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Republic of the PhilippinesSUPREME COURT

ManilaFIRST DIVISIONG.R. Nos. L-44501-05 July 19, 1990

JOHN L. GARRISON, FRAN RO!ERTSON, RO!ERT H. CATHE", JAMES#. RO!ERTSON, FELICITAS $E GU%MAN &'( E$#AR$ M)GUR,petitioners,vs.COURT OF APPEALS &'( REPU!LIC OF THE PHILIPPINES, respondents.Quasha, Asperilla, Ancheta, Valmonte, Peña & Marcos for petitioners. NAR*ASA, J.:Souht to be overturned in these appeals is the !ud"ent of the #ourt of

$ppeals, 1 %hich affir"ed the decision of the #ourt of First Instance of &a"balesat Olonapo #it' convictin the petitioners (of violation of Section )* +a +- +b of

the National Internal Revenue #ode, as a"ended, b' not filin their respectiveinco"e ta returns for the 'ear -/0/( and sentencin (each of the" to pa' a fineof T%o Thousand +P1,222.22 Pesos, %ith subsidiar' i"prison"ent in case ofinsolvenc', and to pa' the costs proportionatel'. +

The petitioners have adopted the factual findins of the #ourt of $ppeals, viz .3-. 4O5N 6. 7$RRISON (%as born in the Philippines and . . . lived in this countr'since birth up to -/)*, %hen he %as repatriated and returned to the 8nitedStates. 5e sta'ed in the 8nited States for the follo%in t%ent' 'ears until Ma' *,-/0*, %hen he entered the Philippines throuh the #lar9 $ir :ase. The saidaccused lived in the Philippines since his return on Ma' 0, -/0*. 5e lives %ith hisFilipino %ife and their children at No. ) #orpus Street, ;est Tapinac, Olonapo

#it', and the' o%n the house and lot on %hich the' are presentl' residin. 5is%ife ac<uired b' inheritance si hectares of aricultural land in =ue>onProvince.(1. 4$M?S ;. RO:?RTSON (%as born on Dece"ber 11, -/-* in Olonapo,&a"bales and he re% up in this countr'. 5e and his fa"il' %ere repatriated tothe 8nited States in -/)*. The' sta'ed in 6on :each, #alifornia until the latterpart of -/)0 or the earl' part of -/)@, %hen he %as reAassined overseas,particularl' to the Pacific area %ith ho"e base in 7ua". 5is net arrival in thePhilippines %as in -/*B and he sta'ed in this countr' fro" that ti"e up to thepresent. 5e is presentl' residin at No. 1* ?licaCo, Street, ?ast :a!acA:a!ac,Olonapo #it', and his house and lot are declared in his na"e for ta purposes.(. FR$NE ;. RO:?RTSON (%as born in the Philippines and he lived in thiscountr' up to -/)*, %hen he %as repatriated to the 8nited States alon %ith hisbrother, his coAaccused 4a"es ;. Robertson. 5e sta'ed in the 8nited States forabout one 'ear, durin %hich ti"e he resided in Manolia $venue, 6on :each,#alifornia. So"eti"e in -/)0 or earl' -/)@, he %as assined to %or9 in thePacific $rea, particularl' 5a%aii. $t that ti"e he had been visitin the Philippinesoff and on in connection %ith his %or9. In -/01, he returned once "ore to thePhilippines and he has been residin here ever since. 5e is "arried to a Filipino



citi>en na"ed 7enerosa 4uico and the' live at No. National Road, 6o%erEala9lan, Olonapo #it'. The residential lot on %hich the' are presentl' residinis declared in his %ifes na"e for ta purposes, %hile the house constructedthereon %as oriinall' declared in his na"e and the sa"e %as transferred in his%ifes na"e onl' in Februar', -/@-.(

). RO:?RT 5. #$T5?G %as born in Tennessee, 8nited States, on $pril B, -/-@Hhis first arrival in the Philippines, as a "e"ber of the liberation forces of the8nited States, %as in -/)). 5e sta'ed in the Philippines until $pril, -/*2, %henhe returned to the 8nited States, and he ca"e bac9 to the Philippines in -/*-.5e sta'ed in the Philippines since -/*- up to the present.(*. F?6I#IT$S D? 78&M$N (%as born in the Philippines in -/* and her father%as a naturali>ed $"erican citi>en. ;hile she %as stud'in at the 8niversit' ofSto. To"as, Manila, she %as recruited to %or9 in the 8nited States Naval :ase,Subic :a', Philippines. $fter%ards, she left the Philippines to %or9 in the 8nitedStates Naval :ase, 5onolulu, 5a%aii, and she returned to the Philippines on orabout $pril 1-, -/0@. The said accused has not left the Philippines since then.

She is "arried to 4ose de 7u>"an, a Filipino citi>en, and the' and their childrenlive at No. /0 Fendler Street, ?ast Tapinac, Olonapo #it'. 5er husband ise"plo'ed in the 8nited States Naval :ase, Olonapo #it', and he also %or9s asan insurance "anaer of the Travellers 6ife.(0. ?D;$RD Mc78RE (ca"e to the Philippines on 4ul' --, -/0@ and he sta'edin this countr' continuousl' up to the present ti"e.(

$66 T5? P?TITION?RS (are 8nited States citi>ens, entered this countr' underSection / +a of the Philippine I""iration $ct of -/)2, as a"ended, andpresentl' e"plo'ed in the 8nited States Naval :ase, Olonapo #it'. For the 'ear -/0/ 4ohn 6. 7arrison earned -*,1BB.22H Fran9 Robertson, -1,2)*.B)H Robert5. #athe', /,B**.12H 4a"es ;. Robertson, -),/B*.*)H Felicitas de 7u>"an, B,*21.)2H and ?d%ard Mc7ur9 -1,)2@.// . . .

$66 S$ID P?TITION?RS (received separate notices fro" 6adislao Fir"acion,District Revenue Officer, stationed at Olonapo #it', infor"in the" that the' hadnot filed their respective inco"e ta returns for the 'ear -/0/, as re<uired b'Section )* of the National Internal Revenue #ode, and directin the" to file thesaid returns %ithin ten da's fro" receipt of the notice. :ut the accused refused tofile their inco"e ta returns, clai"in that the' are not resident aliens but onl'special te"porar' visitors, havin entered this countr' under Section / +a of thePhilippine I""iration $ct of -/)2, as a"ended. The accused also clai"edee"ption fro" filin the return in the Philippines b' virtue of the provisions of

$rticle JII, pararaph 1 of the 8SARP Militar' :ases $ree"ent.(The petitioners contend that iven these facts, the' "a' not under the la% bedee"ed resident aliens re<uired to file inco"e ta returns. 5ence, the' arue, it%as error for the #ourt of $ppeals K- to consider their (ph'sical or bodil' presence( in the countr' as (sufficient b'itself to <ualif' . . +the" as resident aliens despite the fact that the' %ere notresidents of the Philippines i""ediatel' before their e"plo'"ent b' the 8.S.7overn"ent at Subic Naval :ase and their presence here durin the periodconcerned %as dictated b' their respective %or9 as e"plo'ees of the 8nited



States Naval :ase in the Philippines,( and1 to refuse to reconi>e their (taAee"pt status . . under the pertinentprovisions of the RPA8S Militar' :ases $ree"ent.(The provision alleed to have been violated b' the petitioners, Section )* of theNational Internal Revenue #ode, as a"ended, reads as follo%s3

S?#. )*. K Individual returns. +a Re<uire"ents. +- The follo%in individualsare re<uired to file an inco"e ta return, if the' have a ross inco"e of at leastOne Thousand ?iht 5undred Pesos for the taable'earH . . .+b If alien residin in the Philippines, reardless of %hether the ross inco"e%as derived fro" sources %ithin or outside the Philippines.The sanction for breach thereof is prescribed b' Section @ of the sa"e code, to%it3S?#. @. Penalt' for failure to file return nor to pa' ta. K $n'one liable to pa'the ta, to "a9e a return or to suppl' infor"ation re<uired under this code, %horefuses or nelects to pa' such ta, to "a9e such return or to suppl' such

infor"ation at the ti"e or ti"es herein specified each 'ear, shall be punished b'a fine of not "ore than T%o Thousand Pesos or b' i"prison"ent for not "orethan si "onths, or both . . .The provision under %hich the petitioners clai" ee"ption, on the other hand, iscontained in the Militar' :ases $ree"ent bet%een the Philippines and the8nited States, 4 readin as follo%s31. No national of the 8nited States servin in or e"plo'ed in the Philippines inconnection %ith construction, "aintenance, operation or defense of the basesand reside in the Philippines b' reason onl' of such e"plo'"ent, or his spouseand "inor children and dependents, parents or her spouse, shall be liable to pa'inco"e ta in the Philippines ecept in reard to inco"e derived fro" Philippinesources or sources other than the 8S sources.The petitioners clai" that the' are covered b' this ee"ptin provision of the:ases $ree"ent since, as is ad"itted on all sides, the' are all 8.S. nationals,all e"plo'ed in the $"erican Naval :ase at Subic :a' +involved in so"e %a' orother in (construction, "aintenance, operation or defense( thereof, and receivesalar' therefro" eclusivel' and fro" no other source in the PhilippinesH and it istheir intention, as is sho%n b' the unrebutted evidence, to return to the 8nitedStates on ter"ination of their e"plo'"ent.That clai" had been re!ected b' the #ourt of $ppeals %ith the terse state"entthat the :ases $ree"ent (spea9s of ee"ption fro" the payment of inco"e ta,not fro" the filing of the inco"e ta returns . .( 5

To be sure, the :ases $ree"ent ver' plainl' Identifies the persons NOT (liableto pa' inco"e ta in the Philippines ecept in reard to inco"e derived fro"Philippine sources or sources other than the 8S sources.( The' are the personsin %ho" concur the follo%in re<uisites, to %it3- nationals of the 8nited States servin in or e"plo'ed in the PhilippinesH1 their service or e"plo'"ent is (in connection %ith construction, "aintenance,operation or defense of the basesH(



the' reside in the Philippines b' reason onl' of such e"plo'"entH and) their inco"e is derived eclusivel' fro" (8.S. sources.(No%, there is no <uestion +- that the petitioners are 8.S. nationals servin ore"plo'ed in the PhilippinesH +1 that their e"plo'"ent is (in connection %ithconstruction, "aintenance, operation or defense( of a base, Subic :a' Naval

:aseH + the' reside in the Philippines b' reason onl' of such e"plo'"ent since,as is undisputed, the' all intend to depart fro" the countr' on ter"ination of theire"plo'"entH and +) the' earn no inco"e fro" Philippine sources or sourcesother than the 8.S. sources. Therefore, b' the eplicit ter"s of the :ases

$ree"ent, none of the" (shall be liable to pa' inco"e ta in the Philippines . . .(Indeed, the petitioners clai" for ee"ption pursuant to this $ree"ent had beensustained b' the #ourt of Ta $ppeals %hich set aside and cancelled theassess"ents "ade aainst said petitioners b' the :IR for deficienc' inco"etaes for the taable 'ears -/0/A-/@1. The decision of the #ourt of Ta $ppealsto this effect %as contested in this #ourt b' the #o""issioner of InternalRevenue, but the sa"e %as nonetheless affir"ed on $uust -1, -/B0. /

:ut even if ee"pt fro" paying income tax , said petitioners %ere, it is contendedb' the respondents, not ecused fro" filin inco"e ta returns. For the InternalRevenue #ode +Sec. )*, supra re<uires the filin of an inco"e ta return also b'an' (alien residin in the Philippines, reardless of %hether the ross inco"e%as derived fro" sources %ithin or outside the PhilippinesH( and since thepetitioners, althouh aliens residin %ithin the Philippines, had failed to do so,the' had been properl' prosecuted and convicted for havin thus violated the#ode.(;hat the la% re<uires,( states the challened !ud"ent of the #ourt of $ppeals,(is "erel' ph'sical or bodil' presence in a iven place for a period of ti"e, notthe intention to "a9e it a per"anent place of abode. It is on this proposition,ta9en in the liht of the established facts on record to the effect that al"ost all ofthe appellants %ere born here, repatriated to the 8S and to co"e bac9, in thelatest in -/0@, and to sta' in the Philippines up to the present ti"e, that "a9esappellants resident aliens not "erel' transients or so!ourners %hich residence for <uite a lon period of ti"e, coupled %ith the a"ount and source of inco"e %ithinthe Philippines, renders i""aterial, for purposes of filin the inco"e ta returnsas contraAdistinuished fro" the pa'"ent of inco"e ta, their intention to obac9 to the 8nited States.(?ach of the petitioners does indeed fall %ithin the letter of the codal precept thatan (alien residin in the Philippines( is oblied (to file an inco"e ta return.(None of the" "a' be considered a nonAresident alien, (a "ere transient orso!ourner,( %ho is not under an' leal dut' to file an inco"e ta return under thePhilippine Ta #ode. This is "ade clear b' Revenue Relations No. 1 of theDepart"ent of Finance of Februar' -2, -/)2, 9 %hich la's do%n the relevantstandards on the "atter3

$n alien actuall' present in the Philippines %ho is not a "ere transient orso!ourner is a resident of the Philippines for purposes of inco"e ta. ;hether heis a transient or not is deter"ined b' his intentions %ith reards to the lenth andnature of his sta'. $ "ere floatin intention indefinite as to ti"e, to return to



another countr' is not sufficient to constitute hi" as transient. If he lives in thePhilippines and has no definite intention as to his sta', he is a resident. One %hoco"es to the Philippines for a definite purpose %hich in its nature "a' bepro"ptl' acco"plished is a transient. :ut if his purpose is of such a nature thatan etended sta' "a' be necessar' to its acco"plish"ent, and to that end the

alien "a9es his ho"e te"poraril' in the Philippines, he beco"es a resident,thouh it "a' be his intention at all ti"es to return to his do"icile abroad %henthe purpose for %hich he ca"e has been consu""ated or abandoned.The petitioners concede that the foreoin standards have been (a ood'ardstic9,( and are in fact not at substantial variance fro" $"erican

!urisprudence. 10 The' ac9no%lede, too, that (their ee"ption under the :ases $ree"ent relates si"pl' to nonAliabilit' for the pa'"ent of inco"e ta, not to thefilin of . . . +a return.( :ut, the' arue 11 K. . . after havin epressl' reconi>ed that petitioners need not pa' inco"e tahere, there appears to be no loic in re<uirin the" to file inco"e ta returns%hich an'ho% %ould serve no practical purpose since their liabilit' on the

a"ounts stated thereon can hardl' be eacted. The "ore practical vie%, ta9ininto account polic' considerations that pro"pted the 7overn"ent of the Republicof the Philippines to ee"pt the petitioners, as %ell as other $"erican citi>enssi"ilarl' situated, fro" the pa'"ent of inco"e ta here, is to reconi>e the lesser act of filin %ithin the ee"ption ranted. This is si"pl' bein consistent %ith thereason behind the rant of taAee"pt status to petitioners.Pointin out further to %hat the' consider (the ad"inistrative i"ple"entation ofthat +taAee"ption provision +of the :ases $ree"ent b' both overn"ents for about 11 'ears +%hich did not re<uire the filin of inco"e ta returns b' $"ericanciti>enAe"plo'ees holdin /A$ special visas li9e petitioners, and to (the hiherplane of political realities %hich pro"pted the Philippine 7overn"ent to partiall'surrender its inherent riht to ta,( petitioners sub"it that (the particular proble"involved in these cases is a "atter that has to find solution and ouht to be dealt%ith in conference tables rather than before the court of la%. ( 1+

=uite apart fro" the evidentl' distinct and different character of the re<uire"entto pa' inco"e ta in contrast to the re<uire"ent to file a ta return, it appearsthat the ee"ption ranted to the petitioners b' the :ases $ree"ent fro"pa'"ent of inco"e ta is not absolute. :' the eplicit ter"s of the :ases

$ree"ent, it eists onl' as reards inco"e derived fro" their e"plo'"ent (inthe Philippines in connection %ith construction, "aintenance, operation ordefense of the basesH( it does not eist in respect of other inco"e, i.e., (inco"ederived fro" Philippine sources or sources other than the 8S sources.(Obviousl', %ith respect to the latter for" of inco"e, i.e., that obtained orproceedin fro" (Philippine sources or sources other than the 8S sources,( thepetitioners, and all other $"erican nationals %ho are residents of the Philippines,are leall' bound to pa' ta thereon. In other %ords, so that $"erican nationalsresidin in the countr' "a' be relieved of the dut' to pa' inco"e ta for an'iven 'ear, it is incu"bent on the" to sho% the :ureau of Internal Revenue thatin that 'ear the' had derived inco"e eclusivel' fro" their e"plo'"ent inconnection %ith the 8.S. bases, and none %hatever (fro" Philippine sources or



sources other than the 8S sources.( The' have to "a9e this 9no%n to the7overn"ent authorities. It is not in the first instance the latters dut' or burden to"a9e unaided verification of the sources of inco"e of $"erican residents. Thedut' rests on the 8.S. nationals concerned to invo9e and prima facie establishtheir taAee"pt status. It cannot si"pl' be presu"ed that the' earned no

inco"e fro" an' other sources than their e"plo'"ent in the $"erican bases andare therefore totall' ee"pt fro" inco"e ta. The situation is no different fro"that of Filipino and other resident inco"eAearners in the Philippines %ho, b'reason of the personal ee"ptions and per"issible deductions under the Ta#ode, "a' not be liable to pa' inco"e ta 'ear for an' particular 'earH that the'are not liable to pa' inco"e ta, no "atter ho% plain or irrefutable such aproposition "iht be, does not ee"pt the" fro" the dut' to file an inco"e tareturn.These considerations i"pel affir"ance of the !ud"ents of the #ourt of $ppealsand the Trial #ourt.;5?R?FOR?, the petition for revie% on certiorari is D?NI?D, and the

challened decision of the #ourt of $ppeals is $FFIRM?D. #osts aainstpetitioners.SO ORD?R?D.


Manila?N :$N#G.R. No. L-5-4 A2l 0, 19/COMMISSIONER OF INTERNAL RE*ENUE, petitioner,vs.!RITISH O*ERSEAS AIR#A"S CORPORATION &'( COURT OF TA3APPEALS, respondents.Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent ritish

Air!ays. MELENCIO-HERRERA, J.:Petitioner #o""issioner of Internal Revenue +#IR see9s a revie% on certiorariof the !oint Decision of the #ourt of Ta $ppeals +#T$ in #T$ #ases Nos. 1@and 1*0-, dated 10 4anuar' -/B, %hich set aside petitioners assess"ent of deficienc' inco"e taes aainst respondent :ritish Overseas $ir%a's#orporation +:O$# for the fiscal 'ears -/*/ to -/0@, -/0BA0/ to -/@2A@-,respectivel', as %ell as its Resolution of -B Nove"ber, -/B den'inreconsideration.:O$# is a -22L :ritish 7overn"entAo%ned corporation orani>ed and eistinunder the la%s of the 8nited Eindo" It is enaed in the international airlinebusiness and is a "e"berAsinator' of the Interline $ir Transport $ssociation+I$T$. $s such it operates air transportation service and sells transportationtic9ets over the routes of the other airline "e"bers. Durin the periods coveredb' the disputed assess"ents, it is ad"itted that :O$# had no landin rihts for



traffic purposes in the Philippines, and %as not ranted a #ertificate of publicconvenience and necessit' to operate in the Philippines b' the #ivil $eronautics:oard +#$:, ecept for a nineA"onth period, partl' in -/0- and partl' in -/01,%hen it %as ranted a te"porar' landin per"it b' the #$:. #onse<uentl', it didnot carr' passeners andor caro to or fro" the Philippines, althouh durin the

period covered b' the assess"ents, it "aintained a eneral sales aent in thePhilippines K ;a"er :arnes and #o"pan', 6td., and later =antas $ir%a's K%hich %as responsible for sellin :O$# tic9ets coverin passeners andcaroes. 1".#. $o. %''( +#T$ #ase No. 1@, the First #aseOn @ Ma' -/0B, petitioner #o""issioner of Internal Revenue +#IR, for brevit'assessed :O$# the areate a"ount of P1,)/B,*B.*0 for deficienc' inco"etaes coverin the 'ears -/*/ to -/0. This %as protested b' :O$#.Subse<uent investiation resulted in the issuance of a ne% assess"ent, dated-0 4anuar' -/@2 for the 'ears -/*/ to -/0@ in the a"ount of PB*B,2@.@/.:O$# paid this ne% assess"ent under protest.

On @ October -/@2, :O$# filed a clai" for refund of the a"ount of PB*B,2@.@/,%hich clai" %as denied b' the #IR on -0 Februar' -/@1. :ut before said denial,:O$# had alread' filed a petition for revie% %ith the Ta #ourt on 1@ 4anuar'-/@1, assailin the assess"ent and pra'in for the refund of the a"ount paid.".#. $o. %'') +#T$ #ase No. 1*0-, the Second #aseOn -@ Nove"ber -/@-, :O$# %as assessed deficienc' inco"e taes, interests,and penalt' for the fiscal 'ears -/0BA-/0/ to -/@2A-/@- in the areate a"ountof P*)/,1@.), and the additional a"ounts of P-,222.22 and P-,B22.22 asco"pro"ise penalties for violation of Section )0 +re<uirin the filin of corporation returns penali>ed under Section @) of the National Internal Revenue#ode +NIR#.On 1* Nove"ber -/@-, :O$# re<uested that the assess"ent becounter"anded and set aside. In a letter, dated -0 Februar' -/@1, ho%ever, the#IR not onl' denied the :O$# re<uest for refund in the First #ase but also reAissued in the Second #ase the deficienc' inco"e ta assess"ent for P*),-1.2B for the 'ears -/0/ to -/@2A@- plus P-,222.22 as co"pro"isepenalt' under Section @) of the Ta #ode. :O$#s re<uest for reconsideration%as denied b' the #IR on 1) $uust -/@. This pro"pted :O$# to file theSecond #ase before the Ta #ourt pra'in that it be absolved of liabilit' for deficienc' inco"e ta for the 'ears -/0/ to -/@-.This case %as subse<uentl' tried !ointl' %ith the First #ase.On 10 4anuar' -/B, the Ta #ourt rendered the assailed !oint Decisionreversin the #IR. The Ta #ourt held that the proceeds of sales of :O$#passae tic9ets in the Philippines b' ;arner :arnes and #o"pan', 6td., andlater b' =antas $ir%a's, durin the period in <uestion, do not constitute :O$#inco"e fro" Philippine sources (since no service of carriae of passeners or freiht %as perfor"ed b' :O$# %ithin the Philippines( and, therefore, saidinco"e is not sub!ect to Philippine inco"e ta. The #T$ position %as that inco"efro" transportation is inco"e fro" services so that the place %here services arerendered deter"ines the source. Thus, in the dispositive portion of its Decision,



the Ta #ourt ordered petitioner to credit :O$# %ith the su" of PB*B,2@.@/,and to cancel the deficienc' inco"e ta assess"ents aainst :O$# in thea"ount of P*),-1.2B for the fiscal 'ears -/0BA0/ to -/@[email protected], this Petition for Revie% on certiorari of the Decision of the Ta #ourt.The Solicitor 7eneral, in representation of the #IR, has aptl' defined the issues,

thus3-. ;hether or not the revenue derived b' private respondent :ritish Overseas $ir%a's #orporation +:O$# fro" sales of tic9ets in the Philippines for air transportation, %hile havin no landin rihts here, constitute inco"e of :O$#fro" Philippine sources, and, accordinl', taable.1. ;hether or not durin the fiscal 'ears in <uestion :O$# s a resident foreincorporation doin business in the Philippines or has an office or place of business in the Philippines.. In the alternative that private respondent "a' not be considered a residentforein corporation but a nonAresident forein corporation, then it is liable toPhilippine inco"e ta at the rate of thirt'Afive per cent +*L of its ross inco"e

received fro" all sources %ithin the Philippines.8nder Section 12 of the -/@@ Ta #ode3+h the ter" resident forein corporation enaed in trade or business %ithin thePhilippines or havin an office or place of business therein.+i The ter" (nonAresident forein corporation( applies to a forein corporation notenaed in trade or business %ithin the Philippines and not havin an' office or place of business thereinIt is our considered opinion that :O$# is a resident forein corporation. There isno specific criterion as to %hat constitutes (doin( or (enain in( or (transactin( business. ?ach case "ust be !uded in the liht of its peculiar environ"ental circu"stances. The ter" i"plies a continuit' of co""ercialdealins and arrane"ents, and conte"plates, to that etent, the perfor"ance of acts or %or9s or the eercise of so"e of the functions nor"all' incident to, and inproressive prosecution of co""ercial ain or for the purpose and ob!ect of thebusiness orani>ation. + (In order that a forein corporation "a' be rearded asdoin business %ithin a State, there "ust be continuit' of conduct and intentionto establish a continuous business, such as the appoint"ent of a local aent, andnot one of a te"porar' character.

:O$#, durin the periods covered b' the sub!ect A assess"ents, "aintained aeneral sales aent in the Philippines, That eneral sales aent, fro" -/*/ to-/@-, (%as enaed in +- sellin and issuin tic9etsH +1 brea9in do%n the%hole trip into series of trips K each trip in the series correspondin to a differentairline co"pan'H + receivin the fare fro" the %hole tripH and +) conse<uentl'allocatin to the various airline co"panies on the basis of their participation in theservices rendered throuh the "ode of interline settle"ent as prescribed b'

$rticle VI of the Resolution No. B*2 of the I$T$ $ree"ent.( 4 Those activities%ere in eercise of the functions %hich are nor"all' incident to, and are inproressive pursuit of, the purpose and ob!ect of its orani>ation as aninternational air carrier. In fact, the reular sale of tic9ets, its "ain activit', is thever' lifeblood of the airline business, the eneration of sales bein the para"ount



ob!ective. There should be no doubt then that :O$# %as (enaed in( businessin the Philippines throuh a local aent durin the period covered b' theassess"ents. $ccordinl', it is a resident forein corporation sub!ect to ta uponits total net inco"e received in the precedin taable 'ear fro" all sources %ithinthe Philippines. 5

Sec. 1). Rates of ta on corporations. K ...+b Ta on forein corporations. K ...+1 Resident corporations. K $ corporation orani>ed, authori>ed, or eistinunder the la%s of an' forein countr', ecept a forein fife insurance co"pan',enaed in trade or business %ithin the Philippines, shall be taable as providedin subsection +a of this section upon the total net inco"e received in theprecedin taable 'ear fro" all sources !ithin the Philippines. +?"phasissuppliedNet, %e address ourselves to the issue of %hether or not the revenue fro" salesof tic9ets b' :O$# in the Philippines constitutes inco"e fro" Philippine sourcesand, accordinl', taable under our inco"e ta la%s.

The Ta #ode defines (ross inco"e( thus3(7ross inco"e( includes ains, profits, and inco"e derived fro" salaries, %aesor co"pensation for personal service of %hatever 9ind and in %hatever for"paid, or fro" profession, vocations, trades, *usiness, commerce, sales, or dealins in propert', %hether real or personal, ro%in out of the o%nership or use of or interest in such propert'H also fro" interests, rents, dividends,securities, or the transactions of any *usiness carried on for gain or profile, or ains, profits, and income derived from any source !hatever +Sec. 1/H?"phasis suppliedThe definition is broad and co"prehensive to include proceeds fro" sales of transport docu"ents. (The %ords inco"e fro" an' source %hatever disclose aleislative polic' to include all inco"e not epressl' ee"pted %ithin the class of taable inco"e under our la%s.( Inco"e "eans (cash received or its e<uivalent(Hit is the a"ount of "one' co"in to a person %ithin a specific ti"e ...H it "eansso"ethin distinct fro" principal or capital. For, %hile capital is a fund, inco"e isa flo%. $s used in our inco"e ta la%, (inco"e( refers to the flo% of %ealth.

The records sho% that the Philippine ross inco"e of :O$# for the fiscal 'ears-/0BA0/ to -/@2A@- a"ounted to P-2,)1B,0B .22.

Did such (flo% of %ealth( co"e fro" (sources %ithin the Philippines(,The source of an inco"e is the propert', activit' or service that produced theinco"e. / For the source of inco"e to be considered as co"in fro" thePhilippines, it is sufficient that the inco"e is derived fro" activit' %ithin thePhilippines. In :O$#s case, the sale of tic9ets in the Philippines is the activit'that produces the inco"e. The tic9ets echaned hands here and pa'"ents for fares %ere also "ade here in Philippine currenc'. The site of the source of pa'"ents is the Philippines. The flo% of %ealth proceeded fro", and occurred%ithin, Philippine territor', en!o'in the protection accorded b' the Philippineovern"ent. In consideration of such protection, the flo% of %ealth should sharethe burden of supportin the overn"ent.

