Sometime in November 1985, petitioner Commissioner
FIRST DIVISION of Internal Revenue issued a letter of authority to examine
[G.R. No. 137377. December 18, 2001]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. MARUBENI
CORPORATION, respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal
Revenue assails the decision dated January 15, 1999 of the
Court of Appeals in CA-G.R. SP No. 42518 which affirmed the
decision dated July 29, 1996 of the Court of Tax Appeals in
CTA Case No. 4109. The tax court ordered the Commissioner
of Internal Revenue to desist from collecting the 1985
deficiency income, branch profit remittance and contractors
taxes from Marubeni Corporation after finding the latter to
have properly availed of the tax amnesty under Executive
Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign
corporation organized and existing under the laws of Japan.
It is engaged in general import and export trading, financing
and the construction business. It is duly registered to engage
in such business in the Philippines and maintains a branch
office in Manila.
the books of accounts of the Manila branch office of
respondent corporation for the fiscal year ending March
1985. In the course of the examination, petitioner found
respondent to have undeclared income from two (2)
contracts in the Philippines, both of which were completed
in 1984. One of the contracts was with the National
Development Company (NDC) in connection with the
construction and installation of a wharf/port complex at the
Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte. The other contract was with the
Philippine Phosphate Fertilizer Corporation (Philphos) for
the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate.
On March 1, 1986, petitioners revenue examiners
recommended an assessment for deficiency income, branch
profit remittance, contractors and commercial brokers
taxes. Respondent questioned this assessment in a letter
dated June 5, 1986.
On August 27, 1986, respondent corporation received a
letter dated August 15, 1986 from petitioner assessing
respondent several deficiency taxes. The assessed deficiency
internal revenue taxes, inclusive of surcharge and interest,
were as follows:
I. DEFICIENCY INCOME TAX
FY ended March 31, 1985
Undeclared gross income (Philphos and
and NDC construction projects). . . . . . . . . . . Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . .
. P 967,269,811.14 . 314,362,688.57

Less: Cost and expenses (50%) . . . . . . . . . . . . . . Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00

. 483,634,905.57
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50
Net undeclared income . . . . . . . . . . . . . . . . . . . . . .
. 483,634,905.57 20% int. p.a. fr. 4-26-85

Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66

. 169,272,217.00
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
III. DEFICIENCY CONTRACTORS TAX
20% int. p.a. fr. 7-15-85 to
FY ended March 31, 1985
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
Undeclared gross receipts/ gross income from
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . .
. P 290,583,972.40 Philphos and NDC construction projects . . .
. P 967,269,811.14
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
Contractors tax due thereon (4%). . . . . . . . . . . . . .
FY ended March 31, 1985 . 38,690,792.00

Undeclared net income from Add: 50% surcharge for non-declaration. . . . .

. 19,345,396.00
Philphos and NDC construction projects . . . .
. P 483,634,905.57 25% surcharge for late payment . . . . . . . . . 9,672,698.00

Less: Income tax thereon . . . . . . . . . . . . . . . . . . . Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00

