HARTE-HANKS PHILIPPINES, INC., PETITIONER, VS.

COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.

DECISION
REYES, J.:
This is a Petition for Review on Certiorari[1] under Rule 45 of the 1997 Rules of Court
which seeks to reverse and set aside the Decision [2] dated September 7, 2012 and
Resolution[3] dated February 4, 2013 of the Court of Tax Appeals (CTA) en banc in
C.T.A. EB No. 748 (C.T.A. Case No. 8050) regarding the claim for Value-Added Tax
(VAT) refund of Harte-Hanks Philippines, Inc. (HHPI) in the amount of P3,167,402.34.

Facts of the Case

HHPI is a domestic corporation engaged in the business of providing outsourcing

customer relationship management solutions through inbound and outbound call
services to its customers. It is located in Bonifacio Global City in Taguig and, as such,
pays VAT to the Bureau of Internal Revenue (BIR) using the calendar year (CY) system.
[4]

During the first quarter of CY 2008, HHPI received income for services rendered within
the Philippines for clients abroad. On April 25, 2008, it filed its original Quarterly VAT
Return with the BIR through the BIR Electronic Filing and Payment System. The return
was amended on May 29, 2008 showing that HHPI had no output VAT liability for the
first quarter of CY 2008 as it had no local sales subject to 12% VAT but it has unutilized
input VAT of P3,167,402.34 on its domestic purchases of goods and services on its
zero-rated sales of services.[5]

On March 23, 2010, HHPI filed a claim for refund of its unutilized input VAT of
P3,167,402.34 before the BIR. Asserting that there was inaction on the part of the
Commissioner of Internal Revenue (CIR) and in order to toll the running of the two-year
period prescribed by law, HHPI elevated its claim to the CTA on March 30, 2010. [6]

On May 25, 2010, the CIR sought the dismissal of HHPI's claim for refund due to the
prematurity of the appeal. According to the CIR, the 120-day period under Section
112(C)[7] of the National Internal Revenue Code (NIRC) of 1997 for the CIR to act on the
matter had not yet lapsed. Therefore, HHPI failed to exhaust administrative remedies
before it appealed before the CTA. [8]

On July 14, 2010, HHPI filed its comment praying for the denial of the motion to dismiss
because: (1) it was procedurally infirm for having been addressed to the Clerk of Court
instead of the party litigant; (2) it lacked basis that HHPI failed to exhaust administrative
remedies; (3) the two-year prescriptive period under Section 229 [9] of the 1997 NIRC
was not applicable; (4) the duty imposed in Section 112(C) of the 1997 NIRC was upon
the CIR and not upon HHPI; (5) the motion was violative of HHPI's right to seek refund
within the two-year period; and (6) HHPI failed to take action on its administrative claim.
[10]
In a Resolution[11] dated November 30, 2010, the CTA Third Division granted the motion
to dismiss in view of the prematurity of the petition. Citing the case of CIR v. Aichi
Forging Company of Asia, Inc.,[12] the CTA explained the mandatory 120-day period
under Section 112(D) of the 1997 NIRC reckoned from the date of submission of the
complete documents in support of the application for refund, and the 30-day period to
appeal to be reckoned either from the lapse of the 120-day period without any decision
rendered by the CIR on the application or, upon receipt of the CIR's decision before or
after the 120-day period has expired. The CTA Third Division also stressed that the two-
year period refers to the period for the filing of the claim before the CIR and was never
intended to include the period for filing the judicial claim. [13]

HHPI's motion for reconsideration[14] thereof was denied in the CTA's

Resolution[15] dated March 14, 2011 after finding no cogent reason to deviate from its
ruling.

Undaunted, HHPI filed a petition for review [16] before the CTA en banc which, however,
denied the same in the assailed Decision [17] dated September 7, 2012, and accordingly,
affirmed the resolution of the CTA Third Division. It was declared that the crucial nature
of the mandatory 120 and 30-day periods and that non-observance thereof will deprive
the court of competence to entertain the appeal; [18] that the 120 and 30-day periods in
Section 112(C) of the 1997 NIRC refer to the taxpayer's discretion on whether or not to
appeal the CIR's decision or inaction with the CTA; and, that the said periods are
indispensable even if the claim is lodged within the two-year prescriptive period. [19]

HHPI sought for reconsideration but the same was denied in the Resolution [20] dated
February 4, 2013.

Hence, this petition anchored on the following arguments, to wit:

1. In CIR v. San Roque Power Corporation,[21] the Court held that taxpayers who
filed their judicial claims after the issuance of BIR Ruling No. DA-489-03 but
before Aichi[22] cannot be faulted for filing such claims prematurely; [23]

2. The failure to comply with the 120-day period under Section 112(C) of the
1997 NIRC is not jurisdictional;[24]

3. CIR's motion to dismiss was fatally defective and should have been
disregarded;[25] and

4. 4. Sections 112 and 229 of the 1997 NIRC should be reconciled. [26]

Ruling of the Court

The petition has no merit.

It should be noted that the petition for review was filed before the CTA on March 30,
2010, or merely seven days after the administrative claim for refund was filed before the
BIR on March 23, 2010. Evidently, HHPI failed to wait for the lapse of the 120-day
period which is expressly provided for by law for the CIR to grant or deny the application
for refund.