$ transportation tic9et is not a "ere piece of paper. ;hen issued b' a co""on



carrier, it constitutes the contract bet%een the tic9etAholder and the carrier. Itives rise to the obliation of the purchaser of the tic9et to pa' the fare and thecorrespondin obliation of the carrier to transport the passener upon the ter"sand conditions set forth thereon. The ordinar' tic9et issued to "e"bers of thetravelin public in eneral e"braces %ithin its ter"s all the ele"ents to constitute

it a valid contract, bindin upon the parties enterin into the relationship.9

True, Section @+a of the Ta #ode, %hich enu"erates ite"s of ross inco"efro" sources %ithin the Philippines, na"el'3 +- interest, +1- dividends, +service, +) rentals and ro'alties, +* sale of real propert', and +0 sale of personal propert', does not "ention inco"e fro" the sale of tic9ets for international transportation. 5o%ever, that does not render it less an inco"e fro"sources %ithin the Philippines. Section @, b' its lanuae, does not intend theenu"eration to be eclusive. It "erel' directs that the t'pes of inco"e listedtherein be treated as inco"e fro" sources %ithin the Philippines. $ cursor'readin of the section %ill sho% that it does not state that it is an allAinclusiveenu"eration, and that no other 9ind of inco"e "a' be so considered. ( 10

:O$#, ho%ever, %ould i"press upon this #ourt that inco"e derived fro"transportation is inco"e for services, %ith the result that the place %here theservices are rendered deter"ines the sourceH and since :O$#s service of transportation is perfor"ed outside the Philippines, the inco"e derived is fro"sources %ithout the Philippines and, therefore, not taable under our inco"e tala%s. The Ta #ourt upholds that stand in the !oint Decision under revie%.The absence of fliht operations to and fro" the Philippines is not deter"inativeof the source of inco"e or the site of inco"e taation. $d"ittedl', :O$# %as anoffAline international airline at the ti"e pertinent to this case. The test of taabilit'is the (source(H and the source of an inco"e is that activit' ... %hich produced theinco"e. 11 8n<uestionabl', the passae docu"entations in these cases %eresold in the Philippines and the revenue therefro" %as derived fro" a activit'reularl' pursued %ithin the Philippines. business a $nd even if the :O$# tic9etssold covered the (transport of passeners and caro to and fro" forein cities(,1+ it cannot alter the fact that inco"e fro" the sale of tic9ets %as derived fro"the Philippines. The %ord (source( conve's one essential idea, that of oriin, andthe oriin of the inco"e herein is the Philippines. 1It should be pointed out, ho%ever, that the assess"ents upheld herein appl' onl'to the fiscal 'ears covered b' the <uestioned deficienc' inco"e ta assess"entsin these cases, or, fro" -/*/ to -/0@, -/0BA0/ to -/@2A@-. For, pursuant toPresidential Decree No. 0/, pro"ulated on 1) Nove"ber, -/@1, internationalcarriers are no% taed as follo%s3... Provided, ho%ever, That international carriers shall pa' a ta of 1A per centon their cross Philippine billins. +Sec. 1)b 1-, Ta #ode.Presidential Decree No. -**, pro"ulated on 1- $pril, -/@B, provided astatutor' definition of the ter" (ross Philippine billins,( thus3... (7ross Philippine billins( includes ross revenue reali>ed fro" upliftsan'%here in the %orld b' an' international carrier doin business in thePhilippines of passae docu"ents sold therein, %hether for passener, ecessbaae or "ail provided the caro or "ail oriinates fro" the Philippines. ...



The foreoin provision ensures that international airlines are taed on their inco"e fro" Philippine sources. The 1A L ta on ross Philippine billins is aninco"e ta. If it had been intended as an ecise or percentae ta it %ould havebeen place under Title V of the Ta #ode coverin Taes on :usiness.6astl', %e find as untenable the :O$# aru"ent that the dis"issal for lac9 of

"erit b' this #ourt of the appeal in +A vs. -ommissioner of nternal #evenue+7.R. No. 6A22)- on Februar' , -/0/, is res /udicata to the present case. Therulin b' the Ta #ourt in that case %as to the effect that the "ere sale of tic9ets,unacco"panied b' the ph'sical act of carriae of transportation, does not render the tapa'er therein sub!ect to the co""on carriers ta. $s elucidated b' the Ta#ourt, ho%ever, the co""on carriers ta is an ecise ta, bein a ta on theactivit' of transportin, conve'in or re"ovin passeners and caro fro" oneplace to another. It purports to ta the business of transportation. -) :ein anecise ta, the sa"e can be levied b' the State onl' %hen the acts, privilees or businesses are done or perfor"ed %ithin the !urisdiction of the Philippines. Thesub!ect "atter of the case under consideration is inco"e ta, a direct ta on the

inco"e of persons and other entities (of %hatever 9ind and in %hatever for"derived fro" an' source.( Since the t%o cases treat of a different sub!ect "atter,the decision in one cannot be res /udicata to the other.;5?R?FOR?, the appealed !oint Decision of the #ourt of Ta $ppeals is hereb'S?T $SID?. Private respondent, the :ritish Overseas $ir%a's #orporation+:O$#, is hereb' ordered to pa' the a"ount of P*),-1.2B as deficienc'inco"e ta for the fiscal 'ears -/0BA0/ to -/@2A@- plus *L surchare, and -L"onthl' interest fro" $pril -0, -/@1 for a period not to eceed three + 'ears inaccordance %ith the Ta #ode. The :O$# clai" for refund in the a"ount of PB*B,2@.@/ is hereb' denied. ;ithout costs.SO ORD?R?D.Paras, "ancayco, Padilla, idin, 0armiento and -ortes, ++., concur.1ernan, +., too2 no part.


Manila

G.R. No. L-40+9 Ju' +, 19//N.*. REE$ERIJ AMSTER$AM &'( RO"AL INTEROCEAN LINES,petitioners,vs.COMMISSIONER OF INTERNAL RE*ENUE, respondent.GANCA"CO, J.:The issue posed in this petition is the inco"e ta liabilit' of a forein shippincorporation %hich called on Philippine ports to load caroes for foreindestination on t%o occasions in -/0 and -/0), respectivel', and %hich collectedfreiht fees on these transactions.Fro" March 1@ to $pril 2, -/0, M.V. $"stel"eer and fro" Septe"ber 1) toOctober 1B, -/0), MV ($"stel9roon, ( both of %hich are vessels of petitioner



N.:. Reederi! ($MST?RD$M,( called on Philippine ports to load caroes forforein destination. The freiht fees for these transactions %ere paid abroad inthe a"ount of 8S /B,-@*.22 in -/0 and 8S -@,-/.22 in -/0). In these t%oinstances, petitioner Ro'al Interocean 6ines acted as husbandin aent for a feeor co""ission on said vessels. No inco"e ta appears to have been paid b'

petitioner N.V. Reederi! ($MST?RD$M( on the freiht receipts.Respondent #o""issioner of Internal Revenue, throuh his ea"iners, filed thecorrespondin inco"e ta returns for and in behalf of the for"er under Section-* of the National Internal Revenue #ode. $ppl'in the then prevailin "ar9etconversion rate of P./2 to the 8S -.22, the ross receipts of petitioner N.V.Reederi! ($"sterda"( for -/0 and -/0) a"ounted to PB1,BB1.*2 andP**,2*1.22, respectivel'. On 4une 2, -/0@, respondent #o""issionerassessed said petitioner in the a"ounts of P-/,/@.12 and P101,/2)./) asdeficienc' inco"e ta for -/0 and -/0), respectivel', as (a nonAresident foreincorporation not enaed in trade or business in the Philippines under Section 1)+b +- of the Ta #ode.

On the assu"ption that the said petitioner is a forein corporation enaed intrade or business in the Philippines, on $uust 1B, -/0@, petitioner Ro'alInterocean 6ines filed an inco"e ta return of the afore"entioned vesselsco"puted at the echane rate of P1.22 to 8Ss-.22 1 and paid the ta thereon inthe a"ount of P-,B*.*1 and P/,))B./), respectivel', pursuant to Section 1) +b+1 in relation to Section @ +: +e of the National Internal Revenue #ode andSection -0 of Revenue Reulations No. 1. On the sa"e t%o dates, petitionerRo'al Interocean 6ines as the husbandin aent of petitioner N.V. Reederi!($MST?RD$M( filed a %ritten protest aainst the above"entioned assess"ent"ade b' the respondent #o""issioner %hich protest %as denied b' saidrespondent in a letter dated March , -/0/3 On March -, -/0/, petitioners fileda petition for revie% %ith the respondent #ourt of Ta $ppeals pra'in for thecancellation of the sub!ect assess"ent. $fter due hearin, the respondent court,on Dece"ber -, -/@0, rendered a decision "odif'in said assess"ents b'eli"inatin the *2L fraud co"pro"ise penalties i"posed upon petitioners.Petitioners filed a "otion for reconsideration of said decision but this %as deniedb' the respondent court.5ence, this petition for revie% %here petitioners raised the follo%in issues3

$. ;5?T5?R N.V. R??D?RI4 ($MST?RD$M( NOT 5$VIN7 $NG OFFI#? ORP6$#? OF :8SIN?SS IN T5? P5I6IPPIN?S, ;5OS? V?SS?6S #$66?D ONT5? P5I6IPPIN? PORTS FOR T5? P8RPOS? OF 6O$DIN7 #$R7O?S ON6GT;I#?AON? IN -/0 $ND $NOT5?R IN -/0) K S5O86D :? T$J?D $S $FOR?I7N #ORPOR$TION NOT ?N7$7?D IN TR$D? OR :8SIN?SS IN T5?P5I6IPPIN?S 8ND?R S?#TION 1)+b +- OF T5? T$J #OD? OR S5O86D :?T$J?D $S $ FOR?I7N #ORPOR$TION ?N7$7?D IN TR$D? OR :8SIN?SSIN T5? P5I6IPPIN?S 8ND?R S?#TION 1)+b +1 IN R?6$TION TO S?#TION@ +e OF T5? S$M? #OD?H $ND:. ;5?T5?R T5? FOR?I7N ?J#5$N7? R?#?IPTS OF N.V. R??D?RI4($MST?RD$M( S5O86D :? #ONV?RT?D INTO P5I6I PIN? P?SOS $T T5?OFFI#I$6 R$T? OF P1.22 TO 8S -.22, OR $T P./2 TO 8S -.22.



Petitioners contend that respondent court erred in holdin that petitioner N.V.Reederi! ($MST?RD$M( is a nonAresident forein corporation because italleedl' disrearded Section -0 of Revenue Reulations No. 1 +providin forthe deter"ination of the net inco"e of forein corporations doin business in thePhilippines and in holdin that the forein echane an e receipts of said

petitioner for purposes of co"putin its inco"e ta should be converted intoPhilippine pesos at the rate of P./2 to 8S -.22 instead of P1.22 to 8S -.22.The petition is devoid of "erit.Petitioner N.V. Reederi! ($MST?RD$M( is a forein corporation not authori>ed or licensed to do business in the Philippines. It does not have a branch office in thePhilippines and it "ade onl' t%o calls in Philippine ports, one in -/0 and theother in -/0). In order that a forein corporation "a' be considered enaed intrade or business, its business transactions "ust be continuous. $ casualbusiness activit' in the Philippines b' a forein corporation, as in the presentcase, does not a"ount to enain in trade or business in the Philippines forinco"e ta purposes.

The #ourt reproduces %ith approval the follo%in dis<uisition of the respondentcourt K $ corporation is itself a tapa'in entit' and spea9in enerall', for purposes ofinco"e ta, corporations are classified into +a do"estic corporations and +bforein corporations. +Sec. 1)+a and +b, Ta #ode. Forein corporations arefurther classified into +- resident forein corporations and +1 nonAresidentforein corporations. +Sec. 1)+b +- and +1. Ta #ode. $ resident foreincorporation is a forein corporation enaed in trade or business %ithin thePhilippines or havin an office or place of business therein +Sec. B)+, Ta#ode %hile a nonA resident forein corporation is a forein corporation notenaed in trade or business %ithin the Philippines and not havin an' office orplace of business therein. +Sec. B)+h, Ta #ode.

$ do"estic corporation is taed on its inco"e fro" sources %ithin and %ithoutthe Philippines, but a forein corporation is taed onl' on its inco"e fro" sources%ithin the Philippines. +Sec. 1)+a, Ta #odeH Sec. -0, Rev. Res. No. 1.5o%ever, %hile a forein corporation doin business in the Philippines is taableon inco"e solel' fro" sources %ithin the Philippines, it is per"itted to deductionsfro" ross inco"e but onl' to the etent connected %ith inco"e earned in thePhilippines. +Secs. 1)+b +1 and @, Ta #ode. On the other hand, foreincorporations not doin business in the Philippines are taable on inco"e fro" allsources %ithin the Philippines, as interest, dividends, rents, salaries, %aes,pre"iu"s, annuities #o"pensations, re"unerations, e"olu"ents, or other fiedor deter"inable annual or periodical or casual ains, profits and inco"e andcapital ains( The ta is 2L +no% *L of such ross inco"e. +Sec. 1) +b +-,Ta #ode.

$t the ti"e "aterial to this case, certain corporations %ere iven specialtreat"ent, na"el', buildin and loan associations operatin as such inaccordance %ith Section -@- of the #orporation 6a%, educational institutions,do"estic life insurance co"panies and for( forein life insurance co"paniesdoin business in the Philippines. +Sec. 1)+a Q +c, Ta #ode. It bears



e"phasis, ho%ever, that forein life insurance co"panies %hich %ere not doinbusiness in the Philippines %ere taable as other forein corporations notauthori>ed to do business in the Philippines. +Sec. 1)+c Ta #ode.No% to the case at bar. 5ere, petitioner N.V. Reederi! ($"sterda"( is a nonAresident forein corporation, orani>ed and eistin under the la%s of The

Netherlands %ith principal office in $"sterda" and not licensed to do business inthe Philippines. +pp. BAB-, #T$ records. $s a nonAresident forein corporation, itis thus a forein corporation, not enaed in trade or business %ithin thePhilippines and not havin an' office or place of business therein. +Sec. B)+h,Ta #ode. $s stated above, it is therefore taable on inco"e fro" all sources%ithin the Philippines, as interest, dividends, rents, salaries, %aes, pre"iu"s,annuities, co"pensations, re"unerations, e"olu"ents, or other fied ordeter"inable annual or periodical or casual ains, profits and inco"e and capitalains, and the ta is e<ual to thirt' per centum of such a"ount, under Section1)+b +- of the Ta #ode. The accent is on the %ords ofAAsuch a"ount.(

$ccordinl', petitioner N. V. Reederi! ($"sterda"( bein a nonAresident forein

corporation, its taable inco"e for purposes of our inco"e ta la% consists of itsross inco"e fro" all sources %ithin the Philippines.The la% see"s clear and specific. It thus calls for its application as %orded as itleaves no lee%a' for interpretation. The applicable provision i"poses a ta onforein corporations fallin under the classification of nonAresident corporations%ithout an' eceptions or conditions, unli9e in the case of forein corporationsenaed in trade or business %ithin the Philippines %hich contained +at the ti"e"aterial to this case an eception %ith respect to forein life insuranceco"panies. $dherence to the provision of the la%, %hich specifies anddeter"ines the taable inco"e of, and the rate of inco"e ta applicable to, nonAresident forein corporations, %ithout "entionin an' eceptions, %ould thereforelead to the conclusion that petitioner N.V. Reederi! ($"sterda"( is sub!ect toinco"e ta on ross inco"e fro" all sources %ithin the Philippines.

$ forein corporation enaed in trade or business %ithin the Philippines, or%hich has an office or place of business therein, is taed on its total net inco"ereceived fro" all sources %ithin the Philippines at the rate of 1*L upon thea"ount but %hich taable net inco"e does not eceed P-22,222.22, and *Lupon the a"ount but %hich taable net inco"e eceeds P-22,222.22. + On theother hand, a forein corporation not enaed in trade or business %ithin thePhilipp"es and %hich does not have an' office or place of business therein istaed on inco"e received fro" all sources %ithin the Philippines at the rate of*L of the ross inco"e.

Petitioner relies on Section 1) +b +1 and Section @ +: +e of the Ta #ode andi"ple"entin Section -0 of the Inco"e Ta Reulations but these provisionsrefer to a forein corporation enaed in trade or business in the Philippines andnot to a forein corporation not enaed in trade or business in the Philippinesli9e petitionerAshipAo%ner herein. Thus, the respondent court aptl' ruled3It "ust be stressed, ho%ever, that Section @ +e of the #ode, as i"ple"ented b'Section -0 of the Reulations, provides the rule of the deter"ination of the netinco"e taable in the Philippines of a forein stea"ship co"pan' doin business



in the Philippines. To assure that nonAresident forein stea"ship co"panies notenaed in business in the Philippines and not havin an' office or place ofbusiness herein are not covered therein, the reulations eplicitl' and clearl'provide that (the net inco"e of a forein stea"ship co co"pan' doin businessin or fro" this countr' is ascertained,( under the for"ula contained therein, (for

the purpose of the inco"e ta. The reason is easil' discernible. $s stated above,the taable inco"e of nonAresident forein corporations consists of its rossinco"e fro" all sources %ithin the Philippines. $ccordinl', a forein stea"shipcorporation derives inco"e partl' fro" sources %ithin and partl' fro" sources%ithout the Philippines if it is carrying on a *usiness of transportation service bet%een points in the Philippines and points outside the Philippines. +Vol. ,-/0*, Federal Taes, Par. -0B/. Onl' then does Section @ +e of the Ta#ode, are i"ple"ented b' Section -0 of the Reulations, appl' in co"putinnet inco"e sub!ect to ta. There is no basis therefore for an assertion (thatSection @ +e does not distinuish bet%een a forein corporation enaed inbusiness in the Philippines and a forein corporation not enaed in business in

the Philippines.(( +p. B), #T$ records. +Decision, pp. --A-1.The conversion rate of P1.22 to 8S -.22 %hich petitioners clai" should beapplicable to the inco"e of petitioners for inco"e ta purposes instead of P./2to s-.22 is li9e%ise untenable. The transactions involved in this case are for thetaable 'ears -/0 and -/0). 8nder Rep. $ct No. 102/, the "onetar' board %asauthori>ed to fi the leal conversion rate for forein echane. The free "ar9etconversion rate durin those 'ears %as P./2 to 8S -.22.This conversion rate issue %as definitel' settled b' this #ourt in the case of-ommissioner of nternal #evenue vs. #oyal nterocean ines and the -ourt of3ax Appeals 4 to %it3It should be noted that on 4ul' - 0, -/*/, the polic' incorporated in #ircular No.12 and i"ple"ented in subse<uent circulars %as relaed %ith the enact"ent ofRepublic $ct No. 102/ %hich directed the "onetar' authorities to ta9e steps forthe adoption of a fourA'ear prora" of radual decontrol, durin %hich theMonetar' :oard, %ith the approval of the President, could and did fi theconversion rate of the Philippine peso to the 8S dollar at a ratio other than thatprescribed in Section )B of Republic $ct 10*. Durin the period involved in thecase at bar, the free "ar9et conversion rate raned fro" P.)@ to P.0* to a 8Sdollar at %hich rate the freiht fees in <uestion %ere co"puted in the contestedassess"ent. Inas"uch said frees %ere revenues derived fro" forein echanetransactions, it follo%s necessaril' that the petitioner %as full' !ustified inco"putin the tapa'ers receipts at Id free "ar9et rates. The case of the 8nited States 6ines, on %hich the appealed decision of the #ourtof Ta $ppeals is anchored, refers to transactions that too9 place *efore theapproval of Republic $ct 102/ on 4ul' -0, -/*/ %hen the onl' leal rate ofechane obtainin in the Philippines %as P1 to 8S -, and all forein echanehad to be surrendered to the #entral :an9 sub!ect to its disposition pursuant toits o%n rules and reulations. 8pon the other hand, the present case refers totransactions that too9 place durin the effectivit' of Republic $ct 102/ %hen



there %as, apart fro" the parit' rate, a leal free "ar9et conversion rate forforein echane transactions, %hich rate had been fied in open tradin, suchas those involved in the case at bar.Indeed, in the course of the investiation conducted b' the #o""issioner on theaccountin records of petitioner Ro'al Interocean 6ines, it %as verified that %hen

said petitioner paid its aenc' fees for services rendered as husbandin aent ofthe said vessels, it used the conversion rate of P./2 to 8S -.22. 5 It is no%estopped fro" clai"in other%ise in this case. ;5?R?FOR?, the petition isD?NI?D %ith costs aainst petitioners. This decision is i""ediatel' eecutor'and no etension of ti"e to file "otion for reconsideration shall be entertained.SO ORD?R?D.


ManilaT5IRD DIVISION

G.R. No. 5 S678 14, 19/9MARU!ENI CORPORATION :o7ly M&u8'2 ; I2(&, Co., L6(.<, petitioner,vs.COMMISSIONER OF INTERNAL RE*ENUE AN$ COURT OF TA3 APPEALS,respondents.Mel4uiades -. "utierrez for petitioner.3he 0olicitor "eneral for respondents. FERNAN, C.J.:

Petitioner, Marubeni #orporation, representin itself as a forein corporation dul'orani>ed and eistin under the la%s of 4apan and dul' licensed to enae inbusiness under Philippine la%s %ith branch office at the )th Floor, F??MI:uildin, $duana Street, Intra"uros, Manila see9s the reversal of the decision ofthe #ourt of Ta $ppeals 1 dated Februar' -1, -/B0 den'in its clai" for refundor ta credit in the a"ount of P11/,)1).)2 representin alleed overpa'"ent ofbranch profit re"ittance ta %ithheld fro" dividends b' $tlantic 7ulf and Pacific#o. of Manila +$7QP.The follo%in facts are undisputed3 Marubeni #orporation of 4apan has e<uit'invest"ents in $7QP of Manila. For the first <uarter of -/B- endin March -,

$7QP declared and paid cash dividends to petitioner in the a"ount of PB)/,@12and %ithheld the correspondin -2L final dividend ta thereon. Si"ilarl', for thethird <uarter of -/B- endin Septe"ber 2, $7QP declared and paid PB)/,@12as cash dividends to petitioner and %ithheld the correspondin -2L finaldividend ta thereon. +

$7QP directl' re"itted the cash dividends to petitioners head office in To9'o,4apan, net not onl' of the -2L final dividend ta in the a"ounts of P@0),@)B forthe first and third <uarters of -/B-, but also of the %ithheld -*L profit re"ittanceta based on the re"ittable a"ount after deductin the final %ithholdin ta of-2L. $ schedule of dividends declared and paid b' $7QP to its stoc9holderMarubeni #orporation of 4apan, the -2L final intercorporate dividend ta and the



-*L branch profit re"ittance ta paid thereon, is sho%n belo%3

-/B- FIRST=8$RT?R +three

"onths ended.-.B- +InPesos

T5IRD=8$RT?R +three

"onths ended/.2.B-

TOT$6 OFFIRST and

T5IRD <uarters

#ash Dividends Paid B)/,@12.)) B)/,@12.22 -,0//,))2.22

-2L Dividend Ta ;ithheld B),/@1.22 B),/@1.22 -0/,/)).22

#ash Dividend net of -2LDividend Ta ;ithheld

@0),@)B.22 @0),@)B.22 -,*1/,)/0.22

-*L :ranch Profit Re"ittanceTa ;ithheld

--),@-1.12 --),@-1.12 11/,)1).)2

Net $"ount Re"itted toPetitioner

0*2,2*.B2 0*2,2*.B2 -,22,[email protected]

The -2L final dividend ta of PB),/@1 and the -*L branch profit re"ittance taof P--),@-1.12 for the first <uarter of -/B- %ere paid to the :ureau of InternalRevenue b' $7QP on $pril 12, -/B- under #entral :an9 Receipt No. 0@*@BB2.

6i9e%ise, the -2L final dividend ta of PB),/@1 and the -*L branch profitre"ittance ta of P--),@-1 for the third <uarter of -/B- %ere paid to the :ureauof Internal Revenue b' $7QP on $uust ), -/B- under #entral :an9#onfir"ation Receipt No. @/2*/2. 4

Thus, for the first and third <uarters of -/B-, $7QP as %ithholdin aent paid-*L branch profit re"ittance on cash dividends declared and re"itted topetitioner at its head office in To9'o in the total a"ount of P11/,)1).)2 on $pril12 and $uust ), -/B-. 5

In a letter dated 4anuar' 1/, -/B-, petitioner, throuh the accountin fir" S'cip,7orres, Vela'o and #o"pan', souht a rulin fro" the :ureau of InternalRevenue on %hether or not the dividends petitioner received fro" $7QP are

effectivel' connected %ith its conduct or business in the Philippines as to beconsidered branch profits sub!ect to the -*L profit re"ittance ta i"posed underSection 1) +b +1 of the National Internal Revenue #ode as a"ended b'Presidential Decrees Nos. -@2* and -@@.In repl' to petitioners <uer', $ctin #o""issioner Ruben $ncheta ruled3Pursuant to Section 1) +b +1 of the Ta #ode, as a"ended, onl' profits re"ittedabroad b' a branch office to its head office %hich are effectivel' connected %ithits trade or business in the Philippines are sub!ect to the -*L profit re"ittance



ta. To be effectivel' connected it is not necessar' that the inco"e be derivedfro" the actual operation of tapa'erAcorporations trade or businessH it issufficient that the inco"e arises fro" the business activit' in %hich thecorporation is enaed. For ea"ple, if a resident forein corporation is enaedin the bu'in and sellin of "achineries in the Philippines and invests in so"e

shares of stoc9 on %hich dividends are subse<uentl' received, the dividendsthus earned are not considered effectivel' connected %ith its trade or businessin this countr'. +Revenue Me"orandu" #ircular No. **AB2.In the instant case, the dividends received b' Marubeni fro" $7QP are notinco"e arisin fro" the business activit' in %hich Marubeni is enaed.

$ccordinl', said dividends if re"itted abroad are not considered branch profitsfor purposes of the -*L profit re"ittance ta i"posed b' Section 1) +b +1 of theTa #ode, as a"ended . . .

#onse<uentl', in a letter dated Septe"ber 1-, -/B- and filed %ith the#o""issioner of Internal Revenue on Septe"ber 1), -/B-, petitioner clai"ed for the refund or issuance of a ta credit of P11/,)1).)2 (representin profit ta

re"ittance erroneousl' paid on the dividends re"itted b' $tlantic 7ulf and Pacific#o. of Manila +$7QP on $pril 12 and $uust ), -/B- to ... head office in To9'o.