. . 169,272,217.00
Add: 20% int. p.a. fr. 4-21-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKERS TAX
FY ended March 31, 1985
Undeclared share from commission income
(denominated as subsidy from Home
Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00
Add: 50% surcharge for non-declaration. . . . . . . 814,284.50
25% surcharge for late payment . . . . . . . . . 407,142.25
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75
Add: 20% int. p.a. fr. 4-21-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68
The 50% surcharge was imposed for your clients failure to
report for tax purposes the aforesaid taxable revenues
while the 25% surcharge wasimposed because of your
clients failure to pay on time the above deficiency
percentage taxes.
x x x x x x x x x. [1]
Petitioner found that the NDC and Philphos contracts were
made on a turn-key basis and that the gross income from the
two projects amounted to P967,269,811.14. Each contract
was for a piece of work and since the projects called for the
construction and installation of facilities in the Philippines,
the entire income therefrom constituted income from
Philippine sources, hence, subject to internal revenue taxes.
The assessment letter further stated that the same was
petitioners final decision and that if respondent disagreed
with it, respondent may file an appeal with the Court of Tax
Appeals within thirty (30) days from receipt of the
assessment.
On September 26, 1986, respondent filed two (2)
petitions for review with the Court of Tax Appeals. The first
petition, CTA Case No. 4109, questioned the deficiency
income, branch profit remittance and contractors tax
assessments in petitioners assessment letter. The second,
CTA Case No. 4110, questioned the deficiency commercial
brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No.
41[2] declaring a one-time amnesty covering unpaid income
taxes for the years 1981 to 1985 was issued. Under this E.O.,
a taxpayer who wished to avail of the income tax amnesty
should, on or before October 31, 1986: (a) file a sworn
statement declaring his net worth as of December 31, 1985;
(b) file a certified true copy of his statement declaring his net
worth as of December 31, 1980 on record with the Bureau of
Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the
BIR; and (c) file a return and pay a tax equivalent to ten per
cent (10%) of the increase in net worth from December 31,
1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent
filed its tax amnesty return dated October 30, 1986 and
attached thereto its sworn statement of assets and liabilities
and net worth as of Fiscal Year (FY) 1981 and FY 1986. The
return was received by the BIR on November 3, 1986 and
respondent paid the amount of P2,891,273.00 equivalent to
ten percent (10%) of its net worth increase between 1981
and 1986.
The period of the amnesty in E.O. No. 41 was later
extended from October 31, 1986 to December 5, 1986 by E.O.
No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O.
No. 41 was expanded by Executive Order (E.O.) No. 64. In
addition to the income tax amnesty granted by E.O. No. 41
for the years 1981 to 1985, E.O. No. 64[3] included estate and
donors taxes under Title III and the tax on business under
Chapter II, Title V of the National Internal Revenue Code, also
covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges under E.O. No.
41 were extended to the foregoing tax liabilities, and the
period within which the taxpayer could avail of the amnesty
was extended to December 15, 1986. Those taxpayers who
already filed their amnesty return under E.O. No. 41, as
amended, could avail themselves of the benefits, immunities
and privileges under the new E.O. by filing an amended
return and paying an additional 5% on the increase in net
worth to cover business, estate and donors tax liabilities.
The period of amnesty under E.O. No. 64 was extended
to January 31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental
tax amnesty return under the benefit of E.O. No. 64 and paid
a further amount of P1,445,637.00 to the BIR equivalent to
five percent (5%) of the increase of its net worth between
1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the
case, the Court of Tax Appeals rendered a decision in CTA
Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and
64 and declared the deficiency taxes subject of said case as
deemed cancelled and withdrawn. The Court of Tax Appeals
disposed of as follows:
WHEREFORE, the respondent Commissioner of Internal
Revenue is hereby ORDERED to DESIST from collecting the
1985 deficiency taxes it had assessed against petitioner and
the same are deemed considered [sic] CANCELLED and
WITHDRAWN by reason of the proper availment by
petitioner of the amnesty under Executive Order No. 41, as
amended.[4]
Petitioner challenged the decision of the tax court by
filing CA-G.R. SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the
petition and affirmed the decision of the Court of Tax
Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
(1) Whether or not the Court of Appeals erred in affirming
the Decision of the Court of Tax Appeals which ruled that
herein respondents deficiency tax liabilities were
extinguished upon respondents availment of tax amnesty
under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income,
branch profit remittance, and contractors taxes assessed by
petitioner.[5]
The main controversy in this case lies in the
interpretation of the exception to the amnesty coverage of
E.O. Nos. 41 and 64. There are three (3) types of taxes
involved herein income tax, branch profit remittance tax and
contractors tax. These taxes are covered by the amnesties
granted by E.O. Nos. 41 and 64. Petitioner claims, however,
that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in
Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers
cannot avail of the amnesty granted thereunder, viz:
Sec. 4. Exceptions.The following taxpayers may not avail
themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order
Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court
as of the effectivity hereof;
c) Those with criminal cases involving violations of the
income tax law already filed in court as of the
effectivity hereof;
d) Those that have withholding tax liabilities under the
National Internal Revenue Code, as amended, insofar
as the said liabilities are concerned;
e) Those with tax cases pending investigation by the
Bureau of Internal Revenue as of the effectivity hereof
as a result of information furnished under Section
316 of the National Internal Revenue Code, as
amended;
f) Those with pending cases involving unexplained or
unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three
(Frauds, Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds and
Property) of the Revised Penal Code, as amended.
Petitioner argues that at the time respondent filed for
income tax amnesty on October 30, 1986, CTA Case No. 4109
had already been filed and was pending before the Court of
Tax Appeals. Respondent therefore fell under the exception
in Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of
E.O. No. 41 is very clear and unambiguous. It excepts from
income tax amnesty those taxpayers with income tax cases
already filed in court as of the effectivity hereof. The point of
reference is the date of effectivity of E.O. No. 41. The filing
of income tax cases in court must have been made before and
as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer
not to be disqualified under Section 4 (b) there must have
been no income tax cases filed in court against him when E.O.
No. 41 took effect. This is regardless of when the taxpayer
filed for income tax amnesty, provided of course he files it on
or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No.
4109 questioning the 1985 deficiency income, branch profit
remittance and contractors tax assessments was filed by Section 8. The provisions of Executive Orders Nos. 41 and
respondent with the Court of Tax Appeals on September 26, 54 which are not contrary to or inconsistent with this
1986. When E.O. No. 41 became effective on August 22, 1986, amendatory Executive Order shall remain in full force and
CTA Case No. 4109 had not yet been filed in court. effect.
Respondent corporation did not fall under the said
exception in Section 4 (b), hence, respondent was not By virtue of Section 8 as afore-quoted, the provisions of
disqualified from availing of the amnesty for income tax E.O. No. 41 not contrary to or inconsistent with the
under E.O. No. 41. amendatory act were reenacted in E.O. No. 64. Thus, Section
4 of E.O. No. 41 on the exceptions to amnesty coverage also
The same ruling also applies to the deficiency branch
applied to E.O. No. 64. With respect to Section 4 (b) in
profit remittance tax assessment. A branch profit remittance
particular, this provision excepts from tax amnesty coverage
tax is defined and imposed in Section 24 (b) (2) (ii), Title II,
a taxpayer who has income tax cases already filed in court
Chapter III of the National Internal Revenue Code.[6] In the
as of the effectivity hereof. As to what Executive Order the
tax code, this tax falls under Title II on Income Tax. It is a tax
exception refers to, respondent argues that because of the
on income. Respondent therefore did not fall under the
words income and hereof, they refer to Executive Order No.
exception in Section 4 (b) when it filed for amnesty of its
41.[8]
deficiency branch profit remittance tax assessment.
In view of the amendment introduced by E.O. No. 64,
The difficulty herein is with respect to the contractors
Section 4 (b) cannot be construed to refer to E.O. No. 41 and
tax assessment and respondents availment of the amnesty
its date of effectivity. The general rule is that an amendatory
under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O.
act operates prospectively.[9] While an amendment is
No. 41 by including estate and donors taxes and tax on
generally construed as becoming a part of the original act as
business. Estate and donors taxes fall under Title III of the
if it had always been contained therein,[10] it may not be given
Tax Code while business taxes fall under Chapter II, Title V
a retroactive effect unless it is so provided expressly or by
of the same. The contractors tax is provided in Section 205,
necessary implication and no vested right or obligations of
Chapter II, Title V of the Tax Code; it is defined and imposed
contract are thereby impaired.[11]
under the title on business taxes, and is therefore a tax on
business.[7] There is nothing in E.O. No. 64 that provides that it
should retroact to the date of effectivity of E.O. No. 41, the
When E.O. No. 64 took effect on November 17, 1986, it
original issuance. Neither is it necessarily implied from E.O.
did not provide for exceptions to the coverage of the
No. 64 that it or any of its provisions should apply
amnesty for business, estate and donors taxes. Instead,
retroactively. Executive Order No. 64 is a substantive
Section 8 of E.O. No. 64 provided that:
amendment of E.O. No. 41. It does not merely change
provisions in E.O. No. 41. It supplements the original act by
adding other taxes not covered in the first.[12] It has been held
that where a statute amending a tax law is silent as to
whether it operates retroactively, the amendment will not
be given a retroactive effect so as to subject to tax past
transactions not subject to tax under the original act.[13] In an
amendatory act, every case of doubt must be resolved
against its retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty
issuances. A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a
revenue or tax law.[15] It partakes of an absolute forgiveness
or waiver by the government of its right to collect what is
due it and to give tax evaders who wish to relent a chance to
start with a clean slate.[16] A tax amnesty, much like a tax
exemption, is never favored nor presumed in law.[17] If
granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority.[18] For the right
of taxation is inherent in government. The State cannot strip
itself of the most essential power of taxation by doubtful
words. He who claims an exemption (or an amnesty) from
the common burden must justify his claim by the clearest
grant of organic or state law. It cannot be allowed to exist
upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the
state.[19]
In the instant case, the vagueness in Section 4 (b)
brought about by E.O. No. 64 should therefore be construed
strictly against the taxpayer. The term income tax cases
should be read as to refer to estate and donors taxes and
taxes on business while the word hereof, to E.O. No. 64. Since
Executive Order No. 64 took effect on November 17, 1986,
consequently, insofar as the taxes in E.O. No. 64 are
concerned, the date of effectivity referred to in Section 4 (b)
of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26,
1986. When E.O. No. 64 took effect on November 17, 1986,
CTA Case No. 4109 was already filed and pending in court.
By the time respondent filed its supplementary tax amnesty
return on December 15, 1986, respondent already fell under
the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was
disqualified from availing of the business tax amnesty
granted therein.
It is respondents other argument that assuming it did
not validly avail of the amnesty under the two Executive
Orders, it is still not liable for the deficiency contractors tax
because the income from the projects came from the
Offshore Portion of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the
Offshore Portion. All materials and equipment in the
contract under the Offshore Portion were manufactured and
completed in Japan, not in the Philippines, and are therefore
not subject to Philippine taxes.
Before going into respondents arguments, it is
necessary to discuss the background of the two contracts,
examine their pertinent provisions andimplementation.
The NDC and Philphos are two government
corporations. In 1980, the NDC, as the corporate investment
arm of the Philippine Government, established the Philphos
to engage in the large-scale manufacture of phosphatic
fertilizer for the local and foreign markets.[20] The Philphos
plant complex which was envisioned to be the largest
phosphatic fertilizer operation in Asia, and among the
largest in the world, covered an area of 180 hectares within
the 435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to
construct and install a modern, reliable, efficient and
integrated wharf/port complex at the Leyte Industrial
Development Estate. The wharf/ port complex was intended
to be one of the major facilities for the industrial plants at
the Leyte Industrial Development Estate. It was to be
specifically adapted to the site for the handling of phosphate
rock, bagged or bulk fertilizer products, liquid materials and
other products of Philphos, the Philippine Associated
Smelting and Refining Corporation (Pasar),[21] and other
industrial plants within the Estate. The bidding was
participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982,
the NDC and respondent entered into an agreement entitled
Turn-Key Contract for Leyte Industrial Estate Port
Development Project Between National Development
Company and Marubeni Corporation.[22] The Port
Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading
systems, fuel oil depot, utilities systems, storage and service
buildings, offsite facilities, harbor service vessels,
navigational aid system, fire-fighting system, area lighting,
mobile equipment, spare parts and other related
facilities.[23] The scope of the works under the contract
covered turn-key supply, which included grants of licenses
and the transfer of technology and know-how,[24] and:
x x x the design and engineering, supply and delivery,
construction, erection and installation, supervision,
direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract,
as well as the coordination of tie-ins at boundaries and
schedule of the use of a part or the whole of the Wharf/Port
Complex through the Owner, with the design and
construction of other facilities around the site. The scope of
works shall also include any activity, work and supply
necessary for, incidental to or appropriate under present
international industrial port practice, for the timely and
successful implementation of the object of this Contract,
whether or not expressly referred to in the
abovementioned Annex I.[25]
The contract price for the wharf/ port complex
was Y12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down
into two portions: (1) the Japanese Yen Portion I; (2) the