In San Roque,[27] it has been held that the compliance with the 120-day waiting period
is mandatory and jurisdictional. The waiting period, originally fixed at 60 days only,
was part of the provisions of the first VAT law, Executive Order No. 273, which took
effect on January 1, 1988. The waiting period was extended to 120 days effective
January 1, 1998 under Republic Act No. 8424 or the Tax Reform Act of 1997. The 120-
day period under Section 112(C) has been in the statute books for more than 15
years before respondent San Roque filed its judicial claim. [28]

Moreover, a taxpayer's failure to comply with the prescribed 120-day waiting period
would render the petition premature and is violative of the principle on exhaustion of
administrative remedies. Accordingly, the CTA does not acquire jurisdiction over the
same. This being so, "[w]hen a taxpayer prematurely files a judicial claim for tax refund
or credit with the CTA without waiting for the decision of the [CIR], there is no 'decision'
of the [CIR] to review and thus the CTA as a court of special jurisdiction has no
jurisdiction over the appeal."[29]

The CTA, being a court of special jurisdiction, has the judicial power to review the
decisions of the CIR. Concomitantly, the CTA also has the power to decide an appeal
because the CIR's inaction[30] within the 120-day waiting period shall be deemed a
denial of the taxpayer's application for refund or tax credit.

In the instant case, the petition for review is considered premature because the 120-
day mandatory period was not observed before an appeal was elevated to the CTA.
Either the CTA or this Court could also legitimize such procedural infirmity because it
would run counter to Article 5[31] of the Civil Code unless a law exists that would
authorize the validity of said petition. Regrettably, such law is wanting in the instant
case.

Tax refunds or credits, just like tax exemptions, are strictly construed against the
taxpayer.[32] A refund is not a matter of right by the mere fact that a taxpayer has
undisputed excess input VAT or that such tax was admittedly illegally, erroneously or
excessively collected. Corollarily, a taxpayer's non-compliance with the mandatory 120-
day period is fatal to the petition even if the CIR does not assail the numerical
correctness of the tax sought to be refunded. Otherwise, the mandatory and
jurisdictional conditions impressed by law would be rendered useless.

Additionally, the 30-day appeal period to the CTA "was adopted precisely to do away
with the old rule,[33] so that under the VAT System the taxpayer will always have 30 days
to file the judicial claim even if the CIR acts only on the 120 th day, or does not act at all
during the 120-day period."[34] In effect, the taxpayer should wait for the 120 th day before
the 30-day prescriptive period to appeal can be availed of. Hence, the non-observance
of the 120-day period is fatal to the filing of a judicial claim to the CTA, the non-
observance of which will result in the dismissal of the same due to prematurity. In fine,
the premature filing of the judicial claim for refund of the excess input VAT of HHPI in
the amount of P3,167,402.34 warrants a dismissal of the petition because the latter
acquired no jurisdiction over the same.

WHEREFORE, in view of the foregoing, the Decision dated September 7, 2012 and
Resolution dated February 4, 2013 of the Court of Tax Appeals en banc, in C.T.A. EB
No. 748, are AFFIRMED.

SO ORDERED.

CIR v Solidbank Corporation (G.R. No. 148191)

Facts:
Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts
amounting to P1,474,693.44. It alleged that the total included P350,807,875.15
representing gross receipts from passive income which was already subjected to
20%final withholding tax (FWT).
The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20%
FWT should not form part of its taxable gross receipts for purposes of computing the
tax.

Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for
the refund or tax credit. It also filed a petition for review with the CTA where the it
ordered the refund.

The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross
receipts because the FWT was not actually received by the bank but was directly
remitted to the government. 

The Commissioner claims that although the FWT was not actually received by
Solidbank, the fact that the amount redounded to the bank’s benefit makes it part of the
taxable gross receipts in computing the Gross Receipts Tax. Solidbank says the CA
ruling is correct.

Issue:
Whether or not the FWT forms part of the gross receipts tax.

Held:
Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax
is imposed. The payor, a separate entity, acts as no more than an agent of the
government for the collection of tax in order to ensure its payment. This amount that is
used to settle the tax liability is sourced from the proceeds constitutive of the tax base. 

These proceeds are either actual or constructive. Both parties agree that there is no
actual receipt by the bank. What needs to be determined is if there is constructive
receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be
rationalized. 

The Court  applied provisions of the Civil Code on actual and constructive possession.
Article 531 of the Civil Code clearly provides that the acquisition of the right of
possession is through the proper acts and legal formalities established.  The withholding
process is one such act.  There may not be actual receipt of the income withheld;
however, as provided for in Article 532, possession by any person without any power
shall be considered as acquired when ratified by the person in whose name the act of
possession is executed.

 In our withholding tax system, possession is acquired by the payor as the withholding
agent of the government, because the taxpayer ratifies the very act of possession for
the government. There is thus constructive receipt.

The processes of bookkeeping and accounting for interest on deposits and yield on
deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or
remittance. Besides, Solidbank admits that its income is subjected to a tax burden
immediately upon “receipt”, although it claims that it derives no pecuniary benefit or
advantage through the withholding process.

There being constructive receipt, part of which is withheld, that income is included as
part of the tax base on which the gross receipts tax is imposed.

SECOND DIVISION

[G.R. NO. 139786 : September 27, 2006]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CITYTRUST INVESTMENT

PHILS., INC., Respondent.

[G.R. NO. 140857 : September 27, 2006]

 ASIANBANK CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE,Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

Does the twenty percent (20%) final withholding tax (FWT) on a bank's passive
income1 form part of the taxable gross receipts for the purpose of computing the five
percent (5%) gross receipts tax (GRT)? This is the central issue in the present two (2)
consolidated petitions for review.

In G.R. No. 139786, petitioner Commissioner of Internal Revenue (Commissioner)

assails the Court of Appeals Decision dated August 17, 1999 in CA-G.R. SP No.
527072 affirming the Court of Tax Appeals (CTA) Decision 3 ordering the refund or
issuance of tax credit certificate in favor of respondent Citytrust Investment Philippines.,
Inc. (Citytrust). In G.R. No. 140857, petitioner Asianbank Corporation (Asianbank)
challenges the Court of Appeals Decision dated November 22, 1999 in CA-G.R. SP No.
512484 reversing the CTA Decision5 ordering a tax refund in its (Asianbank's) favor.

A brief review of the taxation laws provides an adequate backdrop for our subsequent
narration of facts.

