xxx
notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of
some money from abroad which he presumed to be a gift but turned out to be an error and is
now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that
The record however is not ambivalent, as the record clearly shows that private respondent is
such notation was practically an invitation for investigation and that Javier had literally "laid his
self-convinced, and so acted, that he is the beneficial owner, and of which reason is liable to
cards on the table." 13
tax. Put another way, the studied insinuation that private respondent may not be the beneficial
owner of the money or income flowing to him as enhanced by the studied claim that the amount
is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy, as In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was
witness what transpired upon receipt of the amount.
discussed in this manner:
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK
. . for
. The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
the amount of private respondent's wife was $999,000.00 after opening a dollar account with
consisting of deception willfully and deliberately done or resorted to in order to induce another
Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste to
and
give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud
dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977,
with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with
effected a total massive withdrawal from the said dollar account in the sum of $975,000.00the
or sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be
P7,020,000.00. . . . 11
considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal
Revenue committed mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability, it would be unfair to treat
In reply, the private respondent argues:
the mistakes of the petitioner as tainted with fraud and those of the respondent as made in
good faith.
xxx xxx xxx
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances
The petitioner contends that the private respondent committed fraud by not declaring the which, at most, create only suspicion and the mere understatement of a tax is not itself proof of
fraud for the purpose of tax evasion. 15
"mistaken remittance" in his income tax return and by merely making a footnote thereon which
read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation." It is respectfully submitted that the
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not
said return was not fraudulent. The footnote was practically an invitation to the petitioner to
be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16
make an investigation, and to make the proper assessment.
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed by

the herein petitioner. The government was not induced to give up some legal right and place
THE CA ERRED IN HOLDING THAT FILSYNS LIABILITY TO WITHHOLD THE INCOME TAX
itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax FOR INTEREST, ROYALTIES AND DIVIDENDS, WHICH WERE PAYABLE TO NONliabilities because Javier did not conceal anything. Error or mistake of law is not fraud. TheRESIDENT FOREIGN CORPORATIONS, ATTACHED UPON SETTING-UP OR ACCRUAL OF
petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly
THESE AMOUNTS RATHER THAN WHEN SAID AMOUNTS BECOME DUE AND
commendable. Unfortunately, the imposition of the fraud penalty in this case is not justifiedDEMANDABLE
by
UNDER THE APPLICABLE CONTRACTS.
the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending
most of the money he received, but the records lack a clear showing of fraud committed
In G.R. No. 124377, what is being questioned by petitioner is the assessed deficiency
because he did not conceal the fact that he had received an amount of money although it was a
withholding tax at source for the period from the fourth quarter of 1975 to the fourth
"subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed
quarter of 1976 amounting to P379,700.68.
as fraud penalty by the petitioner against the private respondent in the deficiency assessment
should be deleted.
The pivot of inquiry here is - whether the liability to withhold tax at source on income payments
to non-resident foreign corporations arises upon remittance of the amounts due to the foreign
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax
creditors or upon accrual thereof.
Appeals is AFFIRMED. No costs.
SO ORDERED.
[G.R. Nos. 118498 & 124377. October 12, 1999]FILIPINAS SYNTHETIC
FIBER CORPORATION, petitioner vs. COURT OF APPEALS, COURT OF
TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION

It is petitioners submission that the withholding taxes on the said interest income and royalties
were paid to the government when the subject interest and royalties were actually remitted
abroad. Stated otherwise, whatever amount has accrued in the books, the withholding tax due
thereon is ultimately paid to the government upon remittance abroad of the amount accrued.
Section 53 of the National Internal Revenue Code, in force at that time (1975), reads:
Withholding Tax at source ...

Before the Court are two consolidated Petitions for Review on Certiorari under Rule 45 of the
xxx
Revised Rules of Court seeking to set aside the Decisions of the Court of Appeals in CA-GR.