Japanese Yen Portion II, while the price in Philippine
currency was referred to as the Philippine Pesos Portion.
The Japanese Yen Portions I and II were financed in two (2)
ways: (a) by yen credit loan provided by the Overseas
Economic Cooperation Fund (OECF); and (b) by suppliers
credit in favor of Marubeni from the Export-Import Bank of
Japan. The OECF is a Fund under the Ministry of Finance of
Japan extended by the Japanese government as assistance to
foreign governments to promote economic
development. The OECF extended to the Philippine
[26]
Government a loan of Y7,560,000,000.00 for the Leyte
Industrial Estate Port Development Project and authorized
the NDC to implement the same.[27] The other type of
financing is an indirect type where the supplier, i.e.,
Marubeni, obtained a loan from the Export-Import Bank of
Japan to advance payment to its sub-contractors.[28]
Under the financing schemes, the Japanese Yen Portions
I and II and the Philippine Pesos Portion were further
broken down and subdivided according to the materials,
equipment and services rendered on the project. The price
breakdown and the corresponding materials, equipment
and services were contained in a list attached as Annex III to
the contract.[29]
A few months after execution of the NDC contract,
Philphos opened for public bidding a project to construct
and install two ammonia storage tanks in Isabel. Like the
NDC contract, it was Marubeni Head Office in Japan that
participated in and won the bidding. Thus, on May 2, 1982,
Philphos and respondent corporation entered into an
agreement entitled Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer
Corporation and Marubeni Corporation.[30] The object of the
contract was to establish and place in operating condition a
modern, reliable, efficient and integrated ammonia storage
complex adapted to the site for the receipt and storage of
liquid anhydrous ammonia[31]and for the delivery of
ammonia to an integrated fertilizer plant adjacent to the
storage complex and to vessels at the dock.[32] The storage
complex was to consist of ammonia storage tanks,
refrigeration system, ship unloading system, transfer
pumps, ammonia heating system, fire-fighting system, area
lighting, spare parts, and other related facilities.[33] The scope
of the works required for the completion of the ammonia
storage complex covered the supply, including grants of
licenses and transfer of technology and know-how,[34] and:
x x x the design and engineering, supply and delivery,
construction, erection and installation, supervision,
direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this
Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of
the Ammonia Storage Complex through the Owner with the
design and construction of other facilities at and around the
Site. The scope of works shall also include any activity,
work and supply necessary for, incidental to or appropriate
under present international industrial practice, for the
timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the
abovementioned Annex I.[35]
The contract price for the project
was Y3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price
in Japanese currency was broken down into the Japanese
Yen Portion I and Japanese Yen Portion II while the price in
Philippine currency was classified as the Philippine Pesos
Portion. Both Japanese Yen Portions I and II were financed
by suppliers credit from the Export-Import Bank of Japan.
The price stated in the three portions were further broken
down into the corresponding materials, equipment and
services required for the project and their individual prices.
Like the NDC contract, the breakdown in the Philphos
contract is contained in a list attached to the latter as Annex
III.[36]
The division of the price into Japanese Yen Portions I
and II and the Philippine Pesos Portion under the two
contracts corresponds to the two parts into which the
contracts were classifiedthe Foreign Offshore Portion and receipts is hereby imposed on proprietors or operators of
the Philippine Onshore Portion. In both contracts, the the following business establishments and/or persons
Japanese Yen Portion I corresponds to the Foreign Offshore engaged in the business of selling or rendering the
Portion.[37] Japanese Yen Portion II and the Philippine Pesos following services for a fee or compensation:
Portion correspond to the Philippine Onshore Portion.[38]
(a) General engineering, general building and
Under the Philippine Onshore Portion, respondent does
specialty contractors, as defined in Republic Act
not deny its liability for the contractors tax on the income
No. 4566;
from the two projects. In fact respondent claims, which
petitioner has not denied, that the income it derived from the
xxxxxxxxx
Onshore Portion of the two projects had been declared for
tax purposes and the taxes thereon already paid to the
(q) Other independent contractors. The term
Philippine government.[39] It is with regard to the gross
independent contractors includes persons
receipts from the Foreign Offshore Portion of the two
(juridical or natural) not enumerated above (but
contracts that the liabilities involved in the assessments
not including individuals subject to the occupation
subject of this case arose. Petitioner argues that since the
tax under the Local Tax Code) whose activity
two agreements are turn-key,[40] they call for the supply of
consists essentially of the sale of all kinds of
both materials and services to the client, they are contracts
services for a fee regardless of whether or not the
for a piece of work and are indivisible. The situs of the two
performance of the service calls for the exercise or
projects is in the Philippines, and the materials provided and
use of the physical or mental faculties of such
services rendered were all done and completed within the
contractors or their employees. It does not include
territorial jurisdiction of the Philippines.[41] Accordingly,
regional or area headquarters established in the
respondents entire receipts from the contracts, including its
Philippines by multinational corporations,
receipts from the Offshore Portion, constitute income from
including their alien executives, and which
Philippine sources. The total gross receipts covering both
headquarters do not earn or derive income from
labor and materials should be subjected to contractors tax in
the Philippines and which act as supervisory,
accordance with the ruling in Commissioner of Internal
communications and coordinating centers for their
Revenue v. Engineering Equipment & Supply Co.[42]
affiliates, subsidiaries or branches in the Asia-
A contractors tax is imposed in the National Internal Pacific Region.
Revenue Code (NIRC) as follows:
x x x x x x x x x.[43]
Sec. 205. Contractors, proprietors or operators of dockyards,
and others.A contractors tax of four percent of the gross
 Under the afore-quoted provision, an independent
contractor is a person whose activity consists essentially of
the sale of all kinds of services for a fee, regardless of
whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such
contractors or their employees. The word contractor refers
to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other
persons, using his own means and methods without
submitting himself to control as to the petty details.[44]
A contractors tax is a tax imposed upon the privilege of
engaging in business.[45] It is generally in the nature of an
excise tax on the exercise of a privilege of selling services or
labor rather than a sale on products;[46] and is directly
collectible from the person exercising the privilege.[47] Being
an excise tax, it can be levied by the taxing authority only
when the acts, privileges or business are done or performed
within the jurisdiction of said authority.[48] Like property
taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.[49]
In the case at bar, it is undisputed that respondent was
an independent contractor under the terms of the two
subject contracts. Respondent, however, argues that the
work therein were not all performed in the Philippines
because some of them were completed in Japan in
accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals
that the materials and equipment to be made and the works
and services to be performed by respondent are indeed
classified into two. The first part, entitled Breakdown of
Japanese Yen Portion I provides:
Japanese Yen Portion I of the Contract Price has
been subdivided according to discrete portions of
materials and equipment which will be shipped to
Leyte as units and lots. This subdivision of price is to be
used by owner to verify invoice for Progress Payments
under Article 19.2.1 of the Contract. The agreed subdivision
of Japanese Yen Portion I is as follows:
x x x x x x x x x. [50]
The subdivision of Japanese Yen Portion I covers materials
and equipment while Japanese Yen Portion II and the
Philippine Pesos Portion enumerate other materials and
equipment and the construction and installation work on the
project. In other words, the supplies for the project are listed
under Portion I while labor and other supplies are listed
under Portion II and the Philippine Pesos Portion. Mr.
Takeshi Hojo, then General Manager of the Industrial Plant
Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of
the two projects, testified that all the machines and
equipment listed under Japanese Yen Portion I in Annex III
were manufactured in Japan.[51] The machines and
equipment were designed, engineered and fabricated by
Japanese firms sub-contracted by Marubeni from the list of
sub-contractors in the technical appendices to each
contract.[52] Marubeni sub-contracted a majority of the
equipment and supplies to Kawasaki Steel Corporation
which did the design, fabrication, engineering and
manufacture thereof;[53] Yashima & Co. Ltd. which
manufactured the mobile equipment; Bridgestone which
provided the rubber fenders of the mobile equipment;[54] and
B.S. Japan for the supply of radio equipment.[55] The
engineering and design works made by Kawasaki Steel
Corporation included the lay-out of the plant facility and
calculation of the design in accordance with the
specifications given by respondent.[56] All sub-contractors
and manufacturers are Japanese corporations and are based
in Japan and all engineering and design works were
performed in that country.[57]
The materials and equipment under Portion I of the NDC
Port Project is primarily composed of two (2) sets of ship
unloader and loader; several boats and mobile
equipment.[58] The ship unloader unloads bags or bulk
products from the ship to the port while the ship loader
loads products from the port to the ship. The unloader and
loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of
these equipment were completely manufactured in Japan
according to the specifications of the project. After
manufacture, they were rolled on to a barge and transported
to Isabel, Leyte.[59] Upon reaching Isabel, the unloader and
loader were rolled off the barge and pulled to the pier to the
spot where they were installed.[60] Their installation simply
consisted of bolting them onto the pier.[61]
Like the ship unloader and loader, the three tugboats
and a line boat were completely manufactured in Japan. The
boats sailed to Isabel on their own power. The mobile
equipment, consisting of three to four sets of tractors, cranes
and dozers, trailers and forklifts, were also manufactured
and completed in Japan. They were loaded on to a
shipping vessel and unloaded at the Isabel Port. These
pieces of equipment were all on wheels and self-propelled.
Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.[62]
In addition to the foregoing, there are other items listed
in Japanese Yen Portion I in Annex III to the NDC contract.
These other items consist of supplies and materials for five
(5) berths, two (2) roads, a causeway, a warehouse, a transit
shed, an administration building and a security building.
Most of the materials consist of steel sheets, steel pipes,
channels and beams and other steel structures, navigational
and communication as well as electrical equipment. [63]
In connection with the Philphos contract, the major
pieces of equipment supplied by respondent were the
ammonia storage tanks and refrigeration units.[64] The steel
plates for the tank were manufactured and cut in Japan
according to drawings and specifications and then shipped
to Isabel. Once there, respondents employees put the steel
plates together to form the storage tank. As to the
refrigeration units, they were completed and assembled in
Japan and thereafter shipped to Isabel. The units were
simply installed there.[65] Annex III to the Philphos contract
lists down under the Japanese Yen Portion I the materials for
the ammonia storage tank, incidental equipment, piping
facilities, electrical and instrumental apparatus, foundation
material and spare parts.
All the materials and equipment transported to the
Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the
contracts.[66] The inspection was made by representatives of
respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to
verify the correctness of the tests on the machines and
equipment[67]while Philphos sent a representative to Japan
to inspect the storage equipment.[68]
 The sub-contractors of the materials and equipment
under Japanese Yen Portion I were all paid by respondent in
Japan. In his deposition upon oral examination, Kenjiro
Yamakawa, formerly the Assistant General Manager and
Manager of the Steel Plant Marketing Department,
Engineering & Construction Division, Kawasaki Steel
Corporation, testified that the equipment and supplies for
the two projects provided by Kawasaki under Japanese Yen
Portion I were paid by Marubeni in Japan. Receipts for such
payments were duly issued by Kawasaki in Japanese and
English.[69]Yashima & Co. Ltd. and B.S. Japan were likewise
paid by Marubeni in Japan.[70]
Between Marubeni and the two Philippine corporations,
payments for all materials and equipment under Japanese
Yen Portion I were made to Marubeni by NDC and Philphos
also in Japan. The NDC, through the Philippine National
Bank, established letters of credit in favor of respondent
through the Bank of Tokyo. The letters of credit were
financed by letters of commitment issued by the OECF with
the Bank of Tokyo. The Bank of Tokyo, upon respondents
submission of pertinent documents, released the amount in
the letters of credit in favor of respondent and credited the
amount therein to respondents account within the same
bank.[71]
Clearly, the service of design and engineering, supply
and delivery, construction, erection and installation,
supervision, direction and control of testing and
commissioning, coordination[72]of the two projects involved
two taxing jurisdictions. These acts occurred in two
countries Japan and the Philippines. While the construction
and installation work were completed within the
Philippines, the evidence is clear that some pieces of
equipment and supplies were completely designed and
engineered in Japan. The two sets of ship unloader and
loader, the boats and mobile equipment for the NDC project
and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished
products when shipped to the Philippines. The other
construction supplies listed under the Offshore Portion such
as the steel sheets, pipes and structures, electrical and
instrumental apparatus, these were not finished products
when shipped to the Philippines. They, however, were
likewise fabricated and manufactured by the sub-
contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside
the taxing jurisdiction of the Philippines and are therefore
not subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner
of Internal Revenue v. Engineering Equipment & Supply Co[73]is
not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not
engaged in the manufacture of air conditioning units in the
Philippines. Engineering Equipment designed, supplied and
installed centralized air-conditioning systems for clients
who contracted its services. Engineering, however, did not
manufacture all the materials for the air-conditioning
system. It imported some items for the system it designed
and installed.[74] The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no
foreign element involved in the supply of materials and
services.
 With the foregoing discussion, it is unnecessary to
discuss the other issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision
in CA-G.R. SP No. 42518 is affirmed.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and Ynares-
Santiago, JJ., concur. Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent

