G.R. No.

153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

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

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of
respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision 2 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002 Resolution 3 of
the Court of Appeals denying its motion for reconsideration.

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

In 1995, respondent received the amount of P1,707,772.64, representing her sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17,
1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26.6

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

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

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

WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated
June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby
directed to grant petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.8

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

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

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

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

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

SEC. 25. Tax on Nonresident Alien Individual. –

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

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

xxxx

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

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

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

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

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

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

SEC. 42. x x x

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

xxxx

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

xxxx

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

xxxx

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

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

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

If the income is from labor the place where the labor is done should be decisive; if it is done in
this country, the income should be from "sources within the United States." If the income is from
capital, the place where the capital is employed should be decisive; if it is employed in this
country, the income should be from "sources within the United States." If the income is from the
sale of capital assets, the place where the sale is made should be likewise decisive.

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

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

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

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

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

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the

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

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

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

xxxx

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.

CONSUELO YNARES-SANTIAGO

Associate Justice

WE CONCUR:
G.R. No. 137377 December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the
Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to have
properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.

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

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of

authority to examine the books of accounts of the Manila branch office of respondent corporation
for the fiscal year ending March 1985. In the course of the examination, petitioner found
respondent to have undeclared income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the National Development Company
(NDC) in connection with the construction and installation of a wharf/port complex at the Leyte
Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract
was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an
ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency

income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

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

I. DEFICIENCY INCOME TAX

FY ended March 31, 1985

Undeclared gross income (Philphos and

NDC construction projects) P967,269,811.14

Less: Cost and expenses (50%) 483,634,905.57

Net undeclared income 483,634,905.57

Income tax due thereon 169,272,217.00

Add: 50% surcharge 84,636,108.50

20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90

TOTAL AMOUNT DUE P290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

FY ended March 31, 1985

Undeclared gross income from Philphos

and NDC construction projects P483,634,905.57

Less: Income tax thereon 169,272,217.00

Amount subject to Tax 314,362,688.57

Tax due thereon 47,154,403.00

Add: 50% surcharge 23,577,201.50

20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66

TOTAL AMOUNT DUE P83,036,965.16

III. DEFICIENCY CONTRACTOR'S TAX

FY ended March 31, 1985

Undeclared gross receipts/gross income
from Philphos and NDC construction
projects P967,269,811.14

Contractor's tax due thereon (4%) 38,690,792.00

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

20% surcharge for late payment 9,672,698.00

Sub-total 67,708,886.00

Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46

TOTAL AMOUNT DUE P85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKER'S TAX

FY ended March 31, 1985

Undeclared share from commission

income
(denominated as "subsidy from Home
Office") P24,683,114.50

Tax due thereon 1,628,569.00

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

20% surcharge for late payment 407,142.25

Sub-total 2,849,995.75
 Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 751,539.98

TOTAL AMOUNT DUE P3,600,535.68

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

xxx xxx xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that
the gross income from the two projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction and installation of facilities in the
Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the same was
petitioner's final decision and that if respondent disagreed with it, respondent may file an appeal
with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31, 1986:
(a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true
copy of his statement declaring his net worth as of December 31, 1980 on record with the Bureau
of Internal Revenue (BIR), or if no such record exists, file a statement of said net worth subject to
verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the
increase in net worth from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth
as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3,
1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its
net worth increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years
1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on
business under Chapter II, Title V of the National Internal Revenue Code, also covering the years
1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41
were extended to the foregoing tax liabilities, and the period within which the taxpayer could avail
of the amnesty was extended to December 15, 1986. Those taxpayers who already filed their
amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits,
immunities and privileges under the new E.O. by filing an amended return and paying an
additional 5% on the increase in net worth to cover business, estate and donor's tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of
E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent
(5%) of the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly
availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED

to DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner
and the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of
the proper availment by petitioner of the amnesty under Executive Order No. 41, as
amended."4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court
of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of
the Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's availment of tax amnesty under Executive Orders Nos.
41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5