On 4une -), -/B1, respondent #o""issioner of Internal Revenue deniedpetitioners clai" for refundcredit of P11/,)1).)2 on the follo%in rounds3;hile it is true that said dividends re"itted %ere not sub!ect to the -*L profitre"ittance ta as the sa"e %ere not inco"e earned b' a Philippine :ranch ofMarubeni #orporation of 4apanH and neither is it sub!ect to the -2Lintercorporate dividend ta, the recipient of the dividends, bein a nonAresidentstoc9holder, nevertheless, said dividend inco"e is sub!ect to the 1* L tapursuant to $rticle -2 +1 +b of the Ta Treat' dated Februar' -, -/B2 bet%eenthe Philippines and 4apan.Inas"uch as the cash dividends re"itted b' $7QP to Marubeni #orporation,4apan is sub!ect to 1* L ta, and that the taes %ithheld of -2 L asintercorporate dividend ta and -* L as profit re"ittance ta totals +sic 1* L,the a"ount refundable offsets the liabilit', hence, nothin is left to be refunded. /

Petitioner appealed to the #ourt of Ta $ppeals %hich affir"ed the denial of therefund b' the #o""issioner of Internal Revenue in its assailed !ud"ent ofFebruar' -1, -/B0. 9

In support of its re!ection of petitioners clai"ed refund, respondent Ta #ourteplained3;hatever the dialectics e"plo'ed, no a"ount of sophistr' can inore the factthat the dividends in <uestion are inco"e taable to the Marubeni #orporation ofTo9'o, 4apan. The said dividends %ere distributions "ade b' the $tlantic, 7ulfand Pacific #o"pan' of Manila to its shareholder out of its profits on theinvest"ents of the Marubeni #orporation of 4apan, a nonAresident foreincorporation. The invest"ents in the $tlantic 7ulf Q Pacific #o"pan' of theMarubeni #orporation of 4apan %ere directl' "ade b' it and the dividends on theinvest"ents %ere li9e%ise directl' re"itted to and received b' the Marubeni#orporation of 4apan. Petitioner Marubeni #orporation Philippine :ranch has noparticipation or intervention, directl' or indirectl', in the invest"ents and in the



receipt of the dividends. $nd it appears that the funds invested in the $tlantic 7ulf Q Pacific #o"pan' did not co"e out of the funds infused b' the Marubeni#orporation of 4apan to the Marubeni #orporation Philippine :ranch. $s a "atter of fact, the #entral :an9 of the Philippines, in authori>in the re"ittance of theforein echane e<uivalent of +sic the dividends in <uestion, treated the

Marubeni #orporation of 4apan as a nonAresident stoc9holder of the $tlantic 7ulfQ Pacific #o"pan' based on the supportin docu"ents sub"itted to it.Sub!ect to certain eceptions not pertinent hereto, inco"e is taable to theperson %ho earned it. $d"ittedl', the dividends under consideration %ere earnedb' the Marubeni #orporation of 4apan, and hence, taable to the saidcorporation. ;hile it is true that the Marubeni #orporation Philippine :ranch isdul' licensed to enae in business under Philippine la%s, such dividends arenot the inco"e of the Philippine :ranch and are not taable to the said Philippinebranch. ;e see no sinificance thereto in the identit' concept or principalAaentrelationship theor' of petitioner because such dividends are the inco"e of andtaable to the 4apanese corporation in 4apan and not to the Philippine branch. 10

5ence, the instant petition for revie%.It is the aru"ent of petitioner corporation that follo%in the principalAaentrelationship theor', Marubeni 4apan is li9e%ise a resident forein corporationsub!ect onl' to the -2 L intercorporate final ta on dividends received fro" ado"estic corporation in accordance %ith Section 1)+c +- of the Ta #ode of-/@@ %hich states3Dividends received b' a do"estic or resident forein corporation liable to taunder this #ode K +- Shall be sub!ect to a final ta of -2L on the total a"ountthereof, %hich shall be collected and paid as provided in Sections * and *) ofthis #ode ....Public respondents, ho%ever, are of the contrar' vie% that Marubeni, 4apan,bein a nonAresident forein corporation and not enaed in trade or business inthe Philippines, is sub!ect to ta on inco"e earned fro" Philippine sources at therate of * L of its ross inco"e under Section 1) +b +- of the sa"e #ode %hichreads3+b 3ax on foreign corporations K +- NonAresident corporations. K $ foreincorporation not enaed in trade or business in the Philippines shall pa' a tae<ual to thirt'Afive per cent of the ross inco"e received durin each taable'ear fro" all sources %ithin the Philippines as ... dividends ....but epressl' "ade sub!ect to the special rate of 1*L under $rticle -2+1 +b ofthe Ta Treat' of -/B2 concluded bet%een the Philippines and 4apan. 11 Thus3

$rticle -2 +- Dividends paid b' a co"pan' %hich is a resident of a #ontractinState to a resident of the other #ontractin State "a' be taed in that other#ontractin State.+1 5o%ever, such dividends "a' also be taed in the #ontractin State of %hichthe co"pan' pa'in the dividends is a resident, and accordin to the la%s of that#ontractin State, but if the recipient is the beneficial o%ner of the dividends theta so chared shall not eceedH+a . . .+b 1* per cent of the ross a"ount of the dividends in all other cases.



#entral to the issue of Marubeni 4apans ta liabilit' on its dividend inco"e fro"Philippine sources is therefore the deter"ination of %hether it is a resident or anonAresident forein corporation under Philippine la%s.8nder the Ta #ode, a resident forein corporation is one that is (enaed intrade or business( %ithin the Philippines. Petitioner contends that precisel'

because it is enaed in business in the Philippines throuh its Philippine branchthat it "ust be considered as a resident forein corporation. Petitioner reasonsthat since the Philippine branch and the To9'o head office are one and the sa"eentit', %hoever "ade the invest"ent in $7QP, Manila does not "atter at all. $sinle corporate entit' cannot be both a resident and a nonAresident corporationdependin on the nature of the particular transaction involved. $ccordinl',%hether the dividends are paid directl' to the head office or coursed throuh itslocal branch is of no "o"ent for after all, the head office and the office branchconstitute but one corporate entit', the Marubeni #orporation, %hich, under bothPhilippine ta and corporate la%s, is a resident forein corporation because it istransactin business in the Philippines.

The Solicitor 7eneral has ade<uatel' refuted petitioners aru"ents in this %ise3The eneral rule that a forein corporation is the sa"e !uridical entit' as itsbranch office in the Philippines cannot appl' here. This rule is based on thepre"ise that the business of the forein corporation is conducted throuh itsbranch office, follo%in the principal aent relationship theor'. It is understoodthat the branch beco"es its aent here. So that %hen the forein corporationtransacts business in the Philippines independentl' of its branch, the principalAaent relationship is set aside. The transaction beco"es one of the foreincorporation, not of the branch. #onse<uentl', the tapa'er is the foreincorporation, not the branch or the resident forein corporation.#orollaril', if the business transaction is conducted throuh the branch office, thelatter beco"es the tapa'er, and not the forein corporation. 1+

In other %ords, the alleed overpaid taes %ere incurred for the re"ittance ofdividend inco"e to the head office in 4apan %hich is a separate and distinctinco"e tapa'er fro" the branch in the Philippines. There can be no other loicalconclusion considerin the undisputed fact that the invest"ent +totallin 1B.102shares includin that of no"inee %as "ade for purposes peculiarl' er"ane tothe conduct of the corporate affairs of Marubeni 4apan, but certainl' not of thebranch in the Philippines. It is thus clear that petitioner, havin "ade thisindependent invest"ent attributable onl' to the head office, cannot no% clai" theincre"ents as ordinar' conse<uences of its trade or business in the Philippinesand avail itself of the lo%er ta rate of -2 L.:ut %hile public respondents correctl' concluded that the dividends in dispute%ere neither sub!ect to the -* L profit re"ittance ta nor to the -2 Lintercorporate dividend ta, the recipient bein a nonAresident stoc9holder, the'rossl' erred in holdin that no refund %as forthco"in to the petitioner becausethe taes thus %ithheld totalled the 1* L rate i"posed b' the PhilippineA4apanTa #onvention pursuant to $rticle -2 +1 +b.To si"pl' add the t%o taes to arrive at the 1* L ta rate is to disreard a basicrule in taation that each ta has a different ta basis. ;hile the ta on dividends



is directl' levied on the dividends received, (the ta base upon %hich the -* Lbranch profit re"ittance ta is i"posed is the profit actuall' re"itted abroad.( 1

Public respondents li9e%ise erred in auto"aticall' i"posin the 1* L rate under $rticle -2 +1 +b of the Ta Treat' as if this %ere a flat rate. $ closer loo9 at theTreat' reveals that the ta rates fied b' $rticle -2 are the "ai"u" rates as

reflected in the phrase (shall not eceed.( This "eans that an' ta i"posable b'the contractin state concerned should not eceed the 1* L li"itation and thatsaid rate %ould appl' onl' if the ta i"posed b' our la%s eceeds the sa"e. Inother %ords, b' reason of our bilateral neotiations %ith 4apan, %e have areedto have our riht to ta li"ited to a certain etent to attain the oals set forth inthe Treat'.Petitioner, bein a nonAresident forein corporation %ith respect to thetransaction in <uestion, the applicable provision of the Ta #ode is Section 1) +b+- +iii in con!unction %ith the PhilippineA4apan Treat' of -/B2. Said sectionprovides3+b 3ax on foreign corporations. K +- NonAresident corporations K ... +iii On

dividends received fro" a do"estic corporation liable to ta under this #hapter,the ta shall be -*L of the dividends received, %hich shall be collected and paidas provided in Section * +d of this #ode, sub!ect to the condition that thecountr' in %hich the nonAresident forein corporation is do"iciled shall allo% acredit aainst the ta due fro" the nonAresident forein corporation, taesdee"ed to have been paid in the Philippines e<uivalent to 12 L %hichrepresents the difference bet%een the reular ta +* L on corporations and theta +-* L on dividends as provided in this SectionH ....Proceedin to appl' the above section to the case at bar, petitioner, bein a nonAresident forein corporation, as a eneral rule, is taed * L of its ross inco"efro" all sources %ithin the Philippines. Section 1) +b +-.5o%ever, a discounted rate of -*L is iven to petitioner on dividends receivedfro" a do"estic corporation +$7QP on the condition that its do"icile state+4apan etends in favor of petitioner, a ta credit of not less than 12 L of thedividends received. This 12 L represents the difference bet%een the reular taof * L on nonAresident forein corporations %hich petitioner %ould haveordinaril' paid, and the -* L special rate on dividends received fro" a do"esticcorporation.#onse<uentl', petitioner is entitled to a refund on the transaction in <uestion tobe co"puted as follo%s3Total cash dividend paid ................P-,0//,))2.22less -*L under Sec. 1)+b +- +iii .........................................1*),/-0.22AAAAAAAAAAAAAAAAAA#ash dividend net of -* L tadue petitioner ...............................P-,))).*1).22less net a"ountactuall' re"itted .............................-,22,[email protected]

$"ount to be refunded to petitioner



representin overpa'"ent of taes on dividends re"itted ..............P -)) )*1.)2It is readil' apparent that the -* L ta rate i"posed on the dividends received b'a forein nonAresident stoc9holder fro" a do"estic corporation under Section 1)

+b +- +iii is easil' %ithin the "ai"u" ceilin of 1* L of the ross a"ount of thedividends as decreed in $rticle -2 +1 +b of the Ta Treat'.There is one final point that "ust be settled. Respondent #o""issioner ofInternal Revenue is laborin under the i"pression that the #ourt of Ta $ppealsis covered b' :atas Pa"bansa :l. -1/, other%ise 9no%n as the 4udiciar'Reorani>ation $ct of -/B2. 5e allees that the instant petition for revie% %as notperfected in accordance %ith :atas Pa"bansa :l. -1/ %hich provides that (theperiod of appeal fro" final orders, resolutions, a%ards, !ud"ents, or decisionsof an' court in all cases shall be fifteen +-* da's counted fro" the notice of thefinal order, resolution, a%ard, !ud"ent or decision appealed fro" ....This is co"pletel' untenable. The cited :P :l. -1/ does not include the #ourt of

Ta $ppeals %hich has been created b' virtue of a special la%, Republic $ct No.--1*. Respondent court is not a"on those courts specificall' "entioned inSection 1 of :P :l. -1/ as fallin %ithin its scope.Thus, under Section -B of Republic $ct No. --1*, a part' adversel' affected b'an order, rulin or decision of the #ourt of Ta $ppeals is iven thirt' +2 da'sfro" notice to appeal therefro". Other%ise, said order, rulin, or decision shallbeco"e final.Records sho% that petitioner received notice of the #ourt of Ta $ppealssdecision den'in its clai" for refund on $pril -*, -/B0. On the 2th da', or onMa' -*, -/B0 +the last da' for appeal, petitioner filed a "otion forreconsideration %hich respondent court subse<uentl' denied on Nove"ber -@,-/B0, and notice of %hich %as received b' petitioner on Nove"ber 10, -/B0.T%o da's later, or on Nove"ber 1B, -/B0, petitioner si"ultaneousl' filed a noticeof appeal %ith the #ourt of Ta $ppeals and a petition for revie% %ith theSupre"e #ourt. 14 Fro" the foreoin, it is evident that the instant appeal %asperfected %ell %ithin the 2Ada' period provided under R.$. No. --1*, the %hole2Ada' period to appeal havin beun to run aain fro" notice of the denial ofpetitioners "otion for reconsideration.;5?R?FOR?, the <uestioned decision of respondent #ourt of Ta $ppealsdated Februar' -1, -/B0 %hich affir"ed the denial b' respondent #o""issionerof Internal Revenue of petitioner Marubeni #orporations clai" for refund ishereb' R?V?RS?D. The #o""issioner of Internal Revenue is ordered to refundor rant as ta credit in favor of petitioner the a"ount of P-)),)*1.)2representin overpa'"ent of taes on dividends received. No costs.So ordered.


ManilaSECON$ $I*ISION



G.R. No. 19010+ July 11, +01+ACCENTURE, INC., Petitioner,vs.COMMISSIONER OF INTERNAL RE*ENUE, Respondent.D ? # I S I O N

SERENO,J.:

This is a Petition filed under Rule )* of the -//@ Rules of #ivil Procedure,pra'in for the reversal of the Decision of the #ourt of Ta $ppeals ?n :anc +#T$?n :anc dated 11 Septe"ber 122/ and its subse<uent Resolution dated 1October 122/.-

$ccenture, Inc. +$ccenture is a corporation enaed in the business of providin"anae"ent consultin, business strateies develop"ent, and sellin andorlicensin of soft%are.1 It is dul' reistered %ith the :ureau of Internal Revenue+:IR as a Value $dded Ta +V$T tapa'er or enterprise in accordance %ithSection 10 of the National Internal Revenue #ode +Ta #ode.

On / $uust 1221, $ccenture filed its Monthl' V$T Return for the period - 4ul'

1221 to - $uust 1221 +-st period. Its =uarterl' V$T Return for the fourth<uarter of 1221, %hich covers the -st period, %as filed on -@ Septe"ber 1221Hand an $"ended =uarterl' V$T Return, on 1- 4une 122).) The follo%in arereflected in $ccentureUs V$T Return for the fourth <uarter of 12213*

56!phi5

Pu)=&ss A7ou'6 I'u6

Do"estic PurchasesA #apital 7oods P-1,-1,@11.22 P-,1

Do"estic PurchasesA 7oods other than capital 7oods P0),@B/,*2@./2 P0,)@

Do"estic PurchasesA Services P-0,)**,B0B.-2 P-,0)

To6&l I'u6 T&> P9,55,/0

&eroArated Sales P-0,--

Total Sales P*,0)

$ccenture filed its Monthl' V$T Return for the "onth of Septe"ber 1221 on 1)October 1221H and that for October 1221, on -1 Nove"ber 1221. These returns%ere a"ended on / 4anuar' 122. $ccentureUs =uarterl' V$T Return for the first

<uarter of 122, %hich included the period - Septe"ber 1221 to 2 Nove"ber1221 +1nd period, %as filed on -@ Dece"ber 1221H and the $"ended =uarterl'V$T Return, on -B 4une 122). The latter contains the follo%in infor"ation30

Pu)=&ss A7ou'6 I'u

Do"estic PurchasesA #apital 7oods PB2,@0*,1/).-2 PB,2

Do"estic PurchasesA 7oods other than capital 7oods P-1,B12,*)-.@2 P-,1



Do"estic PurchasesAServices P0,1B,@*B.22 P0,

To6&l I'u6 T&> P+,/+

&eroArated Sales P*)*,0

Total Sales P P*@1,B

The "onthl' and <uarterl' V$T returns of $ccenture sho% that, not%ithstandinits application of the input V$T credits earned fro" its >eroArated transactionsaainst its output V$T liabilities, it still had ecess or unutili>ed input V$T credits.These V$T credits are in the a"ounts of P/,**,B2/.B2 for the -st period andP1@,0B1,)*/.B for the 1nd period, or a total of P@,2B,10/.-B.@

Out of the P@,2B,10/.-B, onl' P*,-@B,B)).1- pertained to the allocated inputV$T on $ccentureUs (do"estic purchases of taable oods %hich cannot be

directl' attributed to its >eroArated sale of services.(B

This allocated input V$T %asbro9en do%n to PB,B--,2-.00 for the -st period and P10,0@,*)1.** for the 1ndperiod./

The ecess input V$T %as not applied to an' output V$T that $ccenture %asliable for in the sa"e <uarter %hen the a"ount %as earnedKor to an' of thesucceedin <uarters. Instead, it %as carried for%ard to petitionerUs 1nd =uarterl'V$T Return for 122.-2

Thus, on - 4ul' 122), $ccenture filed %ith the Depart"ent of Finance +DoF anad"inistrative clai" for the refund or the issuance of a Ta #redit #ertificate+T##. The DoF did not act on the clai" of $ccenture. 5ence, on - $uust122), the latter filed a Petition for Revie% %ith the First Division of the #ourt of

Ta $ppeals +Division, pra'in for the issuance of a T## in its favor in thea"ount of P*,-@B,B)).1-.The #o""issioner of Internal Revenue +#IR, in its $ns%er,-- arued thus3-. The sale b' $ccenture of oods and services to its clients are not >eroAratedtransactions.1. #lai"s for refund are construed strictl' aainst the clai"ant, and $ccenturehas failed to prove that it is entitled to a refund, because its clai" has not beenfull' substantiated or docu"ented.In a - Nove"ber 122B Decision,-1 the Division denied the Petition of $ccenturefor failin to prove that the latterUs sale of services to the alleed forein clients<ualified for >ero percent V$T.-

In resolvin the sole issue of %hether or not $ccenture %as entitled to a refund or an issuance of a T## in the a"ount of P*,-@B,B)).1-,-) the Division ruled that

$ccenture had failed to present evidence to prove that the forein clients to%hich the for"er rendered services did business outside the Philippines. -* Rulinthat $ccentureUs services %ould <ualif' for >eroAratin under the -//@ NationalInternal Revenue #ode of the Philippines +Ta #ode onl' if the recipient of theservices %as doin business outside of the Philippines,-0 the Division cited#o""issioner of Internal Revenue v. :ur"eister and ;ain Scandinavian



#ontractor Mindanao, Inc. +:ur"eister-@ as basis. $ccenture appealed the DivisionUs Decision throuh a Motion for Reconsideration+MR.-B In its MR, it arued that the reliance of the Division on :ur"eister %as"isplaced-/ for the follo%in reasons3-. The issue involved in :ur"eister %as the entitle"ent of the applicant to a

refund, iven that the recipient of its service %as doin business in thePhilippinesH it %as not an issue of failure of the applicant to present evidence toprove the fact that the recipient of its services %as a forein corporation doinbusiness outside the Philippines.12

1. :ur"eister e"phasi>ed that, to <ualif' for >eroAratin, the recipient of theservices should be doin business outside the Philippines, and $ccenture hadsuccessfull' established that.1-

. 5avin been pro"ulated on 11 4anuar' 122@ or after $ccenture filed itsPetition %ith the Division, :ur"eister cannot be "ade to appl' to this case.11

$ccenture also cited #o""issioner of Internal Revenue v. $"erican ?press+$"e1 in support of its position. The MR %as denied b' the Division in its -1

March 122/ Resolution.

1)

$ccenture appealed to the #T$ ?n :anc. There it arued that prior to thea"end"ent introduced b' Republic $ct No. +R.$. /@, 1* there %as nore<uire"ent that the services "ust be rendered to a person enaed in businessconducted outside the Philippines to <ualif' for >eroAratin. The #T$ ?n :ancareed that because the case pertained to the third and the fourth <uarters oftaable 'ear 1221, the applicable la% %as the -//@ Ta #ode, and not R.$./@.10 Still, it ruled that even thouh the provision used in :ur"eister %asSection -21+b+1 of the earlier -/@@ Ta #ode, the pronounce"ent thereinre<uirin recipients of services to be enaed in business outside the Philippinesto <ualif' for >eroAratin %as applicable to the case at bar, because Section-2B+:+1 of the -//@ Ta #ode %as a "ere reenact"ent of Section -21+b+1 ofthe -/@@ Ta #ode.The #T$ ?n :anc concluded that $ccenture failed to dischare the burden ofprovin the latterUs alleation that its clients %ere foreinAbased.1@

Resolute, $ccenture filed a Petition for Revie% %ith the #T$ ?n :anc, but thelatter affir"ed the DivisionUs Decision and Resolution.1B $ subse<uent MR %asalso denied in a Resolution dated 1 October 122/.5ence, the present Petition for Revie%1/ under Rule )*.In a 4oint Stipulation of Facts and Issues, the parties and the Division haveareed to sub"it the follo%in issues for resolution3-. ;hether or not PetitionerUs sales of oods and services are >eroArated for V$Tpurposes under Section -2B+:+1+ of the -//@ Ta #ode.1. ;hether or not petitionerUs clai" for refundta credit in the a"ount ofP*,-@B,BB).1- represents unutili>ed input V$T paid on its do"estic purchasesof oods and services for the period co""encin fro" - 4ul' 1221 until 2Nove"ber 1221.. ;hether or not Petitioner has carried over to the succeedin taable <uarter+sor 'ear+s the alleed unutili>ed input V$T paid on its do"estic purchases ofoods and services for the period co""encin fro" - 4ul' 1221 until 2



Nove"ber 1221, and applied the sa"e full' to its output V$T liabilit' for the saidperiod.). ;hether or not Petitioner is entitled to the refund of the a"ount ofP*,-@B,BB).1-, representin the unutili>ed input V$T on do"estic purchases ofoods and services for the period co""encin fro" - 4ul' 1221 until 2

Nove"ber 1221, fro" its sales of services to various forein clients.*. ;hether or not PetitionerUs clai" for refundta credit in the a"ount ofP*,-@B,BB).1-, as alleed unutili>ed input V$T on do"estic purchases of oodsand services for the period coverin - 4ul' 1221 until 2 Nove"ber 1221 are dul'substantiated b' proper docu"ents.2

For consideration in the present Petition are the follo%in issues3-. Should the recipient of the services be (doin business outside thePhilippines( for the transaction to be >eroArated under Section -2B+:+1 of the-//@ Ta #ode1. 5as $ccenture successfull' proven that its clients are entities doin businessoutside the Philippines

Recipient of services "ust be doin business outside the Philippines for thetransactions to <ualif' as >eroArated. $ccenture anchors its refund clai" on Section --1+$ of the -//@ Ta #ode,%hich allo%s the refund of unutili>ed input V$T earned fro" >eroArated oreffectivel' >eroArated sales. The provision reads3S?#. --1. Refunds or Ta #redits of Input Ta. A+$ &eroARated or ?ffectivel' &eroARated Sales. A $n' V$TAreistered person,%hose sales are >eroArated or effectivel' >eroArated "a', %ithin t%o +1 'earsafter the close of the taable <uarter %hen the sales %ere "ade, appl' for theissuance of a ta credit certificate or refund of creditable input ta due or paidattributable to such sales, ecept transitional input ta, to the etent that suchinput ta has not been applied aainst output ta3 Provided, ho%ever, That in thecase of >eroArated sales under Section -20+$+1+a+-, +1 and +: and Section-2B +:+- and +1, the acceptable forein currenc' echane proceeds thereofhad been dul' accounted for in accordance %ith the rules and reulations of the:an9o Sentral n Pilipinas +:SP3 Provided, further, That %here the tapa'er isenaed in >eroArated or effectivel' >eroArated sale and also in taable or ee"ptsale of oods of properties or services, and the a"ount of creditable input tadue or paid cannot be directl' and entirel' attributed to an' one of thetransactions, it shall be allocated proportionatel' on the basis of the volu"e ofsales. Section -2B+: referred to in the foreoin provision %as first seen %henPresidential Decree No. +P.D. -//)- a"ended Title IV of P.D. --*B,1 %hich isalso 9no%n as the National Internal Revenue #ode of -/@@. Several Decisionshave referred to this as the -/B0 Ta #ode, even thouh it "erel' a"ended TitleIV of the -/@@ Ta #ode.T%o 'ears thereafter, or on - 4anuar' -/BB, ?ecutive Order No. +?.O. 1@ further a"ended provisions of Title IV. ?.O. 1@ b' transferrin the old Title IVprovisions to Title VI and fillin in the for"er title %ith ne% provisions thati"posed a V$T.The V$T s'ste" introduced in ?.O. 1@ %as restructured throuh Republic $ct



No. +R.$. @@-0.) This la%, %hich %as approved on * Ma' -//), %idened the tabase. Section thereof reads3S?#TION . Section -21 of the National Internal Revenue #ode, as a"ended, ishereb' further a"ended to read as follo%s3(S?#. -21. ValueAadded ta on sale of services and use or lease of properties.

(+b Transactions sub!ect to >eroArate. K The follo%in services perfor"ed in thePhilippines b' V$TAreistered persons shall be sub!ect to 2L3(+- Processin, "anufacturin or repac9in oods for other persons doinbusiness outside the Philippines %hich oods are subse<uentl' eported, %herethe services are paid for in acceptable forein currenc' and accounted for inaccordance %ith the rules and reulations of the :an9o Sentral n Pilipinas+:SP.(+1 Services other than those "entioned in the precedin subApararaph, theconsideration for %hich is paid for in acceptable forein currenc' and accounted

for in accordance %ith the rules and reulations of the :an9o Sentral nPilipinas +:SP.(?ssentiall', Section -21+b of the -/@@ Ta #odeKas a"ended b' P.D. -//),?.O. 1@, and R.$. @@-0Kprovides that if the consideration for the servicesprovided b' a V$TAreistered person is in a forein currenc', then this transactionshall be sub!ected to >ero percent rate.The -//@ Ta #ode reproduced Section -21+b of the -/@@ Ta #ode in itsSection -2B+:, to %it3+: Transactions Sub!ect to &ero Percent +2L Rate. A The follo%in servicesperfor"ed in the Philippines b' V$TA reistered persons shall be sub!ect to >eropercent +2L rate.+- Processin, "anufacturin or repac9in oods for other persons doinbusiness outside the Philippines %hich oods are subse<uentl' eported, %herethe services are paid for in acceptable forein currenc' and accounted for inaccordance %ith the rules and reulations of the :an9o Sentral n Pilipinas+:SPH+1 Services other than those "entioned in the precedin pararaph, theconsideration for %hich is paid for in acceptable forein currenc' and accountedfor in accordance %ith the rules and reulations of the :an9o Sentral nPilipinas +:SPH .On - Nove"ber 122*, Section 0 of R.$. /@, %hich a"ended the foreoinprovision, beca"e effective. It reads3S?#. 0. Section -2B of the sa"e #ode, as a"ended, is hereb' further a"endedto read as follo%s3(S?#. -2B. ValueAadded Ta on Sale of Services and 8se or 6ease of Properties. A+: Transactions Sub!ect to &ero Percent +2L Rate. A The follo%in servicesperfor"ed in the Philippines b' V$TAreistered persons shall be sub!ect to >eropercent +2L rate3+- Processin, "anufacturin or repac9in oods for other persons doin



business outside the Philippines %hich oods are subse<uentl' eported, %herethe services are paid for in acceptable forein currenc' and accounted for inaccordance %ith the rules and reulations of the :an9o Sentral n Pilipinas+:SPH(+1 Services other than those "entioned in the precedin pararaph rendered to

a person enaed in business conducted outside the Philippines or to anonresident person not enaed in business %ho is outside the Philippines %henthe services are perfor"ed, the consideration for %hich is paid for in acceptableforein currenc' and accounted for in accordance %ith the rules and reulationsof the :an9o Sentral n Pilipinas +:SPH .( +?"phasis suppliedThe "eat of $ccentureUs aru"ent is that no%here does Section -2B+: of the-//@ Ta #ode state that services, to be >eroArated, should be rendered toclients doin business outside the Philippines, the re<uire"ent introduced b'R.$. /@.* Re<uired b' Section -2B+:, prior to the a"end"ent, is that theconsideration for the services rendered be in forein currenc' and in accordance%ith the rules of the :an9o Sentral n Pilipinas +:SP. Since $ccenture has

co"plied %ith all the conditions i"posed in Section -2B+:, it is entitled to therefund pra'ed for.In support of its clai", $ccenture cites $"e, in %hich this #ourt supposedl'ruled that Section -2B+: reveals a clear intent on the part of the leislators not toi"pose the condition of bein (consu"ed abroad( in order for the servicesperfor"ed in the Philippines to be >eroArated.0

The Division ruled that this #ourt, in $"e and :ur"eister, did not declare thatthe re<uire"entKthat the client "ust be doin business outside the PhilippinesKcan be disrearded, because this re<uire"ent is epressl' provided in $rticle-2B+1 of the Ta #ode.@

$ccenture <uestions the DivisionUs application to this case of thepronounce"ents "ade in :ur"eister. $ccordin to petitioner, the provisionapplied to the present case %as Section -21+b of the -/@@ Ta #ode, and notSection -2B+: of the -//@ Ta #ode, %hich %as the la% effective %hen thesub!ect transactions %ere entered into and a refund %as applied for.In refutin $ccentureUs theor', the #T$ ?n :anc ruled that since Section -2B+:of the -//@ Ta #ode %as a "ere reproduction of Section -21+b of the -/@@ Ta#ode, this #ourtUs interpretation of the latter "a' be used in interpretin thefor"er, vi>3In the :ur"eister case, the Supre"e #ourt har"oni>ed both Sections -21+b+-and -21+b+1 of the -/@@ Ta #ode, as a"ended, pertainin to >eroAratedtransactions. $ parallel approach should be accorded to the renu"beredprovisions of Sections -2B+:+1 and -2B+:+- of the -//@ NIR#. This "eansthat Section -2B+:+1 "ust be read in con!unction %ith Section -2B+:+-.Section -2B+:+1 re<uires as follo%s3 a services other than processin,"anufacturin or repac9in rendered b' V$T reistered persons in thePhilippinesH and b the transaction paid for in acceptable forein currenc' dul'accounted for in accordance %ith :SP rules and reulations. The sa"e provision"ade reference to Section -2B+:+- further i"posin the re<uisite c that therecipient of services "ust be perfor"in business outside of Philippines.