British Airways.

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review

on certiorari of the joint Decision of the Court of Tax Appeals (CTA)
in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set
aside petitioner's assessment of deficiency income taxes against
respondent British Overseas Airways Corporation (BOAC) for the
fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well
as its Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized
and existing under the laws of the United Kingdom It is engaged in
the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over the
routes of the other airline members. During the periods covered by
the disputed assessments, it is admitted that BOAC had no landing
rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-
month period, partly in 1961 and partly in 1962, when it was
granted a temporary landing permit by the CAB. Consequently, it did
not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it
maintained a general sales agent in the Philippines — Wamer
Barnes and Company, Ltd., and later Qantas Airways — which was
responsible for selling BOAC tickets covering passengers and
cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR,
for brevity) assessed BOAC the aggregate amount of P2,498,358.56
for deficiency income taxes covering the years 1959 to 1963. This
was protested by BOAC. Subsequent investigation resulted in the
issuance of a new assessment, dated 16 January 1970 for the years
1959 to 1967 in the amount of P858,307.79. BOAC paid this new
assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of
P858,307.79, which claim was denied by the CIR on 16 February
1972. But before said denial, BOAC had already filed a petition for
review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes,
interests, and penalty for the fiscal years 1968-1969 to 1970-1971
in the aggregate amount of P549,327.43, and the additional
amounts of P1,000.00 and P1,800.00 as compromise penalties for
violation of Section 46 (requiring the filing of corporation returns)
penalized under Section 74 of the National Internal Revenue Code
(NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972,
however, the CIR not only denied the BOAC request for refund in the
First Case but also re-issued in the Second Case the deficiency
income tax assessment for P534,132.08 for the years 1969 to 1970-
71 plus P1,000.00 as compromise penalty under Section 74 of the
Tax Code. BOAC's request for reconsideration was denied by the CIR
on 24 August 1973. This prompted BOAC to file the Second Case
before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint
Decision reversing the CIR. The Tax Court held that the proceeds of
sales of BOAC passage tickets in the Philippines by Warner Barnes
and Company, Ltd., and later by Qantas Airways, during the period
in question, do not constitute BOAC income from Philippine sources
"since no service of carriage of passengers or freight was performed
by BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax. The CTA position was that income
from transportation is income from services so that the place where
services are rendered determines the source. Thus, in the
dispositive portion of its Decision, the Tax Court ordered petitioner
to credit BOAC with the sum of P858,307.79, and to cancel the
deficiency income tax assessments against BOAC in the amount of
P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the
Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined
the issues, thus:
1. Whether or not the revenue derived by private
respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for
air transportation, while having no landing rights
here, constitute income of BOAC from Philippine
sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question
BOAC s a resident foreign corporation doing
business in the Philippines or has an office or place
of business in the Philippines.
3. In the alternative that private respondent may
not be considered a resident foreign corporation
but a non-resident foreign corporation, then it is
liable to Philippine income tax at the rate of thirty-
five per cent (35%) of its gross income received
from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged
in trade or business within the Philippines or
having an office or place of business therein.
(i) The term "non-resident foreign corporation"
applies to a foreign corporation not engaged in
trade or business within the Philippines and not
having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must
be judged in the light of its peculiar environmental circumstances.
The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or
for the purpose and object of the business organization. 2 "In order
that a foreign corporation may be regarded as doing business within
a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips
— each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities were
in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding
taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. — ...
 (b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation
organized, authorized, or existing under the laws of
any foreign country, except a foreign fife insurance
company, engaged in trade or business within the
Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net
income received in the preceding taxable year
from all sources within the Philippines. (Emphasis
supplied)
Next, we address ourselves to the issue of whether or not the
revenue from sales of tickets by BOAC in the Philippines constitutes
income from Philippine sources and, accordingly, taxable under our
income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income
derived from salaries, wages or compensation for
personal service of whatever kind and in whatever
form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in
property, whether real or personal, growing out of
the ownership or use of or interest in such
property; also from interests, rents, dividends,
securities, or the transactions of any business carried
on for gain or profile, or gains, profits, and income
derived from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds
from sales of transport documents. "The words 'income from any
source whatever' disclose a legislative policy to include all income
not expressly exempted within the class of taxable income under
our laws." Income means "cash received or its equivalent"; it is the
amount of money coming to a person within a specific time ...; it
means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the
fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the
Philippines",
The source of an income is the property, activity or service that
produced the income. 8 For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued by
a common carrier, it constitutes the contract between the ticket-
holder and the carrier. It gives rise to the obligation of the purchaser
of the ticket to pay the fare and the corresponding obligation of the
carrier to transport the passenger upon the terms and conditions
set forth thereon. The ordinary ticket issued to members of the
traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of
gross income from sources within the Philippines, namely: (1)
interest, (21) dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal property, does not
mention income from the sale of tickets for international
transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language,
does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will
show that it does not state that it is an all-inclusive enumeration,
and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived
from transportation is income for services, with the result that the
place where the services are rendered determines the source; and
since BOAC's service of transportation is performed outside the
Philippines, the income derived is from sources without the
Philippines and, therefore, not taxable under our income tax laws.
The Tax Court upholds that stand in the joint Decision under
review.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income taxation.
Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the "source"; and the
source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued within the
Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers
and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source" conveys one essential idea, that of
origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal
years covered by the questioned deficiency income tax assessments in these cases, or, from
1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated
on 24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers
shall pay a tax of 2-½ per cent on their cross
Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978,
provided a statutory definition of the term "gross Philippine
billings," thus:
... "Gross Philippine billings" includes gross revenue
realized from uplifts anywhere in the world by any
international carrier doing business in the
Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail
provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are
taxed on their income from Philippine sources. The 2-½ % tax on
gross Philippine billings is an income tax. If it had been intended as
an excise or percentage tax it would have been place under Title V of
the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal
for lack of merit by this Court of the appeal in JAL vs. Commissioner
of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case
was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the
taxpayer therein subject to the common carrier's tax. As elucidated
by the Tax Court, however, the common carrier's tax is an excise tax,
being a tax on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to tax
the business of transportation. 14 Being an excise tax, the same can
be levied by the State only when the acts, privileges or businesses
are done or performed within the jurisdiction of the Philippines.
The subject matter of the case under consideration is income tax, a
direct tax on the income of persons and other entities "of whatever
kind and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in one cannot
be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax
Appeals is hereby SET ASIDE. Private respondent, the British
Overseas Airways Corporation (BOAC), is hereby ordered to pay the
amount of P534,132.08 as deficiency income tax for the fiscal years
1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest
from April 16, 1972 for a period not to exceed three (3) years in
accordance with the Tax Code. The BOAC claim for refund in the
amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-54108 January 17, 1984
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF TAX APPEALS and SMITH KLINE & FRENCH
OVERSEAS CO. (PHILIPPINE BRANCH), respondents.
The Solicitor General for petitioner.
Siguion Reyna, Montecillo & Ongsiako and J.C. Castañeda, Jr. and E.C.
Alcantara for respondents.
AQUINO, J.:
This case is about the refund of a 1971 income tax amounting to
P324,255. Smith Kline and French Overseas Company, a
multinational firm domiciled in Philadelphia, Pennsylvania, is
licensed to do business in the Philippines. It is engaged in the
importation, manufacture and sale of pharmaceuticals drugs and
chemicals.
In its 1971 original income tax return, Smith Kline declared a net
taxable income of P1,489,277 (Exh. A) and paid P511,247 as tax due.
Among the deductions claimed from gross income was P501,040
($77,060) as its share of the head office overhead expenses.
However, in its amended return filed on March 1, 1973, there was
an overpayment of P324,255 "arising from underdeduction of home
office overhead" (Exh. E). It made a formal claim for the refund of
the alleged overpayment.
It appears that sometime in October, 1972, Smith Kline received
from its international independent auditors, Peat, Marwick, Mitchell
and Company, an authenticated certification to the effect that the
Philippine share in the unallocated overhead expenses of the main
office for the year ended December 31, 1971 was actually $219,547
(P1,427,484). It further stated in the certification that the allocation
was made on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole. By reason
of the new adjustment, Smith Kline's tax liability was greatly
reduced from P511,247 to P186,992 resulting in an overpayment
of P324,255.
On April 2, 1974, without awaiting the action of the Commissioner
of Internal Revenue on its claim Smith Kline filed a petition for
review with the Court of Tax Appeals.
In its decision of March 21, 1980, the Tax Court ordered the
Commissioner to refund the overpayment or grant a tax credit to
Smith Kline. The Commissioner appealed to this Court.
The governing law is found in section 37 of the old National Internal
Revenue Code, Commonwealth Act No. 466, which is reproduced in
Presidential Decree No. 1158, the National Internal Revenue Code of
1977 and which reads:
SEC. 37. Income form sources within the
Philippines. —
xxx xxx xxx
(b) Net income from sources in the Philippines. —
From the items of gross income specified in
subsection (a) of this section there shall be
deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a
ratable part of any expenses, losses, or other
deductions which cannot definitely be allocated to
some item or class of gross income. The remainder,
if any, shall be included in full as net income from
sources within the Philippines.
xxx xxx xxx
Revenue Regulations No. 2 of the Department of Finance contains
the following provisions on the deductions to be made to determine
the net income from Philippine sources:
SEC. 160. Apportionment of deductions. — From the
items specified in section 37(a), as being derived
specifically from sources within the Philippines
there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated
thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be
allocated to some item or class of gross income. The
remainder shall be included in full as net income
from sources within the Philippines. The ratable
part is based upon the ratio of gross income from
sources within the Philippines to the total gross
income.
Example: A non-resident alien individual whose
taxable year is the calendar year, derived gross
income from all sources for 1939 of P180,000,
including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Philippines
12,000
Gain from sale of real property located within the
Philippines 11,000
Total P36,000
that is, one-fifth of the total gross income was from
sources within the Philippines. The remainder of
the gross income was from sources without the
Philippines, determined under section 37(c).
The expenses of the taxpayer for the year amounted
to P78,000. Of these expenses the amount of P8,000
is properly allocated to income from sources within
the Philippines and the amount of P40,000 is
properly allocated to income from sources without
the Philippines.
 The remainder of the expense, P30,000, cannot be
definitely allocated to any class of income. A ratable
part thereof, based upon the relation of gross
income from sources within the Philippines to the
total gross income, shall be deducted in computing
net income from sources within the Philippines.
Thus, these are deducted from the P36,000 of gross
income from sources within the Philippines
expenses amounting to P14,000 [representing
P8,000 properly apportioned to the income from
sources within the Philippines and P6,000, a ratable
part (one-fifth) of the expenses which could not be
allocated to any item or class of gross income.] The
remainder, P22,000, is the net income from sources
within the Philippines.
From the foregoing provisions, it is manifest that where an expense
is clearly related to the production of Philippine-derived income or
to Philippine operations (e.g. salaries of Philippine personnel, rental
of office building in the Philippines), that expense can be deducted
from the gross income acquired in the Philippines without resorting
to apportionment.
The overhead expenses incurred by the parent company in
connection with finance, administration, and research and
development, all of which direct benefit its branches all over the
world, including the Philippines, fall under a different category
however. These are items which cannot be definitely allocated or
Identified with the operations of the Philippine branch. For 1971,
the parent company of Smith Kline spent $1,077,739. Under section
37(b) of the Revenue Code and section 160 of the regulations, Smith
Kline can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch's gross income to
the total gross income, worldwide, of the multinational corporation.
In his petition for review, the Commissioner does not dispute the
right of Smith Kline to avail itself of section 37(b) of the Tax Code
and section 160 of the regulations. But the Commissioner maintains
that such right is not absolute and that as there exists a contract (in
this case a service agreement) which Smith Kline has entered into
with its home office, prescribing the amount that a branch can
deduct as its share of the main office's overhead expenses, that
contract is binding.
The Commissioner contends that since the share of the Philippine
branch has been fixed at $77,060, Smith Kline itself cannot claim
more than the said amount. To allow Smith Kline to deduct more
than what was expressly provided in the agreement would be to
ignore its existence. It is a cardinal rule that a contract is the law
between the contracting parties and the stipulations therein must
be respected unless these are proved to be contrary to law, morals,
good customs and public policy. There being allegedly no showing
to the contrary, the provisions thereof must be followed.
The Commissioner also argues that the Tax Court erred in relying on
the certification of Peat, Marwick, Mitchell and Company that Smith
Kline is entitled to deduct P1,427,484 ($219,547) as its allotted
share and that Smith Kline has not presented any evidence to show
that the home office expenses chargeable to Philippine operations
exceeded $77,060.
On the other hand, Smith Kline submits that the contract between
itself and its home office cannot amend tax laws and regulations.
The matter of allocated expenses which are deductible under the
law cannot be the subject of an agreement between private parties
nor can the Commissioner acquiesce in such an agreement.
Smith Kline had to amend its return because it is of common
knowledge that audited financial statements are generally
completed three or four months after the close of the accounting
period. There being no financial statements yet when the
certification of January 11, 1972 was made the treasurer could not
have correctly computed Smith Kline's share in the home office
overhead expenses in accordance with the gross income formula
prescribed in section 160 of the Revenue Regulations. What the
treasurer certified was a mere estimate.
Smith Kline likewise submits that it has presented ample evidence
to support its claim for refund. To this end, it has presented before
the Tax Court the authenticated statement of Peat, Marwick,
Mitchell and Company to show that since the gross income of the
Philippine branch was P7,143,155 ($1,098,617) for 1971 as per
audit report prepared by Sycip, Gorres, Velayo and Company, and
the gross income of the corporation as a whole was $6,891,052,
Smith Kline's share at 15.94% of the home office overhead expenses
was P1,427,484 ($219,547) (Exh. G to G-2, BIR Records, 4-5).
Clearly, the weight of evidence bolsters its position that the amount
of P1,427,484 represents the correct ratable share, the same having
been computed pursuant to section 37(b) and section 160.
In a manifestation dated July 19, 1983, Smith Kline declared that
with respect to its share of the head office overhead expenses in its
income tax returns for the years 1973 to 1981, it deducted its
ratable share of the total overhead expenses of its head office for
those years as computed by the independent auditors hired by the
parent company in Philadelphia, Pennsylvania U.S.A., as soon as said
computations were made available to it.
We hold that Smith Kline's amended 1971 return is in conformity
with the law and regulations. The Tax Court correctly held that the
refund or credit of the resulting overpayment is in order.
WHEREFORE, the decision of the Tax Court is hereby affirmed. No
costs.
SO ORDERED
Makasiar (Chairman), Concepcion, Jr., Guerrero, De Castro and
Escolin, JJ., concur.
Abad Santos, J., took no part.
The Lawphil Project - Arellano Law Foundation
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT
OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts, on various dates, with foreign
insurance companies not doing business in the Philippines namely:
Imperio Compañia de Seguros, La Union y El Fenix Español,
Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance
Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance
Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the
foreign reinsurers a portion of the premiums on insurance it has
originally underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the
risks insured. Said reinsurrance contracts were signed by Philippine
Guaranty Co., Inc. in Manila and by the foreign reinsurers outside
the Philippines, except the contract with Swiss Reinsurance
Company, which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
reinsurers' liability simultaneous with that of Philippine Guaranty
Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. Compromise for non-filing of withholding
was required to keep a register in Manila where the risks ceded to 100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
the foreign reinsurers where entered, and entry therein was binding
upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
for by the foreign reinsurers. The foreign reinsurers further agreed, ==========
in consideration for managing or administering their affairs in the
1954
Philippines, to compensate the Philippine Guaranty Co., Inc., in an
amount equal to 5% of the reinsurance premiums. Conflicts and/or Gross premium per investigation . . . . . . . . . . P780.880.68
differences between the parties under the reinsurance contracts
were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Withholding tax due thereon at 24% . . . . . . . . P184,411.00
Swiss Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines. 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00