Under Section 27(D), formerly Section 24(e)(1) of the National Internal Revenue Code
of 1997 (Tax Code), the earnings of banks from passive income are subject to a 20%
FWT,6 thus:

(D) Rates of Tax on Certain Passive Incomes' 

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements received by domestic
corporation and royalties, derived from sources within the Philippines: x x x

Apart from the 20% FWT, banks are also subject to the 5% GRT on their gross receipts,
which includes their passive income. Section 121 (formerly Section 119) of the Tax
Code reads:

SEC. 121. Tax on banks and Non-bank financial intermediaries. - There shall be
collected a tax on gross receipts derived from sources within the Philippines by all
banks and non-bank financial intermediaries in accordance with the following schedule:

xxx
Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pretermination, then the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction as short, medium
or long-term and the correct rate of tax shall be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.

I - G.R. No. 139786

Citytrust, respondent, is a domestic corporation engaged in quasi-banking activities. In

1994, Citytrust reported the amount of P110,788,542.30 as its total gross receipts and
paid the amount of P5,539,427.11 corresponding to its 5% GRT. 

Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner
of Internal Revenue7 (ASIAN BANK case), ruled that the basis in computing the 5%
GRT is the gross receipts minus the 20% FWT. In other words, the 20% FWT on a
bank's passive income does not form part of the taxable gross receipts.

On July 19, 1996, Citytrust, inspired by the above-mentioned CTA ruling, filed with the
Commissioner a written claim for the tax refund or credit in the amount of P326,007.01.
It alleged that its reported total gross receipts included the 20% FWT on its passive
income amounting to P32,600,701.25. Thus, it sought to be reimbursed of the 5% GRT
it paid on the portion of 20% FWT or the amount of P326,007.01. 

On the same date, Citytrust filed a Petition for Review with the CTA, which eventually
granted its claim.8

On appeal by the Commissioner, the Court of Appeals affirmed the CTA Decision, citing
as main bases Commissioner of Internal Revenue v. Tours Specialist
Inc.9 and Commissioner of Internal Revenue v. Manila Jockey Club,10 holding that
monies or receipts that do not redound to the benefit of the taxpayer are not part of its
gross receipts, thus:

Patently, as expostulated by our Supreme Court, monies or receipts that do not

redound to the benefit of the taxpayer are not part of its gross receipts for the
purpose of computing its taxable gross receipts. In Manila Jockey Club, a portion of
the wager fund and the ten-peso contribution, although actually receivedby the Club,
was not considered as part of its gross receipts for the purpose of imposing the
amusement tax. Similarly, in Tours Specialists, the room or hotel charges actually
received by them from the foreign travel agency was, likewise, not included in its gross
receipts for the imposition of the 3% contractor's tax. In both cases, the fees, bets or
hotel charges, as the case may be, were actually received and held in trust by the
taxpayers. On the other hand, the 20% final tax on the Respondent's passive
income was already deducted and withheld by various withholding agents.
Hence, the actual or the exact amount received by the Respondent, as its passive
income in the year 1994, was less the 20% final tax already withheld by various
withholding agents. The various withholding agents at source were required
under section 50 (a), of the National Internal Revenue Code of 1986, to withhold
the 20% final tax on certain passive income x x x.

Moreover, under Section 51 (g) of the said Code, all taxes withheld pursuant to
the provisions of this Code and its implementing regulations are considered trust
funds and shall be maintained in a separate account and not commingled with
any other funds of the withholding agent.

Accordingly, the 20% final tax withheld against the Respondent's passive income
was already remitted to the Bureau of Internal Revenue, for the corresponding
year that the same was actually withheld and considered final withholding taxes
under Section 50 of the same Code. Indubitably, to include the same to the
Respondent's gross receipts for the year 1994 would be to tax twice the passive
income derived by Respondent for the said year, which would constitute double
taxation anathema to our taxation laws.

Hence, the present consolidated petitions.

The Commissioner's arguments in the two (2) petitions may be synthesized as follows:

first, there is no law which excludes the 20% FWT from the taxable gross receipts for
the purpose of computing the 5% GRT; 

second, the imposition of the 20% FWT on the bank's passive income and the 5% GRT
on its taxable gross receipts, which include the bank's passive income, does not
constitute double taxation;

third, the ruling by this Court in Manila Jockey Club,12 cited in the ASIAN BANKcase, is
not applicable;

fourth, in the computation of the 5% GRT, the passive income need not
be actuallyreceived in order to form part of the taxable gross receipts.

In its Resolution13 dated January 17, 2000, this Court adopted as Citytrust's Comment
on the instant Petition for Review its Memorandum submitted to the CTA and its
Comment submitted to the Court of Appeals. Citytrust contends therein that: first,
Section 4(e) of Revenue Regulations No. 12-80 dated November 7, 1980 provides that
the rates of taxes on the gross receipts of financial institutions shall be based only on all
items of income actually received;and, second, this Court's ruling in Manila Jockey
Club14 is applicable. Asianbank echoes similar arguments.

We rule in favor of the Commissioner.