Other%ise, if both the provider and recipient of service are doin business in thePhilippines, the sale transaction is sub!ect to reular V$T as eplained in the:ur"eister case . #learl', the Supre"e #ourtUs pronounce"ents in the :ur"eister case re<uirin

that the recipient of the services "ust be doin business outside the Philippinesas "andated b' la% overn the instant case.B

$ssu"in that the foreoin is true, $ccenture still arues that the ta appealscourts cannot be allo%ed to appl' to :ur"eister this #ourtUs interpretation ofSection -21+b of the -/@@ Ta #ode, because the Petition of $ccenture hadalread' been filed before the case %as even pro"ulated on 11 4anuar' 122@, / to %it3 . ;hile the :ur"eister case for"s part of the leal s'ste" and assu"es thesa"e authorit' as the statute itself, ho%ever, the sa"e cannot be appliedretroactivel' aainst the Petitioner because to do so %ill be pre!udicial to thelatter.)2

The #T$ en banc is of the opinion that $ccenture cannot invo9e the nonAretroactivit' of the rulins of the Supre"e #ourt, %hose interpretation of the la%is part of that la% as of the date of its enact"ent.)-

;e rule that the recipient of the service "ust be doin business outside thePhilippines for the transaction to <ualif' for >eroAratin under Section -2B+: ofthe Ta #ode.This #ourt upholds the position of the #T$ en banc that, because Section -2B+:of the -//@ Ta #ode is a verbati" cop' of Section -21+b of the -/@@ Ta #ode,an' interpretation of the latter holds true for the for"er.Moreover, even thouh $ccentureUs Petition %as filed before :ur"eister %aspro"ulated, the pronounce"ents "ade in that case "a' be applied to thepresent one %ithout violatin the rule aainst retroactive application. ;hen this#ourt decides a case, it does not pass a ne% la%, but "erel' interprets apreeistin one.)1 ;hen this #ourt interpreted Section -21+b of the -/@@ Ta#ode in :ur"eister, this interpretation beca"e part of the la% fro" the "o"ent itbeca"e effective. It is ele"entar' that the interpretation of a la% b' this #ourtconstitutes part of that la% fro" the date it %as oriinall' passed, since this#ourts construction "erel' establishes the conte"poraneous leislative intentthat the interpreted la% carried into effect.)

$ccenture <uestions the #T$Us application of :ur"eister, because the provisioninterpreted therein %as Section -21+b of the -/@@ Ta #ode. In support of itsposition that Section -2B of the -//@ Ta #ode does not re<uire that the servicesbe rendered to an entit' doin business outside the Philippines, $ccentureinvo9es this #ourtUs pronounce"ents in $"e. 5o%ever, a readin of that case%ill readil' reveal that the provision applied %as Section -21+b of the -/@@ Ta#ode, and not Section -2B of the -//@ Ta #ode. $s previousl' "entioned, aninterpretation of Section -21+b of the -/@@ Ta #ode is an interpretation ofSection -2B of the -//@ Ta #ode, the latter bein a "ere reproduction of thefor"er.This #ourt further finds that $ccentureUs reliance on $"e is "isplaced.



;e ruled in $"e that Section -21 of the -/@@ Ta #ode does not re<uire thatthe services be consu"ed abroad to be >eroArated. 5o%ever, no%here in thatcase did this #ourt discuss the necessar' <ualification of the recipient of theservice, as this "atter %as never put in <uestion. In fact, the recipient of theservice in $"e is a nonresident forein client.

The afore"entioned case eplains ho% the credit card s'ste" %or9s. Theissuance of a credit card allo%s the holder thereof to obtain, on credit, oods andservices fro" certain establish"ents. $s proof that this credit is etended b' theestablish"ent, a credit card draft is issued. Thereafter, the co"pan' issuin thecredit card %ill pa' for the purchases of the credit card holders b' redee"in thedrafts. The obliation to collect fro" the card holders and to bear the lossKincase the' do not pa'Krests on the issuer of the credit card.The service provided b' respondent in $"e consisted of atherin the bills andcredit card drafts fro" establish"ents located in the Philippines and for%ardinthe" to its parent co"pan's reional operatin centers outside the countr'. Itfacilitated in the Philippines the collection and pa'"ent of receivables belonin

to its 5on EonAbased forein client.The #ourt eplained ho% the services rendered in $"e %ere considered tohave been perfor"ed and consu"ed in the Philippines, to %it3#onsu"ption is (the use of a thin in a %a' that thereb' ehausts it.( $pplied toservices, the ter" "eans the perfor"ance or (successful co"pletion of acontractual dut', usuall' resultin in the perfor"erUs release fro" an' past orfuture liabilit' .( The services rendered b' respondent are perfor"ed orsuccessfull' co"pleted upon its sendin to its forein client the drafts and bills ithas athered fro" service establish"ents here. Its services, havin beenperfor"ed in the Philippines, are therefore also consu"ed in the Philippines. ))

The effect of the place of consu"ption on the >eroAratin of the transaction %asnot the issue in :ur"eister.56!phi5 Instead, this #ourt addressed the s<uarel'raised issue of %hether the recipient of services should be doin businessoutside the Philippines for the transaction to <ualif' for >eroAratin. ;e ruled thatit should. Thus, another essential condition for <ualification for >eroAratin underSection -21+b+1 of the -/@@ Ta #ode is that the recipient of the business bedoin that business outside the Philippines. In clarif'in that there is no conflictbet%een this pronounce"ent and that laid do%n in $"e, %e ruled thus3 . $s the #ourt held in #o""issioner of Internal Revenue v. $"erican?press International, Inc. +Philippine :ranch, the place of pa'"ent isi""aterial, "uch less is the place %here the output of the service is ulti"atel'used. $n essential condition for entitle"ent to 2L V$T under Section -21 +b +-and +1 is that the recipient of the services is a person doin business outside thePhilippines. In this case, the recipient of the services is the #onsortiu", %hich isdoin business not outside, but %ithin the Philippines because it has a -*A'earcontract to operate and "aintain N$PO#ORUs t%o -22A"ea%att po%er baresin Mindanao. +?"phasis in the oriinal)*

In $"e %e ruled that the place of perfor"ance andor consu"ption of theservice is i""aterial. In :ur"eister, the #ourt found that, althouh the place ofthe consu"ption of the service does not affect the entitle"ent of a transaction to



>eroAratin, the place %here the recipient conducts its business does. $"e does not conflict %ith :ur"eister. In fact, to full' understand ho% Section-21+b+1 of the -/@@ Ta #odeKand conse<uentl' Section -2B+:+1 of the-//@ Ta #odeK%as intended to operate, the t%o afore"entioned cases shouldbe ta9en toether. The >eroAratin of the services perfor"ed b' respondent in

$"e %as affir"ed b' the #ourt, because althouh the services rendered %ereboth perfor"ed and consu"ed in the Philippines, the recipient of the service %asstill an entit' doin business outside the Philippines as re<uired in :ur"eister.That the recipient of the service should be doin business outside the Philippinesto <ualif' for >eroAratin is the onl' loical interpretation of Section -21+b+1 ofthe -/@@ Ta #ode, as %e eplained in :ur"eister3This can onl' be the loical interpretation of Section -21 +b +1. If the providerand recipient of the (other services( are both doin business in the Philippines,the pa'"ent of forein currenc' is irrelevant. Other%ise, those sub!ect to thereular V$T under Section -21 +a can avoid pa'in the V$T b' si"pl' stipulatinpa'"ent in forein currenc' in%ardl' re"itted b' the recipient of services. To

interpret Section -21 +b +1 to appl' to a pa'erArecipient of services doinbusiness in the Philippines is to "a9e the pa'"ent of the reular V$T underSection -21 +a dependent on the enerosit' of the tapa'er. The provider ofservices can choose to pa' the reular V$T or avoid it b' stipulatin pa'"ent inforein currenc' in%ardl' re"itted b' the pa'erArecipient. Such interpretationre"oves Section -21 +a as a ta "easure in the Ta #ode, an interpretation this#ourt cannot sanction. $ ta is a "andator' eaction, not a voluntar'contribution. Further, %hen the provider and recipient of services are both doin business inthe Philippines, their transaction falls s<uarel' under Section -21 +a overnindo"estic sale or echane of services. Indeed, this is a purel' local sale orechane of services sub!ect to the reular V$T, unless of course the transactionfalls under the other provisions of Section -21 +b.Thus, %hen Section -21 +b +1 spea9s of (services other than those "entionedin the precedin subpararaph,( the leislative intent is that onl' the services aredifferent bet%een subpararaphs - and 1. The re<uire"ents for >eroAratin,includin the essential condition that the recipient of services is doin businessoutside the Philippines, re"ain the sa"e under both subpararaphs. +?"phasisin the oriinal)0

6astl', it is %orth "entionin that prior to the pro"ulation of :ur"eister,#onress had alread' clarified the intent behind Sections -21+b+1 of the -/@@Ta #ode and -2B+:+1 of the -//@ Ta #ode a"endin the earlier provision.R.$. /@ added the follo%in phrase3 (rendered to a person enaed inbusiness conducted outside the Philippines or to a nonresident person notenaed in business %ho is outside the Philippines %hen the services areperfor"ed.(

$ccenture has failed to establish that the recipients of its services do businessoutside the Philippines.

$ccenture arues that based on the docu"entar' evidence it presented,)@ it %as



able to establish the follo%in circu"stances3-. The records of the Securities and ?chane #o""ission +S?# sho% that

$ccentureUs clients have not established an' branch office in %hich to dobusiness in the Philippines.1. For these services, $ccenture bills another corporation, $ccenture

Participations :.V. +$P:, %hich is li9e%ise a forein corporation %ith no(presence in the Philippines.(. Onl' those not doin business in the Philippines can be re<uired under :SPrules to pa' in acceptable currenc' for their purchase of oods and services fro"the Philippines. Thus, in a do"estic transaction, %here the provider and recipientof services are both doin business in the Philippines, the :SP cannot re<uirean' part' to "a9e pa'"ent in forein currenc'.)B

$ccenture clai"s that these docu"entar' pieces of evidence are supported b'the Report of ?""anuel Mendo>a, the #ourtAco""issioned Independent#ertified Public $ccountant. 5e ascertained that $ccentureUs ross billinspertainin to >eroArated sales %ere all supported b' >eroArated Official Receipts

and :illin State"ents. These docu"ents sho% that these >eroArated sales %erepaid in forein echane currenc' and dul' accounted for in the rules andreulations of the :SP.)/

In the #T$Us opinion, ho%ever, the docu"ents presented b' $ccenture "erel'substantiate the eistence of the sales, receipt of forein currenc' pa'"ents, andin%ard re"ittance of the proceeds of these sales dul' accounted for inaccordance %ith :SP rules. Petitioner presented no evidence %hatsoever thatthese clients %ere doin business outside the Philippines.*2

$ccenture insists, ho%ever, that it %as able to establish that it had renderedservices to forein corporations doin business outside the Philippines, unli9e in:ur"eister, %hich alleedl' involved a forein corporation doin business in thePhilippines.*-

;e den' $ccentureUs Petition for a ta refund.The evidence presented b' $ccenture "a' have established that its clients areforein.56!phi5 This fact does not auto"aticall' "ean, ho%ever, that theseclients %ere doin business outside the Philippines. $fter all, the Ta #ode itselfhas provisions for a forein corporation enaed in business %ithin thePhilippines and vice versa, to %it3S?#. 11. Definitions A ;hen used in this Title3 +5 The ter" (resident forein corporation( applies to a forein corporationenaed in trade or business %ithin the Philippines.+I The ter" Wnonresident forein corporationU applies to a forein corporation notenaed in trade or business %ithin the Philippines. +?"phasis in the oriinal#onse<uentl', to co"e %ithin the purvie% of Section -2B+:+1, it is not enouhthat the recipient of the service be proven to be a forein corporationH rather, it"ust be specificall' proven to be a nonresident forein corporation.There is no specific criterion as to %hat constitutes (doin( or (enain in( or(transactin( business. ;e ruled thus in #o""issioner of Internal Revenue v.:ritish Overseas $ir%a's #orporation3*1



. There is no specific criterion as to %hat constitutes (doin( or (enain in(or (transactin( business. ?ach case "ust be !uded in the liht of its peculiarenviron"ental circu"stances. The ter" i"plies a continuit' of co""ercialdealins and arrane"ents, and conte"plates, to that etent, the perfor"ance of acts or %or9s or the eercise of so"e of the functions nor"all' incident to, and in

proressive prosecution of co""ercial ain or for the purpose and ob!ect of thebusiness orani>ation. (In order that a forein corporation "a' be rearded asdoin business %ithin a State, there "ust be continuit' of conduct and intentionto establish a continuous business, such as the appoint"ent of a local aent, andnot one of a te"porar' character.(*

$ tapa'er clai"in a ta credit or refund has the burden of proof to establish thefactual basis of that clai".56!phi5 Ta refunds, li9e ta ee"ptions, areconstrued strictl' aainst the tapa'er.*)

$ccenture failed to dischare this burden. It alleed and presented evidence toprove onl' that its clients %ere forein entities. 5o%ever, as found b' both the#T$ Division and the #T$ ?n :anc, no evidence %as presented b' $ccenture to

prove the fact that the forein clients to %ho" petitioner rendered its services%ere clients doin business outside the Philippines. $s ruled b' the #T$ ?n :anc, the Official Receipts, Interco"pan' Pa'"entRe<uests, :illin State"ents, Me"o InvoicesAReceivable, Me"o InvoicesAPa'able, and :an9 State"ents presented b' $ccenture "erel' substantiated theeistence of sales, receipt of forein currenc' pa'"ents, and in%ard re"ittanceof the proceeds of such sales dul' accounted for in accordance %ith :SP rules,all of these %ere devoid of an' evidence that the clients %ere doin businessoutside of the Philippines.**

;5?R?FOR?, the instant Petition is D?NI?D. The 11 Septe"ber 122/ Decisionand the 1 October 122/ Resolution of the #ourt of Ta $ppeals ?n :anc in#.T.$. ?: No. )@@, dis"issin the Petition for the refund of the ecess orunutili>ed input V$T credits of $ccenture, Inc., are $FFIRM?D.SO ORD?R?D.


Manila?N :$N#G.R. No. L-454+5 A2l +9, 199JOSE GATCHALIAN, ET AL., plaintiffsAappellants,vs.THE COLLECTOR OF INTERNAL RE*ENUE, defendantAappellee."uillermo . #eyes for appellants.7ffice of the 0olicitor8"eneral 3uason forappellee.IMPERIAL, J.:The plaintiff brouht this action to recover fro" the defendant #ollector of InternalRevenue the su" of P-,B0.)), %ith leal interest thereon, %hich the' paidunder protest b' %a' of inco"e ta. The' appealed fro" the decision rendered inthe case on October 1, -/0 b' the #ourt of First Instance of the #it' of Manila,



%hich dis"issed the action %ith the costs aainst the".The case %as sub"itted for decision upon the follo%in stipulation of facts3#o"e no% the parties to the aboveA"entioned case, throuh their respectiveundersined attorne's, and hereb' aree to respectfull' sub"it to this 5onorable#ourt the case upon the follo%in state"ent of facts3

-. That plaintiff are all residents of the "unicipalit' of Pulilan, :ulacan, and thatdefendant is the #ollector of Internal Revenue of the PhilippinesH1. That prior to Dece"ber -*, -/) plaintiffs, in order to enable the" to purchaseone s%eepsta9es tic9et valued at t%o pesos +P1, subscribed and paid thereforthe a"ounts as follo%s3

-. 4ose 7atchalian ....................................................................................................

1. 7reoria #ristobal ...............................................................................................

. Saturnina Silva ....................................................................................................

). 7uiller"o Tapia ...................................................................................................

*. 4esus 6easpi ......................................................................................................

0. 4ose Silva .............................................................................................................

@. To"asa Mercado ................................................................................................

B. 4ulio 7atchalian ...................................................................................................

/. ?"iliana Santiao ................................................................................................

-2. Maria #. 6easpi ...............................................................................................

--. Francisco #abral ...............................................................................................

-1. 7on>alo 4avier ....................................................................................................

-. Maria Santiao ...................................................................................................

-). :uenaventura 7u>"an ......................................................................................

-*. Mariano Santos .................................................................................................

Total .................................................................................................... That i""ediatel' thereafter but prior to Dece"ber -*, -/), plaintiffspurchased, in the ordinar' course of business, fro" one of the dul' authori>edaents of the National #harit' S%eepsta9es Office one tic9et bearin No. -@B0@for the su" of t%o pesos +P1 and that the said tic9et %as reistered in the na"eof 4ose 7atchalian and #o"pan'H). That as a result of the dra%in of the s%eepsta9es on Dece"ber -*, -/), theaboveA"entioned tic9et bearin No. -@B0@ %on one of the third pri>es in the



a"ount of P*2,222 and that the correspondin chec9 coverin the aboveA"entioned pri>e of P*2,222 %as dra%n b' the National #harit' S%eepsta9esOffice in favor of 4ose 7atchalian Q #o"pan' aainst the Philippine National:an9, %hich chec9 %as cashed durin the latter part of Dece"ber, -/) b' 4ose7atchalian Q #o"pan'H

*. That on Dece"ber 1/, -/), 4ose 7atchalian %as re<uired b' inco"e taea"iner $lfredo David to file the correspondin inco"e ta return coverin thepri>e %on b' 4ose 7atchalian Q #o"pan' and that on Dece"ber 1/, -/), thesaid return %as sined b' 4ose 7atchalian, a cop' of %hich return is enclosed as?hibit $ and "ade a part hereofH0. That on 4anuar' B, -/*, the defendant "ade an assess"ent aainst 4ose7atchalian Q #o"pan' re<uestin the pa'"ent of the su" of P-,)//./) to thedeput' provincial treasurer of Pulilan, :ulacan, ivin to said 4ose 7atchalian Q#o"pan' until 4anuar' 12, -/* %ithin %hich to pa' the said a"ount ofP-,)//./), a cop' of %hich letter "ar9ed ?hibit : is enclosed and "ade a parthereofH

@. That on 4anuar' 12, -/*, the plaintiffs, throuh their attorne', sent todefendant a repl', a cop' of %hich "ar9ed ?hibit # is attached and "ade a parthereof, re<uestin ee"ption fro" pa'"ent of the inco"e ta to %hich repl'there %ere enclosed fifteen +-* separate individual inco"e ta returns filedseparatel' b' each one of the plaintiffs, copies of %hich returns are attached and"ar9ed ?hibit DA- to DA-*, respectivel', in order of their na"es listed in thecaption of this case and "ade parts hereofH a state"ent of sale sined b' 4ose7atchalian sho%in the a"ount put up b' each of the plaintiffs to cover up theattached and "ar9ed as ?hibit ? and "ade a part hereofH and a cop' of theaffidavit sined b' 4ose 7atchalian dated Dece"ber 1/, -/) is attached and"ar9ed ?hibit F and "ade part thereofHB. That the defendant in his letter dated 4anuar' 1B, -/*, a cop' of %hich"ar9ed ?hibit 7 is enclosed, denied plaintiffs re<uest of 4anuar' 12, -/*, foree"ption fro" the pa'"ent of ta and reiterated his de"and for the pa'"ent ofthe su" of P-,)//./) as inco"e ta and ave plaintiffs until Februar' -2, -/*%ithin %hich to pa' the said taH/. That in vie% of the failure of the plaintiffs to pa' the a"ount of ta de"andedb' the defendant, not%ithstandin subse<uent de"and "ade b' defendant uponthe plaintiffs throuh their attorne' on March 1, -/*, a cop' of %hich "ar9ed?hibit 5 is enclosed, defendant on Ma' -, -/* issued a %arrant of distraintand lev' aainst the propert' of the plaintiffs, a cop' of %hich %arrant "ar9ed?hibit I is enclosed and "ade a part hereofH-2. That to avoid e"barrass"ent arisin fro" the e"baro of the propert' of theplaintiffs, the said plaintiffs on 4une -*, -/*, throuh 7reoria #ristobal, Maria#. 6easpi and 4esus 6easpi, paid under protest the su" of P02-.*- as part ofthe ta and penalties to the "unicipal treasurer of Pulilan, :ulacan, as evidencedb' official receipt No. @)*)B@/ %hich is attached and "ar9ed ?hibit 4 and "adea part hereof, and re<uested defendant that plaintiffs be allo%ed to pa' underprotest the balance of the ta and penalties b' "onthl' install"entsH--. That plaintiffs re<uest to pa' the balance of the ta and penalties %as



ranted b' defendant sub!ect to the condition that plaintiffs file the usual bondsecured b' t%o solvent persons to uarantee pro"pt pa'"ent of eachinstall"ents as it beco"es dueH-1. That on 4ul' -0, -/*, plaintiff filed a bond, a cop' of %hich "ar9ed ?hibit Eis enclosed and "ade a part hereof, to uarantee the pa'"ent of the balance of

the alleed ta liabilit' b' "onthl' install"ents at the rate of P--B.@2 a "onth,the first pa'"ent under protest to be effected on or before 4ul' -, -/*H-. That on 4ul' -0, -/* the said plaintiffs for"all' protested aainst thepa'"ent of the su" of P021.*-, a cop' of %hich protest is attached and "ar9ed?hibit 6, but that defendant in his letter dated $uust -, -/* overruled theprotest and denied the re<uest for refund of the plaintiffsH-). That, in vie% of the failure of the plaintiffs to pa' the "onthl' install"ents inaccordance %ith the ter"s and conditions of bond filed b' the", the defendant inhis letter dated 4ul' 1, -/*, cop' of %hich is attached and "ar9ed ?hibit M,ordered the "unicipal treasurer of Pulilan, :ulacan to eecute %ithin five da'sthe %arrant of distraint and lev' issued aainst the plaintiffs on Ma' -, -/*H

-*. That in order to avoid anno'ance and e"barrass"ent arisin fro" the lev' of their propert', the plaintiffs on $uust 1B, -/0, throuh 4ose 7atchalian,7uiller"o Tapia, Maria Santiao and ?"iliano Santiao, paid under protest to the"unicipal treasurer of Pulilan, :ulacan the su" of P-,102./ representin theunpaid balance of the inco"e ta and penalties de"anded b' defendant asevidenced b' inco"e ta receipt No. *B-- %hich is attached and "ar9ed ?hibitN and "ade a part hereofH and that on Septe"ber , -/0, the plaintiffs for"all'protested to the defendant aainst the pa'"ent of said a"ount and re<uestedthe refund thereof, cop' of %hich is attached and "ar9ed ?hibit O and "adepart hereofH but that on Septe"ber ), -/0, the defendant overruled the protestand denied the refund thereofH cop' of %hich is attached and "ar9ed ?hibit Pand "ade a part hereofH and-0. That plaintiffs de"anded upon defendant the refund of the total su" of onethousand eiht hundred and sit' three pesos and fort'Afour centavos+P-,B0.)) paid under protest b' the" but that defendant refused and stillrefuses to refund the said a"ount not%ithstandin the plaintiffs de"ands.-@. The parties hereto reserve the riht to present other and additional evidenceif necessar'.?hibit ? referred to in the stipulation is of the follo%in tenor33o !hom it may concern9I, 4ose 7atchalian, a resident of Pulilan, :ulacan, "arried, of ae, hereb' certif',that on the --th da' of $uust, -/), I sold parts of "' shares on tic9et No.-@B0@ to the persons and for the a"ount indicated belo% and the part of "a'share re"ainin is also sho%n to %it3

Purchaser Amount

Address

-. Mariano Santos ........................................... P2.-) Pulilan, :ulacan.

1. :uenaventura 7u>"an ............................... .- A Do A



. Maria Santiao ............................................ .-@ A Do A

). 7on>alo 4avier .............................................. .-) A Do A

*. Francisco #abral .......................................... .- A Do A

0. Maria #. 6easpi .......................................... .-0 A Do A

@. ?"iliana Santiao ......................................... .- A Do A

B. 4ulio 7atchalian ............................................ .- A Do A

/. 4ose Silva ...................................................... .2@ A Do A

-2. To"asa Mercado ....................................... .2B A Do A

--. 4esus 6easpi ............................................. .-* A Do A

-1. 7uiller"o Tapia ........................................... .- A Do A

-. Saturnina Silva ............................................ .2B A Do A

-). 7reoria #ristobal ....................................... .-B A Do A

-*. 4ose 7atchalian ............................................ .-B A Do A

1.22 Total cost of said

tic9etH and that, therefore, the persons na"ed above are entitled to the parts of%hatever pri>e that "iht be %on b' said tic9et.

Pulilan, :ulacan, P.I.+Sd. 4OS? 7$T#5$6I$N $nd a su""ar' of ?hibits DA- to DA-* is inserted in the bill of eceptions asfollo%s3R?#$PIT86$TIONS OF -* INDIVID8$6 IN#OM? T$J R?T8RNS FOR -/)

$66 D$T?D 4$N8$RG -/, -/* S8:MITT?D TO T5? #O66?#TOR OFINT?RN$6 R?V?N8?.

$ame:xhi*it$o.

PurchasePrice

Price;on

:xpes

-. 4ose 7atchalian .......................................... DA- P2.-BP),)1

*

P )B2

1. 7reoria #ristobal ...................................... DA1 .-B ),*@* 1,222

. Saturnina Silva ............................................. DA .2B -,B@* 02

). 7uiller"o Tapia .......................................... DA) .- ,1* 02

*. 4esus 6easpi b' Maria #ristobal ......... DA* .-* ,B1* @12



0. 4ose Silva .................................................... DA0 .2B -,B@* 02

@. To"asa Mercado ....................................... DA@ .2@ -,B@* 02

B. 4ulio 7atchalian b' :eatri> 7u>"an ....... DAB .- ,-*2 1)2

/. ?"iliana Santiao ...................................... DA/ .- ,1* 02

-2. Maria #. 6easpi ...................................... DA-2 .-0 ),-22 /02

--. Francisco #abral ...................................... DA-- .- ,1* 02

-1. 7on>alo 4avier .......................................... DA-1 .-) ,1* 02

-. Maria Santiao .......................................... DA- .-@ ),*2 02

-). :uenaventura 7u>"an ........................... DA-) .- ,1* 02

-*. Mariano Santos ........................................ DA-* .-) ,1* 02

1.22*2,222

The leal <uestions raised in plaintiffsAappellants five assined errors "a'properl' be reduced to the t%o follo%in3 +- ;hether the plaintiffs for"ed apartnership, or "erel' a co""unit' of propert' %ithout a personalit' of its o%nH inthe first case it is ad"itted that the partnership thus for"ed is liable for thepa'"ent of inco"e ta, %hereas if there %as "erel' a co""unit' of propert',the' are ee"pt fro" such pa'"entH and +1 %hether the' should pa' the tacollectivel' or %hether the latter should be prorated a"on the" and paidindividuall'.The #ollector of Internal Revenue collected the ta under section -2 of $ct No.1B, as last a"ended b' section 1 of $ct No. @0-, readin as follo%s3S?#. -2. +a There shall be levied, assessed, collected, and paid annuall' uponthe total net inco"e received in the precedin calendar 'ear fro" all sources b'ever' corporation, !ointAstoc9 co"pan', partnership, !oint account +cuenta enparticipacion, association or insurance co"pan', orani>ed in the PhilippineIslands, no "atter ho% created or orani>ed, but not includin dul' reisteredeneral copartnership +co"paCias colectivas, a ta of three per centu" uponsuch inco"eH and a li9e ta shall be levied, assessed, collected, and paidannuall' upon the total net inco"e received in the precedin calendar 'ear fro"all sources %ithin the Philippine Islands b' ever' corporation, !ointAstoc9co"pan', partnership, !oint account +cuenta en participacion, association, orinsurance co"pan' orani>ed, authori>ed, or eistin under the la%s of an'forein countr', includin interest on bonds, notes, or other interestAbearinobliations of residents, corporate or other%ise3 Provided, ho!ever, That nothinin this section shall be construed as per"ittin the taation of the inco"e derivedfro" dividends or net profits on %hich the nor"al ta has been paid.