Compromise for non-filing of withholding

Pursuant to the aforesaid reinsurance contracts, Philippine 100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranty Co., Inc. ceded to the foreign reinsurers the following
premiums:
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from

its gross income when it file its income tax returns for 1953 and
1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of
Internal Revenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums, thus:
Philippine Guaranty Co., Inc., protested the assessment on the
ground that reinsurance premiums ceded to foreign reinsurers not
1953 doing business in the Philippines are not subject to withholding tax.
Gross premium per investigation . . . . . . . . . . P768,580.00 Its protest was denied and it appealed to the Court of Tax Appeals.

Withholding tax due thereon at 24% . . . . . . . . P184,459.00

On July 6, 1963, the Court of Tax Appeals rendered judgment with
this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of
P375,345.00 as withholding income taxes for the years
1953 and 1954, plus the statutory delinquency penalties
thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of
the Commissioner of Internal Revenue's assessment for withholding
tax on the reinsurance premiums ceded in 1953 and 1954 to the
foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did
not constitute income from sources within the Philippines because
the foreign reinsurers did not engage in business in the Philippines,
nor did they have office here.
The reinsurance contracts, however, show that the transactions or
activities that constituted the undertaking to reinsure Philippine
Guaranty Co., Inc. against loses arising from the original insurances
in the Philippines were performed in the Philippines. The liability of
the foreign reinsurers commenced simultaneously with the liability
of Philippine Guaranty Co., Inc. under the original insurances.
Philippine Guaranty Co., Inc. kept in Manila a register of the risks
ceded to the foreign reinsurers. Entries made in such register bound
the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on
premiums imposed by Section 259 of the Tax Code for the privilege
of doing insurance business in the Philippines were payable by the
foreign reinsurers when the same were not recoverable from the
original assured. The foreign reinsurers paid Philippine Guaranty
Co., Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of
the affairs of the former in the Philippines in regard to their
reinsurance activities here. Disputes and differences between the
parties were subject to arbitration in the City of Manila. All the
reinsurance contracts, except that with Swiss Reinsurance
Company, were signed by Philippine Guaranty Co., Inc. in the
Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company was signed by both parties in
Switzerland, the same specifically provided that its provision shall
be construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to
Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on
their income from sources within the Philippines. The word
"sources" has been interpreted as the activity, property or service
giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies
to reinsure Philippine Guaranty Co., Inc., against liability for loss
under original insurances. Such undertaking, as explained above,
took place in the Philippines. These insurance premiums, therefore,
came from sources within the Philippines and, hence, are subject to
corporate income tax.
The foreign insurers' place of business should not be confused with
their place of activity. Business should not be continuity and
progression of transactions 2 while activity may consist of only a
single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting its
income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore,
is not the place of business but the place of activity that created an
income.
Petitioner further contends that the reinsurance premiums are not
income from sources within the Philippines because they are not
specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds
of income mentioned therein should be treated as income from
sources within the Philippines but it does not require that other
kinds of income should not be considered likewise. 1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to preserve the
State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is
supposed to provide. Considering that the reinsurance premiums in
question were afforded protection by the government and the
recipient foreign reinsurers exercised rights and privileges
guaranteed by our laws, such reinsurance premiums and reinsurers
should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the
rulings of the Commissioner of Internal Revenue requiring no
withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax
thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate
if from liability to pay such withholding tax The Government is not
estopped from collecting taxes by the mistakes or errors of its
agents.3
In respect to the question of whether or not reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are
subject to withholding tax under Section 53 and 54 of the Tax Code,
suffice it to state that this question has already been answered in
the affirmative in Alexander Howden & Co., Ltd. vs. Collector of
Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be
computed from the amount actually remitted to the foreign
reinsurers instead of from the total amount ceded. And since it did
not remit any amount to its foreign insurers in 1953 and 1954, no
withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In
the case of foreign corporations subject to taxation under
this Title not engaged in trade or business within the
Philippines and not having any office or place of business
therein, there shall be deducted and withheld at the source
in the same manner and upon the same items as is provided
in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in
the same manner and subject to the same conditions as
provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and
general copartnerships (compañias colectivas), in what ever
capacity acting, including lessees or mortgagors of real or
personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt,
custody, disposal, or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or
 place of business therein, shall (except in the case provided Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera,
for in subsection [a] of this section) deduct and withhold Paredes, Dizon and Regala, JJ., concur.
from such annual or periodical gains, profits, and income a Makalintal and Zaldivar, JJ., took no part.
tax equal to twelve per centum thereof: Provided That no
deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such
corporation is engaged in trade or business within the
Philippines or has an office or place of business therein, and
(2) more than eighty-five per centum of the gross income of
such corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such
dividends (or for such part of such period as the
corporation has been in existence)was derived from sources
within the Philippines as determined under the provisions
of section thirty-seven: Provided, further, That the Collector
of Internal Revenue may authorize such tax to be deducted
and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.

The above-quoted provisions allow no deduction from the income

therein enumerated in determining the amount to be withheld.
According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the

Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax
for the years 1953 and 1954, respectively. If the amount of
P375,345.00 is not paid within 30 days from the date this
judgement becomes final, there shall be collected a surcharged of
5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that
the maximum amount that may be collected as interest shall not
exceed the amount corresponding to a period of three (3) years.
With costs againsts petitioner.
 THE COLLECTOR (NOW COMMISSIONER) Of INTERNAL
REVENUE, respondent.