The issue of whether the 20% FWT on a bank's interest income forms part of the
taxable gross receipts for the purpose of computing the 5% GRT is no longer novel.
This has been previously resolved by this Court in a catena of cases, such as China
Banking Corporation v. Court of Appeals,15 Commissioner of Internal Revenue v.
Solidbank Corporation,16 Commissioner of Internal Revenue v. Bank of
Commerce,17 and the latest, Commissioner of Internal Revenue v. Bank of the
Philippine Islands.18

The above cases are unanimous in defining "gross receipts" as "the entire receipts
without any deduction." We quote the Court's enlightening ratiocination in Bank of the
Philippines Islands,19 thus: 

The Tax Code does not provide a definition of the term "gross receipts". Accordingly,
the term is properly understood in its plain and ordinary meaning and must be taken to
comprise of the entire receipts without any deduction. We, thus, made the following
disquisition in Bank of Commerce:

The word "gross" must be used in its plain and ordinary meaning. It is defined as
"whole, entire, total, without deduction." A common definition is "without
deduction." "Gross" is also defined as "taking in the whole; having no deduction
or abatement; whole, total as opposed to a sum consisting of separate or
specified parts." Gross is the antithesis of net.Indeed, in China Banking Corporation
v. Court of Appeals, the Court defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v.
Koppers Company, Inc. - 

Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation.
However, this is no way should affect or control the normal usage of words in the
construction of our statutes; and we see nothing that would require us not to include the
proceeds here in question in the gross receipts allocation unless statutorily such
inclusion is prohibited. Under the ordinary basic methods of handling accounts, the
term gross receipts, in the absence of any statutory definition of the term, must
be taken to include the whole total gross receipts without any deductions, x x x.
[Citations omitted] (Emphasis supplied)"

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word "gross" appearing in the term "gross receipts," as used in the ordinance, must
have been and was there used as the direct antithesis of the word "net." In its usual and
ordinary meaning, "gross receipts" of a business is the whole and entire amount of the
receipts without deduction, x x x. On the ordinary, "net receipts" usually are the receipts
which remain after deductions are made from the gross amount thereof of the expenses
and cost of doing business, including fixed charges and depreciation. Gross receipts
become net receipts after certain proper deductions are made from the gross. And in
the use of the words "gross receipts," the instant ordinance, or course, precluded
plaintiff from first deducting its costs and expenses of doing business, etc., in arriving at
the higher base figure upon which it must pay the 5% tax under this ordinance.
(Emphasis supplied)

xxxxxx

Additionally, we held in Solidbank, to wit:

[W]e note that US cases have persuasive effect in our jurisdiction because Philippine
income tax law is patterned after its US counterpart.

[G]ross receipts with respect to any period means the sum of: (a) The total amount
received or accrued during such period from the sale, exchange, or other disposition of
x x x other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of its trade or business, and (b)
The gross income, attributable to a trade or business, regularly carried on by the
taxpayer, received or accrued during such period x x x.

x x x [B]y gross earnings from operations x x x was intended all operations x x x

including incidental, subordinate, and subsidiary operations, as well as principal
operations.

When we speak of the "gross earnings" of a person or corporation, we mean the entire
earnings or receipts of such person or corporation from the business or operation to
which we refer.

From these cases, "gross receipts" refer to the total, as opposed to the net income.
These are therefore the total receipts before any deduction for the expenses of
management. Webster's New International Dictionary, in fact, defines gross as "whole
or entire."

In China Banking Corporation,20 this Court further explained that the legislative intent to
apply the term in its plain and ordinary meaning may be surmised from a historical
perspective of the levy on gross receipts. From the time the GRT on banks was first
imposed in 1946 under Republic Act No. 3921 and throughout its successive re-
enactments,22 the legislature has not established a definition of the term "gross
receipts." Under Revenue Regulations No. 12-80 and No. 17-84, as well as several
numbered rulings, the BIR has consistently ruled that the term "gross receipts" does
not admit of any deduction. This interpretation has remained unchanged throughout
the various re-enactments of the present Section 121 of the Tax Code. On the
presumption that the legislature is familiar with the contemporaneous interpretation of a
statute given by the administrative agency tasked to enforce the statute, the reasonable
conclusion is that the legislature has adopted the BIR's interpretation. In other words,
the subsequent re-enactments of the present Section 121, without changes in the term
interpreted by the BIR, confirm that its interpretation carries out the legislative purpose.

Now, bereft of any laudable statutory basis, Citytrust and Asianbank simply anchor their
argument on Section 4(e) of Revenue Regulations No. 12-80 stating that "the rates of
taxes to be imposed on the gross receipts of such financial institutions shall be based
on all items of income actually received." They contend that since the 20% FWT is
withheld at source and is paid directly to the government by the entities from which the
banks derived the income, the same cannot be considered actually received, hence,
must be excluded from the taxable gross receipts.

The argument is bereft of merit. 

First, Section 4(e) merely recognizes that income may be taxable either at the time of
its actual receipt or its accrual, depending on the accounting method of the taxpayer. It
does not really exclude accrued interest income from the taxable gross receipts
but merely postpones its inclusion until actual payment of the interest to the lending
bank. Thus, while it is true that Section 4(e) states that "the rates of taxes to be imposed
on the gross receipts of such financial institutions shall be based on all items of
income actually received," it goes on to distinguish actual receipt from accrual, i.e.,
that "mere accrual shall not be considered, but once payment is received in such
accrual or in case of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions." 

And second, Revenue Regulations No. 12-80, issued on November 7, 1980, had been
superseded by Revenue Regulations No. 17-84 issued on October 12, 1984. Section
4(e) of Revenue Regulations No. 12-80 provides that only items of income actually
received shall be included in the tax base for computing the GRT. On the other hand,
Section 7(c) of Revenue Regulations No. 17-84 includes all interest income in
computing the GRT, thus:

SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes. - 

(a) The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations
need not be included in the gross income in computing the depositor's/investor's income
tax liability in accordance with the provision of Section 29 (b), (c) and (d) of the National
Internal Revenue Code, as amended.

(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes
declared for purposes of imposing the withholding taxes in accordance with these
regulations shall be allowed as interest expense deductible for purposes of computing
taxable net income of the payor.

(c) If the recipient of the above-mentioned items of income are financial

institutions, the same shall be included as part of the tax base upon which the
gross receipt tax is imposed.