The ain derived or loss sustained fro" the sale or other disposition b' acorporation, !ointAstoc9 co"pan', partnership, !oint account +cuenta enparticipacion, association, or insurance co"pan', or propert', real, personal, or"ied, shall be ascertained in accordance %ith subsections +c and +d of sectiont%o of $ct Nu"bered T%o thousand eiht hundred and thirt'Athree, as a"ended

b' $ct Nu"bered T%ent'Anine hundred and t%ent'Asi.The foreoin ta rate shall appl' to the net inco"e received b' ever' taablecorporation, !ointAstoc9 co"pan', partnership, !oint account +cuenta enparticipacion, association, or insurance co"pan' in the calendar 'ear nineteenhundred and t%ent' and in each 'ear thereafter.There is no doubt that if the plaintiffs "erel' for"ed a co""unit' of propert' thelatter is ee"pt fro" the pa'"ent of inco"e ta under the la%. :ut accordin tothe stipulation facts the plaintiffs orani>ed a partnership of a civil naturebecause each of the" put up "one' to bu' a s%eepsta9es tic9et for the solepurpose of dividin e<uall' the pri>e %hich the' "a' %in, as the' did in fact in thea"ount of P*2,222 +article -00*, #ivil #ode. The partnership %as not onl'

for"ed, but upon the orani>ation thereof and the %innin of the pri>e, 4ose7atchalian personall' appeared in the office of the Philippines #harit'S%eepsta9es, in his capacit' as coApartner, as such collection the pri>e, theoffice issued the chec9 for P*2,222 in favor of 4ose 7atchalian and co"pan',and the said partner, in the sa"e capacit', collected the said chec9. $ll thesecircu"stances repel the idea that the plaintiffs orani>ed and for"ed aco""unit' of propert' onl'.5avin orani>ed and constituted a partnership of a civil nature, the said entit' isthe one bound to pa' the inco"e ta %hich the defendant collected under theaforesaid section -2 +a of $ct No. 1B, as a"ended b' section 1 of $ct No.@0-. There is no "erit in plaintiffs contention that the ta should be prorateda"on the" and paid individuall', resultin in their ee"ption fro" the ta.In vie% of the foreoin, the appealed decision is affir"ed, %ith the costs of thisinstance to the plaintiffs appellants. So ordered.


ManilaFIRST DIVISIONG.R. No. /1 O)6o8 1/, 19//MARIANO P. PASCUAL &'( RENATO P. $RAGON, petitioners,vs.THE COMMISSIONER OF INTERNAL RE*ENUE &'( COURT OF TA3APPEALS, respondents.<e la -uesta, <e las Alas and -allanta a! 7ffices for petitioners.3he 0olicitor "eneral for respondents GANCA"CO, J.:The distinction bet%een coAo%nership and an unreistered partnership or !ointventure for inco"e ta purposes is the issue in this petition.



On 4une 11, -/0*, petitioners bouht t%o +1 parcels of land fro" Santiao:ernardino, et al. and on Ma' 1B, -/00, the' bouht another three + parcels ofland fro" 4uan Ro<ue. The first t%o parcels of land %ere sold b' petitioners in-/0B toMarenir Develop"ent #orporation, %hile the three parcels of land %eresold b' petitioners to ?rlinda Re'es and Maria Sa"son on March -/,-/@2.

Petitioners reali>ed a net profit in the sale "ade in -/0B in the a"ount ofP-0*,11).@2, %hile the' reali>ed a net profit of P02,222.22 in the sale "ade in-/@2. The correspondin capital ains taes %ere paid b' petitioners in -/@ and-/@) b' availin of the ta a"nesties ranted in the said 'ears.5o%ever, in a letter dated March -, -/@/ of then $ctin :IR #o""issioner?fren I. Plana, petitioners %ere assessed and re<uired to pa' a total a"ount ofP-2@,-2-.@2 as alleed deficienc' corporate inco"e taes for the 'ears -/0Band -/@2.Petitioners protested the said assess"ent in a letter of 4une 10, -/@/ assertinthat the' had availed of ta a"nesties %a' bac9 in -/@).In a repl' of $uust 11, -/@/, respondent #o""issioner infor"ed petitioners that

in the 'ears -/0B and -/@2, petitioners as coAo%ners in the real estatetransactions for"ed an unreistered partnership or !oint venture taable as acorporation under Section 12+b and its inco"e %as sub!ect to the taesprescribed under Section 1), both of the National Internal Revenue #ode 1 thatthe unreistered partnership %as sub!ect to corporate inco"e ta asdistinuished fro" profits derived fro" the partnership b' the" %hich is sub!ectto individual inco"e taH and that the avail"ent of ta a"nest' under P.D. No.1, as a"ended, b' petitioners relieved petitioners of their individual inco"e taliabilities but did not relieve the" fro" the ta liabilit' of the unreisteredpartnership. 5ence, the petitioners %ere re<uired to pa' the deficienc' inco"eta assessed.Petitioners filed a petition for revie% %ith the respondent #ourt of Ta $ppealsdoc9eted as #T$ #ase No. 2)*. In due course, the respondent court b' a"a!orit' decision of March 2, -/B@, + affir"ed the decision and action ta9en b'respondent co""issioner %ith costs aainst petitioners.It ruled that on the basis of the principle enunciated in :vangelista anunreistered partnership %as in fact for"ed b' petitioners %hich li9e acorporation %as sub!ect to corporate inco"e ta distinct fro" that i"posed on thepartners.In a separate dissentin opinion, $ssociate 4ude #onstante Roa<uin stated thatconsiderin the circu"stances of this case, althouh there "iht in fact be a coAo%nership bet%een the petitioners, there %as no ade<uate basis for theconclusion that the' thereb' for"ed an unreistered partnership %hich "ade(he" liable for corporate inco"e ta under the Ta #ode.5ence, this petition %herein petitioners invo9e as basis thereof the follo%inalleed errors of the respondent court3

$. IN 5O6DIN7 $S PR?S8MPTIV?6G #ORR?#T T5? D?T?RMIN$TION OFT5? R?SPOND?NT #OMMISSION?R, TO T5? ?FF?#T T5$T P?TITION?RSFORM?D $N 8NR?7IST?R?D P$RTN?RS5IP S8:4?#T TO #ORPOR$T?IN#OM? T$J, $ND T5$T T5? :8RD?N OF OFF?RIN7 ?VID?N#? IN



OPPOSITION T5?R?TO R?STS 8PON T5? P?TITION?RS.:. IN M$EIN7 $ FINDIN7, SO6?6G ON T5? :$SIS OF ISO6$T?D S$6?TR$NS$#TIONS, T5$T $N 8NR?7IST?R?D P$RTN?RS5IP ?JIST?D T58SI7NORIN7 T5? R?=8IR?M?NTS 6$ID DO;N :G 6$; T5$T ;O86D;$RR$NT T5? PR?S8MPTION#ON#68SION T5$T $ P$RTN?RS5IP

?JISTS.#. IN FINDIN7 T5$T T5? INST$NT #$S? IS SIMI6$R TO T5? ?V$N7?6IST$#$S? $ND T5?R?FOR? S5O86D :? D?#ID?D $6ON7SID? T5??V$N7?6IST$ #$S?.D. IN R86IN7 T5$T T5? T$J $MN?STG DID NOT R?6I?V? T5?P?TITION?RS FROM P$GM?NT OF OT5?R T$J?S FOR T5? P?RIOD#OV?R?D :G S8#5 $MN?STG. +pp. -1A-, Rollo.The petition is "eritorious.The basis of the sub!ect decision of the respondent court is the rulin of this#ourt in :vangelista. 4

In the said case, petitioners borro%ed a su" of "one' fro" their father %hich

toether %ith their o%n personal funds the' used in bu'in several realproperties. The' appointed their brother to "anae their properties %ith fullpo%er to lease, collect, rent, issue receipts, etc. The' had the real propertiesrented or leased to various tenants for several 'ears and the' ained net profitsfro" the rental inco"e. Thus, the #ollector of Internal Revenue de"anded thepa'"ent of inco"e ta on a corporation, a"on others, fro" the".In resolvin the issue, this #ourt held as follo%s3The issue in this case is %hether petitioners are sub!ect to the ta oncorporations provided for in section 1) of #o""on%ealth $ct No. )00, other%ise9no%n as the National Internal Revenue #ode, as %ell as to the residence ta for corporations and the real estate dealers fied ta. ;ith respect to the ta oncorporations, the issue hines on the "eanin of the ter"s corporation andpartnership as used in sections 1) and B) of said #ode, the pertinent parts of%hich read3Sec. 1). #ate of the tax on corporations.KThere shall be levied, assessed,collected, and paid annuall' upon the total net inco"e received in the precedintaable 'ear fro" all sources b' ever' corporation orani>ed in, or eistin under the la%s of the Philippines, no "atter ho% created or orani>ed but not includindul' reistered eneral coApartnerships +co"panies collectives, a ta upon suchinco"e e<ual to the su" of the follo%in3 ...Sec. B)+b. The ter" (corporation( includes partnerships, no "atter ho% createdor orani>ed, !ointAstoc9 co"panies, !oint accounts +cuentas en participation,associations or insurance co"panies, but does not include dul' reisteredeneral coApartnerships +co"panies colectivas.

$rticle -@0@ of the #ivil #ode of the Philippines provides3:' the contract of partnership t%o or "ore persons bind the"selves to contribute"one', propert', or industr' to a co""on fund, %ith the intention of dividin theprofits a"on the"selves.Pursuant to this article, the essential elements of a partnership are t!o, namely9=a> an agreement to contri*ute money, property or industry to a common fund?



and =*> intent to divide the profits among the contracting parties . The firstele"ent is undoubtedl' present in the case at bar, for, ad"ittedl', petitionershave areed to, and did, contribute "one' and propert' to a co""on fund.@ence, the issue narro!s do!n to their intent in acting as they did . 8ponconsideration of all the facts and circu"stances surroundin the case, !e are

fully satisfied that their purpose !as to engage in real estate transactions formonetary gain and then divide the same among themselves , because3-. 0aid common fund !as not something they found already in existence . It %asnot a propert' inherited b' the" pro indiviso. The' created it purposely . ;hat is"ore the' !ointl' borro%ed a substantial portion thereof in order to establish saidco""on fund.1. The' invested the same, not merely in one transaction, *ut in a series oftransactions. On Februar' 1, -/), the' bouht a lot for P-22,222.22. On $pril ,-/)), the' purchased 1- lots for P-B,222.22. This %as soon follo%ed, on $pril1, -/)), b' the ac<uisition of another real estate for P-2B,B1*.22. Five +* da'slater +$pril 1B, -/)), the' ot a fourth lot for P1@,1).-). 3he num*er of lots

=)> ac4uired and transcations underta2en, as !ell as the *rief interregnum*et!een each, particularly the last three purchases, is strongly indicative of a pattern or common design that !as not limited to the conservation and preservation of the aforementioned common fund or even of the propertyac4uired *y petitioners in 1e*ruary, 5B)(. n other !ords, one cannot *ut

perceive a character of ha*ituality peculiar to *usiness transactions engaged infor purposes of gain.. 3he aforesaid lots !ere not devoted to residential purposes or to other

personal uses, of petitioners herein. The properties %ere leased separatel' toseveral persons, %ho, fro" -/)* to -/)B inclusive, paid the total su" ofP@2,20B.2 b' %a' of rentals. See"inl', the lots are still bein so let, forpetitioners do not even suest that there has been an' chane in the utili>ationthereof.). Since $uust, -/)*, the properties have *een under the management of one

person, na"el', Si"eon ?vanelists, %ith full po%er to lease, to collect rents, toissue receipts, to brin suits, to sin letters and contracts, and to indorse anddeposit notes and chec9s. 3hus, the affairs relative to said properties have *eenhandled as if the same *elonged to a corporation or *usiness enterpriseoperated for profit.*. 3he foregoing conditions have existed for more than ten =5C> years , or, to beeact, over fifteen +-* 'ears, since the first propert' %as ac<uired, and overt%elve +-1 'ears, since Si"eon ?vanelists beca"e the "anaer.0. Petitioners have not testified or introduced an' evidence, either on theirpurpose in creatin the set up alread' adverted to, or on the causes for itscontinued eistence. The' did not even tr' to offer an eplanation therefor.

$lthouh, ta9en sinl', the' "iht not suffice to establish the intent necessar' toconstitute a partnership, the collective effect of these circumstances is such as toleave no room for dou*t on the existence of said intent in petitioners herein. 7nly one or t!o of the aforementioned circumstances !ere present in the cases cited*y petitioners herein, and, hence, those cases are not in point . 5



sho!ing a contrary intention cannot *e considered a partnership.Persons %ho contribute propert' or funds for a co""on enterprise and aree toshare the ross returns of that enterprise in proportion to their contribution, but%ho severall' retain the title to their respective contribution, are not thereb'rendered partners. The' have no co""on stoc9 or capital, and no co""unit' of

interest as principal proprietors in the business itself %hich the proceeds derived.+?le"ents of the 6a% of Partnership b' Flord D. Meche" 1nd ?d., section B, p.@).

$ !oint purchase of land, b' t%o, does not constitute a coApartnership in respecttheretoH nor does an aree"ent to share the profits and losses on the sale of land create a partnershipH the parties are onl' tenants in co""on. +#lar9 vs.Side%a', -)1 8.S. 0B1,-1 #t. 1@, * 6. ?d., --*@.;here plaintiff, his brother, and another areed to beco"e o%ners of a sinletract of realt', holdin as tenants in co""on, and to divide the profits of disposin of it, the brother and the other not bein entitled to share in plaintiffsco""ission, no partnership eisted as bet%een the three parties, %hatever their

relation "a' have been as to third parties. +Maee vs. Maee -1 N.?. 0@, 1Mass. )-.n order to constitute a partnership inter sese there must *e9 =a> An intent to formthe same? =*> generally participating in *oth profits and losses? =c> and such acommunity of interest, as far as third persons are concerned as ena*les each

party to ma2e contract, manage the *usiness, and dispose of the !hole property.8Municipal Paving -o. vs. @erring 5C P. 5C%', C )'C.>The co""on o%nership of propert' does not itself create a partnership bet%eenthe o%ners, thouh the' "a' use it for the purpose of "a9in ainsH and the'"a', %ithout beco"in partners, aree a"on the"selves as to the"anae"ent, and use of such propert' and the application of the proceedstherefro". +Spurloc9 vs. ;ilson, -)1 S.;. 0,-02 No. $pp. -).

The sharin of returns does not in itself establish a partnership %hether or not thepersons sharin therein have a !oint or co""on riht or interest in the propert'.There "ust be a clear intent to for" a partnership, the eistence of a !uridicalpersonalit' different fro" the individual partners, and the freedo" of each part'to transfer or assin the %hole propert'.In the present case, there is clear evidence of coAo%nership bet%een thepetitioners. There is no ade<uate basis to support the proposition that the'thereb' for"ed an unreistered partnership. The t%o isolated transactions%hereb' the' purchased properties and sold the sa"e a fe% 'ears thereafter didnot thereb' "a9e the" partners. The' shared in the ross profits as coA o%nersand paid their capital ains taes on their net profits and availed of the taa"nest' thereb'. 8nder the circu"stances, the' cannot be considered to havefor"ed an unreistered partnership %hich is thereb' liable for corporate inco"eta, as the respondent co""issioner proposes.

$nd even assu"in for the sa9e of aru"ent that such unreistered partnershipappears to have been for"ed, since there is no such eistin unreisteredpartnership %ith a distinct personalit' nor %ith assets that can be held liable for said deficienc' corporate inco"e ta, then petitioners can be held individuall'



liable as partners for this unpaid obliation of the partnership p. 5o%ever, aspetitioners have availed of the benefits of ta a"nest' as individual tapa'ers inthese transactions, the' are thereb' relieved of an' further ta liabilit' arisintherefro".;5?R?FROM, the petition is hereb' 7R$NT?D and the decision of the

respondent #ourt of Ta $ppeals of March 2, -/B@ is hereb' R?V?RS?D andS?T $SID? and another decision is hereb' rendered relievin petitioners of thecorporate inco"e ta liabilit' in this case, %ithout pronounce"ent as to costs.SO ORD?R?D.

THIRD DIVISION

[G.R. No. 127105. June 25, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner , vs. S.C. JONSON AN!

SON, INC., "n# COURT OF A$$EALS, respondents.

! E C I S I O N

GON%AGA&RE'ES, J .(

This is a petition for review on certiorari under Rule 45 of the Rules of Courtseeking to set aside the deision of the Court of !ppeals dated Nove"#er $% &''( in C!)

*R S+ No, 4-.-/ affir"ing the deision of the Court of Ta0 !ppeals in CT! Case No,5&1(,

The anteedent fats as found #2 the Court of Ta0 !ppeals are not disputed% to wit3[Respondent], a domestic corporation organized and operating under the Philippine laws,

entered into a license agreement with SC Johnson and Son, United States of America

(USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the

[respondent] was granted the right to use the trademark, patents and technology owned by

the latter including the right to manufacture, package and distribute the products covered

by the Agreement and secure assistance in management, marketing and production from

SC Johnson and Son, U. S. A.The said License Agreement was duly registered with the Technology Transfer Board of

the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of

Registration No. 8064 (Exh. A).

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson

and Son, USA royalties based on a percentage of net sales and subjected the same to 25%

withholding tax on royalty payments which [respondent] paid for the period covering

July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. B to L and

submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division

(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing

that, the antecedent facts attending [respondents] case fall squarely within the samecircumstances under which said MacGeorge and Gillete rulings were issued. Since the

agreement was approved by the Technology Transfer Board, the preferential tax rate of

10% should apply to the [respondent]. We therefore submit that royalties paid by the

[respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax

pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13

Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]



(Petition for Review [filed with the Court of Appeals], par. 12). [Respondents] claim for

the refund of P963,266.00 was computed as follows:

*ross /5 &-Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

______ _______ __________ __________ ______July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190

September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877

March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122

May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266[if !supportFootnotes][1][endif]

======== ======== ======= =======

The Co""issioner did not at on said lai" for refund, +rivate respondent S,C,ohnson 6 Son% In, 7S,C, ohnson8 then filed a petition for review #efore the Court of

Ta0 !ppeals 7CT!8 where the ase was doketed as CT! Case No, 5&1(% to lai" a

refund of the overpaid withholding ta0 on ro2alt2 pa2"ents fro" ul2 &''/ to 9a2 &''1,On 9a2 $% &''(% the Court of Ta0 !ppeals rendered its deision in favor of S,C,

ohnson and ordered the Co""issioner of Internal Revenue to issue a ta0 redit

ertifiate in the a"ount of +'(1%/((,-- representing overpaid withholding ta0 on ro2alt2 pa2"ents #eginning ul2% &''/ to 9a2% &''1,:if ;support<ootnotes=:/=:endif=

The Co""issioner of Internal Revenue thus filed a petition for review with the

Court of !ppeals whih rendered the deision su#>et of this appeal on Nove"#er $%

&''( finding no "erit in the petition and affir"ing in toto the CT! ruling,:if ;support<ootnotes=:1=

:endif=

This petition for review was filed #2 the Co""issioner of Internal Revenue raising

the following issue3THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON,

USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON

ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE

RP-WEST GERMANY TAX TREATY.

+etitioner ontends that under !rtile &17/8 7#8 7iii8 of the R+)?S Ta0 Treat2% whih

is known as the "ost favored nation lause% the lowest rate of the +hilippine ta0 at &-

"a2 #e i"posed on ro2alties derived #2 a resident of the ?nited States fro" soureswithin the +hilippines onl2 if the iru"stanes of the resident of the ?nited States are

si"ilar to those of the resident of @est *er"an2, Sine the R+)?S Ta0 Treat2 ontains no

"athing redit provision as that provided under !rtile /4 of the R+)@est *er"an2 Ta0Treat2% the ta0 on ro2alties under the R+)?S Ta0 Treat2 is not paid under si"ilar

iru"stanes as those o#taining in the R+)@est *er"an2 Ta0 Treat2, Aven assu"ing



that the phrase paid under si"ilar iru"stanes refers to the pa2"ent of ro2alties% and

not ta0es% as held #2 the Court of !ppeals% still% the "ost favored nation lause annot #e

invoked for the reason that when a ta0 treat2 onte"plates iru"stanes attendant to the pa2"ent of a ta0% or ro2alt2 re"ittanes for that "atter% these "ust neessaril2 refer to

iru"stanes that are ta0)related, <inall2% petitioner argues that sine S,C, ohnsons

invoation of the "ost favored nation lause is in the nature of a lai" for e0e"ptionfro" the appliation of the regular ta0 rate of /5 for ro2alties% the provisions of the

treat2 "ust #e onstrued stritl2 against it,

In its Co""ent% private respondent S,C, ohnson avers that the instant petitionshould #e denied 7&8 #eause it ontains a defetive ertifiation against foru" shopping

as reBuired under SC Cirular No, /.)'&% that is% the ertifiation was not e0euted #2 the

petitioner herself #ut #2 her ounsel and 7/8 that the "ost favored nation lause under

the R+)?S Ta0 Treat2 refers to ro2alties paid under si"ilar iru"stanes as thosero2alties su#>et to ta0 in other treaties that the phrase paid under si"ilar iru"stanes

does not refer to pa2"ent of the ta0 #ut to the su#>et "atter of the ta0% that is% ro2alties%

#eause the "ost favored nation lause is intended to allow the ta0pa2er in one state to

avail of "ore li#eral provisions ontained in another ta0 treat2 wherein the ountr2 of residene of suh ta0pa2er is also a part2 thereto% su#>et to the #asi ondition that the

su#>et "atter of ta0ation in that other ta0 treat2 is the sa"e as that in the original ta0treat2 under whih the ta0pa2er is lia#le thus% the R+)?S Ta0 Treat2 speaks of ro2alties

of the sa"e kind paid under si"ilar iru"stanes, S,C, ohnson also ontends that the

Co""issioner is estopped fro" insisting on her interpretation that the phrase paid under si"ilar iru"stanes refers to the "anner in whih the ta0 is paid% for the reason that

said interpretation is e"#odied in Revenue 9e"orandu" Cirular 7R9C8 1')'/ whih

was alread2 a#andoned #2 the Co""issioners predeessor in &''1 and was e0pressl2

revoked in IR Ruling No, -5/)'5 whih stated that ro2alties paid to an !"erianliensor are su#>et onl2 to &- withholding ta0 pursuant to !rt &17/87#87iii8 of the R+)

?S Ta0 Treat2 in relation to the R+)@est *er"an2 Ta0 Treat2, Said ruling should #e

given retroative effet e0ept if suh is pre>udiial to the ta0pa2er pursuant to Setion/4( of the National Internal Revenue Code,

+etitioner filed Repl2 alleging that the fat that the ertifiation against foru"

shopping was signed #2 petitioners ounsel is not a fatal defet as to warrant thedis"issal of this petition sine Cirular No, /.)'& applies onl2 to original ations and not

to appeals% as in the instant ase, 9oreover% the reBuire"ent that the ertifiation should

#e signed #2 petitioner and not #2 ounsel does not appl2 to petitioner who has onl2 the

Offie of the Soliitor *eneral as statutor2 ounsel, +etitioner reiterates that even if the phrase paid under si"ilar iru"stanes e"#odied in the "ost favored nation lause of

the R+)?S Ta0 Treat2 refers to the pa2"ent of ro2alties and not ta0es% still the presene

or a#sene of a "athing redit provision in the said R+)?S Ta0 Treat2 would onstitutea "aterial iru"stane to suh pa2"ent and would #e deter"inative of the said lauses

appliation,

@e address first the o#>etion raised #2 private respondent that the ertifiationagainst foru" shopping was not e0euted #2 the petitioner herself #ut #2 her ounsel% the

Offie of the Soliitor *eneral 7O,S,*,8 through one of its Soliitors% !tt2, To"as 9,

Navarro,

SC Cirular No, /.)'& provides3



SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE

SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM

SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS

TO : xxx xxx xxx

The attention of the Court has been called to the filing of multiple petitions and

complaints involving the same issues in the Supreme Court, the Court of Appeals or othertribunals or agencies, with the result that said courts, tribunals or agencies have to resolve

the same issues.

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of

Appeals, the petitioner aside from complying with pertinent provisions of the Rules of

Court and existing circulars, must certify under oath to all of the following facts or

undertakings: (a) he has not theretofore commenced any other action or proceeding

involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal or

agency; xxx

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall

be a cause for the summary dismissal of the multiple petitions or complaints; xxx

The irular e0pressl2 reBuires that a ertifiate of non)foru" shopping should #e

attahed to petitions filed #efore this Court and the Court of !ppeals, +etitionersallegation that Cirular No, /.)'& applies onl2 to original ations and not to appeals as in

the instant ase is not supported #2 the te0t nor #2 the o#vious intent of the Cirular

whih is to prevent "ultiple petitions that will result in the sa"e issue #eing resolved #2different ourts,

!nent the reBuire"ent that the part2% not ounsel% "ust ertif2 under oath that he

has not o""ened an2 other ation involving the sa"e issues in this Court or the Court

of !ppeals or an2 other tri#unal or agen2% we are inlined to aept petitionerssu#"ission that sine the OS* is the onl2 law2er for the petitioner% whih is a

govern"ent agen2 "andated under Setion 15% Chapter &/% title III% ook IV of the &'.$

!d"inistrative Code:if ;support<ootnotes=:4=:endif= to #e represented onl2 #2 the Soliitor *eneral%the ertifiation e0euted #2 the OS* in this ase onstitutes su#stantial o"pliane with

Cirular No, /.)'&,

@ith respet to the "erits of this petition% the "ain point of ontention in thisappeal is the interpretation of !rtile &1 7/8 7#8 7iii8 of the R+)?S Ta0 Treat2 regarding

the rate of ta0 to #e i"posed #2 the +hilippines upon ro2alties reeived #2 a non)resident

foreign orporation, The provision states insofar as pertinent that)&8 Ro2alties derived #2 a resident of one of the Contrating States fro" soures within

the other Contrating State "a2 #e ta0ed #2 #oth Contrating States,

/8 However% the ta0 i"posed #2 that Contrating State shall not e0eed,a) In the case of the United States, 15 percent of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:(i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a

corporation registered with the Philippine Board of Investments and engaged in preferred

areas of activities; and

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind

paid under similar circumstances to a resident of a third State.



000 000 000(italics supplied)

Respondent S, C, ohnson and Son% In, lai"s that on the #asis of the Buoted provision% it is entitled to the onessional ta0 rate of &- perent on ro2alties #ased on

!rtile &/ 7/8 7#8 of the R+)*er"an2 Ta0 Treat2 whih provides3

7/8 However% suh ro2alties "a2 also #e ta0ed in the Contrating State in whih the2arise% and aording to the law of that State% #ut the ta0 so harged shall not e0eed3

0 0 0

#8 &- perent of the gross a"ount of ro2alties arising fro" the use of% or the right to use%

an2 patent% trade"ark% design or "odel% plan% seret for"ula or proess% or fro" the useof or the right to use% industrial% o""erial% or sientifi eBuip"ent% or for infor"ation

onerning industrial% o""erial or sientifi e0periene,For as long as the transfer of technology, under Philippine law, is subject to approval, the

limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the

Republic of the Philippines, only apply if the contract giving rise to such royalties has

been approved by the Philippine competent authorities.

?nlike the R+)?S Ta0 Treat2% the R+)*er"an2 Ta0 Treat2 allows a ta0 redit of /- perent of the gross a"ount of suh ro2alties against *er"an ino"e and orporation ta0

for the ta0es pa2a#le in the +hilippines on suh ro2alties where the ta0 rate is redued to

&- or &5 perent under suh treat2, !rtile /4 of the R+)*er"an2 Ta0 Treat2 states)&8 Ta0 shall #e deter"ined in the ase of a resident of the <ederal Repu#li of *er"an2

as follows3

0 0 0 0 0 0 0 0 0b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall

be allowed as a credit against German income and corporation tax payable in respect of

the following items of income arising in the Republic of the Philippines, the tax paid

under the laws of the Philippines in accordance with this Agreement on:

0 0 0 0 0 0 0 0 0dd) royalties, as defined in paragraph 3 of Article 12;

0 0 0 0 0 0 0 0 0c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be

deemed to be

0 0 0 0 0 0 0 0 0cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to

paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.