Sycip, Salazar, Luna and Associates and Lichauco, Picazo and Agcaoili
for petitioners.
Office of the Solicitor General for respondent.

BENGZON, J.P., J.:

In 1950 the Commonwealth Insurance Co., a domestic corporation,

entered into reinsurance contracts with 32 British insurance
companies not engaged in trade or business in the Philippines,
whereby the former agreed to cede to them a portion of the
premiums on insurances on fire, marine and other risks it has
underwritten in the Philippines. Alexander Howden & Co., Ltd., also
a British corporation not engaged in business in this country,
represented the aforesaid British insurance companies. The
reinsurance contracts were prepared and signed by the foreign
reinsurers in England and sent to Manila where Commonwealth
Insurance Co. signed them.

Pursuant to the aforesaid contracts, Commonwealth Insurance Co.,

in 1951, remitted P798,297.47 to Alexander Howden & Co., Ltd., as
reinsurance premiums. In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed in April 1952 an income tax
return declaring the sum of P798,297.47, with accrued interest
thereon in the amount of P4,985.77, as Alexander Howden & Co.,
Ltd.'s gross income for calendar year 1951. It also paid the Bureau
of Internal Revenue P66,112.00 income tax thereon.

On May 12, 1954, within the two-year period provided for by law,
G.R. No. L-19392 April 14, 1965 Alexander Howden & Co., Ltd. filed with the Bureau of Internal
Revenue a claim for refund of the P66,112.00, later reduced to
P65,115.00, because Alexander Howden & Co., Ltd. agreed to the
ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET
payment of P977.00 as income tax on the P4,985.77 accrued
AL., petitioners,
interest. A ruling of the Commissioner of Internal Revenue, dated
vs.
December 8, 1953, was invoked, stating that it exempted from
withholding tax reinsurance premiums received from domestic
insurance companies by foreign insurance companies not
authorized to do business in the Philippines. Subsequently,
Alexander Howden & Co., Ltd. instituted an action in the Court of
First Instance of Manila for the recovery of the aforesaid amount
claimed. Pursuant to Section 22 of Republic Act 1125 the case was
certified to the Court of Tax Appeals. On November 24, 1961 the Tax
Court denied the claim.
Plaintiffs have appealed, thereby squarely raising the following
issues: (1) Are portions of premiums earned from insurances locally
underwritten by a domestic corporation, ceded to and received by
non-resident foreign reinsurance companies, thru a non-resident
foreign insurance broker, pursuant to reinsurance contracts signed
by the reinsurers abroad but signed by the domestic corporation in
the Philippines, subject to income tax or not? (2) If subject thereto,
may or may not the income tax on reinsurance premiums be
withheld pursuant to Sections 53 and 54 of the National Internal
Revenue Code?
Section 24 of the National Internal Revenue Code subjects to tax a
non-resident foreign corporation's income from sources within the
Philippines. The first issue therefore hinges on whether or not the
reinsurance premiums in question came from sources within the
Philippines.
Appellants would impress upon this Court that the reinsurance
premiums came from sources outside the Philippines, for these
reasons: (1) The contracts of reinsurance, out of which the
reinsurance premiums were earned, were prepared and signed
abroad, so that their situs lies outside the Philippines; (2) The
reinsurers, not being engaged in business in the Philippines,
received the reinsurance premiums as income from their business
conducted in England and, as such, taxable in England; and, (3)
Section 37 of the Tax Code, enumerating what are income from
sources within the Philippines, does not include reinsurance
premiums.
The source of an income is the property, activity or service that
produced the income. 1 The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the
Philippines. In the first place, the reinsured, the liabilities insured
and the risks originally underwritten by Commonwealth Insurance
Co., upon which the reinsurance premiums and indemnity were
based, were all situated in the Philippines. Secondly, contrary to
appellants' view, the reinsurance contracts were perfected in the
Philippines, for Commonwealth Insurance Co. signed them last in
Manila. The American cases cited are inapplicable to this case
because in all of them the reinsurance contracts were signed outside
the jurisdiction of the taxing State. And, thirdly, the parties to the
reinsurance contracts in question evidently intended Philippine law
to govern. Article 11 thereof provided for arbitration in Manila,
according to the laws of the Philippines, of any dispute arising
between the parties in regard to the interpretation of said contracts
or rights in respect of any transaction involved. Furthermore, the
contracts provided for the use of Philippine currency as the medium
of exchange and for the payment of Philippine taxes.
Appellants should not confuse activity that creates income
with business in the course of which an income is realized. An
activity may consist of a single act; while business implies continuity
of transactions. 2 An income may be earned by a corporation in the
Philippines although such corporation conducts all its businesses
abroad. Precisely, Section 24 of the Tax Code does not require a
foreign corporation to be engaged in business in the Philippines in
order for its income from sources within the Philippines to be
taxable. It subjects foreign corporations not doing business in the
Philippines to tax for income from sources within the Philippines. If
by source of income is meant the business of the taxpayer, foreign
corporations not engaged in business in the Philippines would be
exempt from taxation on their income from sources within the
Philippines.
Furthermore, as used in our income tax law, "income" refers to the
flow of wealth. 3 Such flow, in the instant case, proceeded from the
Philippines. Such income enjoyed the protection of the Philippine
Government. As wealth flowing from within the taxing jurisdiction
of the Philippines and in consideration for protection accorded it by
the Philippines, said income should properly share the burden of
maintaining the government.
Appellants further contend that reinsurance premiums not being
among those mentioned in Section 37 of the Tax Code as income
from sources within the Philippines, the same should not be treated
as such. Section 37, however, is not an all-inclusive enumeration. It
states that "the following items of gross income shall be treated as
gross income from sources within the Philippines." It does not state
or imply that an income not listed therein is necessarily from
sources outside the Philippines.
As to appellants' contention that reinsurance premiums constitute
"gross receipts" instead of "gross income", not subject to income tax,
suffice it to say that, as correctly observed by the Court of Tax
Appeals, "gross receipts" of amounts that do not constitute return of
capital, such as reinsurance premiums, are part of the gross income
of a taxpayer. At any rate, the tax actually collected in this case was
computed not on the basis of gross premium receipts but on the net
premium income, that is, after deducting general expenses, payment
of policies and taxes.
The reinsurance premiums in question being taxable, we turn to the
issue whether or not they are subject to withholding tax under
Section 54 in relation to Section 53 of the Tax Code.
Subsection (b) of Section 53 subjects to withholding tax the
following: interest, dividends, rents, salaries, wages,premiums,
annuities, compensations, remunerations, emoluments, or other
fixed or determinable annual or periodical gains, profits, and
income of any non-resident alien individual not engaged in trade or
business within the Philippines and not having any office or place of
business therein. Section 54, by reference, applies this provision
toforeign corporations not engaged in trade or business in the
Philippines.
Appellants maintain that reinsurance premiums are not "premiums"
at all as contemplated by Subsection (b) of Section 53; that they are
not within the scope of "other fixed or determinable annual or
periodical gains, profits, and income"; that, therefore, they are not
items of income subject to withholding tax.
It is urged for the applicant that no opposition has been registered
against his petition on the issues above-discussed. Absence of
opposition, however, does not preclude the scanning of the whole
record by the appellate court, with a view to preventing the
conferment of citizenship to persons not fully qualified therefor
(Lee Ng Len vs. Republic, G.R. No. L-20151, March 31, 1965). The
applicant's complaint of unfairness could have some weight if the
objections on appeal had been on points not previously passed
upon. But the deficiencies here in question are not new but well-
known, having been ruled upon repeatedly by this Court, and we see
no excuse for failing to take them into account.
1äwphï1. ñët
The argument of appellants is that "premiums", as used in Section
53 (b), is preceded by "rents, salaries, wages" and followed by
"annuities, compensations, remunerations" which connote
periodical income payable to the recipient on account of some
investment or for personal services rendered. "Premiums" should,
therefore, in appellants' view, be given a meaning kindred to the
other terms in the enumeration and be understood in its broadest
sense as "a reward or recompense for some act done; a bonus;
compensation for the use of money; a price for a loan; a sum in
addition to interest."
We disagree with the foregoing proposition. Since Section 53
subjects to withholding tax various specified income, among them,
"premiums", the generic connotation of each and every word or
phrase composing the enumeration in Subsection (b) thereof is
income. Perforce, the word "premiums", which is neither qualified
nor defined by the law itself, should mean income and should
include all premiums constituting income, whether they be
insurance or reinsurance premiums.
Assuming that reinsurance premiums are not within the word
"premiums" in Section 53, still they may be classified
as determinable and periodical income under the same provision of
law. Section 199 of the Income Tax Regulations defines fixed,
determinable, annual and periodical income:
Income is fixed when it is to be paid in amounts definitely
pre-determined. On the other hand, it is determinable
whenever there is a basis of calculation by which the
amount to be paid may be ascertained.
The income need not be paid annually if it is paid
periodically; that is to say, from time to time, whether or not
at regular intervals. That the length of time during which
the payments are to be made may be increased or
diminished in accordance with someone's will or with the
happening of an event does not make the payments any the
less determinable or periodical. ...
Reinsurance premiums, therefore, are determinable and periodical
income: determinable, because they can be calculated accurately on
the basis of the reinsurance contracts; periodical, inasmuch as they
were earned and remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of the
Commissioner of Internal Revenue dated December 8, 1953.
Appellants' brief also cited rulings of the same official, dated
October 13, 1953, February 7, 1955 and February 8, 1955, as well as
the decision of the defunct Board of Tax Appeals in the case of
Franklin Baker Co., 4thereby attempting to show that the prevailing
administrative interpretation of Sections 53 and 54 of the Tax Code
exempted from withholding tax reinsurance premiums ceded to
non-resident foreign insurance companies. It is asserted that since
Sections 53 and 54 were "substantially re-enacted" by Republic Acts
1065 (approved June 12, 1954), 1291 (approved June 15, 1955),
1505 (approved June 16, 1956) and 2343 (approved June 20, 1959)
when the said administrative rulings prevailed, the rulings should
be given the force of law under the principle of legislative approval
by re-enactment.
The principle of legislative approval by re-enactment may briefly be
stated thus: Where a statute is susceptible of the meaning placed
upon it by a ruling of the government agency charged with its
enforcement and the Legislature thereafter re-enacts the provisions
without substantial change, such action is to some extent
confirmatory that the ruling carries out the legislative purpose.5
The aforestated principle, however, is not applicable to this case.
Firstly, Sections 53 and 54 were never reenacted. Republic Acts
1065, 1291, 1505 and 2343 were merely amendments in respect to
the rate of tax imposed in Sections 53 and 54. Secondly, the
administrative rulings of the Commissioner of Internal Revenue
relied upon by the taxpayers were only contained in letters to
taxpayers and never published, so that the Legislature is not
presumed to know said rulings. Thirdly, in the case on which
appellants rely, Interprovincial Autobus Co., Inc. vs. Collector of
Internal Revenue, L-6741, January 31, 1956, what was declared to
have acquired the force or effect of law was
a regulation promulgated to implement a law; whereas, in this case,
what appellants would seek to have the force of law are opinions on
queries submitted.
It may not be amiss to note that in 1963, after the Tax Court
rendered judgment in this case, Congress enacted Republic Act
3825, as an amendment to Sections 24 and 54 of the Tax Code,
exempting from income taxes and withholding tax, reinsurance
premiums received by foreign corporations not engaged in business
in the Philippines. Republic Act 3825 in effect took out from Sections
24 and 54 something which formed a part of the subject matter
therein,6 thereby affirming the taxability of reinsurance premiums
prior to the aforestated amendment.
Finally, appellant would argue that Judge Augusto M. Luciano, who
penned the decision appealed from, was disqualified to sit in this
case since he had appeared as counsel for the Commissioner of
Internal Revenue and, as such, answered plaintiff's complaint before
the Court of First Instance of Manila.
The Rules of Court provides that no judge shall sit in any case in
which he has been counsel without the written consent of all the
parties in interest, signed by them and entered upon the record. The
party objecting to the judge's competency may file, in writing, with
such judge his objection stating therein the grounds for it. The judge
shall thereupon proceed with the trial or withdraw therefrom, but
his action shall be made in writing and made part of the record.7
Appellants, instead of asking for Judge Luciano's disqualification by
raising their objection in the Court of Tax Appeals, are content to
raise it for the first time before this Court. Such being the case they
may not now be heard to complain on this point, when Judge
Luciano has given his opinion on the merits of the case. A litigant
cannot be permitted to speculate upon the action of the court and
raise an objection of this nature after decision has been rendered. 8
WHEREFORE, the judgment appealed from is hereby affirmed with
costs against appellants. It is so ordered.
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman
(Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from
the January 18, 2002 Decision1 of the Court of Appeals in CA-G.R. SP
No. 59794, which granted the tax refund of respondent Juliane
Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails
the May 8, 2002 Resolution3 of the Court of Appeals denying its
motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident
German citizen, is the President of JUBANITEX, Inc., a domestic
corporation engaged in "[m]anufacturing, marketing on wholesale
only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile
products."4 Through JUBANITEX’s General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent will
receive 10% sales commission on all sales actually concluded and
collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64,
representing her sales commission income from which JUBANITEX
withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal
Revenue (BIR). On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of P1,707,772.64 and
a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted
by JUBANITEX to the BIR. Respondent contended that her sales
commission income is not taxable in the Philippines because the
same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the
Philippines.
The next day, April 15, 1998, she filed a petition for review with the
CTA contending that no action was taken by the BIR on her claim for
refund.7 On June 28, 2000, the CTA rendered a decision denying her
claim. It held that the commissions received by respondent were
actually her remuneration in the performance of her duties as
President of JUBANITEX and not as a mere sales agent thereof. The
income derived by respondent is therefore an income taxable in the
Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the
Decision of the CTA, holding that respondent received the
commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or
service that produce the income, the sales commission received by
respondent is not taxable in the Philippines because it arose from
the marketing activities performed by respondent in Germany. The
dispositive portion of the appellate court’s Decision, reads:
WHEREFORE, premises considered, the assailed decision of the
Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and
SET ASIDE and the respondent court is hereby directed to grant
petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was
denied.9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is
taxable in the Philippines because the source thereof is JUBANITEX,
a domestic corporation located in the City of Makati. It thus implied
that source of income means the physical source where the income
came from. It further argued that since respondent is the President
of JUBANITEX, any remuneration she received from said
corporation should be construed as payment of her overall
managerial services to the company and should not be interpreted
as a compensation for a distinct and separate service as a sales
commission agent.
Respondent, on the other hand, claims that the income she received
was payment for her marketing services. She contended that income
of nonresident aliens like her is subject to tax only if the source of
the income is within the Philippines. Source, according to
respondent is the situs of the activity which produced the income.
And since the source of her income were her marketing activities in
Germany, the income she derived from said activities is not subject
to Philippine income taxation.
The issue here is whether respondent’s sales commission income is
taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC),
states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the
Philippines. –
(1) In General. – A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien individual,
on taxable income received from all sources within the Philippines.
A nonresident alien individual who shall come to the Philippines
and stay therein for an aggregate period of more than one hundred
eighty (180) days during any calendar year shall be deemed a
‘nonresident alien doing business in the Philippines,’ Section 22(G)
of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. – There shall be levied, collected and paid for
each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines x x x a tax equal
to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident
aliens, whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining
the taxability of non-resident aliens is the income’s "source." In
construing the meaning of "source" in Section 25 of the NIRC, resort
must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine
Legislature was Act No. 2833,10 which took effect on January 1,
1920.11 Under Section 1 thereof, nonresident aliens are likewise
subject to tax on income "from all sources within the Philippine
Islands," thus –
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources within the Philippine Islands by
every individual, a nonresident alien, including interest on bonds,
notes, or other interest-bearing obligations of residents, corporate
or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.)
Revenue Law of 1916 as amended by U.S. Revenue Law of
1917.12 Being a law of American origin, the authoritative decisions
of the official charged with enforcing it in the U.S. have peculiar
persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of
income to be treated as from sources within the U.S. and specifies
when similar types of income are to be treated as from sources
outside the U.S.14 Under the said Code, compensation for labor and
personal services performed in the U.S., is generally treated as
income from U.S. sources; while compensation for said services
performed outside the U.S., is treated as income from sources
outside the U.S.15 A similar provision is found in Section 42 of our
NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. – Compensation for labor or personal services
performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without
the Philippines;
The following discussions on sourcing of income under the Internal
Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor; and/or (3) the sale of capital
assets. While the three elements of this attempt at definition need
not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "sources within the
United States" and suggest an investigation into the nature and
location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from
"sources within the United States." If the income is from capital, the
place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "sources
within the United States." If the income is from the sale of capital
assets, the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in
this fundamental light. It is not a place, it is an activity or property.
As such, it has a situs or location, and if that situs or location is
within the United States the resulting income is taxable to
nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was
to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source,"
or situs of the activities or property which produce the income. The
result is that, on the one hand, nonresident aliens and nonresident
foreign corporations are prevented from deriving income from the
United States free from tax, and, on the other hand, there is no
undue imposition of a tax when the activities do not take place in,
and the property producing income is not employed in, this country.
Thus, if income is to be taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the
income issues or is derived must be situated within the jurisdiction
so that the source of the income may be said to have a situs in this
country.
The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to be
levied upon to defray the burdens of the United States Government
is that income which is created by activities and property protected
by this Government or obtained by persons enjoying that
protection. 16
The important factor therefore which determines the source of
income of personal services is not the residence of the payor, or the
place where the contract for service is entered into, or the place of
payment, but the place where the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue,18 the Court addressed the issue on the applicable source
rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks located
in the Philippines. It was held therein that the undertaking of the
foreign insurance company to indemnify the local insurance
company is the activity that produced the income. Since the activity
took place in the Philippines, the income derived therefrom is
taxable in our jurisdiction. Citing Mertens, The Law of Federal
Income Taxation, the Court emphasized that the technical meaning
of source of income is the property, activity or service that produced
the same. Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the
Philippines. x x x the reinsured, the liabilities insured and the risk
originally underwritten by Commonwealth Insurance Co., upon
which the reinsurance premiums and indemnity were based, were
all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign airline
company which does not maintain any flight to and from the
Philippines is liable for Philippine income taxation in respect of
sales of air tickets in the Philippines, through a general sales agent
relating to the carriage of passengers and cargo between two points
both outside the Philippines. Ruling in the affirmative, the Court
applied the case of Alexander Howden & Co., Ltd. v. Collector of
Internal Revenue, and reiterated the rule that the source of income
is that "activity" which produced the income. It was held that the
"sale of tickets" in the Philippines is the "activity" that produced the
income and therefore BOAC should pay income tax in the
Philippines because it undertook an income producing activity in
the country.
Both the petitioner and respondent cited the case of Commissioner
of Internal Revenue v. British Overseas Airways Corporation in
support of their arguments, but the correct interpretation of the
said case favors the theory of respondent that it is the situs of the
activity that determines whether such income is taxable in the
Philippines. The conflict between the majority and the dissenting
opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue. The divergence in opinion centered on whether the sale of
tickets in the Philippines is to be construed as the "activity" that
produced the income, as viewed by the majority, or merely the
physical source of the income, as ratiocinated by Justice Florentino
P. Feliciano in his dissent. The majority, through Justice Ameurfina
Melencio-Herrera, as ponente, interpreted the sale of tickets as a
business activity that gave rise to the income of BOAC. Petitioner
cannot therefore invoke said case to support its view that source of
income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated
that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located or
where BOAC physically received the same. But such was not the
import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to
pinpoint the taxable activity and to justify its conclusion that BOAC
is subject to Philippine income taxation. Thus –
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips
— each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as
an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the
assessments. x x x21
xxxx
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued by
a common carrier, it constitutes the contract between the ticket-
holder and the carrier. It gives rise to the obligation of the purchaser
of the ticket to pay the fare and the corresponding obligation of the
carrier to transport the passenger upon the terms and conditions
set forth thereon. The ordinary ticket issued to members of the
traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties
entering into the relationship.22
The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With respect
to rendition of labor or personal service, as in the instant case, it is
the place where the labor or service was performed that determines
the source of the income. There is therefore no merit in petitioner’s
interpretation which equates source of income in labor or personal
service with the residence of the payor or the place of payment of
the income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine
income taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital
question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi jurisagainst the
taxpayer.24 To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt
from taxation.
In the instant case, the appointment letter of respondent as agent of
JUBANITEX stipulated that the activity or the service which would
entitle her to 10% commission income, are "sales actually concluded
and collected through [her] efforts."25 What she presented as
evidence to prove that she performed income producing activities
abroad, were copies of documents she allegedly faxed to JUBANITEX
and bearing instructions as to the sizes of, or designs and fabrics to
be used in the finished products as well as samples of sales orders
purportedly relayed to her by clients. However, these documents do
not show whether the instructions or orders faxed ripened into
concluded or collected sales in Germany. At the very least, these
pieces of evidence show that while respondent was in Germany, she
sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether
these sales were truly concluded in Germany, respondent presented
no such evidence. Neither did she establish reasonable connection
between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
The paucity of respondent’s evidence was even noted by Atty.
Minerva Pacheco, petitioner’s counsel at the hearing before the
Court of Tax Appeals. She pointed out that respondent presented no
contracts or orders signed by the customers in Germany to prove
the sale transactions therein.26 Likewise, in her Comment to the
Formal Offer of respondent’s evidence, she objected to the
admission of the faxed documents bearing instruction/orders
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self
serving.29 The concern raised by petitioner’s counsel as to the
absence of substantial evidence that would constitute proof that the
sale transactions for which respondent was paid commission
actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except for
the months of July and September 1995, respondent was in the
Philippines in the months of March, May, June, and August
1995,30 the same months when she earned commission income for
services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her appointment
as commission agent is exclusivelyfor Germany and other
European markets.
In sum, we find that the faxed documents presented by respondent SO ORDERED.
did not constitute substantial evidence, or that relevant evidence
that a reasonable mind might accept as adequate to support the
conclusion31 that it was in Germany where she performed the
income producing service which gave rise to the reported monthly
sales in the months of March and May to September of 1995. She
thus failed to discharge the burden of proving that her income was
from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund
should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-