Revenue Regulations No. 17-84 categorically states that if the recipient of the above-
mentioned items of income are financial institutions, the same shall be included
as part of the tax base upon which the gross receipt tax is imposed. There is,
therefore, an implied repeal of Section 4(e). There exists a disparity between Section
4(e) which imposes the GRT only on all items of income actually received (as
opposed to their mere accrual) and Section 7(c) which includes all interest
income (whether actual or accrued) in computing the GRT. As held by this Court
in Commissioner of Internal Revenue v. Solidbank Corporation,23"the exception having
been eliminated, the clear intent is that the later R.R. No. 17-84 includes the
exception within the scope of the general rule." Clearly, then, the current Revenue
Regulations require interest income, whether actually received or merely accrued, to
form part of the bank's taxable gross receipts. 2

Moreover, this Court, in Bank of Commerce,25 settled the matter by holding that "actual
receipt may either be physical receipt or constructive receipt," thus:

Actual receipt of interest income is not limited to physical receipt. Actual receipt
may either be physical receipt or constructive receipt. When the depositary bank
withholds the final tax to pay the tax liability of the lending bank, there is prior to
the withholding a constructive receipt by the lending bank of the amount
withheld. From the amount constructively received by the lending bank, the depositary
bank deducts the final withholding tax and remits it to the government for the account of
the lending bank. Thus, the interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies that the
amount of the tax withheld comes from the income earned by the taxpayer. Since the
amount of the tax withheld constitute income earned by the taxpayer, then that amount
manifestly forms part of the taxpayer's gross receipts. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the government in payment of
his tax liability. The amount withheld indubitably comes from the income of the taxpayer,
and thus forms part of his gross receipts.

Corollarily, the Commissioner contends that the imposition of the 20% FWT and 5%
GRT does not constitute double taxation.

We agree.
Double taxation means taxing for the same tax period the same thing or activity twice,
when it should be taxed but once, for the same purpose and with the same kind of
character of tax.26This is not the situation in the case at bar. The GRT is a percentage
tax under Title V of the Tax Code ([Section 121], Other Percentage Taxes), while the
FWT is an income tax under Title II of the Code (Tax on Income). The two concepts are
different from each other. In Solidbank Corporation,27 this Court defined that a
percentage tax is a national tax measured by a certain percentage of the gross selling
price or gross value in money of goods sold, bartered or imported; or of the gross
receipts or earnings derived by any person engaged in the sale of services. It is not
subject to withholding. An income tax, on the other hand, is a national tax imposed on
the net or the gross income realized in a taxable year. It is subject to withholding. Thus,
there can be no double taxation here as the Tax Code imposes two different kinds of
taxes.

Now, both Asianbank and Citytrust rely on Manila Jockey Club28 in support of their
positions. We are not convinced. In said case, Manila Jockey Club paid amusement tax
on its commission in the total amount of bets called wager funds from the period
November 1946 to October 1950. But such payment did not include the 5 - % of the
funds which went to the Board on Races and to the owners of horses and jockeys. We
ruled that the gross receipts of the Manila Jockey Club should not include the 5 '%
because although delivered to the Club, such money has been especially earmarked by
law or regulation for other persons.

The Manila Jockey Club29 does not apply to the cases at bar because what happened
there is earmarking and not withholding. Earmarking is not the same as withholding.
Amounts earmarked do not form part of gross receipts because these are by law or
regulation reserved for some person other than the taxpayer, although delivered or
received. On the contrary, amounts withheld form part of gross receipts because these
are in constructive possession and not subject to any reservation, the withholding agent
being merely a conduit in the collection process.30 The distinction was explained
in Solidbank, thus:

"The Manila Jockey Club had to deliver to the Board on Races, horse owners and
jockeys amounts that never became the property of the race track (Manila Jockey
Club merely held that these amounts were held in trust and did not form part of gross
receipts). Unlike these amounts, the interest income that had been withheld for the
government became property of the financial institutions upon constructive
possession thereof. Possession was indeed acquired, since it was ratified by the
financial institutions in whose name the act of possession had been executed.
The money indeed belonged to the taxpayers; merely holding it in trust was not
enough (A trustee does not own money received in trust.) It is a basic concept in
taxation that such money does not constitute taxable income to the trustee [China
Banking Corp. v. Court of Appeals, supra, p. 27]).

The government subsequently becomes the owner of the money when the
financial institutions pay the FWT to extinguish their obligation to the
government. As this Court has held before, this is the consideration for the
transfer of ownership of the FWT from these institutions to the government (Ibid.,
p. 26). It is ownership that determines whether interest income forms part of
taxable gross receipts (Ibid., p. 27). Being originally owned by these financial
institutions as part of their interest income, the FWT should form part of their
taxable gross receipts.

In fine, let it be stressed that tax exemptions are highly disfavored. It is a governing
principle in taxation that tax exemptions are to be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority and should be granted only by
clear and unmistakable terms. 

WHEREFORE, in G.R. No. 139786, we GRANT the petition of the Commissioner of

Internal Revenue and REVERSE the Decision of the Court of Appeals dated August 17,
1999 in CA-G.R. SP No. 52707. 

In G.R. No. 140857, we DENY the petition of Asianbank Corporation and AFFIRM in

toto the Decision of the Court of Appeals in CA-G.R. SP No. 51248. Costs against
petitioner. 

SO ORDERED.

CIR v. The Insular Life Insurance Co., Ltd.

"Stare decisis et non quieta movere. Stand by the decisions and disturb not what is
settled. Stare decisis simply means that for the sake of certainty, a conclusion reached
in one case should be applied to those that follow if the facts are substantially the same,
even though the parties may be different. It proceeds from the first principle of justice
that, absent any powerful countervailing considerations, like cases ought to be decided
alike. Thus, where the same questions relating to the same event have been put
forward by the parties similarly situated as in a previous case litigated and decided by a
competent court, the rule of stare decisisis a bar to any attempt to relitigate the same
issue."