The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income
tax, branch profit remittance tax and contractor's tax. These taxes are covered by the amnesties
granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O.
No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty
herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;
 c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code,
as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of
the effectivity hereof as a result of information furnished under Section 316 of the
National Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before
the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986,
CTA Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases
already filed in court as of the effectivity hereof." The point of reference is the date of effectivity of
E.O. No. 41. The filing of income tax cases in court must have been made before and as of the
date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b)
there must have been no income tax cases filed in court against him when E.O. No. 41 took
effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course
he files it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractor's tax assessments was filed by respondent with
the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August
22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall
under the said exception in Section 4 (b), hence, respondent was not disqualified from availing of
the amnesty for income tax under E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch
profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the
National Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a
tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it filed
for amnesty of its deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41
by including estate and donor's taxes and tax on business. Estate and donor's taxes fall under
Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The
contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on business. 7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No.
64 provided that:
 "Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or

inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No.
41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4
(b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has "income
tax cases already filed in court as of the effectivity hereof." As to what Executive Order the
exception refers to, respondent argues that because of the words "income" and "hereof," they
refer to Executive Order No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer
to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original act
as if it had always been contained therein,10 it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or obligations of contract are
thereby impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of
E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any
of its provisions should apply retroactively. Executive Order No. 64 is a substantive amendment
of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original
act by adding other taxes not covered in the first.12 It has been held that where a statute
amending a tax law is silent as to whether it operates retroactively, the amendment will not be
given a retroactive effect so as to subject to tax past transactions not subject to tax under the
original act.13 In an amendatory act, every case of doubt must be resolved against its retroactive
effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give tax evaders who wish to
relent a chance to start with a clean slate.16 A tax amnesty, much like a tax exemption, is never
favored nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax exemption,
must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 18 For
the right of taxation is inherent in government. The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest grant of organic or state law. It cannot be
allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore
be construed strictly against the taxpayer. The term "income tax cases" should be read as to
refer to estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64.
Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the
taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No.
41 should be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent
already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from
availing of the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under the
two Executive Orders, it is still not liable for the deficiency contractor's tax because the income
from the projects came from the "Offshore Portion" of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-
scale manufacture of phosphatic fertilizer for the local and foreign markets. 20 The Philphos plant
complex which was envisioned to be the largest phosphatic fertilizer operation in Asia, and
among the largest in the world, covered an area of 180 hectares within the 435-hectare Leyte
Industrial Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at the
Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling
of phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of
Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar), 21 and other
industrial plants within the Estate. The bidding was participated in by Marubeni Head Office in
Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation."22 The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities,
harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.23 The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and
know-how,24 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the Wharf-
Port Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins
at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex
through the Owner, with the design and construction of other facilities around the site.
The scope of works shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial port practice, for the
timely and successful implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I."25

The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In
the contract, the price in Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency
was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were
financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic Cooperation
Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-Import Bank of
Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote economic development. 26 The
OECF extended to the Philippine Government a loan of ¥7,560,000,000.00 for the Leyte
Industrial Estate Port Development Project and authorized the NDC to implement the
same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained
a loan from the Export-Import Bank of Japan to advance payment to its sub-contractors. 28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment and
services rendered on the project. The price breakdown and the corresponding materials,
equipment and services were contained in a list attached as Annex III to the contract. 29

A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982,
Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract for
Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni
Corporation."30 The object of the contract was to establish and place in operating condition a
modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia31 and for the delivery of ammonia to an
integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. 32 The
storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading
system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts,
and other related facilities.33 The scope of the works required for the completion of the ammonia
storage complex covered the supply, including grants of licenses and transfer of technology and
know-how,34 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and construction of other
facilities at and around the Site. The scope of works shall also include any activity, work
and supply necessary for, incidental to or appropriate under present international
industrial practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I." 35