0 0 0 0 0 0 0 0 0!ording to petitioner% the ta0es upon ro2alties under the R+)?S Ta0 Treat2 are

not paid under iru"stanes si"ilar to those in the R+)@est *er"an2 Ta0 Treat2 sine

there is no provision for a /- perent "athing redit in the for"er onvention and private respondent annot invoke the onessional ta0 rate on the strength of the "ost

favored nation lause in the R+)?S Ta0 Treat2, +etitioners position is e0plained thus3Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax

paid on income from sources within the Philippines is allowed as a credit against German

income and corporation tax on the same income. In the case of royalties for which the tax

is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West

Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To



illustrate, the royalty income of a German resident from sources within the Philippines

arising from the use of, or the right to use, any patent, trade mark, design or model, plan,

secret formula or process, is taxed at 10% of the gross amount of said royalty under

certain conditions. The rate of 10% is imposed if credit against the German income and

corporation tax on said royalty is allowed in favor of the German resident. That means

the rate of 10% is granted to the German taxpayer if he is similarly granted a creditagainst the income and corporation tax of West Germany. The clear intent of the

matching credit is to soften the impact of double taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar matching credit as that provided under the

RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty

is not paid under similar circumstances as those obtaining in the RP-West Germany Tax

Treaty. Therefore, the most favored nation clause in the RP-West Germany Tax Treaty

cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. [if !supportFootnotes]

[5][endif]

The petition is "eritorious,

@e are una#le to sustain the position of the Court of Ta0 !ppeals% whih was

upheld #2 the Court of !ppeals% that the phrase paid under si"ilar iru"stanes in!rtile &1 7/8 7#8% 7iii8 of the R+)?S Ta0 Treat2 should #e interpreted to refer to pa2"ent

of ro2alt2% and not to the pa2"ent of the ta0% for the reason that the phrase paid under si"ilar iru"stanes is followed #2 the phrase to a resident of a third state, The

respondent ourt held that @ords are to #e understood in the onte0t in whih the2 are

used% and sine what is paid to a resident of a third state is not a ta0 #ut a ro2alt2 logi

instruts that the treat2 provision in Buestion should refer to ro2alties of the sa"e kind paid under si"ilar iru"stanes,

The a#ove onstrution is #ased prinipall2 on s2nta0 or sentene struture #ut fails

to take into aount the purpose ani"ating the treat2 provisions in point, To #egin with%we are not aware of an2 law or rule pertinent to the pa2"ent of ro2alties% and none has

#een #rought to our attention% whih provides for the pa2"ent of ro2alties under dissi"ilar iru"stanes, The ta0 rates on ro2alties and the iru"stanes of pa2"entthereof are the sa"e for all the reipients of suh ro2alties and there is no disparit2 #ased

on nationalit2 in the iru"stanes of suh pa2"ent,:if ;support<ootnotes=:(=:endif= On the other

hand% a ursor2 reading of the various ta0 treaties will show that there is no si"ilarit2 in

the provisions on relief fro" or avoidane of dou#le ta0ation :if ;support<ootnotes=:$=:endif= as this isa "atter of negotiation #etween the ontrating parties,:if ;support<ootnotes=:.=:endif= !s will #e

shown later% this dissi"ilarit2 is true partiularl2 in the treaties #etween the +hilippines

and the ?nited States and #etween the +hilippines and @est *er"an2,The R+)?S Ta0 Treat2 is >ust one of a nu"#er of #ilateral treaties whih the

+hilippines has entered into for the avoidane of dou#le ta0ation, :if ;support<ootnotes=:'=:endif= The

purpose of these international agree"ents is to reonile the national fisal legislations of the ontrating parties in order to help the ta0pa2er avoid si"ultaneous ta0ation in two

different >urisditions,:if ;support<ootnotes=:&-=:endif= 9ore preisel2% the ta0 onventions are drafted

with a view towards the eli"ination of )n*e+n"*)on" -u+)#)" #ou/e *""*)on% whih isdefined as the i"position of o"para#le ta0es in two or "ore states on the sa"e ta0pa2er

in respet of the sa"e su#>et "atter and for idential periods,:if ;support<ootnotes=:&&=:endif=% iting

the Co""ittee on <isal !ffairs of the OrganiEation for Aono"i Co)operation and

Develop"ent 7OACD8,&& The apparent rationale for doing awa2 with dou#le ta0ation is



to enourage the free flow of goods and servies and the "ove"ent of apital% tehnolog2

and persons #etween ountries% onditions dee"ed vital in reating ro#ust and d2na"i

eono"ies,:if ;support<ootnotes=:&/=:endif= <oreign invest"ents will onl2 thrive in a fairl2 predita#leand reasona#le international invest"ent li"ate and the protetion against dou#le

ta0ation is ruial in reating suh a li"ate,:if ;support<ootnotes=:&1=:endif=

Dou#le ta0ation usuall2 takes plae when a person is resident of a ontrating stateand derives ino"e fro"% or owns apital in% the other ontrating state and #oth states

i"pose ta0 on that ino"e or apital, In order to eli"inate dou#le ta0ation% a ta0 treat2

resorts to several "ethods, <irst% it sets out the respetive rights to ta0 of the state of soure or situs and of the state of residene with regard to ertain lasses of ino"e or

apital, In so"e ases% an e0lusive right to ta0 is onferred on one of the ontrating

states however% for other ite"s of ino"e or apital% #oth states are given the right to ta0%

although the a"ount of ta0 that "a2 #e i"posed #2 the state of soure is li"ited, :if ;

support<ootnotes=:&4=:endif=

The seond "ethod for the eli"ination of dou#le ta0ation applies whenever the

state of soure is given a full or li"ited right to ta0 together with the state of residene, In

this ase% the treaties "ake it inu"#ent upon the state of residene to allow relief inorder to avoid dou#le ta0ation, There are two "ethods of relief) the e0e"ption "ethod

and the redit "ethod, In the e0e"ption "ethod% the ino"e or apital whih is ta0a#le inthe state of soure or situs is e0e"pted in the state of residene% although in so"e

instanes it "a2 #e taken into aount in deter"ining the rate of ta0 applia#le to the

ta0pa2ers re"aining ino"e or apital, On the other hand% in the redit "ethod% althoughthe ino"e or apital whih is ta0ed in the state of soure is still ta0a#le in the state of

residene% the ta0 paid in the for"er is redited against the ta0 levied in the latter, The

#asi differene #etween the two "ethods is that in the e0e"ption "ethod% the fous is on

the ino"e or apital itself% whereas the redit "ethod fouses upon the ta0,:if ;support<ootnotes=

:&5=:endif=

In negotiating ta0 treaties% the underl2ing rationale for reduing the ta0 rate is that

the +hilippines will give up a part of the ta0 in the e0petation that the ta0 given up for this partiular invest"ent is not ta0ed #2 the other ountr2,:if ;support<ootnotes=:&(=:endif= Thus the

petitioner orretl2 opined that the phrase ro2alties paid under si"ilar iru"stanes in

the "ost favored nation lause of the ?S)R+ Ta0 Treat2 neessaril2 onte"platediru"stanes that are ta0)related,

In the ase at #ar% the state of soure is the +hilippines #eause the ro2alties are

paid for the right to use propert2 or rights% i,e, trade"arks% patents and tehnolog2%

loated within the +hilippines,:if ;support<ootnotes=:&$=:endif= The ?nited States is the state of residene sine the ta0pa2er% S, C, ohnson and Son% ?, S, !,% is #ased there, ?nder the

R+)?S Ta0 Treat2% the state of residene and the state of soure are #oth per"itted to ta0

the ro2alties% with a restraint on the ta0 that "a2 #e olleted #2 the state of soure, :if ;

support<ootnotes=:&.=:endif= <urther"ore% the "ethod e"plo2ed to give relief fro" dou#le ta0ation

is the allowane of a ta0 redit to itiEens or residents of the ?nited States 7in an

appropriate a"ount #ased upon the ta0es paid or arued to the +hilippines8 against the?nited States ta0% #ut suh a"ount shall not e0eed the li"itations provided #2 ?nited

States law for the ta0a#le 2ear,:if ;support<ootnotes=:&'=:endif= ?nder !rtile &1 thereof% the

+hilippines "a2 i"pose one of three rates) /5 perent of the gross a"ount of the

ro2alties &5 perent when the ro2alties are paid #2 a orporation registered with the



Vienna Convention on the Faw of Treaties states that a treat2 shall #e interpreted in good

faith in aordane with the ordinar2 "eaning to #e given to the ter"s of the treat2 in

their onte0t and in the light of its o#>et and purpose,:if ;support<ootnotes=://=:endif=

!s stated earlier% the ulti"ate reason for avoiding dou#le ta0ation is to enourage

foreign investors to invest in the +hilippines ) a ruial eono"i goal for developing

ountries,:if ;support<ootnotes=:/1=:endif=

The goal of dou#le ta0ation onventions would #e thwartedif suh treaties did not provide for effetive "easures to "ini"iEe% if not o"pletel2

eli"inate% the ta0 #urden laid upon the ino"e or apital of the investor, Thus% if the rates

of ta0 are lowered #2 the state of soure% in this ase% #2 the +hilippines% there should #e aono"itant o""it"ent on the part of the state of residene to grant so"e for" of ta0

relief% whether this #e in the for" of a ta0 redit or e0e"ption, :if ;support<ootnotes=:/4=:endif=

Otherwise% the ta0 whih ould have #een olleted #2 the +hilippine govern"ent will

si"pl2 #e olleted #2 another state% defeating the o#>et of the ta0 treat2 sine the ta0 #urden i"posed upon the investor would re"ain unrelieved, If the state of residene does

not grant so"e for" of ta0 relief to the investor% no #enefit would redound to the

+hilippines% i,e,% inreased invest"ent resulting fro" a favora#le ta0 regi"e% should it

i"pose a lower ta0 rate on the ro2alt2 earnings of the investor% and it would #e #etter toi"pose the regular rate rather than lose "uh)needed revenues to another ountr2,

!t the sa"e ti"e% the intention #ehind the adoption of the provision on relief fro"dou#le ta0ation in the two ta0 treaties in Buestion should #e onsidered in light of the

purpose #ehind the "ost favored nation lause,

The purpose of a "ost favored nation lause is to grant to the ontrating part2treat"ent not less favora#le than that whih has #een or "a2 #e granted to the "ost

favored a"ong other ountries,:if ;support<ootnotes=:/5=:endif= The "ost favored nation lause is

intended to esta#lish the priniple of eBualit2 of international treat"ent #2 providing that

the itiEens or su#>ets of the ontrating nations "a2 en>o2 the privileges aorded #2either part2 to those of the "ost favored nation,:if ;support<ootnotes=:/(=:endif= The essene of the

priniple is to allow the ta0pa2er in one state to avail of "ore li#eral provisions granted

in another ta0 treat2 to whih the ountr2 of residene of suh ta0pa2er is also a part2 provided that the su#>et "atter of ta0ation% in this ase ro2alt2 ino"e% is the sa"e as

that in the ta0 treat2 under whih the ta0pa2er is lia#le, oth !rtile &1 of the R+)?S Ta0

Treat2 and !rtile &/ 7/8 7#8 of the R+)@est *er"an2 Ta0 Treat2% a#ove)Buoted% speaksof ta0 on ro2alties for the use of trade"ark% patent% and tehnolog2, The entitle"ent of the

&- rate #2 ?,S, fir"s despite the a#sene of a "athing redit 7/- for ro2alties8

would derogate fro" the design #ehind the "ost favored nation lause to grant eBualit2

of international treat"ent sine the ta0 #urden laid upon the ino"e of the investor is notthe sa"e in the two ountries, The si"ilarit2 in the iru"stanes of pa2"ent of ta0es is a

ondition for the en>o2"ent of "ost favored nation treat"ent preisel2 to undersore the

need for eBualit2 of treat"ent,@e aordingl2 agree with petitioner that sine the R+)?S Ta0 Treat2 does not give

a "athing ta0 redit of /- perent for the ta0es paid to the +hilippines on ro2alties as

allowed under the R+)@est *er"an2 Ta0 Treat2% private respondent annot #e dee"edentitled to the &- perent rate granted under the latter treat2 for the reason that there is no

pa2"ent of ta0es on ro2alties under si"ilar iru"stanes,

It #ears stress that ta0 refunds are in the nature of ta0 e0e"ptions, !s suh the2 are

regarded as in derogation of sovereign authorit2 and to #e onstrued strictissimi juris



against the person or entit2 lai"ing the e0e"ption, :if ;support<ootnotes=:/$=:endif= The #urden of

proof is upon hi" who lai"s the e0e"ption in his favor and he "ust #e a#le to >ustif2

his lai" #2 the learest grant of organi or statute law, :if ;support<ootnotes=:/.=:endif= +rivaterespondent is lai"ing for a refund of the alleged overpa2"ent of ta0 on ro2alties

however% there is nothing on reord to support a lai" that the ta0 on ro2alties under the

R+)?S Ta0 Treat2 is paid under si"ilar iru"stanes as the ta0 on ro2alties under theR+)@est *er"an2 Ta0 Treat2,

EREFORE% for all the foregoing% the instant petition is *R!NTAD, The deision

dated 9a2 $% &''( of the Court of Ta0 !ppeals and the deision dated Nove"#er $% &''(of the Court of !ppeals are here#2 SAT !SIDA,

SO OR!ERE!.


Manila?N :$N#

G.R. Nos. L-+40+0-+1 July +9, 19/FLORENCIO RE"ES &'( ANGEL RE"ES, petitioners,vs.COMMISSIONER OF INTERNAL RE*ENUE &'( HON. COURT OF TA3APPEALS, respondents.+ose ;. <io2no and <omingo 0andoval for petitioners.7ffice of the 0olicitor"eneral for respondents.FERNAN$O, J.:Petitioners in this case %ere assessed b' respondent #o""issioner of InternalRevenue the su" of P)0,0)@.22 as inco"e ta, surchare and co"pro"ise forthe 'ears -/*- to -/*), an assess"ent subse<uentl' reduced to P@,*1B.22.This assess"ent souht to be reconsidered unsuccessfull' %as the sub!ect of anappeal to respondent #ourt of Ta $ppeals. Thereafter, another assess"ent %as"ade aainst petitioners, this ti"e for bac9 inco"e taes plus surchare andco"pro"ise in the total su" of P1*,/@.@*, coverin the 'ears -/** and -/*0.There bein a failure on their part to have such assess"ents reconsidered, the"atter %as li9e%ise ta9en to the respondent #ourt of Ta $ppeals. The t%ocases- involvin as the' did identical issues and ulti"atel' traceable to factssi"ilar in character %ere heard !ointl' %ith onl' one decision bein rendered.In that !oint decision of respondent #ourt of Ta $ppeals, the ta liabilit' for the'ears -/*- to -/*) %as reduced to P@,-1B.22 and for the 'ears -/** and-/*0, to P12,0-/.22 as inco"e ta due (fro" the partnership for"ed( b'petitioners.1 The reduction %as due to the eli"ination of surchare, the failure tofile the inco"e ta return bein accepted as due to petitioners honest belief thatno such liabilit' %as incurred as %ell as the co"pro"ise penalties for such failureto file. $ reconsideration of the aforesaid decision %as souht and denied b'respondent #ourt of Ta $ppeals. 5ence this petition for revie%.The facts as found b' respondent #ourt of Ta $ppeals, %hich bein supportedb' substantial evidence, "ust be respected) follo%3 (On October -, -/*2,petitioners, father and son, purchased a lot and buildin, 9no%n as the 7ibbs



:uildin, situated at 0@- Das"ariCas Street, Manila, for PB*,222.22, of %hichthe' paid the su" of P@*,222.22, leavin a balance of P)02,222.22,representin the "ortae obliation of the vendors %ith the #hina :an9in#orporation, %hich "ortae obliations %ere assu"ed b' the vendees. Theinitial pa'"ent of P@*,222.22 %as shared e<uall' b' petitioners. $t the ti"e of

the purchase, the buildin %as leased to various tenants, %hose rihts under thelease contracts %ith the oriinal o%ners, the purchasers, petitioners herein,areed to respect. The ad"inistration of the buildin %as entrusted to anad"inistrator %ho collected the rentsH 9ept its boo9s and records and renderedstate"ents of accounts to the o%nersH neotiated leasesH "ade necessar'repairs and disbursed pa'"ents, %henever necessar', after approval b' theo%nersH and perfor"ed such other functions necessar' for the conservation andpreservation of the buildin. Petitioners divided e<uall' the inco"e of operationand "aintenance. The ross inco"e fro" rentals of the buildin a"ounted toabout P/2,222.22 annuall'.(*

Fro" the above facts, the respondent #ourt of Ta $ppeals appl'in the

appropriate provisions of the National Internal Revenue #ode, the first of %hichi"poses an inco"e ta on corporations (orani>ed in, or eistin under the la%sof the Philippines, no "atter ho% created or orani>ed but not includin dul'reistered eneral coApartnerships +co"panias colectivas, ...,(0 a ter", %hichaccordin to the second provision cited, includes partnerships (no "atter ho%created or orani>ed, ...,(@ and appl'in the leadin case of :vangelista v.-ollector of nternal #evenue,B sustained the action of respondent #o""issioner of Internal Revenue, but reduced the ta liabilit' of petitioners, as previousl'noted.Petitioners "aintain the vie% that the ?vanelista rulin does not appl'H for the",the situation is dissi"ilar.5D!phE5.ñFt #onse<uentl' the' allee that the relianceb' respondent #ourt of Ta $ppeals %as un%arranted and the decision should beset aside. If their interpretation of the authoritative doctrine therein set forthco""ands assent, then clearl' %hat respondent #ourt of Ta $ppeals did fails tofind shelter in the la%. That is the cru of the "atter. $ perusal of the ?vanelistadecision is therefore unavoidable.

$s noted in the opinion of the #ourt, penned b' the present #hief 4ustice, theissue %as %hether petitioners are sub!ect to the ta on corporations provided forin section 1) of #o""on%ealth $ct No. )00, other%ise 9no%n as the NationalInternal Revenue #ode, ...(/ $fter referrin to another section of the NationalInternal Revenue #ode, %hich eplicitl' provides that the ter" corporation(includes partnerships( and then to $rticle -@0@ of the #ivil #ode of thePhilippines, definin %hat a contract of partnership is, the opinion oes on tostate that (the essential ele"ents of a partnership are t%o, na"el'3 +a anaree"ent to contribute "one', propert' or industr' to a co""on fundH and +bintent to divide the profits a"on the contractin parties. The first ele"ent isundoubtedl' present in the case at bar, for, ad"ittedl', petitioners have areed toand did, contribute "one' and propert' to a co""on fund. 5ence, the issuenarro%s do%n to their intent in actin as the' did. 8pon consideration of all thefacts and circu"stances surroundin the case, %e are full' satisfied that their



purpose %as to enae in real estate transactions for "onetar' ain and thendivide the sa"e a"on the"selves, ...(-2

In support of the above conclusion, reference %as "ade to the follo%incircu"stances, na"el', the co""on fund bein created purposel' not so"ethinalread' found in eistence, the invest"ent of the sa"e not "erel' in one

transaction but in a series of transactionsH the lots thus ac<uired not beindevoted to residential purposes or to other personal uses of petitioners in thatcaseH such properties havin been under the "anae"ent of one person %ith fullpo%er to lease, to collect rents, to issue receipts, to brin suits, to sin letters andcontracts and to endorse notes and chec9sH the above conditions havin eistedfor "ore than -2 'ears since the ac<uisition of the above propertiesH and notesti"on' havin been introduced as to the purpose (in creatin the set upalread' adverted to, or on the causes for its continued eistence.( -- Theconclusion that e"ered had all the i"print of inevitabilit'. Thus3 ($lthouh, ta9ensinl', the' "iht not suffice to establish the intent necessar' to constitute apartnership, the collective effect of these circu"stances is such as to leave no

roo" for doubt on the eistence of said intent in petitioners herein.(

-1

It "a' be said that there could be a differentiation "ade bet%een thecircu"stances above detailed and those eistin in the present case. It does notsuffice thouh to preclude the applicabilit' of the ?vanelista decision.Petitioners could harp on these bein onl' one transaction. The' could stressthat an affidavit of one of the" found in the :ureau of Internal Revenue records%ould indicate that their intention %as to house in the buildin ac<uired b' the"the respective enterprises, coupled %ith a plan of effectin a division in -2 'ears.It is a little surprisin then that %hile the purchase %as "ade on October -,-/*2 and their brief as petitioners filed on October 12, -/0*, al"ost -* 'earslater, there %as no alleation that such division as bet%een the" %as in fact"ade. Moreover, the facts as found and as sub"itted in the brief "ade clear thatthe buildin in <uestion continued to be leased b' other parties %ith petitionersdividin (e<uall' the inco"e ... after deductin the epenses of operation and"aintenance ...(- Differences of such sliht sinificance do not call for a differentrulin.It is obvious that petitioners effort to avoid the controllin force of the ?vanelistarulin cannot be dee"ed successful. Respondent #ourt of Ta $ppeals actedcorrectl'. It 'ielded to the co""and of an authoritative decisionH it reconi>ed itsbindin character. There is clearl' no "erit to the second error assined b'petitioners, %ho %ould den' its applicabilit' to their situation.The first alleed error co""itted b' respondent #ourt of Ta $ppeals in holdinthat petitioners, in ac<uirin the 7ibbs :uildin, established a partnership sub!ectto inco"e ta as a corporation under the National Internal Revenue #ode isli9e%ise untenable. In their discussion in their brief of this alleed error, stress islaid on their bein coAo%ners and not partners. Such an alleation %as li9e%ise"ade in the ?vanelista case.This is the %a' it %as disposed of in the opinion of the present #hief 4ustice3(This pretense %as correctl' re!ected b' the #ourt of Ta $ppeals.(-) Then ca"ethe eplanation %h'3 (To bein %ith, the ta in <uestion is one i"posed upon



(corporations(, %hich, strictl' spea9in, are distinct and different fro"(partnerships(. ;hen our Internal Revenue #ode includes (partnerships( a"onthe entities sub!ect to the ta on (corporations(, said #ode "ust allude, therefore,to orani>ations %hich are not necessarily (partnerships(, in the technical senseof the ter". Thus, for instance, section 1) of said #ode exempts fro" the

afore"entioned ta (dul' reistered eneral partnerships(, %hich constituteprecisel' one of the "ost t'pical for"s of partnerships in this !urisdiction.6i9e%ise, as defined in section B)+b of said #ode, (the ter" corporation includespartnerships, no matter ho! created or organized.( This <ualif'in epressionclearl' indicates that a !oint venture need not be underta9en in an' of thestandard for"s, or in confor"it' %ith the usual re<uire"ents of the la% onpartnerships, in order that one could be dee"ed constituted for purposes of theta on corporations. $ain, pursuant to said section B)+b, the ter" (corporation(includes, a"on others, (!oint accounts, +cuentas en participacion( and(associations(, none of !hich has a legal personality of its o!n, independent ofthat of its mem*ers. $ccordinl', the la%"a9er could not have rearded that

personalit' as a condition essential to the eistence of the partnerships thereinreferred to. In fact, as above stated, (dul' reistered eneral copartnerships( K%hich are possessed of the afore"entioned personalit' A have been epressl'ecluded b' la% +sections 1) and B)b fro" the connotation of the ter"(corporation(.(-* The opinion %ent on to su""ari>e the "atter aptl'3 (Forpurposes of the ta on corporations, our $ational nternal #evenue -ode,include these partnerships K %ith the eception onl' of dul' reistered eneralcoApartnerships %ithin the purvie% of the ter" (corporation.( It is, therefore, clearto our "ind that petitioners herein constitute a partnership, insofar as said #odeis concerned, and are sub!ect to the inco"e ta for corporations.( -0

In the liht of the above, it cannot be said that the respondent #ourt of Ta $ppeals decided the "atter incorrectl'. There is no %arrant for the assertion thatit failed to appl' the settled la% to uncontroverted facts. Its decision cannot besuccessfull' assailed. Moreover, an observation "ade in Alham*ra -igar &-igarette Manufacturing -o. v. -ommissioner of nternal #evenue,-@ is %ellA%orthrecallin. Thus3 (Nor as a "atter of principle is it advisable for this #ourt to setaside the conclusion reached b' an aenc' such as the #ourt of Ta $ppeals%hich is, b' the ver' nature of its functions, dedicated eclusivel' to the stud'and consideration of ta proble"s and has necessaril' developed an epertiseon the sub!ect, unless, as did not happen here, there has been an abuse ori"provident eercise of its authorit'.(;5?R?FOR?, the decision of the respondent #ourt of Ta $ppeals orderinpetitioners (to pa' the su"s of P@,-1B.22 as inco"e ta due fro" thepartnership for"ed b' herein petitioners for the 'ears -/*- to -/*) andP12,0-/.22 for the 'ears -/** and -/*0 %ithin thirt' da's fro" the date thisdecision beco"es final, plus the correspondin surchare and interest in case ofdelin<uenc',( is affir"ed. ;ith costs aainst petitioners.




Manila?N :$N#7.R. No. 6A///0 October -*, -/*@?8F?MI$ ?V$N7?6IST$, M$N8?6$ ?V$N7?6IST$, and FR$N#IS#$?V$N7?6IST$, petitioners,

vs.THE COLLECTOR OF INTERNAL RE*ENUE &'( THE COURT OF TA3APPEALS, respondents.0antiago 1. Alidio and Angel 0. <a2ila, +r., for petitioner.7ffice of the 0olicitor"eneral Am*rosio Padilla, Assistant 0olicitor "eneral :smeraldo Gmali and0olicitor 1elicisimo #. #osete for #espondents.CONCEPCION, J .?This is a petition filed b' ?ufe"ia ?vanelista, Manuela ?vanelista andFrancisca ?vanelista, for revie% of a decision of the #ourt of Ta $ppeals, thedispositive part of %hich reads3FOR $66 T5? FOR?7OIN7, %e hold that the petitioners are liable for the

inco"e ta, real estate dealers ta and the residence ta for the 'ears -/)* to-/)/, inclusive, in accordance %ith the respondents assess"ent for the sa"e inthe total a"ount of P0,B@B.), %hich is hereb' affir"ed and the petition forrevie% filed b' petitioner is hereb' dis"issed %ith costs aainst petitioners.It appears fro" the stipulation sub"itted b' the parties3-. That the petitioners borro%ed fro" their father the su" of P*/,-)22.22 %hicha"ount toether %ith their personal "onies %as used b' the" for the purpose ofbu'in real properties,.1. That on Februar' 1, -/), the' bouht fro" Mrs. 4osefina Florentino a lot %ithan area of ,@-.)2 s<. ". includin i"prove"ents thereon fro" the su" ofP-22,222.22H this propert' has an assessed value of P*@,*[email protected] as of -/)BH. That on $pril , -/)) the' purchased fro" Mrs. 4osefa Oppus 1- parcels ofland %ith an areate area of ,@-B.)2 s<. ". includin i"prove"ents thereonfor P-2,222.22H this propert' has an assessed value of PB1,1**.22 as of -/)BH). That on $pril 1B, -/)) the' purchased fro" the Insular Invest"ents Inc., a lotof ),* s<. ". includin i"prove"ents thereon for P-2B,B1*.22. This propert'has an assessed value of P),/B.22 as of -/)BH*. That on $pril 1B, -/)) the' bouht for" Mrs. Valentina $fable a lot of B,@- s<.". includin i"prove"ents thereon for P1@,1).). This propert' has anassessed value of P*/,-)2.22 as of -/)BH0. That in a docu"ent dated $uust -0, -/)*, the' appointed their brotherSi"eon ?vanelista to "anae their properties %ith full po%er to leaseH to collectand receive rentsH to issue receipts thereforH in default of such pa'"ent, to brinsuits aainst the defaultin tenantsH to sin all letters, contracts, etc., for and intheir behalf, and to endorse and deposit all notes and chec9s for the"H@. That after havin bouht the aboveA"entioned real properties the petitionershad the sa"e rented or leases to various tenantsHB. That fro" the "onth of March, -/)* up to an includin Dece"ber, -/)*, thetotal a"ount collected as rents on their real properties %as P/,*//.22 %hile theepenses a"ounted to P,0*2.22 thereb' leavin the" a net rental inco"e of



P*,/)B.H/. That on -/)0, the' reali>ed a ross rental inco"e of in the su" of P1),@B0.2,out of %hich a"ount %as deducted in the su" of P-0,1BB.1@ for epensesthereb' leavin the" a net rental inco"e of P@,)/B.-H-2. That in -/)B, the' reali>ed a ross rental inco"e of P-@,)*.22 out of the

%hich a"ount %as deducted the su" of P),[email protected]* as epenses, thereb' leavinthe" a net rental inco"e of P-1,0-*.*.It further appears that on Septe"ber 1), -/*) respondent #ollector of InternalRevenue de"anded the pa'"ent of inco"e ta on corporations, real estatedealers fied ta and corporation residence ta for the 'ears -/)*A-/)/,co"puted, accordin to assess"ent "ade b' said officer, as follo%s3

IN#OM? T$J?S

-/)* -).B)

-/)0 -,-)).@-

-/)@ -2.)