Facts:
Petitioner Commissioner of Internal Revenue is the official duly authorized under
Section 4 of the National Internal Revenue Code (NIRC) of 1997 to assess and collect
internal revenue taxes, as well as the power to decide disputed assessments, subject to
the exclusive appellate jurisdiction of this Court. 

Respondent The Insular Life Assurance, Co., Ltd. is a corporation duly organized and
existing under and by virtue of the laws of the Republic of the Philippines. It is registered
as a non-stock mutual life insurer with the Securities and Exchange Commission. 
On October 7, 2004, respondent received an Assessment Notice with Formal Letter of
Demand both dated July 29, 2004, assessing respondent for deficiency DST on its
premiums on direct business/sums assured for calendar year 2002, computed as
follows: 

Documentary Stamp Tax 

Deficiency Documentary Stamp              ₱70,732,389.83
Tax-Basic

Add: Increments (Interest and                  23,201,969.38

Compromise Penalty) 

Total Amount Due                                    ₱93,934,359.21 

Thereafter, respondent filed its Protest Letter on November 4, 2004, which was
subsequently denied by petitioner in a Final Decision, on Disputed Assessment dated
April 15, 2005 for lack of factual and legal bases. Apparently, respondent received the
aforesaid Final Decision on Disputed Assessment only on June 23, 2005. 

Issue:
WHETHER OR NOT THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS
A COOPERATIVE AND [IS] THUS[,] EXEMPT FROM DOCUMENTARY STAMP TAX.

Held:
The Court has pronounced in Republic of the Philippines v. Sunlife Assurance Company
ofCanada9 that "[u]nder the Tax Code although respondent is a cooperative,
registration with the CDA is not necessary in order for it to be exempt from the payment
of both percentage taxes on insurance premiums, under Section 121; and documentary
stamp taxes on policies of insurance or annuities it grants, under Section 199."
Section 199 of the NIRC of 1997 provides:
Sec. 199. Documents and Papers Not Subject to Stamp Tax. – The provisions of
Section 173 to the contrary notwithstanding, the following instruments, documents and
papers shall be exempt from the documentary stamp tax: 

(a) Policies of insurance or annuities made or granted by a fraternal or beneficiary

society, order, association or cooperative company, operated on the lodge system or
local cooperation plan and organized and conducted solely by the members thereof for
the exclusive benefit of each member and not for profit. 

x x x x (Emphasis ours) 

As regards the applicability of Sunlife to the case at bar, the CTA, through records, has
established the following similarities between the two which call for the application of the
doctrine of stare decisis: 
1. Sunlife Assurance Company of Canada and the respondent are both engaged in
mutual life insurance business in the Philippines; 
2. The structures of both corporations were converted from stock life insurance
corporation to non-stock mutual life insurance for the benefit of its policyholders
pursuant to Section 266, Title 17 of the Insurance Code of 1978 and they were made
prior to the effectivity of Republic Act (R.A.) No. 6938, otherwise known as the
"Cooperative Code of the Philippines"; 
3. Both corporations claim to bea purely cooperative corporation duly licensed to
engage in mutual life insurance business; 
4. Both corporations claim exemption from payment of the documentary stamp taxes
(DST) under Section 199(1) of the Tax Code (now Section 199[a] of the NIRC of 1997,
as amended); and 
5. Petitioner CIR requires registration with the CDA before it grants tax exemptions
under the Tax Code.

The CTA observed that the factual circumstances obtaining in Sunlife and the present
case are substantially the same. Hence, the CTA based its assailed decision on the
doctrine enunciated by the Court in the said case. On the other hand, the petitioner
submitted that the doctrine in Sunlife should be reconsidered and not be applied
because the same failed to consider Section 3(e) of R.A No. 6939,12 which provides
that CDA has the power to register all cooperatives,13 to wit: 
Section 3. Powers, Functions and Responsibilities. – The Authority shall have the
following powers, functions and responsibilities: 

xxxx 

(e) Register all cooperatives and their federations and unions, including their division,
merger, consolidation, dissolution or liquidation. It shall also register the transfer of all or
substantially all of their assets and liabilities and such other matters as may be required
by the Authority; 

xxxx 

The Court presented three justifications in Sunlife why registration with the CDA is not
necessary for cooperatives to claim exemption from DST. 

First, the NIRC of 1997 does not require registration with the CDA. No tax provision
requires a mutual life insurance company to register with that agency in order to enjoy
exemption from both percentage and DST. Although a provision of Section 8 of the
Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of the
Certificate of Registration with the CDA before the issuance of a tax exemption
certificate, that provision cannot prevail over the clear absence of an equivalent
requirement under the Tax Code.

Second, the provisions of the Cooperative Code of the Philippines do not apply.19 The
history of the Cooperative Code was amply discussed in Sunlife where it was noted that
cooperatives under the old law, Presidential Decree (P.D.) No. 17520 "referred only to
an organization composed primarily of small producers and consumers who voluntarily
joined to form a business enterprise that they themselves owned, controlled, and
patronized. The Bureau of Cooperatives Development — under the Department of Local
Government and Community Development (later Ministry of Agriculture) — had the
authority to register, regulate and supervise only the following cooperatives: (1) barrio
associations involved in the issuance of certificates of land transfer; (2) local or primary
cooperatives composed of natural persons and/or barrio associations; (3) federations
composed of cooperatives that may or may not perform business activities; and (4)
unions of cooperatives that did not perform any business activities. Respondent does
not fall under any of the abovementioned types of cooperatives required to be
registered under [P.D. No.] 175." 

When the Cooperative Code was enacted years later, all cooperatives that were
registered under PD 175 and previous laws were also deemed registered with the CDA.
Since respondent was not required to be registered under the old law on cooperatives, it
followed that it was not required to be registered even under the new law. 