SP Nos. 32922[1] and 32022.[2]
(b) Non-resident aliens and foreign corporations - Every individual, corporation, partnership, or
In G.R. No. 118498, the Court of Appeals culled the antecedent facts that matter as follows:association, in whatever capacity acting, including a lessee or mortgagor of real or personal
property, trustee acting in any trust capacity, executor, administrator, receiver, conservator,
fiduciary, employer, and every officer or employee of the Government of the Republic of the
The basic operative facts are not in dispute, to wit: Filipinas Synthetic Fiber Corporation , aPhilippines having the control, receipt, custody, disposal, or payment of interest, dividends,
domestic corporation received on December 27, 1979 a letter of demand ... from the
rents, royalties, salaries, wages, premiums, annuities, compensation, remunerations,
Commissioner of Internal Revenue ... assessing it for deficiency withholding tax at source in
the
emoluments,
or other fixed or determinable annual, periodical, or casual gains, profits, and
total amount of P829,748.77, inclusive of interest and compromise penalties, for the period
income, and capital gains, of any non-resident alien not engaged in trade or business within the
from the fourth quarter of 1974 to the fourth quarter of 1975. The bulk of the deficiencyPhilippines, shall (except in the case provided in sub-section (a) (1) of this Section) deduct and
withholding tax assessment, however, consisted of interest and compromise penalties for withhold from the annual, periodical, or casual gains, profits, and income, and capital gains, a
alleged late payment of withholding taxes due on interest loans, royalties and guarantee fees
tax equal to 30 per cent thereof.
paid by the petitioner to non-resident corporations. The assessment was seasonably protested
by the petitioner through its auditor, SGV and Company. Respondent denied the protest in a
letter dated 14 May 1985 ... on the following ground: For Philippine internal revenue tax x x x
purposes, the liability to withhold and pay income tax withheld at source from certain payments
due to a foreign corporation is at the time of accrual and not at the time of actual payment or
(2) Non-resident foreign corporations - In the case of foreign corporations subject to tax under
remittance thereof, citing BIR Ruling No. 71-003 and BIR Ruling No. 24-71-003-154-84 dated
this Title, not engaged in trade or business within the Philippines, there shall be deducted and
12 September 1984 as well as the decision of the Court of Tax Appeals ... in CTA Case No.withheld at the source in the same manner and upon the same items as is provided in
3307 entitled Construction Resources of Asia, Inc., versus Commissioner of Internal
subsection (b) (1) of this section, as well as on remunerations for technical services or
Revenue. The aforementioned case held that the liability of the taxpayer to withhold and pay
otherwise, a tax equal to thirty-five (35) per cent thereof. This tax shall be returned and paid in
the income tax withheld at source from certain payments due to a non-resident foreign and subject to the same conditions as provided in Section 54.
corporation attaches at the time of accrual payment or remittance thereof and the withholding
agent/corporation is obliged to remit the tax to the government since it already and properly
belongs to the government. Since the taxpayer failed to pay the withholding tax on interest,On the other hand, Section 54 of the same law, provides:
royalties, and guarantee fee at the time of their accrual and in the books of the corporation the
aforesaid assessment is therefore legal and proper.
Returns and payments of taxes withheld at source On June 28, 1985, petitioner brought a Petition for Review [3] before the Court of Tax Appeals,
(a) Quarterly return and payment of taxes withheld - Taxes deducted and withheld under
docketed as CTA Case No. 3951. On June 15, 1993, the said court came out with its Decision,
Section 53 shall be covered by a return and paid to the Commissioner of Internal Revenue or
ruling thus:
his collection agent in the province, city, or municipality where the withholding agent has his
legal residence or principal place of business, or where the withholding agent is a corporation,
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering petitioner to pay where the principal office is located. The taxes deducted and withheld by the withholding agent
shall be held as a special fund in trust for the Government until paid to the collecting
respondent the amount of P306,165.35 as deficiency withholding tax at source for the fourth
officers. The Commissioner of Internal Revenue may, with the approval of the Secretary of
quarter of 1974 to the third quarter of 1975 plus 10% surcharge and 14% annual interest from
require these withholding agents to pay or deposit the taxes deducted and withheld at
November 29, 1979 to July 31, 1980, plus 20% interest from August 1, 1980 until fully paidFinance,
but
more frequent intervals when necessary to protect the interest of the Government. The return
not to exceed that which corresponds to a period of three (3) years pursuant to P.D. No. 1705.
shall be filed and the payment made within 25 days from the close of each calendar quarter ...
