creditors as held by the Supreme Court in the case of Western Minolco
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP) v.
CA, CIR and CTA, G.R. Nos. 106949-50 (1995)
Facts:
Paper Industries Corporation of the Philippines (PICOP) is a Philippine
corporation registered with the Board of Investments (BOI) as a preferred
pioneer enterprise with respect to its integrated pulp and paper mill, and
as a preferred non-pioneer enterprise with respect to its integrated
plywood and veneer mills. Petitioner received from the Commissioner of
Internal Revenue (CIR) two (2) letters of assessment and demand (a) one
for deficiency transaction tax and for documentary and science stamp tax;
and (b) the other for deficiency income tax for 1977, for an aggregate
amount of PhP88,763,255.00.
PICOP protested the assessment of deficiency transaction tax , the
documentary and science stamp taxes, and the deficiency income tax
assessment. CIR did not formally act upon these protests, but issued a
warrant of distraint on personal property and a warrant of levy on real
property against PICOP, to enforce collection of the contested assessments,
thereby denying PICOP's protests. Thereupon, PICOP went before (CTA)
appealing the assessments.
On 15 August 1989, CTA rendered a decision, modifying the CIR’s findings
and holding PICOP liable for the reduced aggregate amount of
P20,133,762.33. Both parties went to the Supreme Court, which referred
the case to the Court of Appeals (CA).
CA denied the appeal of the CIR and modified the judgment against PICOP
holding it liable for transaction tax and absolved it from payment of
documentary and science stamp tax and compromise penalty. It also held
PICOP liable for deficiency of income tax.
Issues:
1. Whether PICOP is liable for transaction tax
2. Whether PICOP is liable for documentary and science stamp tax
3. Whether PICOP is liable for deficiency income tax
Held:
1. YES. PICOP reiterates that it is exempt from the payment of the
transaction tax by virtue of its tax exemption under R.A. No. 5186, as
amended, known as the Investment Incentives Act, which in the form it
existed in 1977-1978, read in relevant part as follows: "SECTION 8.
Incentives to a Pioneer Enterprise. — In addition to the incentives provided
in the preceding section, pioneer enterprises shall be granted the following
incentive benefits: (a) Tax Exemption. Exemption from all taxes under the
National Internal Revenue Code, except income tax, from the date of
investment is included in the Investment Priorities Plan x x x”. The
Supreme Court holds that that PICOP's tax exemption under R.A. No. 5186,
as amended, does not include exemption from the thirty-five percent (35%)
transaction tax. In the first place, the thirty-five percent (35%) transaction
tax is an income tax, a tax on the interest income of the lenders or
Corporation v. Commissioner of Internal Revenue. The 35% transaction tax
is an income tax on interest earnings to the lenders or placers. The latter
are actually the taxpayers. Therefore, the tax cannot be a tax imposed
upon the petitioner. In other words, the petitioner who borrowed funds
from several financial institutions by issuing commercial papers merely
withheld the 35% transaction tax before paying to the financial institutions
the interest earned by them and later remitted the same to the respondent
CIR. The tax could have been collected by a different procedure but the
statute chose this method. Whatever collecting procedure is adopted does
not change the nature of the tax. It is thus clear that the transaction tax is
an income tax and as such, in any event, falls outside the scope of the tax
exemption granted to registered pioneer enterprises by Section 8 of R.A.
No. 5186, as amended. PICOP was the withholding agent, obliged to
withhold thirty-five percent (35%) of the interest payable to its lenders and
to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR").
As a withholding, agent, PICOP is made personally liable for the thirty-five
percent (35%) transaction tax 10 and if it did not actually withhold thirty-
five percent (35%) of the interest monies it had paid to its lenders, PICOP
had only itself to blame.
2. NO. The CIR assessed documentary and science stamp taxes, amounting to
PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax
exemptions are, to be sure, to be "strictly construed," that is, they are not
to be extended beyond the ordinary and reasonable intendment of the
language actually used by the legislative authority in granting the
exemption. The issuance of debenture bonds is certainly conceptually