The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken
down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine
currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II
were financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the
three portions were further broken down into the corresponding materials, equipment and
services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III. 36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were classified —
the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese
Yen Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore Portion. 38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's
tax on the income from the two projects. In fact respondent claims, which petitioner has not
denied, that the income it derived from the Onshore Portion of the two projects had been
declared for tax purposes and the taxes thereon already paid to the Philippine government. 39 It is
with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the
liabilities involved in the assessments subject of this case arose. Petitioner argues that since the
two agreements are turn-key,40 they call for the supply of both materials and services to the client,
they are contracts for a piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done and completed
within the territorial jurisdiction of the Philippines.41Accordingly, respondent's entire receipts from
the contracts, including its receipts from the Offshore Portion, constitute income from Philippine
sources. The total gross receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co.42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A

contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or
operators of the following business establishments and/or persons engaged in the
business of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in

Republic Act No. 4566;

xxx xxx xxx

(q) Other independent contractors. The term "independent contractors" includes

persons (juridical or natural) not enumerated above (but not including individuals
subject to the occupation tax under the Local Tax Code) whose activity consists
essentially of the sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees. It does not include
regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not
earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.

xxx xxx xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees. The word "contractor" refers to a person who, in the pursuit of
independent business, undertakes to do a specific job or piece of work for other persons, using
his own means and methods without submitting himself to control as to the petty details. 44

A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 It is generally in
the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a
sale on products;46 and is directly collectible from the person exercising the privilege.47 Being an
excise tax, it can be levied by the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority. 48 Like property taxes, it cannot be
imposed on an occupation or privilege outside the taxing district. 49

In the case at bar, it is undisputed that respondent was an independent contractor under the
terms of the two subject contracts. Respondent, however, argues that the work therein were not
all performed in the Philippines because some of them were completed in Japan in accordance
with the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials and equipment to be
made and the works and services to be performed by respondent are indeed classified into two.
The first part, entitled "Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
 subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:

xxx xxx xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan. 51 The machines and equipment
were designed, engineered and fabricated by Japanese firms sub-contracted by Marubeni from
the list of sub-contractors in the technical appendices to each contract. 52 Marubeni sub-
contracted a majority of the equipment and supplies to Kawasaki Steel Corporation which did the
design, fabrication, engineering and manufacture thereof; 53 Yashima & Co. Ltd. which
manufactured the mobile equipment; Bridgestone which provided the rubber fenders of the
mobile equipment;54 and B.S. Japan for the supply of radio equipment. 55 The engineering and
design works made by Kawasaki Steel Corporation included the lay-out of the plant facility and
calculation of the design in accordance with the specifications given by respondent. 56 All sub-
contractors and manufacturers are Japanese corporations and are based in Japan and all
engineering and design works were performed in that country. 57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of
two (2) sets of ship unloader and loader; several boats and mobile equipment. 58 The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top of
each is a large crane and a compartment for operation of the crane. Two sets of these equipment
were completely manufactured in Japan according to the specifications of the project. After
manufacture, they were rolled on to a barge and transported to Isabel, Leyte. 59 Upon reaching
Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where
they were installed.60 Their installation simply consisted of bolting them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment,
consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also
manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once
unloaded at the port, they were ready to be driven and perform what they were designed to do. 62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to
the NDC contract. These other items consist of supplies and materials for five (5) berths, two (2)
roads, a causeway, a warehouse, a transit shed, an administration building and a security
building. Most of the materials consist of steel sheets, steel pipes, channels and beams and
other steel structures, navigational and communication as well as electrical equipment. 63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and specifications and then shipped to
Isabel. Once there, respondent's employees put the steel plates together to form the storage
tank. As to the refrigeration units, they were completed and assembled in Japan and thereafter
shipped to Isabel. The units were simply installed there. 65 Annex III to the Philphos contract lists
down under the Japanese Yen Portion I the materials for the ammonia storage tank, incidental
equipment, piping facilities, electrical and instrumental apparatus, foundation material and spare
parts.

All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts. 66 The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests on the
machines and equipment67 while Philphos sent a representative to Japan to inspect the storage
equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid
by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the
Assistant General Manager and Manager of the Steel Plant Marketing Department, Engineering
& Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies
for the two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni
in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese and
English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. 70

Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of
respondent through the Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's
submission of pertinent documents, released the amount in the letters of credit in favor of
respondent and credited the amount therein to respondent's account within the same bank. 71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . " 72 of
the two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan
and the Philippines. While the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets of ship unloader and loader, the boats and
mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units
were made and completed in Japan. They were already finished products when shipped to the
Philippines. The other construction supplies listed under the Offshore Portion such as the steel
sheets, pipes and structures, electrical and instrumental apparatus, these were not finished
products when shipped to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered outside the taxing jurisdiction of
the Philippines and are therefore not subject to contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported some
items for the system it designed and installed.74 The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign element involved in the supply
of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.
SO ORDERED.