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

WHEREFORE, the petition is GRANTED and the January 18, 2002

Decision and May 8, 2002 Resolution of the Court of Appeals in CA-
G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28,
2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondent’s claim for refund of income tax paid for
the year 1995 is REINSTATED.
QUILL CORPORATION, PETITIONER v. NORTH DAKOTA by and
through its TAX COMMIS SIONER, HEIDI HEITKAMP
on writ of certiorari to the supreme court of north dakota
[May 26, 1992]
Justice Stevens delivered the opinion of the
Court.
In this case the Supreme Court of North
Dakota declined to follow Bellas Hessbecause
"the tremendous social, economic,
commercial, and legal innovations" of the past
quarter century have rendered its holding
"obsole[te]." 470 N. W. 2d 203, 208 (1991).
Having granted certiorari, 502 U. S. ___, we
must either reverse the State Supreme Court
or overrule Bellas Hess. While we agree with
much of the State Court's reasoning, we take
the former course.
Quill is a Delaware corporation with offices
and warehouses in Illinois, California, and
Georgia. None of its employees work or reside
in North Dakota and its ownership of tangible
property in that State is either insignificant or
nonexistent. Quill sells office equipment and
[n.1]
supplies; it solicits business through catalogs
and flyers, advertisements in national
periodicals, and telephone calls. Its annual
national sales exceed $200,000,000, of which
almost $1,000,000 are made to about 3,000
customers in North Dakota. It is the sixth
largest vendor of office supplies in the State. It
delivers all of its merchandise to its North
Dakota customers by mail or common carrier
from out of state locations.
As a corollary to its sales tax, North Dakota
imposes a use tax upon property purchased
for storage, use or consumption within the
State. North Dakota requires every "retailer
maintaining a place of business in" the State
to collect the tax from the consumer and
remit it to the State. N. D. Cent. Code § 57-
40.2-07 (Supp. 1991). In 1987 North Dakota
amended the statutory definition of the term
"retailer" to include "every person who
engages in regular or systematic solicitation
of a consumer market in th[e] state." § 57-
40.2-01(6). State regulations in turn
define"regular or systematic solicitation" to
mean three or more advertisements within a
12 month period. N. D. Admin. Code § 81-
04.1-01-03.1 (1988). Thus, since 1987, mail
order companies that engage in such
solicitation have been subject to the tax even
if they maintain no property or personnel in
North Dakota.
Quill has taken the position that North Dakota
does not have the power to compel it to
collect a use tax from its North Dakota
customers. Consequently, the State, through
its Tax Commissioner, filed this action to
require Quill to pay taxes (as well as interest
and penalties) on all such sales made after
July 1, 1987. The trial court ruled in Quill's
favor, finding the case indistinguishable
from Bellas Hess; specifically, it found that
because the State had not shown that it had
spent tax revenues for the benefit of the mail
order business, there was no "nexus to allow
the state to define retailer in the manner it
chose." App. to Pet. for Cert. A41.
The North Dakota Supreme Court reversed,
concluding that "wholesale changes" in both
the economy and the law made it
inappropriate to follow Bellas Hess today. 470
N. W. 2d, at 213. The principal economic
change noted by the court was the
remarkable growth of the mail order business
"from a relatively inconsequential market
niche" in 1967 to a "goliath" with annual sales
that reached "the staggering figure of $183.3
billion in 1989." Id., at 208, 209. Moreover,
the court observed, advances in computer
technology greatly eased the burden of
compliance with a " `welter of complicated
obligations' " imposed by state and local
taxing authorities. Id., at 215 (quoting Bellas
Hess, 386 U. S., at 759-760).
Equally important, in the court's view, were
the changes in the "legal landscape." With
respect to the Commerce Clause, the court
emphasized that Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274 (1977), rejected the
line of cases holding that the direct taxation of
interstate commerce was impermissible and
adopted instead a "consistent andrational
method of inquiry [that focused on] the
practical effect of [the] challenged tax." Mobil
Oil Corp. v. Commissioner of Taxes of Vt., 445
U.S. 425, 443 (1980). This and subsequent
rulings, the court maintained, indicated that
the Commerce Clause no longer mandated the
sort of physical presence nexus suggested
in Bellas Hess.
Similarly, with respect to the Due Process
Clause, the North Dakota court observed that
cases following Bellas Hess had not construed
"minimum contacts" to require physical
presence within a State as a prerequisite to
the legitimate exercise of state power. The
State Court then concluded that "the Due
Process requirement of a `minimal
connection' to establish nexus is
encompassed within the Complete Auto test"
and that the relevant inquiry under the latter
test was whether "the state has provided
some protection, opportunities, or benefit for
which it can expect a return." 470 N. W. 2d, at
216.
Turning to the case at hand, the State Court
emphasized that North Dakota had created
"an economic climate that fosters demand
for" Quill's products, maintained a legal
infrastructure that protected that market, and
disposed of 24 tons of catalogs and flyers
mailed by Quill into the State every year. Id.,
at 218-219. Based on these facts, the court
concluded that Quill's "economic presence" in
North Dakota depended on services and
benefits provided by the State and therefore
generated "a constitutionally sufficient nexus
to justify imposition of the purely
administrative duty of collecting and
remitting the use tax." Id., at 219.[n.2]
As in a number of other cases involving the
application of state taxing statutes to out of
state sellers, our holding in Bellas Hess relied
on both the Due Process Clause and the
Commerce Clause. Although the "two claims
are closely related," Bellas Hess, 386 U. S., at
756, the clauses pose distinct limits on the
taxing powers of the States. Accordingly,
while a State may, consistent with the Due
Process Clause, have the authority to tax a
particular taxpayer, imposition of the tax may
nonetheless violate the Commerce Clause.
See, e. g., Tyler Pipe Industries,
Inc. v. Washington State Dept. of Revenue, 483
U.S. 232 (1987).
The two constitutional requirements differ
fundamentally, in several ways. As discussed
at greater length below, see infra, at Part IV,
the Due Process Clause and the Commerce
Clause reflect different constitutional
concerns. Moreover, while Congress has
plenary power to regulate commerce among
the States and thus may authorize state
actions that burden interstate commerce,
see International Shoe Co. v. Washington, 326
U.S. 310, 315 (1945), it does not similarly
have the power to authorize violations of the
Due Process Clause.
Thus, although we have not always been
precise in distinguishing between the two, the
Due Process Clause and the Commerce Clause
are analytically distinct.
" `Due process' and `commerce
clause' conceptions are not always
sharply separable in dealing with
these problems. . . . To some extent
they overlap. If there is a want of
due process to sustain the tax, by
that fact alone any burden the tax
imposes on the commerce among
the states becomes `undue.' But,
though overlapping, the two
conceptions are not identical.
There may be more than sufficient
factual connections, with economic
and legal effects, between the
transaction and the taxing state to
sustain the tax as against due
process objections. Yet it may fall
because of itsburdening effect
upon the commerce. And, although
the two notions cannot always be
separated, clarity of consideration
and of decision would be
promoted if the two issues are
approached, where they are pre-
sented, at least tentatively as if
they were separate and distinct,
not intermingled
ones." International Harvester
Co. v. Department of Treasury, 322
U.S. 340, 353 (1944) (Rutledge, J.,
concurring in part and dissenting
in part).
Heeding Justice Rutledge's counsel, we
consider each con stitutional limit in turn.
The Due Process Clause "requires some
definite link, some minimum connection,
between a state and the person, property or
transaction it seeks to tax," Miller Bros.
Co. v. Maryland, 347 U.S. 340, 344-345 (1954),
and that the "income attributed to the State
for tax purposes must be rationally related to
`values connected with the taxing State.'
" Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273
(1978) (citation omitted). Here, we are
concerned primarily with the first of these
requirements. Prior to Bellas Hess, we had
held that that requirement was satisfied in a
variety of circumstances involving use taxes.
For example, the presence of sales personnel
in the State, or the maintenance of local
[n.3]
retail stores in the State, justified the
[n.4]
exercise of that power because the seller's
local activities were "plainly accorded the
protection and services of the taxing
State." Bellas Hess, 386 U. S., at 757. The
furthest extension of that power was
recognized in Scripto, Inc. v. Carson, 362 U.S.
207 (1960), in which the Court upheld a use
tax despite the fact that all of the seller's in
state solicitation was performed by
independent contractors. These cases all
involved some sort of physical
presencewithin the State, and in Bellas
Hess the Court suggested that such presence
was not only sufficient for jurisdiction under
the Due Process Clause, but also necessary.
We expressly declined to obliterate the "sharp
distinction . . . between mail order sellers with
retail outlets, solicitors, or property within a
State, and those who do no more than
communicate with customers in the State by
mail or common carrier as a part of a general
interstate business." 386 U. S., at 758.
Our due process jurisprudence has evolved
substantially in the 25 years since Bellas Hess,
particularly in the area of judicial jurisdiction.
Building on the seminal case of International
Shoe Co. v. Washington, 326 U.S. 310 (1945),
we have framed the relevant inquiry as
whether a defendant had minimum contacts
with the jurisdiction "such that the
maintenance of the suit does not offend
`traditional notions of fair play and
substantial justice.' " Id., at 316 (quoting
Milliken v. Meyer, 311 U.S. 457, 463 (1940)).
In that spirit, we have abandoned more
formalistic tests that focused on a defendant's
"presence" within a State in favor of a more
flexible inquiry into whether a defendant's
contacts with the forum made it reasonable,
in the context of our federal system of
government, to require it to defend the suit in
that State. In Shaffer v. Heitner, 433 U.S. 186,
212 (1977), the Court extended the flexible
approach that International Shoe had
prescribed for purposes of in
personam jurisdiction to in rem jurisdiction,
concluding that "all assertions of state court
jurisdiction must be evaluated according to
the standards set forth in International
Shoe and its progeny."
Applying these principles, we have held that if
a foreign corporation purposefully avails
itself of the benefits of an economic market in
the forum State, it may subject itself to the
State's in personam jurisdiction even if it has
no physical presence in the State. As we
explained in Burger King
Corp. v. Rudzewicz, 471 U.S. 462 (1985):
"Jurisdiction in these
circumstances may not be avoided
merely because the defendant did
not physically enter the forum
State. Although territorial
presence frequently will enhance a
potential defendant's affiliation
with a State and reinforce the
reasonable foreseeability of suit
there, it is an inescapable fact of
modern commercial life that a
substantial amount of business is
transacted solely by mail and wire
 communications across state lines,
thus obviating the need for
physical presence within a State in
which business is conducted. So
long as a commercial actor's
efforts are `purposefully directed'
toward residents of another State,
we have consistently rejected the
notion that an absence of physical
contacts can defeat personal
jurisdiction there." Id., at 476
(emphasis in original).
Comparable reasoning justifies the imposition
of the collection duty on a mail order house
that is engaged in continuous and widespread
solicitation of business within a State. Such a
corporation clearly has "fair warning that [its]
activity may subject [it] to the jurisdiction of a
foreign sovereign." Shaffer v. Heitner, 433 U.
S., at 218 (Stevens, J., concurring in
judgment). In "modern commercial life" it
matters little that such solicitation is
accomplished by a deluge of catalogs rather
than a phalanx of drummers: the
requirements of due process are met
irrespective of a corporation's lack of physical
presence in the taxing State. Thus, to the
extent that our decisions have indicated that
the Due Process Clause requires physical
presence in a State for the imposition of duty
to collect a use tax, we overrule those
holdings as superseded by developments in
the law of due process.
In this case, there is no question that Quill has
purposefully directed its activities at North
Dakota residents, that the magnitude of those
contacts are more than sufficient for due
process purposes, and that the use tax is
related to the benefits Quill receives from
access to the State. Wetherefore agree with
the North Dakota Supreme Court's conclusion
that the Due Process Clause does not bar
enforcement of that State's use tax against
Quill.
Article I, § 8, cl. 3 of the Constitution expressly
authorizes Congress to "regulate Commerce
with foreign Nations, and among the several
States." It says nothing about the protection of
interstate commerce in the absence of any
action by Congress. Nevertheless, as Justice
Johnson suggested in his concurring opinion
in Gibbons v. Ogden, 9 Wheat. 1, 231-232, 239
(1824), the Commerce Clause is more than an
affirmative grant of power; it has a negative
sweep as well. The clause, in Justice Stone's
phrasing, "by its own force" prohibits certain
state actions that interfere with interstate
commerce. South Carolina State Highway
Dept. v. Barnwell Bros., Inc., 303 U.S. 177, 185
(1938).
Our interpretation of the "negative" or
"dormant" Commerce Clause has evolved
substantially over the years, particularly as
that clause concerns limitations on state
taxation powers. See generally, P. Hartman,
Federal Limitations on State and Local
Taxation §§ 2:9-2:17 (1981). Our early cases,
beginning with Brown v. Maryland, 12 Wheat.
419 (1827), swept broadly, and
in Leloup v. Port of Mobile, 127 U.S. 640, 648
(1888), we declared that "no State has the
right to lay a tax on interstate commerce in
any form." We later narrowed that rule and
distinguished between direct burdens on
interstate commerce, which were prohibited,
and indirect burdens, which generally were
not. See, e. g., Sanford v. Poe, 69 F. 546 (CA6
1895), aff'd sub nom. Adams Express Co.
v. Ohio State Auditor, 165 U.S. 194, 220
(1897). Western Live Stock v. Bureau of
Revenue, 303 U.S. 250, 256-258 (1938), and
subsequent decisions rejected this formal,
categorical analysis and adopted a "multiple
taxation doctrine" that focused not on
whether a tax was "direct" or "indirect" but