"The distinguishing feature of a cooperative enterprise is the mutuality of cooperation

among its member-policyholders united for that purpose. So long as respondent meets
this essential feature, it does not even have to use and carry the name of a cooperative
to operate its mutual life insurance business. Gratia argumenti that registration is
mandatory; it cannot deprive respondent of its tax exemption privilege merely because it
failed to register. The nature of its operations is clear; its purpose well-defined.
Exemption when granted cannot prevail over administrative convenience."
Third, the Insurance Code does not require registration with the CDA. "The provisions of
this Code primarily govern insurance contracts; only if a particular matter in question is
not specifically provided for shall the provisions of the Civil Code on contracts and
special laws govern." 

There being no cogent reason for the Court to deviate from its ruling in Sunlife, the
Court holds that the respondent, being a cooperative company not mandated by law to
be registered with the CDA, cannot be required under RMC No. 48-91, a mere circular,
to be registered prior to availing of DST exemption. 

"While administrative agencies, such as the Bureau of Internal Revenue, may issue
regulations to implement statutes, they are without authority to limit the scope of the
statute to less than what it provides, or extend or expand the statute beyond its terms,
or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an
administrative agency for that matter cannot amend an act of Congress. Hence, in case
of a discrepancy between the basic law and an interpretative or administrative ruling,
the basic law prevails. " 

Petition is DENIED.
 COMMISSIONER OF INTERNAL REVENUE v. MICHEL J. LHUILLIER PAWNSHOP,
INC. G.R. No. 150947. July 15, 2003
FACTS:

On 1991, the CIR issued Revenue Memorandum Order (RMO) No. 15-91, which was
clarified by RMO No. 43-91  imposing a 5% lending investors tax on pawnshops. It held
that the principal activity of pawnshops is lending money at interest and incidentally
accepting personal property as security for the loan. Since pawnshops are considered
as lending investors effective,  they also become subject to documentary stamp taxes.

On 1997, the Bureau of Internal Revenue (BIR) issued an Assessment Notice against
Lhuillier demanding payment of deficiency percentage.

Lhuillier filed an administrative protest with the Office of the Revenue Regional Director
contending that neither the Tax Code nor the VAT Law expressly imposes 5%
percentage tax on the gross income of pawnshops; that pawnshops are different from
lending investors, which are subject to the 5% percentage tax under the specific
provision of the Tax Code; that RMO No. 15-91 is not implementing any provision of the
Internal Revenue laws but is a new and additional tax measure on pawnshops, which
only Congress could enact, and that it impliedly amends the Tax Code, and that it is a
class legislation as it singles out pawnshops.
On 1998, the BIR issued Warrant of Distraint and/or Levy against Lhuilliers property for
the enforcement and payment of the assessed percentage tax.

When Lhuiller's protest was not acted upon, they elevated it to the CIR which was also
not acted upon. Lhuiller filed a Notice and Memo on Appeal with the CTA.
On 2000, the CTA held the the RMOs were void and that the Assessment Notice should
be cancelled.

The CIR filed a motion for review with the CA which only affirmed the CTA's decision
thus this case in bar.
ISSUE:  Whether pawnshops included in the term lending investors for the purpose of
imposing the 5% percentage tax under the NIRC.
RULING:
No. 
The held that even though the RMOs No were issued in accordance with the power of
the CIR, they cannot issue administrative rulings or circulars not consistent with the law
sought to be applied. It should remain consistent with the law they intend to carry out.
Only Congress can repeal or amend the law. 
In the NIRC, the term lending investor includes all persons who make a practice of
lending money for themselves or others at interest. A pawnshop, on the other hand, is
defined under Section 3 of P.D. No. 114 as a person or entity engaged in the business
of lending money on personal property delivered as security for loans.
While it is true that pawnshops are engaged in the business of lending money, they are
not considered lending investors for the purpose of imposing the 5% percentage taxes
citing the following reasons: 
1. Pawnshops and lending investors were subjected to different tax treatments as per
the NIRC.
2. Congress never intended pawnshops to be treated in the same way as lending
investors.
3. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to
percentage tax dealers in securities and lending investors only. There is no mention of
pawnshops. 

4. The BIR had ruled several times prior to the issuance of the RMOs that pawnshops
were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of
1977.  As Section 116 of the NIRC of 1977 was practically lifted from Section 175 of the
NIRC of 1986, and there being no change in the law, the interpretation thereof should
not have been altered.
 EN BANC

G.R. No. L-16850 May 30, 1962

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. UNITED STATES LINES

COMPANY, Respondent.

Office of the Solicitor General for petitioner.

Ross, Selph and Carrascoso for respondent.

BARRERA, J.:chanrobles virtual law library

This is an appeal by the Commissioner of Internal Revenue from the decision of the
Court of Tax Appeals (in CTA Case No. 556) holding the U.S. Lines Company liable for
payment of common carrier's tax deficiency and surcharges in the total sum of only
P502.75 instead of P25,769.41 as originally assessed and demanded by appellant
Commissioner.

As found and stated in the decision of the Court of Tax Appeals, the U.S. Lines
Company, a foreign corporation duly licensed to do business in the Philippines, under
the trade name "American Pioneer Lines" (for short hereinafter referred to as the
Company), is the operator of ocean-going vessels transporting passengers and freight
to and from the Philippines. It is also the sole agent and representative of the Pacific Far
East Line, Inc., another shipping company engaged in business in the Philippines as a
common carrier by water.

In the examination of its books of accounts and other records to determine its tax
liabilities for the period from January 1, 1950 to September 30, 1955, it was found that
the Company also acted in behalf of the West Coast Trans-Oceanic Steamship Lines
Co., Inc., a non-resident foreign corporation, in connection with the transportation, on
board the "SS Portland Trader" belonging to the latter, on November 27, 1951 and April
29, 1952, of chrome ores from Masinloc, Zambales to the United States, from which
carriage or transportation freight revenue in the total sum of $272,470.00 was realized
by the vessel's owner, and for which the 2% common carrier's percentage tax imposed
by Section 192 of the National Internal Revenue Code was never paid.