Davide, Jr., C .J ., Kapunan, Pardo, and Ynares-Santiago, JJ ., concur.

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

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

MELENCIO-HERRERA, J.:

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

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

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

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

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

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

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for
the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section
46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal
Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside.
In a letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for
refund in the First Case but also re-issued in the Second Case the deficiency income tax
assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was denied by the
CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court
praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

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

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

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

1. Whether or not the revenue derived by private respondent British Overseas

Airways Corporation (BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC
from Philippine sources, and, accordingly, taxable.

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

3. In the alternative that private respondent may not be considered a resident

foreign corporation but a non-resident foreign corporation, then it is liable to
Philippine income tax at the rate of thirty-five per cent (35%) of its gross income
received from all sources within the Philippines.

Under Section 20 of the 1977 Tax Code:

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

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

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

BOAC, during the periods covered by the subject - assessments, maintained a general sales
agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1)
selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the
series corresponding to a different airline company; (3) receiving the fare from the whole trip; and
(4) consequently allocating to the various airline companies on the basis of their participation in
the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions
4

which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is
the very lifeblood of the airline business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was "engaged in" business in the Philippines through
a local agent during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable year from
all sources within the Philippines. 5

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

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

(2) Resident corporations. — A corporation organized, authorized, or existing

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

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

The Tax Code defines "gross income" thus:

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

The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words 'income from any source whatever' disclose a legislative policy to include
all income not expressly exempted within the class of taxable income under our laws." Income
means "cash received or its equivalent"; it is the amount of money coming to a person within a
specific time ...; it means something distinct from principal or capital. For, while capital is a fund,
income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-
71 amounted to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. For the 8

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

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

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

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

The absence of flight operations to and from the Philippines is not determinative of the source of
income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the
time pertinent to this case. The test of taxability is the "source"; and the source of an income is
that activity ... which produced the income. 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", 12 it cannot alter the fact that income
from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of
the income herein is the Philippines. 13

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

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

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

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

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

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court
of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3,
1969, is res judicata to the present case. The ruling by the Tax Court in that case was to the
effect that the mere sale of tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to the common carrier's tax. As
elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on
the activity of transporting, conveying or removing passengers and cargo from one place to
another. It purports to tax the business of transportation. 14 Being an excise tax, the same can
be levied by the State only when the acts, privileges or businesses are done or performed within
the jurisdiction of the Philippines. The subject matter of the case under consideration is income
tax, a direct tax on the income of persons and other entities "of whatever kind and in whatever
form derived from any source." Since the two cases treat of a different subject matter, the
decision in one cannot be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE.
Private respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus
5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three (3)
years in accordance with the Tax Code. The BOAC claim for refund in the amount of
P858,307.79 is hereby denied. Without costs.

SO ORDERED.

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

Fernan, J., took no part.

Separate Opinions

TEEHANKEE, 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 2-½% on their gross Philippine billings. There is,
therefore, no longer ant source of substantial conflict between the two opinions as to the present
2-½% 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 question 1 BOAC [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 "resident foreign 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 taxation only in respect of income derived from 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 the total net income
received in the preceeding taxable year from all sources within the Philippines by
every corporation organized, authorized, or existing under 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 or existing

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 year from 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 by every 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. 2

Clearly, 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 therefore whether 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"
relates not to the physical sourcing of a flow of money or the physical situs of payment but rather
to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs.
Collector of Internal Revenue, the court dealt with the issue of the applicable source rule
3

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. — 4

The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In the Howden case,
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,
that income may be derived from three possible sources only: (1) capital and/or
(2) labor and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful
 guides in any inquiry into whether a particular item is from "source within the
United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor
(services) the place where the labor is done should 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 employed should 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 and to 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, or the 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 is protection of life and propertyand that the income
rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected
by this Government or obtained by persons enjoying that protection. 5