SO ORDERED.

The aforecited provisions of law are silent as to when does the duty to withhold the taxes
arise. And to determine the same, an inquiry as to the nature of accrual method of
With the denial of its motion for reconsideration, petitioner appealed the CTA disposition to
the
accounting,
the procedure used by the herein petitioner, and to the modus
Court of Appeals, which affirmed in toto the appealed decision.
vivendi of withholding tax at source come to the fore.
Dissatisfied therewith, petitioner found its way to this Court via the present Petition; contending
The method of withholding tax at source is a procedure of collecting income tax sanctioned
that:
by the National Internal Revenue Code. Section 53 (c) of which, provides:

Return and Payment - Every person required to deduct and withhold any tax under this section
REGALADO, J.:
shall make return thereof, ... for the payment of the tax, shall pay the amount withheld to the
officer of the Government of the Philippines authorized to receive it. Every such person is made
These cases, involving the same issue being contested by the same parties and having
personally liable for such tax, and is indemnified against the claims and demands of any person
originated from the same factual antecedents generating the claims for tax credit of private
for the amount of any payments made in accordance with the provision of this section.
respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and
are jointly decided herein.
In the aforecited provision of law, the withholding agent is explicitly made personally liable for
the income tax withheld under Section 54. In Phil. Guaranty Co., Inc. vs. Commissioner of
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development
Internal Revenue,[4] the Court, has ratiocinated:
Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal
Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in
The law sets no condition for the personal liability of the withholding agent to attach. The the Philippines, for purposes of the projected expansion of the productive capacity of the
reason is to compel the withholding agent to withhold the tax under all circumstances. In effect,
former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to
the responsibility for the collection of the tax as well as the payment thereof is concentratedAtlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new
upon the person over whom the Government has jurisdiction. Thus, the withholding agent is
concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper
constituted the agent both the government and the taxpayer. With respect to the collection concentrates produced from said machine for a period of fifteen (15) years. It was
and/or withholding of the tax, he is the Governments agent. In regard to the filing of the contemplated that $9,000,000.00 of said loan was to be used for the purchase of the
necessary income tax return and the payment of the tax to the Government, he is the agentconcentrator
of
machinery from Japan. 1
the taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound to
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for
withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable
short) obviously for purposes of its obligation under said contract. Its loan application was
to law.
approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the
approval of its loan for ¥2,880,000,000.00 from a consortium of Japanese banks. The total
On the other hand, under the accrual basis method of accounting, income is reportable when
amount of both loans is equivalent to $20,000,000.00 in United States currency at the then
all the events have occurred that fix the taxpayers right to receive the income, and the amount
prevailing exchange rate. The records in the Bureau of Internal Revenue show that the
can be determined with reasonable accuracy. Thus, it is the right to receive income, approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi
the actual receipt, that determines when to include the amount in gross income.[5] Gleanable
would use the amount as a loan to Atlas and as a consideration for importing copper
from this notion are the following requisites of accrual method of accounting, to wit: (1) that
concentrates
the
from Atlas, and that Mitsubishi had to pay back the total amount of loan by
right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent
September 30, 1981. 2
upon future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3)
there must be a reasonable expectation that the amount will be paid in due course. [6]
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the
former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding
In the case at bar, after a careful examination of pertinent records, the Court concurred in15%
thetax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1)
finding by the Court of Appeals in CA GR. SP No. 32922 that there was a definite liability,
and aSection 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential
clear and imminent certainty that at the maturity of the loan contracts, the foreign corporation
Decree No. 131, and duly remitted to the Government. 3
was going to earn income in an ascertained amount, so much so that petitioner already
deducted as business expense the said amount as interests due to the foreign
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
corporation. This is allowed under the law, petitioner having adopted the accrual method of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was
accounting in reporting its incomes.