-/)B -,/-1.2

-/)/ -,*@*./2

Total includin surchare and co"pro"ise P0,-*@.2/

R?$6 ?ST$T? D?$6?RS FIJ?D T$J

-/)0 P@.*2

-/)@ -*2.22

-/)B -*2.22

-/)/ -*2.22

Total includin penalt' P*[email protected]

R?SID?N#? T$J?S OF #ORPOR$TION

-/)* PB.@*

-/)0 B.@*

-/)@ B.@*



-/)B B.@*

-/)/ B.@*

Total includin surchare P-/.@*

TOT$6 T$J?S D8? P0,B@B.).

Said letter of de"and and correspondin assess"ents %ere delivered topetitioners on Dece"ber , -/*), %hereupon the' instituted the present case inthe #ourt of Ta $ppeals, %ith a pra'er that (the decision of the respondentcontained in his letter of de"and dated Septe"ber 1), -/*)( be reversed, andthat the' be absolved fro" the pa'"ent of the taes in <uestion, %ith costsaainst the respondent.

$fter appropriate proceedins, the #ourt of Ta $ppeals the aboveA"entioneddecision for the respondent, and a petition for reconsideration and ne% trial

havin been subse<uentl' denied, the case is no% before 8s for revie% at theinstance of the petitioners.The issue in this case %hether petitioners are sub!ect to the ta on corporationsprovided for in section 1) of #o""on%ealth $ct. No. )00, other%ise 9no%n asthe National Internal Revenue #ode, as %ell as to the residence ta forcorporations and the real estate dealers fied ta. ;ith respect to the ta oncorporations, the issue hines on the "eanin of the ter"s (corporation( and(partnership,( as used in section 1) and B) of said #ode, the pertinent parts of%hich read3S?#. 1). #ate of tax on corporations.KThere shall be levied, assessed,collected, and paid annuall' upon the total net inco"e received in the precedin

taable 'ear fro" all sources b' ever' corporation orani>ed in, or eistin under the la%s of the Philippines, no "atter ho% created or orani>ed but not includindul' reistered eneral coApartnerships +compañias colectivas, a ta upon suchinco"e e<ual to the su" of the follo%in3 . . .S?#. B) +b. The ter" corporation includes partnerships, no "atter ho% createdor orani>ed, !ointAstoc9 co"panies, !oint accounts +cuentas en participacion,associations or insurance co"panies, but does not include dul' reisteredeneral copartnerships. +compañias colectivas.

$rticle -@0@ of the #ivil #ode of the Philippines provides3:' the contract of partnership t%o or "ore persons bind the"selves to contribute"one', properl', or industr' to a co""on fund, %ith the intention of dividin theprofits a"on the"selves.Pursuant to the article, the essential ele"ents of a partnership are t%o, na"el'3+a an aree"ent to contribute "one', propert' or industr' to a co""on fundHand +b intent to divide the profits a"on the contractin parties. The firstele"ent is undoubtedl' present in the case at bar, for, ad"ittedl', petitionershave areed to, and did, contribute "one' and propert' to a co""on fund.5ence, the issue narro%s do%n to their intent in actin as the' did. 8ponconsideration of all the facts and circu"stances surroundin the case, %e are



full' satisfied that their purpose %as to enae in real estate transactions for"onetar' ain and then divide the sa"e a"on the"selves, because3-. Said co""on fund %as not so"ethin the' found alread' in eistence. It %asnot propert' inherited b' the" pro indiviso. The' created it purposel'. ;hat is"ore the' /ointly *orro!ed a substantial portion thereof in order to establish said

co""on fund.1. The' invested the sa"e, not "erel' not "erel' in one transaction, but in aseries of transactions. On Februar' 1, -/), the' bouht a lot for P-22,222.22.On $pril , -/)), the' purchased 1- lots for P-B,222.22. This %as soon follo%edon $pril 1, -/)), b' the ac<uisition of another real estate for P-2B,B1*.22. Five+* da's later +$pril 1B, -/)), the' ot a fourth lot for P1@,1).-). The nu"berof lots +1) ac<uired and transactions underta9en, as %ell as the briefinterrenu" bet%een each, particularl' the last three purchases, is stronl'indicative of a pattern or co""on desin that %as not li"ited to the conservationand preservation of the afore"entioned co""on fund or even of the propert'ac<uired b' the petitioners in Februar', -/). In other %ords, one cannot but

perceive a character of habituall' peculiar to business transactions enaed inthe purpose of ain.. The aforesaid lots %ere not devoted to residential purposes, or to otherpersonal uses, of petitioners herein. The properties %ere leased separatel' toseveral persons, %ho, fro" -/)* to -/)B inclusive, paid the total su" ofP@2,20B.2 b' %a' of rentals. See"inl', the lots are still bein so let, forpetitioners do not even suest that there has been an' chane in the utili>ationthereof.). Since $uust, -/)*, the properties have been under the "anae"ent of oneperson, na"el' Si"eon ?vanelista, %ith full po%er to lease, to collect rents, toissue receipts, to brin suits, to sin letters and contracts, and to indorse anddeposit notes and chec9s. Thus, the affairs relative to said properties have beenhandled as if the sa"e beloned to a corporation or business and enterpriseoperated for profit.*. The foreoin conditions have eisted for "ore than ten +-2 'ears, or, to beeact, over fifteen +-* 'ears, since the first propert' %as ac<uired, and overt%elve +-1 'ears, since Si"eon ?vanelista beca"e the "anaer.0. Petitioners have not testified or introduced an' evidence, either on theirpurpose in creatin the set up alread' adverted to, or on the causes for itscontinued eistence. The' did not even tr' to offer an eplanation therefor.

$lthouh, ta9en sinl', the' "iht not suffice to establish the intent necessar' toconstitute a partnership, the collective effect of these circu"stances is such as toleave no roo" for doubt on the eistence of said intent in petitioners herein. Onl'one or t%o of the afore"entioned circu"stances %ere present in the cases citedb' petitioners herein, and, hence, those cases are not in point.Petitioners insist, ho%ever, that the' are "ere coAo%ners, not copartners, for, inconse<uence of the acts perfor"ed b' the", a leal entit', %ith a personalit'independent of that of its "e"bers, did not co"e into eistence, and so"e of thecharacteristics of partnerships are lac9in in the case at bar. This pretense %ascorrectl' re!ected b' the #ourt of Ta $ppeals.



To bein %ith, the ta in <uestion is one i"posed upon (corporations(, %hich,strictl' spea9in, are distinct and different fro" (partnerships(. ;hen our InternalRevenue #ode includes (partnerships( a"on the entities sub!ect to the ta on(corporations(, said #ode "ust allude, therefore, to orani>ations %hich are notnecessaril' (partnerships(, in the technical sense of the ter". Thus, for instance,

section 1) of said #ode ee"pts fro" the afore"entioned ta (dul' reisteredeneral partnerships %hich constitute precisel' one of the "ost t'pical for"s ofpartnerships in this !urisdiction. 6i9e%ise, as defined in section B)+b of said#ode, (the ter" corporation includes partnerships, no matter ho! created ororganized .( This <ualif'in epression clearl' indicates that a !oint venture neednot be underta9en in an' of the standard for"s, or in confor"it' %ith the usualre<uire"ents of the la% on partnerships, in order that one could be dee"edconstituted for purposes of the ta on corporations. $ain, pursuant to saidsection B)+b, the ter" (corporation( includes, a"on other, !oint accounts,+cuentas en participation( and (associations,( none of !hich has a legal

personality of its o!n, independent of that of its mem*ers. $ccordinl', the

la%"a9er could not have rearded that personalit' as a condition essential to theeistence of the partnerships therein referred to. In fact, as above stated, (dul'reistered eneral copartnerships( K !hich are possessed of theaforementioned personality K have been epressl' ecluded b' la% +sections 1)and B) b fro" the connotation of the ter" (corporation( It "a' not be a"iss toadd that petitioners alleation to the effect that their liabilit' in connection %iththe leasin of the lots above referred to, under the "anae"ent of one person Keven if true, on %hich %e epress no opinion K tends to increase the si"ilarit'bet%een the nature of their venture and that corporations, and is, therefore, anadditional aru"ent in favor of the i"position of said ta on corporations.8nder the Internal Revenue 6a%s of the 8nited States, (corporations( are taeddifferentl' fro" (partnerships(. :' specific provisions of said la%s, such(corporations( include (associations, !ointAstoc9 co"panies and insuranceco"panies.( 5o%ever, the ter" (association( is not used in the afore"entionedla%s.. . . in an' narro% or technical sense. It includes an' orani>ation, created for thetransaction of desined affairs, or the attain"ent of so"e ob!ect, %hich li9e acorporation, continues not%ithstandin that its "e"bers or participants chane,and the affairs of %hich, li9e corporate affairs, are conducted b' a sinleindividual, a co""ittee, a board, or so"e other roup, actin in a representativecapacit'. It is i""aterial %hether such orani>ation is created b' an aree"ent,a declaration of trust, a statute, or other%ise. It includes a voluntar' association,a !ointAstoc9 corporation or co"pan', a business trusts a Massachusetts trust, aco""on la% trust, and invest"ent trust +%hether of the fied or the"anae"ent t'pe, an interinsuarance echane operatin throuh an attorne'in fact, a partnership association, and an' other t'pe of orani>ation +b'%hatever na"e 9no%n %hich is not, %ithin the "eanin of the #ode, a trust oran estate, or a partnership. +@$ Mertens 6a% of Federal Inco"e Taation, p. @BBHe"phasis supplied..Si"ilarl', the $"erican 6a%.



. . . provides its o!n concept of a partnership, under the ter" partnership itincludes not onl' a partnership as 9no%n at co""on la% but, as %ell, as'ndicate, roup, pool, /oint venture or other unincorporated organizations !hichcarries on any *usiness financial operation, or venture , and %hich is not, %ithinthe "eanin of the #ode, a trust, estate, or a corporation. . . +@$ Mertens 6a% of

Federal Inco"e taation, p. @B/H e"phasis supplied.The ter" partnership includes a s'ndicate, roup, pool, /oint venture or otherunincorporated organization, through or *y means of !hich any *usiness,financial operation, or venture is carried on , . . .. + B Mertens 6a% of FederalInco"e Taation, p. *01 Note 0H e"phasis supplied. .For purposes of the ta on corporations, our $ational nternal #evenue -ode,includes these partnerships K %ith the eception onl' of dul' reistered eneralcopartnerships K !ithin the purvie! of the term Hcorporation.H It is, therefore,clear to our "ind that petitioners herein constitute a partnership, insofar as said#ode is concerned and are sub!ect to the inco"e ta for corporations.

$s reards the residence of ta for corporations, section 1 of #o""on%ealth $ct

No. )0* provides in part3?ntities liable to residence ta.A?ver' corporation, no "atter ho% created ororani>ed, %hether do"estic or resident forein, enaed in or doin business inthe Philippines shall pa' an annual residence ta of five pesos and an annualadditional ta %hich in no case, shall eceed one thousand pesos, in accordance%ith the follo%in schedule3 . . .The ter" corporation as used in this $ct includes !ointAstoc9 co"pan',

partnership, !oint account +cuentas en participacion, association or insuranceco"pan', no matter ho! created or organized . +e"phasis supplied.#onsiderin that the pertinent part of this provision is analoous to that of section1) and B) +b of our National Internal Revenue #ode +co""on%ealth $ct No.)00, and that the latter %as approved on 4une -*, -//, the da' i""ediatel'after the approval of said #o""on%ealth $ct No. )0* +4une -), -//, it isapparent that the ter"s (corporation( and (partnership( are used in both statutes%ith substantiall' the sa"e "eanin. #onse<uentl', petitioners are sub!ect, also,to the residence ta for corporations.6astl', the records sho% that petitioners have habituall' enaed in leasin theproperties above "entioned for a period of over t%elve 'ears, and that the 'earl'ross rentals of said properties fro" 4une -/)* to -/)B raned fro" P/,*// toP-@,)*. Thus, the' are sub!ect to the ta provided in section -/ +< of ourNational Internal Revenue #ode, for (real estate dealers,( inas"uch as, pursuantto section -/) +s thereof3Real estate dealer includes an' person enaed in the business of bu'in,sellin, echanin, leasing, or renting property or his o!n account as principal and holdin hi"self out as a full or part ti"e dealer in real estate or as an o%nerof rental propert' or properties rented or offered to rent for an areate a"ountof three thousand pesos or "ore a 'ear. . . +e"phasis supplied.;herefore, the appealed decision of the #ourt of Ta appeals is hereb' affir"ed%ith costs aainst the petitioners herein. It is so ordered.




Manila?N :$N#G.R. No. L-+/0 July 0, 190

COMMISSIONER OF INTERNAL RE*ENUE petitioner,vs.RO"AL INTEROCEAN LINES &'( THE COURT OF TA3 APPEALS,respondents.7ffice of the 0olicitor "eneral Antonio P. arredo, Assistant 0olicitor "eneral1elicisimo #. #osette and 0pecial8Attorneys -esar . Iierulf :pifanio "."onzales and 0onia 0. 0oriano for petitioner.#oss, 0alcedo, <el #osario, ito & Misa for respondent #oyal nteroceanines. . CONCEPCION, C.J.:

$ppeal b' the #o""issioner of Internal Revenue fro" a decision of the #ourt ofTa $ppeals reversin that of said official, in connection %ith the liabilit' of theRo'al Interocean 6ines, Inc., for deficienc' carriers percentae ta, plussurchare.Said Ro'al Interocean 6iner, Inc. K hereinafter referred to as the tapa'er K is aforein corporation dul' licensed to do business in the Philippines, %ith headoffice in $"sterda", 5olland. The tapa'er is enaed in the operation of oceanAoin vessels, pl'in bet%een the Philippines and other countries, transportinpasseners and caro. It is, li9e%ise, an aent and representative of the 5olland?ast $sia 6ines, a Dutch shippin co"pan', fro" %hich the tapa'er receiveco"pensation in the for" of co""issions for services rendered. It is not disputedthat fro" Februar' to Ma', -/01, inclusive, vessels of the tapa'er andor the5olland ?ast $sia 6ines called at Philippine ports to load caro, %ith freiht,pa'able at destination, valued at 8S @,*2-.*2. This su" had been collected b'and paid to the tapa'ers head office in 5olland, and %as not actuall' turnedover or for%arded, as such freiht fees, to the tapa'er in the Philippines. Theonl' re"ittances received b' the latter fro" its afore"entioned head office %erethose "ade, throuh its aent ban9, for the operational epenses of the branchoffice in the Philippines.Prior to 4anuar', -/01, its dollar earnins derived fro" freiht revenues %ereconverted into the Philippine peso e<uivalent thereof, under the prevailin free"ar9et rate, for purposes of the co""on carriers ta prescribed in Section -/1of the National Internal Revenue #ode. Thereafter, the tapa'er discontinued thispractice and, since Februar', -/01, it reported said revenues, in its "onthl'returns for carriers ta, based on the parit' rate of P1 to -, and paid P-,*22.22as such carriers ta. 8pon ea"ination of the records of the tapa'er, the#o""issioner of Internal Revenue, hereinafter referred to as the petitioner, heldthat, appl'in the free "ar9et converse on rate, the tapa'ers ross receiptsfro" Februar' to Ma', -/01, areated P-0,@@0.B, and, based thereonde"anded pa'"ent of P1,1-/,* as deficienc' co""on carriers ta, plus



surchare and penalt'. 5avin found, soon later, that the su" of P1/,/12.*2 hadt%ice been included in the co"putation of said receipts, petitioner subse<uentl'areed %ith the tapa'er that its ross receipts for the period in <uestion,rec9oned on the free "ar9et conversion rate, a"ounted to P-,B**.BB, basedon %hich petitioner de"anded, in a letter received b' the tapa'er on 4anuar'

-B, -/0, pa'"ent of the total su" of P-,)@-./, consistin of P-,-@@.-1, asdeficienc' carriers ta, plus a 1*L surchare, co"puted as follo%s3Total ross receipts +@,*2-.*2. 8.S. currenc'converted to Philippine currenc' at "ar9et rate ................ P-,B**.BBPercentae ta +1L of P-,B**.BB .............................. P 1,0@@.-16ess3

$"ount paid +based on P1.22 to -.22, parit' rate ........ -,*22.22Deficienc' ta ................................................................. -,-@@.-11*L surchare ............................................................... 1/).1@Total a"ount assessed .................................................... P -,)@-./Petitioner, li9e%ise, de"anded pa'"ent of P122.22 as co"pro"ise penalt'.

The tapa'er protested aainst this deficienc' assess"ent, upon the round thatthe conversion rate should be the parit' rate of P1 to a 8S dollar, not the current"ar9et rate, it bein conceded that the freiht fees in <uestion had not beenph'sicall' re"itted, as such, to the tapa'er in the Philippines, but %ere actuall'collected b' its head office abroad, %hich had re"itted no funds to the for"er,ecept those needed for its operatin epenses. The last re"ittance therefora"ounted to 12,222. Petitioner havin overruled the protest, the tapa'erappealed to the #ourt of Ta $ppeals, %hich, rel'in "ainl' upon -ommissionerof nternal #evenue v. Gnited 0tates ines, 1 reversed petitioners decision,%ithout costs. 5ence this appeal b' the petitioner, %hich %e find to be %ell ta9en.Indeed, (due to the pressure on the international reserve of the countr' and thethreat to econo"ic stabilit',( as %ell as (the state of echane crisis the Monetar':oard availed of the e"erenc' po%er ranted b' Section @) of Republic $ct No.10*, other%ise 9no%n as the #entral :an9 $ct, and issued, on Dece"ber /,-/)/, #ircular No. 12 restrictin (sales of echane b' the #entral :an9,(sub!ectin (all transactions in old and forein echane to licensin( b' thesa"e, and re<uirin the surrender thereto of -22L of all forein echanereceipts at the official parit' rate of P1 to a 8S dollar. Section 1 of #ircular No. )1of the #entral :an9, dated Ma' 1-, -/*, provided, inter alia3The follo%in are foreign exchange transactions and as re<uired b' #entral :an9#ircular No. 12 are su*/ect to prior licensing b' or on behalf of the #entral :an93 +d $n' act b' %hich a resident de*its or credits the account of a non8resident inan' currenc' or the account of a resident in forein currenc'H +f $n' transaction b' %hich a resident performs an' service for a non8residentother than tourists or te"porar' visitors. f the proper license is o*tained, theformer shall demand and o*tain payment for such service %ithin ninet' da's in8.S. dollars or in an' other forein currenc' acceptable to the #entral :an9H



+h All collections of residents made a*road throuh their overseas branchoffices, aents or representatives. Such collections shall *e *rought or ordered to*e *rought *y such residents into the Philippines in 8.S. currenc' or in an' othercurrenc' acceptable to the #entral :an9 after deductin nor"al businessepenses incurred b' such overseas branch offices, aents or representativesH

+" Any other transactions involving international financial implications. +

Subdivision +h of said section 1 of #ircular No. )1 %as a"ended on Ma' 1@,-/*@, to read as follo%s3+h All collections of residents made a*road thru their overseas branch office,aents or representatives. Such collections shall be brouht or ordered to *e*rought *y such residents into the Philippines in 8.S. currenc' or in an' othercurrenc' acceptable to the #entral :an9.

Pursuant to this provision, the afore"entioned freiht fees earned b' thetapa'er are the product of (forein echane( transactions, %ithin the purvie% of #entral :an9 #ircular No. 12, because, havin been collected b' the tapa'ers

"ain office in $"sterda", said fees are dee"ed to have been paid to thetapa'er in the Philippines, on behalf of %hich the for"er had actedH becausethe' %ere due for services rendered in the Philippines, %ithout %hich said "ainoffice %ould have had no riht to collect or receive said feesH because the sa"erepresented the co"pensation for services perfor"ed b' a resident of thePhilippines K the tapa'ers branch office thereinH because the' represented(collections of residents "ade abroad,( to %hich subdivision +h of said section 1refersH and because the' fall under the cateor' of (+an' other transactionsinvolvin international financial i"plications,( covered b' subdivision +" of thesa"e section.It should be noted that on 4ul' -0, -/*/, the polic' incorporated in #ircular No.12 and i"ple"ented in subse<uent circulars, %as relaed %ith the enact"ent ofRepublic $ct No. 102/, %hich directed the "onetar' authorities to ta9e steps forthe adoption of a fourA'ear prora" of radual decontrol, durin %hich theMonetar' :oard, %ith the approval of the President, could and did fi theconversion rate of the Philippine peso to the 8S dollar at a ratio other than thatprescribed in Section )B of Republic $ct 10*. Durin the period involved in thecase at bar, the free "ar9et conversion rate raned fro" P.)@ to P.0* to a 8Sdollar, at %hich rates the freiht fees in <uestion %ere co"puted in the contestedassess"ent. Inas"uch as said fees %ere revenues derived fro" (foreinechane( transactions, it follo%s necessaril' that the petitioner %as full' !ustifiedin co"putin the tapa'ers receipts at said free "ar9et rates.The theor' of the tapa'er to the effect that, not havin been ph'sicall' re"ittedto the Philippines, the fees in <uestion do not parta9e of the nature of revenuesderived fro" forein echane transactions, is "anifestl' devoid of "erit. Thetransactions fro" %hich said revenues %ere derived involved the loadin ofcaro in the Philippines, the transportation of said caro to its ports ofdestination, the deliver' of the caro to the respective consinees, and thepa'"ent of the correspondin fees to the tapa'ers head office at $"sterda".

$s reards the tapa'er, the transactions %ere consu""ated upon deliver' of



the caro to the consinee. 8pon the other hand, the obliations of the latter orthe shipper %ere dischared upon pa'"ent of the freiht. Insofar as the partiesto said transaction %ere concerned, the same !ere fully completed upon

payment of the fees at Amsterdam. The <uestion %hether or not such fees %ereto be re"itted b' the tapa'ers head office in that #it' to its branch office in the

Philippines, %hich had earned it, %as one that concerned eclusivel' the for"erand the latter, it bein independent of the rights and o*ligations of the parties tothe aforementioned transactions, %hich %ere etinuished upon deliver' of thecaro at destination and pa'"ent of the freiht to said "aid office of thetapa'er. In short, the re"ittance or nonAre"ittance of said fees could not affectthe nature of said transactions, as involvin forein echane, not *eing a partthereof in any manner !hatsoever .Then aain, %e ta9e it that K in line %ith the ordinar' course of business,adherence to %hich is presu"ed, in the absence of proof to the K contrar' uponreceipt of said freiht, the sa"e "ust have been credited in the records of thetapa'ers "ain office in $"sterda" in favor of its branch office in the

Philippines, and that, upon notice of such pa'"ent to the head office in $"sterda", the branch office in the Philippines "ust have, in turn, de*ited saidfees aainst its "ain office. Such processes of boo99eepin and accountin are,for leal purposes, tanta"ount to deliver', receipt, or re"ittance. In fact, b' socreditin said fees, the tapa'ers "ain office in $"sterda" in effectac9no%leded bein, in a %a', indebted to its Philippine branch, as debited in thelatters records, in "uch the sa"e %a' as the for"er %ould have been had itreceived the fees directl' fro" the latter. Incidentall', this is in accord %ithestablished practice especiall' a"on "erchants the %orld over, %ho seldo"brin or send "one' ph'sicall' fro" one countr' to another, but, enerall' resortto bills, notes or other conventional for"s of transactin business in the "annerthe' "a' dee" "ost practical and suitable to their respective interests.Needless to sa', the re"ittances "ade b' the tapa'ers head office to itsPhilippine branch, for the operational epenses thereof K or for an' otherpurposes K "ust have been credited in the boo9s of account of the latter infavor of the for"er in the records of %hich the' "ust have been debited saidbranch, and, hence, deducted fro" its assets in $"sterda", includin the freihtrevenues involved herein.The infir"it' of the tapa'ers theor' beco"es readil' apparent %hen ;econsider that, if upheld, its effect %ould be to su*/ect to the carrierJs tax at thefree "ar9et rate all business enterprises that brin their dollar earnins into thePhilippines, and to exempt from such tax or appl' the parit' rate to those %ho donot brin in their dollars or other forein echane, thereb' discri"inatin aainstthose %ho help "aintain or increase our international reserve and in favor ofthese %ho do not onl' fail to do so, but /eopardize the condition of such reserved,b' 9eepin abroad their dollar and other earnins and, %orse still, b' inducingother merchants in the Philippines, engaged in foreign trade, to adopt the same

practice, in order to avoid, evade or cut do!n the payment of said tax . This resultcould not surel' have been intended or countenanced b' the fra"ers of our tala%s, "uch less b' those responsible for our polic' of control and, later, of



radual decontrol, considerin their rave concern for our international reserveand stabilit' of the Philippine currenc'.The case of the 8nited States 6ines, on %hich the appealed decision of the #ourtof Ta $ppeals is anchored, refers to transactions that too9 place *efore theapproval of Republic $ct 102/, on 4ul' -0, -/*/, %hen the only leal rate of

echane obtainin in the Philippines %as P1 to -, and all forein echane hadto be surrendered to the #entral :an9, sub!ect to its disposition pursuant to itso%n rules and reulations. 8pon the other hand, the present case refers totransactions that too9 place durin the effectivit' of Republic $ct 102/, %henthere %as, apart from the parit' rate, a leal free "ar9et conversion rate forforein echane transactions, %hich rate had been fied in open tradin, suchas those involved in the case at bar. $lthouh the decision in the case citedcontains a phrase suestin that there can be no forein echane operation%hen the a"ount involved therein is not re"itted to the Philippines, this i"pliedpronounce"ent %as a "ere o*iter, inasmuch as the result !ould have *een thesame had there *een a remittance of said amount , there bein, at that ti"e, no

other leal rate of echane of 8S dollars than the parit' rate.It is, thus, our considered vie% that the freiht revenues accruin to the tapa'erin the present case, even thouh collected abroad and, not re"itted to its branchoffice in the Philippines, are part of its forein echane operations and sub!ectto the co""on carriers ta, co"puted at the free "ar9et rate then prevailin.It is net ured that the 1*L surchare souht to be collected b' the petitionershould not be i"posed upon the tapa'er, it havin acted in ood faith in doin%hat it did, for it "erel' follo%ed the advice of counsel. The afore"entionedsurchare %as i"posed b' petitioner herein in accordance %ith Section -B ofthe National Internal Revenue #ode, 4 subdivision +a of %hich reads3S?#. -B. Payment of Percentage taxes K +a n general . K It shall be the dut'of ever' person conductin a business on %hich a percentae ta is i"posedunder this Title, to "a9e a true and co"plete return of the a"ount of his, her orits ross "onthl' sales, receipts or earnins, or ross value of output actuall're"oved fro" the factor' or "ill %arehouse and %ithin t%ent' da's after the endof each "onth, pa' the ta due thereon3 Provided , That an' person retirin fro"a business sub!ect to the percentae ta shall notif' the nearest internal revenueofficer thereof, file his return or declaration, and pa' the ta due thereon %ithint%ent' da's after closin his business.If the percentae ta on an' business is not paid %ithin the ti"e specified above,the a"ount of the tax shall *e increased b' t%ent'Afive per centu", theincrement to *e a part of the tax .In case of %illful nelect to file the return %ithin the period prescribed herein, or incase a false or fraudulent return is %ilfull' "ade, there shall be added to the taor to the deficienc' ta, in case an' pa'"ent has been "ade on the basis ofsuch return before the discover' of the falsit' or fraud, a surchare of fift' percentu" of its a"ount. The a"ount so added to an' ta shall be collected at thesa"e ti"e and in the sa"e "anner and as part of the ta unless the ta hasbeen paid before the discover' of the falsit' or fraud, in %hich case the a"ountso added shall be collected in the sa"e "anner as the ta. 5