3. 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 of contracts of service; and (b) the source rule applicable in respect
of sales 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

services performed 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 as income from sources without the Philippines:

(3) Compensation for labor or personal services performed 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. Further, a contract of carriage or of transportation is
6

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, and income
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
be treated 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 that transportation 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. 7

Section 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 Philippines regardless 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., foreign steamship companies
deriving income from sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross
income, the total receipts of all out-going business whether 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 rendered between points both outside the
Philippines give rise to income wholly 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 first sales of personal property. Income from the sale of personal property by the
producer or manufacturer of such personal property will be regarded as sourced entirely within or
entirely without the Philippines or as sourced partly within and partly without the 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 place where 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 the purchase 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") or as 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 the evidence of the contract of carriage entered 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 the compensation paid for the undertaking of BOAC to
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 is income taxation, and not
a sales tax or an excise or privilege tax.

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, That international 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 Philippine income tax 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 2½ 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 2-½ per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. 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 2-½ 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.

Separate Opinions

TEEHANKEE, 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 2-½% on their gross Philippine billings. There is,
therefore, no longer ant source of substantial conflict between the two opinions as to the present
2-½% 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 question 1 BOAC [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 "resident foreign 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 taxation only in respect of income derived from 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 the total net income
received in the preceeding taxable year from all sources within the Philippines by
every corporation organized, authorized, or existing under 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 or existing

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 year from 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 by every 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. 2

Clearly, 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 therefore whether 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"
relates not to the physical sourcing of a flow of money or the physical situs of payment but rather
to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs.
Collector of Internal Revenue, the court dealt with the issue of the applicable source rule
3

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. — 4

The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In the Howden case,
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,
that income may be derived from three possible sources only: (1) capital and/or
(2) labor and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful
guides in any inquiry into whether a particular item is from "source within the
United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor
(services) the place where the labor is done should 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 employed should 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 and to 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, or the 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 is protection of life and propertyand that the income
rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected
by this Government or obtained by persons enjoying that protection. 5

3. 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 of contracts of service; and (b) the source rule applicable in respect
of sales 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

services performed 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 as income from sources without the Philippines:

(3) Compensation for labor or personal services performed 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. Further, a contract of carriage or of transportation is
6

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, and income
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
be treated 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 that transportation 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. 7

Section 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 Philippines regardless 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., foreign steamship companies
deriving income from sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross
income, the total receipts of all out-going business whether 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 rendered between points both outside the
Philippines give rise to income wholly 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 first sales of personal property. Income from the sale of personal property by the
producer or manufacturer of such personal property will be regarded as sourced entirely within or
entirely without the Philippines or as sourced partly within and partly without the 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 place where 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 the purchase 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") or as 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 the evidence of the contract of carriage entered 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 the compensation paid for the undertaking of BOAC to
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 is income taxation, and not
a sales tax or an excise or privilege tax.

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, That international 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 Philippine income tax 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 2½ 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 2-½ per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. 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 2-½ 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.

Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

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

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

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. The purchase price
1

was to come from the proceeds of bonds issued by the Central Bank. Initial payments were
2

made in cash and through irrevocable letters of credit. Fourteen promissory notes were signed
3

for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of
the Philippines. Pursuant thereto, the remaining payments and the interests thereon were
4

remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered
to the NDC in Tokyo. 5

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

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

petition for certiorari.

The petition must fail for the following reasons.

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

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

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

xxx xxx xxx

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

NDC. This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

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

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

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

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

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

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

(4) Interest on Government Securities. — Interest upon the obligations of the

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

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

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

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

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

question must be resolved in favor of the taxing power. 12

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

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

Sec. 54. Payment of corporation income tax at source. — In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business within
the Philippines and not having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and upon the same items as is
provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and
such tax shall be returned and paid in the same manner and subject to the same
conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its taxing power under existing laws.

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

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

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

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

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

responsibilities of withholding agents:

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

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

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

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It

is so ordered.

Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano,
Gancayno, Padilla, Bidin, Sarmiento and Cortez, JJ., concur