later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976,
Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of
All things studiedly considered, the Court is of the opinion, and holds, that the Court of Appeals
Atlas. 4
erred not in ruling that:
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private
x x x Petitioner cannot now claim that there is no duty to withhold and remit income taxes as
respondents
yet
filed a petition for review with respondent court, docketed therein as CTA Case
because the loan contract was not yet due and demandable. Having written-off the amounts
No.as2801. 5 The petition was grounded on the claim that Mitsubishi was a mere agent of
business expense in its books, it had taken advantage of the benefit provided in the law Eximbank, which is a financing institution owned, controlled and financed by the Japanese
allowing for deductions from gross income. Moreover, it had represented to the BIR that theGovernment. Such governmental status of Eximbank, if it may be so called, is the basis for
amounts so deducted were incurred as a business expense in the form of interest and royalties
private repondents' claim for exemption from paying the tax on the interest payments on the
paid to the foreign corporations. It is estopped from claiming otherwise now.[7]
loan as earlier stated. It was further claimed that the interest payments on the loan from the
consortium of Japanese banks were likewise exempt because said loan supposedly came from
or were financed by Eximbank. The provision of the National Internal Revenue Code relied
WHEREFORE, the decisions of the Court of Appeals in CA GR. SP Nos. 32922 and 32022 are
upon is Section 29 (b) (7) (A), 6 which excludes from gross income:
hereby AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS

(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign
governments, (2) financing institutions owned, controlled, or enjoying refinancing from them,
and (3) international or regional financing institutions established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but
was later reset upon manifestation of petitioner that the claim for tax credit of the alleged
erroneous payment was still being reviewed by the Appellate Division of the Bureau of Internal
Revenue. The records show that on November 16, 1976, the said division recommended to
petitioner the approval of private respondent's claim. However, before action could be taken
thereon, respondent court scheduled the case for hearing on September 30, 1977, during
which trial private respondents presented their evidence while petitioner submitted his case on
the basis of the records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax
credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that
petitioner admitted the material averments of private respondents when he supposedly prayed
"for judgment on the pleadings without off-spring proof as to the truth of his
allegations." 8 Furthermore, the court declared that all papers and documents pertaining to the

loan of ¥4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same
experience and expertise in financial transactions, not to speak of the amount involved and its
amount given to Atlas. It also observed that the money for the loans from the consortium ofpurchasing value in 1970.
private Japanese banks in the sum of ¥2,880,000,000.00 "originated" from Eximbank. From
these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with
A thorough analysis of the factual and legal ambience of these cases impels us to give weight
Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from the
to the following arguments of petitioner:
creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development
Corporation." 9
The nature of the above contract shows that the same is not just a simple contract of loan. It is
not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an
MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at
appeal to this Court, docketed herein as G.R. No. 54908.
the former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to
MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be produced by the
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax
installed
on
concentrator.
the amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and
1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term
the petitioner, repeating the same basis for exemption.
was the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in
order to fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
loans from other sources. And from what sources, it is immaterial as far as ATLAS in
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and,
concerned. In this case, MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan
in a letter to private respondents dated November 12, 1979, denied said claim for tax creditand
for the consortium of Japanese banks financed through the EXIMBANK, of Japan.
lack of factual or legal basis. 10
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of
rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. AJapan. While the loans were secured by MITSUBISHI primarily "as a loan to and in
motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a consideration for importing copper concentrates from ATLAS," the fact remains that it was a
resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by
loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
petitioner with respondent court and a petition for review was filed with this Court on December
19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
54908.