Pursuant to this provision, if the ta in <uestion is not paid (%ithin t%ent' da'safter the end of each "onth, ... the a"ount of the ta shall *e increased b't%ent' five per centu" the incre"ent to be a part of the ta.( $s earl' asFebruar' --, -/1*, ;e held in im -o -hui v. Posadas construin a si"ilarprovision, that the sa"e is ("andator',( and, accordinl', sanctioned the

i"position of the 1*L surchare on the sales ta involved therein, %hich hadbeen paid one da' late, or October 1-, -/1), because of a riot aainst the#hinese in Manila on October -B, -/ and 12, -/1). This vie% %as reiterated inIoppel =Phil.> nc. v. -ollector of nternal #evenue referrin to a si"ilar tapa'able not later than 4anuar' 12, -/)1, but not paid then, o%in to the outbrea9of %ar in the Pacific and the "ilitar' occupation of the Philippines b' 4apaneseforces. To the sa"e effect are nsular um*er -o. v. -ollector of nternal#evenue, / #epu*lic of the Philippines v. uzon ndustrial -orp., 9 K in %hich achec9, issued on ti"e and brouht b' a passener to the office of the #it'Treasurer on $pril 12, -/)B, could not be delivered to hi" on that date, onaccount of the nu"erous tapa'ers then lined up in his office, and %as not

actuall' received b' said official until $pril 11, -/)B K Pirovano v. -ommissioner of nternal #evenue 1 0 and the Republic of the Philippines v. im 3ian 3eng0ons & -o., nc . 1 1#onnel ros. -o. v. -ollector of nternal #evenue 1 + and mus :lectric -o. v.-ourt of 3ax Appeals, 1 upon %hich the tapa'er relies, are not in point.In the first case, the issue %as %hether the sales ta of *L of the (ross sellinprice( of certain articles shall be i"posed upon the price set forth in thecorrespondin invoices, not%ithstandin the fact that the phrase (*L sales taincluded( appeared thereon. The <uestion %as resolved in the affir"ative, uponthe round that a circular of the :ureau of Internal Revenue, i"ple"entin thela% i"posin said ta, provided3... 8nless billed to the purchaser as separate ite"s in the invoice, the a"ountsintended to cover the sales ta shall be considered as part of the ross sellinprice of the articles sold, and deductions thereof %ill not be allo%ed.and that the tapa'er had not co"plied %ith it since 4anuar' -B, -/)B, Kalthouh it had adhered thereto up to then, b' issuin invoices containin anite"i>ation of the actual sellin price and of the *L sales ta thereon %hich %asadded to the sellin price and shifted to the custo"er, %ho paid the total a"ount.It should be noted, ho%ever, that K unli2e the tapa'er in the case at bar, %hichdeclared its revenues fro" Februar' to Ma' -/01 as P@*,22.22, %hen, in fact,the revenues areated P-,B**.BB K #onnel :ros #o. had set forth in itsinvoices the true a"ounts collected fro" its custo"ers and the issue hined"erel' on the application of the la% thereto, na"el', %hether the sales ta shallbe based upon said a"ounts, or should be co"puted after deductin therefro"the su" correspondin to the ta. Moreover, althouh disareein %ith theposition ta9en b' the :ureau of Internal Revenue, #onnel :ros. had forth%ithdeposited the a"ount assessed b' the sa"e, and the deposit %as laterconverted into payment , follo%ed b' a for"al re<uest for refund and then, upondenial thereof, b' the correspondin petition for revie% in the #ourt of Ta

$ppeals. Thus, upon demand , the a"ount representin the taes souht to be



collected b' the 7overn"ent %as placed at the latters disposed , sub!ect onl' tothe tapa'ers clai" that it %as not leall' due. 5ence, the reason for thei"position of a surchare K %hich is nonApa'"ent %ithin the period prescribedb' la% K did not, in effect, eist in #onnel :ros case.The second case initiall' referred to a si"ilar clai" for refund of pa'"ents "ade

of the corporate franchise ta K provided in section 1*/ of the Ta #ode, asa"ended b' Rep. $ct No. /, effective in -/)0 K of *L of the ross earnins orreceipts of a corporation that had, since -/2, a "unicipal franchise i"posin ata of -L the earnins for the first 12 'ears and 1L for the net -* 'ears. Thetapa'er "aintained that the application of the Ta #ode i"paired its vestedrihts under said "unicipal franchise. The clai" for refund had an echane ofvie%s, bet%een the :ureau of Internal Revenue and the tapa'er, that draedfor a nu"ber of 'ears, cul"inatin, in Septe"ber -/0-, in an assess"ent fordeficienc' franchise ta, for the period fro" 4anuar' -/*0 to Septe"ber -/02,plus 1*L surchare $lthouh the clai" of i"pair"ent of contractual obliation%as overruled, for the reason that the "unicipal franchise contained an epress

reservation that it %as sub!ect to a"end"ent or repeal, ;e ee"pted thetapa'er fro" the pa'"ent of the surchare upon the authorit' of the #onnel:ros. case.Reardless of our present opinion on the applicabilit' to the I"us case of thevie% ta9en in the #onnel :ros. case concernin the pa'"ent of surchares, thefact is that, in such case, there had been no failure to pa' the ta assessedtherein, so that there reall' %as no leal !ustification for the i"position ofsurchares. The circu"stance that I"us ?lectric #o. had *egun b' de"andin arefund of the payments it had made, for the period fro" -/)B to -/*-, pursuantto the Ta #ode, to %hich it later clai"ed, it could not be "ade sub!ect %ithoutviolatin rihts vested under its "unicipal franchise, "a', perhaps, account forthe reliance upon the #onnel :ros. case, althouh the issue bet%een the electricco"pan' and the 7overn"ent, eventuall', beca"e one for collection of thedeficienc' franchise ta fro" -/*0 to -/02.

$t an' rate, neither case nor both suffice to out%eih the aboveA"entioned sicases declarin that the provision i"posin surchares is "andator'. Thealleed ood faith of the tapa'er herein is K apart fro" bein insufficient to

!ustif' a departure fro" the rule laid do%n and repeatedl' applied in said casesK "erel' based upon the advice said to have been iven b' its counsel.#onsiderin, "oreover, that, up to Dece"ber -/0-, the tapa'er had reported itsearnins at the free "ar9et conversion rate K thereb' indicatin that such %as,in its belief, the rate at %hich its forein echane transactions should beco"puted K its chane of polic' in -/01, alleedl' follo%in said advice ofcounsel, i"plied no "ore than the ta9in of a calculated ris9.;5?R?FOR?, the appealed decision of the #ourt Of Ta $ppeals is reversed,and !ud"ent shall be entered affir"in that of the #o""issioner of InternalRevenue, ecept as to the co"pro"ise penalt' of P122.22, %hich is hereb'eli"inated, and sentencin respondent corporation, Ro'al Interocean 6ines, Inc.,to pa' to petitioner here the su" of P-,)@-./. %ith interest thereon at the lealrate fro" 4anuar' -B, -/0, %hen it received the letter of de"and of said



petitioner, until full pa'"ent, 1 4 ;ith costs aainst said respondent. It is soordered.


Manila?N :$N#G.R. No. L-194+ M&y +5, 19+LOREN%O T. O@A &'( HEIRS OF JULIA !U@ALES, '&7ly? RO$OLFO !.O@A, MARIANO !. O@A, LU% !. O@A, *IRGINIA !. O@A &'( LOREN%O !.O@A, JR., petitioners,vs.THE COMMISSIONER OF INTERNAL RE*ENUE, respondent.7rlando Velasco for petitioners.7ffice of the 0olicitor "eneral Arturo A. Alafriz, Assistant 0olicitor "eneral1elicisimo #. #osete, and 0pecial Attorney Purificacion Greta for respondent.

!ARRE$O, J.: pPetition for revie% of the decision of the #ourt of Ta $ppeals in #T$ #ase No.0-@, si"ilarl' entitled as above, holdin that petitioners have constituted anunreistered partnership and are, therefore, sub!ect to the pa'"ent of thedeficienc' corporate inco"e taes assessed aainst the" b' respondent#o""issioner of Internal Revenue for the 'ears -/** and -/*0 in the total su"of P1-,B/-.22, plus *L surchare and -L "onthl' interest fro" Dece"ber -*,-/*B, sub!ect to the provisions of Section *- +e +1 of the Internal Revenue#ode, as a"ended b' Section B of Republic $ct No. 1) and the costs of thesuit, 1 as %ell as the resolution of said court den'in petitioners "otion for reconsideration of said decision.The facts are stated in the decision of the Ta #ourt as follo%s34ulia :uCales died on March 1, -/)), leavin as heirs her survivin spouse,6oren>o T. OCa and her five children. In -/)B, #ivil #ase No. )*-/ %as institutedin the #ourt of First Instance of Manila for the settle"ent of her estate. 6ater,6oren>o T. OCa the survivin spouse %as appointed ad"inistrator of the estate of said deceased +?hibit , pp. )A)-, :IR rec.. On $pril -), -/)/, thead"inistrator sub"itted the pro!ect of partition, %hich %as approved b' the #ourton Ma' -0, -/)/ +See ?hibit E. :ecause three of the heirs, na"el' 6u>,Virinia and 6oren>o, 4r., all surna"ed OCa, %ere still "inors %hen the pro!ect of partition %as approved, 6oren>o T. OCa, their father and ad"inistrator of theestate, filed a petition in #ivil #ase No. /0@ of the #ourt of First Instance of Manila for appoint"ent as uardian of said "inors. On Nove"ber -), -/)/, the#ourt appointed hi" uardian of the persons and propert' of the aforena"ed"inors +See p. , :IR rec..The pro!ect of partition +?hibit EH see also pp. @@A@2, :IR rec. sho%s that theheirs have undivided oneAhalf +-1 interest in ten parcels of land %ith a totalassessed value of PB@,B02.22, si houses %ith a total assessed value of P-@,*/2.22 and an undeter"ined a"ount to be collected fro" the ;ar Da"ae



transactions involvin the" +?hibit , supraH t.s.n., pp. 1*A10. 5o%ever,petitioners did not actuall' receive their shares in the 'earl' inco"e. +t.s.n., pp.1*A10, )2, /B, -22. The inco"e %as al%a's left in the hands of 6oren>o T. OCa%ho, as heretofore pointed out, invested the" in real properties and securities.+See ?hibit , t.s.n., pp. *2, -21A-2).

On the basis of the foreoin facts, respondent +#o""issioner of InternalRevenue decided that petitioners for"ed an unreistered partnership andtherefore, sub!ect to the corporate inco"e ta, pursuant to Section 1), in relationto Section B)+b, of the Ta #ode. $ccordinl', he assessed aainst thepetitioners the a"ounts of PB,2/1.22 and P-,B//.22 as corporate inco"e taesfor -/** and -/*0, respectivel'. +See ?hibit *, a"ended b' ?hibit -@, pp. *2and B0, :IR rec.. Petitioners protested aainst the assess"ent and as9ed forreconsideration of the rulin of respondent that the' have for"ed an unreisteredpartnership. Findin no "erit in petitioners re<uest, respondent denied it +See?hibit -@, p. B0, :IR rec.. +See pp. -A), Me"orandu" for Respondent, 4une -1,-/0-.

The oriinal assess"ent %as as follo%s35B Net inco"e as per investiation ................ P)2,12/.B/Inco"e ta due thereon ............................... B,2)1.221*L surchare .............................................. 1,2-2.*2#o"pro"ise for nonAfilin .......................... *2.22Total ............................................................... P-2,-21.*25B% Net inco"e as per investiation ................ P0/,1)*.1Inco"e ta due thereon ............................... -,B)/.221*L surchare .............................................. ,)01.1*#o"pro"ise for nonAfilin .......................... *2.22Total ............................................................... P-@,0-.1*+See ?hibit -, pae *2, :IR records8pon further consideration of the case, the 1*L surchare %as eli"inated in line%ith the rulin of the Supre"e #ourt in -ollector v. atangas 3ransportation -o.,7.R. No. 6A/0/1, 4an. 0, -/*B, so that the <uestioned assess"ent refers solel'to the inco"e ta proper for the 'ears -/** and -/*0 and the (#o"pro"ise fornonAfilin,( the latter ite" obviousl' referrin to the co"pro"ise in lieu of thecri"inal liabilit' for failure of petitioners to file the corporate inco"e ta returns for said 'ears. +See ?h. -@, pae B0, :IR records. +Pp. -A, $nne # to PetitionPetitioners have assined the follo%in as alleed errors of the Ta #ourt3I.T5? #O8RT OF T$J $PP?$6S ?RR?D IN 5O6DIN7 T5$T T5?P?TITION?RS FORM?D $N 8NR?7IST?R?D P$RTN?RS5IPHII.T5? #O8RT OF T$J $PP?$6S ?RR?D IN NOT 5O6DIN7 T5$T T5?P?TITION?RS ;?R? #OAO;N?RS OF T5? PROP?RTI?S IN5?RIT?D $ND+T5? PROFITS D?RIV?D FROM TR$NS$#TIONS T5?R?FROM +sicHIII.



T5? #O8RT OF T$J $PP?$6S ?RR?D IN 5O6DIN7 T5$T P?TITION?RS;?R? 6I$:6? FOR #ORPOR$T? IN#OM? T$J?S FOR -/** $ND -/*0 $S

$N 8NR?7IST?R?D P$RTN?RS5IPHIV.ON T5? $SS8MPTION T5$T T5? P?TITION?RS #ONSTIT8T?D $N

8NR?7IST?R?D P$RTN?RS5IP, T5? #O8RT OF T$J $PP?$6S ?RR?D INNOT 5O6DIN7 T5$T T5? P?TITION?RS ;?R? $N 8NR?7IST?R?DP$RTN?RS5IP TO T5? ?JT?NT ON6G T5$T T5?G INV?ST?D T5? PROFITSFROM T5? PROP?RTI?S O;N?D IN #OMMON $ND T5? 6O$NS R?#?IV?D8SIN7 T5? IN5?RIT?D PROP?RTI?S $S #O66$T?R$6SHV .ON T5? $SS8MPTION T5$T T5?R? ;$S $N 8NR?7IST?R?DP$RTN?RS5IP, T5? #O8RT OF T$J $PP?$6S ?RR?D IN NOT D?D8#TIN7T5? V$RIO8S $MO8NTS P$ID :G T5? P?TITION?RS $S INDIVID8$6IN#OM? T$J ON T5?IR R?SP?#TIV? S5$R?S OF T5? PROFITS

$##R8IN7 FROM T5? PROP?RTI?S O;N?D IN #OMMON, FROM T5?

D?FI#I?N#G T$J OF T5? 8NR?7IST?R?D P$RTN?RS5IP.In other %ords, petitioners pose for our resolution the follo%in <uestions3 +-8nder the facts found b' the #ourt of Ta $ppeals, should petitioners beconsidered as coAo%ners of the properties inherited b' the" fro" the deceased4ulia :uCales and the profits derived fro" transactions involvin the sa"e, or,"ust the' be dee"ed to have for"ed an unreistered partnership sub!ect to taunder Sections 1) and B)+b of the National Internal Revenue #ode +1

$ssu"in the' have for"ed an unreistered partnership, should this not be onl'in the sense that the' invested as a co""on fund the profits earned b' theproperties o%ned b' the" in co""on and the loans ranted to the" upon thesecurit' of the said properties, %ith the result that as far as their respectiveshares in the inheritance are concerned, the total inco"e thereof should beconsidered as that of coAo%ners and not of the unreistered partnership $nd +assu"in aain that the' are taable as an unreistered partnership, should notthe various a"ounts alread' paid b' the" for the sa"e 'ears -/** and -/*0 asindividual inco"e taes on their respective shares of the profits accruin fro" theproperties the' o%ned in co""on be deducted fro" the deficienc' corporatetaes, herein involved, assessed aainst such unreistered partnership b' therespondent #o""issionerPonderin on these <uestions, the first thin that has struc9 the #ourt is that%hereas petitioners predecessor in interest died %a' bac9 on March 1, -/))and the pro!ect of partition of her estate %as !udiciall' approved as earl' as Ma'-0, -/)/, and presu"abl' petitioners have been holdin their respective sharesin their inheritance since those dates ad"ittedl' under the ad"inistration or"anae"ent of the head of the fa"il', the %ido%er and father 6oren>o T. OCa,the assess"ent in <uestion refers to the later 'ears -/** and -/*0. ;e believethis point to be i"portant because, apparentl', at the start, or in the 'ears -/)) to-/*), the respondent #o""issioner of Internal Revenue did treat petitioners ascoAo%ners, not liable to corporate ta, and it %as onl' fro" -/** that heconsidered the" as havin for"ed an unreistered partnership. $t least, there is



nothin in the record indicatin that an earlier assess"ent had alread' been"ade. Such bein the case, and ;e see no reason ho% it could be other%ise, itis easil' understandable %h' petitioners position that the' are coAo%ners and notunreistered coApartners, for the purposes of the i"puned assess"ent, cannotbe upheld. Truth to tell, petitioners should find co"fort in the fact that the' %ere

not si"ilarl' assessed earlier b' the :ureau of Internal Revenue.The Ta #ourt found that instead of actuall' distributin the estate of thedeceased a"on the"selves pursuant to the pro!ect of partition approved in-/)/, (the properties re"ained under the "anae"ent of 6oren>o T. OCa %housed said properties in business b' leasin or sellin the" and investin theinco"e derived therefro" and the proceed fro" the sales thereof in realproperties and securities,( as a result of %hich said properties and invest"entssteadil' increased 'earl' fro" PB@,B02.22 in (land account( and P-@,*/2.22 in(buildin account( in -/)/ to P-@*,21B.0B in (invest"ent account,( P-*.@-).0Bin (land account( and P-0/,101.*1 in (buildin account( in -/*0. $nd all thesebeca"e possible because, ad"ittedl', petitioners never actuall' received an'

share of the inco"e or profits fro" 6oren>o T. OCa and instead, the' allo%ed hi"to continue usin said shares as part of the co""on fund for their ventures, evenas the' paid the correspondin inco"e taes on the basis of their respectiveshares of the profits of their co""on business as reported b' the said 6oren>o T.OCa.It is thus incontrovertible that petitioners did not, contrar' to their contention,"erel' li"it the"selves to holdin the properties inherited b' the". Indeed, it isad"itted that durin the "aterial 'ears herein involved, so"e of the saidproperties %ere sold at considerable profit, and that %ith said profit, petitionersenaed, thru 6oren>o T. OCa, in the purchase and sale of corporate securities. Itis li9e%ise ad"itted that all the profits fro" these ventures %ere divided a"onpetitioners proportionatel' in accordance %ith their respective shares in theinheritance. In these circu"stances, it is Our considered vie% that fro" the"o"ent petitioners allo%ed not onl' the inco"es fro" their respective shares ofthe inheritance but even the inherited properties the"selves to be used b'6oren>o T. OCa as a co""on fund in underta9in several transactions or inbusiness, %ith the intention of derivin profit to be shared b' the" proportionall',such act %as tanta"onut to actuall' contributin such inco"es to a co""on fundand, in effect, the' thereb' for"ed an unreistered partnership %ithin the purvie%of the aboveA"entioned provisions of the Ta #ode.It is but loical that in cases of inheritance, there should be a period %hen theheirs can be considered as coAo%ners rather than unreistered coApartners %ithinthe conte"plation of our corporate ta la%s afore"entioned. :efore the partitionand distribution of the estate of the deceased, all the inco"e thereof does belonco""onl' to all the heirs, obviousl', %ithout the" beco"in thereb'unreistered coApartners, but it does not necessaril' follo% that such status ascoAo%ners continues until the inheritance is actuall' and ph'sicall' distributeda"on the heirs, for it is easil' conceivable that after 9no%in their respectiveshares in the partition, the' "iht decide to continue holdin said shares underthe co""on "anae"ent of the ad"inistrator or eecutor or of an'one chosen



b' the" and enae in business on that basis. ;ithal, if this %ere to be allo%ed,it %ould be the easiest thin for heirs in an' inheritance to circu"vent and render"eaninless Sections 1) and B)+b of the National Internal Revenue #ode.It is true that in :vangelista vs. -ollector , -21 Phil. -)2, it %as stated, a"on thereasons for holdin the appellants therein to be unreistered coApartners for ta

purposes, that their co""on fund (%as not so"ethin the' found alread' ineistence( and that (it %as not a propert' inherited b' the" pro indiviso,( but it iscertainl' far fetched to arue therefro", as petitioners are doin here, that ergo,in all instances %here an inheritance is not actuall' divided, there can be nounreistered coApartnership. $s alread' indicated, for ta purposes, the coAo%nership of inherited properties is auto"aticall' converted into an unreisteredpartnership the "o"ent the said co""on properties andor the inco"es derivedtherefro" are used as a co""on fund %ith intent to produce profits for the heirsin proportion to their respective shares in the inheritance as deter"ined in apro!ect partition either dul' eecuted in an etra!udicial settle"ent or approved b'the court in the correspondin testate or intestate proceedin. The reason for this

is si"ple. Fro" the "o"ent of such partition, the heirs are entitled alread' totheir respective definite shares of the estate and the inco"es thereof, for each ofthe" to "anae and dispose of as eclusivel' his o%n %ithout the intervention of the other heirs, and, accordinl' he beco"es liable individuall' for all taes inconnection there%ith. If after such partition, he allo%s his share to be held inco""on %ith his coAheirs under a sinle "anae"ent to be used %ith the intentof "a9in profit thereb' in proportion to his share, there can be no doubt that,even if no docu"ent or instru"ent %ere eecuted for the purpose, for tapurposes, at least, an unreistered partnership is for"ed. This is eactl' %hathappened to petitioners in this case.In this connection, petitioners reliance on $rticle -@0/, pararaph +, of the #ivil#ode, providin that3 (The sharin of ross returns does not of itself establish apartnership, %hether or not the persons sharin the" have a !oint or co""onriht or interest in an' propert' fro" %hich the returns are derived,( and, for that"atter, on an' other provision of said code on partnerships is unavailin. In:vangelista, supra, this #ourt clearl' differentiated the concept of partnershipsunder the #ivil #ode fro" that of unreistered partnerships %hich are consideredas (corporations( under Sections 1) and B)+b of the National Internal Revenue#ode. Mr. 4ustice Roberto #oncepcion, no% #hief 4ustice, elucidated on thispoint thus3To bein %ith, the ta in <uestion is one i"posed upon (corporations(, %hich,strictl' spea9in, are distinct and different fro" (partnerships(. ;hen our InternalRevenue #ode includes (partnerships( a"on the entities sub!ect to the ta on(corporations(, said #ode "ust allude, therefore, to orani>ations %hich are notnecessarily (partnerships(, in the technical sense of the ter". Thus, for instance,section 1) of said #ode exempts fro" the afore"entioned ta (dul' reisteredeneral partnerships,( %hich constitute precisel' one of the "ost t'pical for"s ofpartnerships in this !urisdiction. 6i9e%ise, as defined in section B)+b of said#ode, (the ter" corporation includes partnerships, no matter ho! created ororganized .( This <ualif'in epression clearl' indicates that a !oint venture need



not be underta9en in an' of the standard for"s, or in confir"it' %ith the usualre<uire"ents of the la% on partnerships, in order that one could be dee"edconstituted for purposes of the ta on corporation. $ain, pursuant to said sectionB)+b,the ter" (corporation( includes, a"on others, (!oint accounts,+cuentas en

participacion( and (associations(, none of %hich has a leal personalit' of its

o%n, independent of that of its "e"bers. $ccordinl', the la%"a9er could nothave rearded that personalit' as a condition essential to the eistence of thepartnerships therein referred to. In fact, as above stated, (dul' reistered eneralcoApartnerships( K %hich are possessed of the afore"entioned personalit' Khave been epressl' ecluded b' la% +sections 1) and B)b fro" theconnotation of the ter" (corporation.( .... Si"ilarl', the $"erican 6a%... provides its o!n concept of a partnership. 8nder the ter" (partnership( itincludes not onl' a partnership as 9no%n in co""on la% but, as %ell, as'ndicate, roup, pool, /oint venture, or other unincorporated organization !hich

carries on any *usiness, financial operation, or venture , and %hich is not, %ithinthe "eanin of the #ode, a trust, estate, or a corporation. ... . +@$ Mertens 6a%of Federal Inco"e Taation, p. @B/H e"phasis ours.The ter" (partnership( includes a s'ndicate, roup, pool, /oint venture or otherunincorporated organization, through or *y means of !hich any *usiness,financial operation, or venture is carried on . ... . +B Mertens 6a% of FederalInco"e Taation, p. *01 Note 0H e"phasis ours.For purposes of the ta on corporations, our $ational nternal #evenue -odeincludes these partnerships K %ith the eception onl' of dul' reistered eneralcopartnerships K !ithin the purvie! of the term Hcorporation.H It is, therefore,clear to our "ind that petitioners herein constitute a partnership, insofar as said#ode is concerned, and are sub!ect to the inco"e ta for corporations.;e reiterated this vie%, thru Mr. 4ustice Fernando, in #eyes vs. -ommissioner of nternal #evenue, 7. R. Nos. 6A1)212A1-, 4ul' 1/, -/0B, 1) S#R$ -/B, %hereinthe #ourt ruled aainst a theor' of coAo%nership pursued b' appellants therein.

$s reards the second <uestion raised b' petitioners about the sereation, forthe purposes of the corporate taes in <uestion, of their inherited properties fro"those ac<uired b' the" subse<uentl', ;e consider as !ustified the follo%inratiocination of the Ta #ourt in den'in their "otion for reconsideration3In connection %ith the second round, it is alleed that, if there %as anunreistered partnership, the holdin should be li"ited to the business enaedin apart fro" the properties inherited b' petitioners. In other %ords, the taableinco"e of the partnership should be li"ited to the inco"e derived fro" theac<uisition and sale of real properties and corporate securities and should notinclude the inco"e derived fro" the inherited properties. It is ad"itted that theinherited properties and the inco"e derived therefro" %ere used in the businessof bu'in and sellin other real properties and corporate securities. $ccordinl',the partnership inco"e "ust include not onl' the inco"e derived fro" thepurchase and sale of other properties but also the inco"e of the inheritedproperties.



:esides, as alread' observed earlier, the inco"e derived fro" inheritedproperties "a' be considered as individual inco"e of the respective heirs onl' solon as the inheritance or estate is not distributed or, at least, partitioned, but the"o"ent their respective 9no%n shares are used as part of the co""on assets of the heirs to be used in "a9in profits, it is but proper that the inco"e of such

shares should be considered as the part of the taable inco"e of an unreisteredpartnership. This, ;e hold, is the clear intent of the la%.6i9e%ise, the third <uestion of petitioners appears to have been ade<uatel'resolved b' the Ta #ourt in the afore"entioned resolution den'in petitioners"otion for reconsideration of the decision of said court. Pertinentl', the courtruled this %ise3In support of the third round, counsel for petitioners allees3?ven if %e %ere to 'ield to the decision of this 5onorable #ourt that the hereinpetitioners have for"ed an unreistered partnership and, therefore, have to betaed as such, it "iht be recalled that the petitioners in their individual inco"eta returns reported their shares of the profits of the unreistered partnership. ;e

thin9 it onl' fair and e<uitable that the various a"ounts paid b' the individualpetitioners as inco"e ta on their respective shares of the unreisteredpartnership should be deducted fro" the deficienc' inco"e ta found b' this5onorable #ourt aainst the unreistered partnership. +pae @, Me"orandu" for the Petitioner in Support of Their Motion for Reconsideration, Oct. 1B, -/0-.In other %ords, it is the position of petitioners that the taable inco"e of thepartnership "ust be reduced b' the a"ounts of inco"e ta paid b' eachpetitioner on his share of partnership profits. This is not correctH rather, it shouldbe the other %a' around. The partnership profits distributable to the partners+petitioners herein should be reduced b' the a"ounts of inco"e ta assessedaainst the partnership. #onse<uentl', each of the petitioners in his individualcapacit' overpaid his inco"e ta for the 'ears in <uestion, but the inco"e tadue fro" the partnership has been correctl' assessed. Since the individualinco"e ta liabilities of petitioners are not in issue in this proceedin, it is notproper for the #ourt to pass upon the sa"e.Petitioners insist that it %as error for the Ta #ourt to so rule that %hateverecess the' "iht have paid as individual inco"e ta cannot be credited as partpa'"ent of the taes herein in <uestion. It is arued that to sanction the vie% ofthe Ta #ourt is to oblie petitioners to pa' double inco"e ta on the sa"einco"e, and, %orse, considerin the ti"e that has lapsed since the' paid theirindividual inco"e taes, the' "a' alread' be barred b' prescription fro"recoverin their overpa'"ents in a separate action. ;e do not aree. $s ;e seeit, the case of petitioners as reards the point under discussion is si"pl' that of atapa'er %ho has paid the %ron ta, assu"in that the failure to pa' thecorporate taes in <uestion %as not deliberate. Of course, such tapa'er has theriht to be rei"bursed %hat he has erroneousl' paid, but the la% is ver' clearthat the clai" and action for such rei"burse"ent are sub!ect to the bar ofprescription. $nd since the period for the recover' of the ecess inco"e taes inthe case of herein petitioners has alread' lapsed, it %ould not see" riht tovirtuall' disreard prescription "erel' upon the round that the reason for the



dela' is precisel' because the tapa'ers failed to "a9e the proper return andpa'"ent of the corporate taes leall' due fro" the". In principle, it is but proper not to allo% an' relaation of the ta la%s in favor of persons %ho are not eactl'above suspicion in their conduct visAaAvis their ta obliation to the State.IN VI?; OF $66 T5? FOR?7OIN7, the !ud"ent of the #ourt of Ta $ppeals

appealed fro" is affir" %ith costs aainst petitioners.

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