distinct from pulping and paper manufacturing operations. But no one
contends that issuance of bonds was a principal or regular business activity
of PICOP; only banks or other financial institutions are in the regular
business of raising money by issuing bonds or other instruments to the
general public. The actual dedication of the proceeds of the bonds to the
carrying out of PICOP's registered operations constituted a sufficient nexus
with such registered operations so as to exempt PICOP from taxes
ordinarily imposed upon or in connection with issuance of such bonds. The
Supreme Court agrees with the Court of Appeals on this matter that the
CTA and the CIR had erred in rejecting PICOP's claim for exemption from
stamp taxes.
3. YES. PICOP did not deny the existence of discrepancy in their Income Tax
Return and Books of Account owing to their procedure of recording its
export sales (reckoned in U.S. dollars) on the basis of a fixed rate, day to
day and month to month, regardless of the actual exchange rate and
without waiting when the actual proceeds are received. In other words,
PICOP recorded its export sales at a pre-determined fixed exchange rate.
That pre-determined rate was decided upon at the beginning of the year
and continued to be used throughout the year. Because of this, the CIR has claimed under law, otherwise, the same will be disallowed. There has been no
made out at least a prima facie case that PICOP had understated its sales attempt to define “ordinary and necessary” with precision. However, as guiding
and overstated its cost of sales as set out in its Income Tax Return. For the principle in the proper adjudication of conflicting claims, an expenses is
CIR has a right to assume that PICOP's Books of Accounts speak the truth in considered necessary where the expenditure is appropriate and helpful in the
this case since, as already noted, they embody what must appear to be development of the taxpayer’s business. It is ordinary when it connotes a
admissions against PICOP's own interest. payment which is normal in relation to the business of the taxpayer and the
surrounding circumstances. Assuming that the expenditure is ordinary and
Dispositive: necessary in the operation of the taxpayer’s business; the expenditure, to be an
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is allowable deduction as a business expense, must be determined from the nature
hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the of the expenditure itself, and on the extent and permanency of the work
aggregate amount of P43,794,252.51 itemized as follows: accomplished by the expenditure. Herein, ESSO has not shown that the
(1) Thirty-five percent (35%) transaction remittance to the head office of part of its profits was made in furtherance of its
tax P 3,578,543.51 own trade or business. The petitioner merely presumed that all corporate
(2) Total Deficiency Income Tax expenses are necessary and appropriate in the absence of a showing that they
Due P 40,215,709.00 are illegal or ultra vires; which is erroneous. Claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations
Aggregate Amount Due and Payable P 43,794,252.51

ESSO V. CIR- TESTS OF DEDUCTABILITY

Category: Income Taxation

For an item to be deductible as a business expense, the expense must be ordinary
and necessary; it must be paid or incurred within the taxable year; and it must be
paid or incurred in carrying on a trade or business. In addition, the taxpayer must
substantially prove by evidence or records the deductions claimed under law,
otherwise, the same will be disallowed.

FACTS: ESSO deducted from its gross income for 1959, as part of its ordinary
and necessary business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. The Commissioner disallowed the
claim on the ground that the expenses should be capitalized and might be
written off as a loss only when a “dry hole” should result. Hence, ESSO filed an
amended return where it asked for the refund of P323,270 by reason of its
abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary
and necessary expenses in the same return amount representing margin fees it
had paid to the Central Bank on its profit remittances to its New York Office.

ISSUE: Whether the margin fees may be considered ordinary and

necessary expenses when paid.

HELD:
For an item to be deductible as a business expense, the expense must be
ordinary and necessary; it must be paid or incurred within the taxable year; and
it must be paid or incurred in carrying on a trade or business. In addition, the
taxpayer must substantially prove by evidence or records the deductions