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood
The principal issue in both petitions is whether or not the interest income from the loans to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only signatories to
extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section
the29same were MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that
b) (7) (A) of the tax code and, therefore, exempt from withholding tax. Apropos thereto, theMITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity, private or public,
focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will then befor that matter.
considered as the creditor whose investments in the Philippines on loans are exempt from
taxes under the code.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be the property of the former owner and
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
petitioner should be deemed to have admitted the allegations of the private respondents when
it submitted the case on the basis of the pleadings and records of the bureau. There is nothing
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of
to indicate such admission on the part of petitioner nor can we accept respondent court's
Japan, said amount ceased to be the property of the bank and became the property of
pronouncement that petitioner did not offer to prove the truth of its allegations. The records of
MITSUBISHI.
the Bureau of Internal Revenue relevant to the case were duly submitted and admitted as
petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of
evidence, and the findings of respondent court were based not only on the pleadings but onThe
theconclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
evidence adduced by the parties. There could, therefore, not have been a judgment on theATLAS, the former being the owner of the $20 million upon completion of its loan contract with
pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by
EXIMBANK of Japan.
respondent court.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled from
to the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject
the highest respect and can only be disturbed on appeal if they are not supported by
of the 15% withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK, but
substantial evidence or if there is a showing of gross error or abuse on the part of the tax the interest income earned by MITSUBISHI from the loan to ATLAS. . . . 13
court. 11 Thus, ordinarily, we could give due consideration to the holding of respondent court
that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in
these cases, however, warrant a departure from said general rule since we are convinced that
itself, does not appear to be suppletory or collateral to another contract and is, therefore, not to
there is a misapprehension of facts on the part of the tax court to the extent that its conclusions
be distorted by other considerationsaliunde. The application for the loan was approved on May
are speculative in nature.
20, 1970, or more than a month after the contract between Mitsubishi and Atlas was entered
into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or to use the amount as a loan to and in consideration for importing copper concentrates from
inferential reference to Eximbank whatsoever. The agreement is strictly between MitsubishiAtlas,
as but all that this proves is the justification for the loan as represented by Mitsubishi, a
creditor in the contract of loan and Atlas as the seller of the copper concentrates. From thestandard banking practice for evaluating the prospects of due repayment. There is nothing
categorical language used in the document, one prestation was in consideration of the other.
wrong with such stipulation as the parties in a contract are free to agree on such lawful terms
The specific terms and the reciprocal nature of their obligations make it implausible, if not and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain
vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside
transaction.
from protecting its financial exposure, must see to it that the same are in line with the provisions
and objectives of its charter.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that
Mitsubishi stated in its loan application with the former was that the amount being procuredRespondents postulate that Mitsubishi had to be a conduit because Eximbank's charter
would be used as a loan to and in consideration for importing copper concentrates from prevents it from making loans except to Japanese individuals and corporations. We are not
Atlas. 12 Such an innocuous statement of purpose could not have been intended for, nor could
it
impressed.
Not only is there a failure to establish such submission by adequate evidence but it
legally constitute, a contract of agency. If that had been the purpose as respondent court posits the unfair and unexplained imputation that, for reasons subject only of surmise, said
believes, said corporations would have specifically so stated, especially considering their

financing institution would deliberately circumvent its own charter to accommodate an aliencode, are entitled to exemption and which should indispensably be the party in interest in this
borrower through a manipulated subterfuge, but with it as a principal and the real obligee. case.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed
assuming the truth thereof, is too tenuous and conjectural to support the proposition that "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental
Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also
operations
be
suffer due to diminution of much needed funds. Nor can we close this discussion
logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whateverwithout taking cognizance of petitioner's warning, of pervasive relevance at this time, that while
arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedureinternational
for
comity is invoked in this case on the nebulous representation that the funds
the payment of the latter's obligation is their own concern. It should also be noted that
involved in the loans are those of a foreign government, scrupulous care must be taken to
Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis
avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of
contract with Atlas merely states that the "interest on the amount of the loan shall be the actual
having a Philippine corporation enter into a contract for loans or other domestic securities with
cost beginning from and including other dates of releases against loan." 14
private foreign entities, which in turn will negotiate independently with their governments, could
be availed of to take advantage of the tax exemption law under discussion.
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws
granting exemption from tax are construed strictissimi juris against the taxpayer and liberally
WHEREFORE,
in
the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015,
favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of
dated April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET
proof rests upon the party claiming exemption to prove that it is in fact covered by the
ASIDE.
exemption so claimed, which onus petitioners have failed to discharge. Significantly, private
respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax
SO ORDERED.