rather on whether a tax subjected interstate
commerce to a risk of multiple taxation.
However, in Freeman v. Hewit, 329 U.S. 249,
256 (1946), we embraced again the formal
distinction between direct and indirect
taxation, invalidating Indiana's imposition of
a gross receipts tax on a particular
transaction because that application would
"impos[e] a direct tax on interstate sales."
Most recently, in Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274, 285 (1977), we
renounced the Freeman approach as
"attaching constitutional significance to a
semantic difference." We expressly overruled
one of Freeman's progeny, Spector Motor
Service, Inc. v. O'Connor, 340 U.S. 602 (1951),
which held that a tax on "the privilege of
doing interstate business" was
unconstitutional, while recognizing that a
differently denominated tax with the same
economic effect would not be
unconstitutional. Spector, as we observed
in Railway Express Agency, Inc. v. Virginia, 358
U.S. 434, 441 (1959), created a situation in
which "magic words or labels" could "disable
an otherwise constitutional levy." Complete
Auto emphasized the importance of looking
past "the formal language of the tax statute
[to] its practical effect," Complete Auto, 430 U.
S., at 279, and set forth a four part test that
continues to govern the validity of state taxes
under the Commerce Clause. [n.5]
Bellas Hess was decided in 1967, in the middle
of this latest rally between formalism and
pragmatism. Contrary to the suggestion of the
North Dakota Supreme Court, this timing does
not mean that Complete Auto rendered Bellas
Hess"obsolete." Complete
Auto rejected Freeman and Spector's formal
distinction between "direct" and
"indirect"taxes on interstate commerce
because that formalism allowed the validity of
statutes to hinge on "legal terminol ogy,"
"draftsmanship and phraseology." 430 U. S., at
281. Bellas Hess did not rely on any such
labeling of taxes and therefore did not
automatically fall with Freeman and its
progeny.
While contemporary Commerce Clause
jurisprudence might not dictate the same
result were the issue to arise for the first time
today, Bellas Hess is not inconsistent
with Complete Auto and our recent cases.
Under Complete Auto's four part test, we will
sustain a tax against a Commerce Clause
challenge so long as the "tax [1] is applied to
an activity with a substantial nexus with the
taxing State, [2] is fairly apportioned, [3] does
not discriminate against interstate commerce,
and [4] is fairly related to the services
provided by the State." 430 U. S., at
279. Bellas Hessconcerns the first of these
tests and stands for the proposition that a
vendor whose only contacts with the taxing
State are by mail or common carrier lacks the
"substantial nexus" required by the
Commerce Clause.
Thus, three weeks after Complete Auto was
handed down, we cited Bellas Hess for this
proposition and discussed the case at some
length. In National Geographic
Society v. California Bd. of Equalization, 430
U.S. 551, 559 (1977), we affirmed the
continuing vitality of Bellas Hess' "sharp
distinction . . . between mail order sellers with
[a physical presence in the taxing] State and
those . . . who do no more than communicate
with customers in the State by mail or
common carrier as part of a general interstate
business." We have continued to cite Bellas
Hess with approval ever since. For example,
in Goldberg v. Sweet, 488 U.S. 252, 263 (1989),
we expressed "doubt that termination of an
interstate telephone call, by itself, provides a
substantial enough nexus for a State to tax a
call. See National Bellas Hess . . . (receipt of
mail provides insufficient nexus)." See also D.
H. Holmes Co. v. McNamara, 486 U.S. 24, 33
(1988); Commonwealth Edison
Co. v. Montana, 453 U.S. 609, 626
(1981); Mobil Oil Corp. v. Commissioner of
Taxes, 445 U. S., at 437; National Geographic
Society, 430 U. S., at 559. For these reasons,
we disagree with the State Supreme Court's
conclusion that our decision in Complete
Auto undercut the Bellas Hess rule.
The State of North Dakota relies less
on Complete Auto and more on the evolution
of our due process jurisprudence. The State
contends that the nexus requirements
imposed by the Due Process and Commerce
Clauses are equivalent and that if, as we
concluded above, a mail order house that
lacks a physical presence in the taxing State
nonetheless satisfies the due process
"minimum contacts" test, then that
corporation also meets the Commerce Clause
"substantial nexus" test. We disagree. Despite
the similarity in phrasing, the nexus
requirements of the Due Process and
Commerce Clauses are not identical. The two
standards are animated by different
constitutional concerns and policies.
Due process centrally concerns the
fundamental fairness of governmental
activity. Thus, at the most general level, the
due process nexus analysis requires that we
ask whether an individual's connections with
a State are substantial enough to legitimate
the State's exercise of power over him. We
have, therefore, often identified "notice" or
"fair warning" as the analytic touchstone of
due process nexus analysis. In contrast, the
Commerce Clause, and its nexus requirement,
are informed not so much by concerns about
fairness for the individual defendant as by
structural concerns about the effects of state
regulation on the national economy. Under
the Articles of Confederation, State taxes and
duties hindered and suppressed interstate
commerce; the Framers intended the
Commerce Clause as a cure for these
structural ills. See generally The Federalist
Nos. 7, 11 (A. Hamilton). It is in this light that
we have interpreted the negative implication
of the Commerce Clause. Accordingly, we
have ruled that that Clause prohibits
discrimination against interstate commerce,
see,e. g., Philadelphia v. New Jersey, 437 U.S.
617 (1978), and bars state regulations that
unduly burden interstate commerce, see, e.
g., Kassel v. Consolidated Freightways Corp. of
Del., 450 U.S. 662 (1981).
The Complete Auto analysis reflects these
concerns about the national economy. The
second and third parts of that analysis, which
require fair apportionment and non
discrimination, prohibit taxes that pass an
unfair share of the tax burden onto interstate
commerce. The first and fourth prongs, which
require a substantial nexus and a relationship
between the tax and State provided services,
limit the reach of State taxing authority so as
to ensure that State taxation does not unduly
burden interstate commerce. Thus, the
[n.6]
"substantial nexus" requirement is not, like
due process' "minimum contacts"
requirement, a proxy for notice, but rather a
means for limiting state burdens on interstate
commerce. Accordingly, contrary to the
State's suggestion, a corporation may have
the "minimum contacts" with a taxing State as
required by the Due Process Clause, and yet
lack the "substantial nexus" with that State as
required by the Commerce Clause. [n.7]
The State Supreme Court reviewed our recent
Commerce Clause decisions and concluded
that those rulings signalled a "retreat from
the formalistic constrictions of a stringent
physical presence test in favor of a more
flexible substantive approach" and thus
supported its decision not to apply Bellas
Hess. 470 N. W. 2d, at 214 (citing Standard
Pressed Steel Co. v. Department of Revenue of
Wash., 419 U.S. 560 (1975), and Tyler Pipe
Industries, Inc. v. Washington State Dept. of
Revenue, 483 U.S. 232 (1987)). Although we
agree with the State Court's assessment of the
evolution of our cases, we do not share its
conclusion that this evolution indicates that
the Commerce Clause ruling of Bellas Hess is
no longer good law.
First, as the State Court itself noted, 470 N. W.
2d, at 214, all of these cases involved
taxpayers who had a physical presence in the
taxing State and therefore do not directly
conflict with the rule of Bellas Hess or compel
that it be overruled. Second, and more
importantly, although our Commerce Clause
jurisprudence now favors more flexible
balancing analyses, we have never intimated a
desire to reject all established "bright line"
tests. Although we have not, in our review of
other types of taxes, articulated the same
physical presence requirement that Bellas
Hessestablished for sales and use taxes, that
silence does not imply repudiation of
the Bellas Hess rule.
Complete Auto, it is true,
renounced Freeman and its progeny as
"formalistic." But not all formalism is
alike. Spector's formal distinction between
taxes on the "privilegeof doing business" and
all other taxes served no purpose within our
Commerce Clause jurisprudence, but stood
"only as a trap for the unwary
draftsman." Complete Auto, 430 U. S., at 279.
In contrast, the bright line rule of Bellas
Hess furthers the ends of the dormant
Commerce Clause. Undue burdens on
interstate commerce may be avoided not only
by a case by case evaluation of the actual
burdens imposed by particular regulations or
taxes, but also, in some situations, by the
demarcation of a discrete realm of
commercial activity that is free from
interstate taxation. Bellas Hess followed the
latter approach and created a safe harbor for
vendors "whose only connection with
customers in the [taxing] State is by common
carrier or the United States mail."
Under Bellas Hess, such vendors are free from
state imposed duties to collect sales and use
taxes.[n.8]
Like other bright line tests, the Bellas
Hess rule appears artificial at its edges:
whether or not a State may compel a vendor
to collect a sales or use tax may turn on the
presence in the taxing State of a small sales
force, plant, or office. Cf. National Geographic
Society v. California Bd. of Equalization, 430
U.S. 551 (1977); Scripto, Inc. v. Carson, 362
U.S. 207 (1960). This artificiality, however, is
more than offset by the benefits of a clear
rule. Such a rule firmly establishes the
boundaries of legitimate state authority to
impose a duty to collect sales and use taxes
and reduces litigation concerning those taxes.
This benefitis important, for as we have so
frequently noted, our law in this area is
something of a "quagmire" and the
"application of constitutional principles to
specific state statutes leaves much room for
controversy and confusion and little in the
way of precise guides to the States in the
exercise of their indispensable power of
taxation." Northwestern States Portland
Cement Co. v. Minnesota, 358 U.S. 450, 457-
458 (1959).
Moreover, a bright line rule in the area of
sales and use taxes also encourages settled
expectations and, in doing so, fosters
investment by businesses and
individuals. Indeed, it is not unlikely that
[n.9]
the mail order industry's dramatic growth
over the last quarter century is due in part to
the bright line exemption from state taxation
created in Bellas Hess.
Notwithstanding the benefits of bright line
tests, we have, in some situations, decided to
replace such tests with more contextual
balancing inquiries. For example, in Arkansas
Electric Cooperative Corp. v. Arkansas Pub.
Serv. Comm'n, 461 U.S. 375 (1983), we
reconsidered a bright line test set forth
in Public Utilities Comm'n of R.
I. v. AttleboroSteam & Electric Co., 273 U.S.
83 (1927). Attleborodistinguished between
state regulation of wholesale salesof
electricity, which was constitutional as an
"indirect" regulation of interstate commerce,
and state regulation of retail sales of
electricity, which was unconstitutional as a
"direct regulation" of commerce. In Arkansas
Electric, we considered whether to "follow the
mechanical test set out in Attleboro, or the
balance of interests test applied in our
Commerce Clause cases." Arkansas Electric
Cooperative Corp., 461 U. S., at 390-391. We
first observed that "the principle of stare
decisis counsels us, here as elsewhere, not
lightly to set aside specific guidance of the
sort we find in Attleboro." Id., at 391. In
deciding to reject the Attleboro analysis, we
were influenced by the fact that the
"mechanical test" was "anachronistic," that
the Court had rarely relied on the test, and
that we could "see no strong reliance
interests" that would be upset by the
rejection of that test. Id., at 391-392. None of
those factors obtains in this case. First,
the Attleboro rule was "anachronistic"
because it relied on formal distinctions
between "direct" and "indirect" regulation
(and on the regulatory counterparts of
our Freeman line of cases); as discussed
above, Bellas Hess turned on a different logic
and thus remained sound after the Court
repudiated an analogous distinction
in Complete Auto. Second, unlike
the Attleboro rule, we have, in our decisions,
frequently relied on the Bellas Hess rule in the
last 25 years, see supra, at 11, and we have
never intimated in our review of sales or use
taxes that Bellas Hess was unsound. Finally,
again unlike the Attlebororule, the Bellas
Hess rule has engendered substantial reliance
and has become part of the basic framework
of a sizeable industry. The "interest in
stability and orderly development of the law"
that undergirds the doctrine of stare decisis,
see Runyonv. McCrary, 427 U.S. 160, 190-191
(1976) (Stevens, J., concurring), therefore
counsels adherence to settled precedent.
In sum, although in our cases subsequent
to Bellas Hess and concerning other types of
taxes we have not adopted a similar bright
line, physical presence requirement, our
reasoning in those cases does not compel that
we now reject the rule that Bellas
Hess established in the area of sales and use
taxes. To the contrary, the continuing value of
a bright line rule in this area and the doctrine
and principles of stare decisis indicate that
the Bellas Hess rule remains good law. For
these reasons, we disagree with the North
Dakota Supreme Court's conclusion that the
time has come to renounce the bright line test
of Bellas Hess.
This aspect of our decision is made easier by
the fact that the underlying issue is not only
one that Congress may be better qualified to
resolve, but also one that Congress has the
[n.10]
ultimate power to resolve. No matter how we
evaluate the burdens that use taxes impose on
interstate commerce, Congress remains free
to disagree with our conclusions.
See Prudential Insurance Co. v. Benjamin, 328
U.S. 408 (1946). Indeed, in recent years
Congress has considered legislation that
would "overrule" the Bellas Hess rule. Its
[n.11]
decision not to take action in this direction
may, of course, have been dictated by respect
for our holding in Bellas Hess that the Due
Process Clause prohibits States from
imposing such taxes, but today we have put
that problem to rest. Accordingly, Congress is
now free to decide whether, when, and to
what extent the States mayburden interstate
mail order concerns with a duty to collect use
taxes.
Indeed, even if we were convinced that Bellas
Hess was inconsistent with our Commerce
Clause jurisprudence, "this very fact [might]
giv[e us] pause and counse[l] withholding our
hand, at least for now. Congress has the
power to protect interstate commerce from
intolerable or even undesirable
burdens." Commonwealth Edison
Co. v. Montana, 453 U.S. 609, 637 (1981)
(White, J., concurring). In this situation, it may
be that "the better part of both wisdom and
valor is to respect the judgment of the other
branches of the Government." Id., at 638.
The judgment of the Supreme Court of North
Dakota is reversed and the case is remanded
for further proceedings not inconsistent with
this opinion.
cIt is so ordered