As a consequence, the Commissioner of Internal Revenue assessed and demanded

from the Company, as deficiency tax, (a) the sum of P6,691.36 for its own business
under the name American Pioneer Lines; (b) P5,429.00 as agent of Pacific Far East
Line, Inc.; and (c) P13,649.05 on the freight revenue of the West Coast Trans-Oceanic
Steamship Lines Co. from the carriage or transportation of the chrome ores, or a total of
P25,769.41.chanroblesvirtualawlibrarychanrobles virtual law library

At the instance of the Company, a reinvestigation of the case was conducted and a
hearing thereon held before the Appellate Division of the Bureau of Internal Revenue.
These, notwithstanding, the Commissioner maintained his demand. Thus, the Company
filed a petition with the Court of Tax Appeals contesting the correctness of (1) the
conversion of "collect" revenues or those freight and passage receipts, commissions,
and agency fees for services in the Philippines, but payable in the United States, at the
rate of P2.00375 to $1.00 and (2) the demand on the Company of the 2% carrier's
percentage tax on the gross receipts of the West Coast Trans-Oceanic Steamship Lines
from the chrome ore shipments of November 27, 1951 and April 29,
1952.chanroblesvirtualawlibrarychanrobles virtual law library

The Court of Tax Appeals, in its decision, ruled for the Company on the first issue, thus
- 

We wish to make it clear that from the records of the case, it appears that all the
"collect" revenues, or those freight charges, passage fares, commissions and agency
fees, collected in the United States in United States currency belong to petitioner's
home office in the United States and were not remitted to petitioner's local office in the
Philippines. In short, the United States dollars collected abroad were not actually
converted to and received in Philippine pesos, and therefore there is no occasion nor
reason to use a conversion rate aside from the legal rate of exchange, i.e., $1.00 to
P2.00. If we have placed the judicial stamp of approval on the agreed conversion rates
of $1.00 to P2.015 and $1.00 to P2.02 with regard to the "prepaid" freight and passage
revenues, respectively, we did so in order to arrive at the actual amounts collected by
the petitioner in Philippine pesos - the correct taxable gross receipts. (Emphasis
supplied.)

As to the second issue, it ruled that the 2% percentage tax under Section 192 of the Tax
Code is imposable only on owners or operators of the common carrier, and as there is
no law constituting the shipping agent the withholding agent of the taxes due from the
principal, said shipping agent is not personally liable for the tax obligations of the latter,
unless the agent voluntarily assumes such obligation which, in this case, the agent
Company did not. Consequently, the petitioning taxpayer was ordered to pay only a tax
deficiency and surcharge in the sum of P502.75. Hence, the institution of this appeal.

The ruling by the lower court that the conversion of the "collect" freight fees (or those
earned in the Philippines but actually paid in the United States in dollars) should be at
the rate of P2.00 to $1.00 as established by law (Sec. 48, Rep. Act No. 265), and not
the rate or exchange of P2.00375 to $1.00, as fixed by the Monetary Board, must be
upheld. No evidence was presented rebutting the positive allegation of respondent
taxpayer, which was sustained by the Tax Court, that the "collect" freightage fees were
not remitted to the local office of the U.S. Lines Company (in the Philippines) nor
actually converted to and received in Philippine pesos. In other words, no foreign
exchange operations were involved here. The statement made in the Commissioner's
brief (p. 20) that "it is uncontroverted that the respondent's (Company's) dollar earnings
here representing its so-called "collect" revenues were accounted for thru its bank, the
National City Bank of New York at P2.00375 to a dollar", is not borne out by the records.
What appears is that the Company received certain amounts from its home office in the
United States to meet its local expenses, and these were withdrawn from a letter of
credit in the First City Bank of New York in Manila at the rate of P2.00375 to a dollar.
But the Company asserts - and there is no evidence to the contrary - that there is no
relationship whatsoever between these funds and the freight fees collected in the United
States.

The other issue is whether on the facts of the case, the Company, as agent of the
vessel "SS Portland Trader" in behalf of its owner, the West Coast Trans-Oceanic
Steamship Lines Company, can be compelled to pay the 2% percentage tax on the
freight revenue earned from the shipment of chrome ores transported from the
Philippines to the United States. As stated earlier, the Court of Tax Appeals ruled in the
negative, citing and adopting a unanimous decision of the defunct Board of Tax Appeals
rendered on July 30, 1953, purporting to interpret Section 192 of the National Internal
Revenue Code, in which it held that a shipping agent is not personally responsible for
the payment of the tax obligations of its principal, reasoning that there is no law
constituting a shipping agent as a withholding agent of the taxes due from its principal. It
further stated that a shipping agent can only be held liable for the payment of the
common carrier's percentage tax if such obligation is stipulated in the agency
agreement, or if the agent voluntarily assumes the tax liability.

We can not agree to this view as applied to the present case, because it adopts a very
restrictive interpretation of Section 192 of the Tax Code. 1 What the legal provision
purports to tax is the business of transportation, so much so that the tax is based on the
gross receipts. The person liable is of course the owner or operator, but this does not
mean that he and he alone can be made actually to pay the tax. In other words,
whoever acts on his behalf and for his benefit may be held liable to pay, for and on
behalf of the carrier or operator, such percentage tax on the business.

It is claimed for the Company that it merely acted as a "husbanding agent" of the vessel
with limited powers. This appears not to be so. A "husbanding agent" is the general
agent of the owner in relation to the ship, with powers, among others, to engage the
vessel for general freight and the usual conditions, and settle for freight and adjust
averages with the merchant.2 But whatever may be the technical functions of a "ship's
husband", the Company, in the case at bar, was considered and acted more as a
general agent. The agency contract is not extant in the records. Still, from the
correspondence between the principal West Coast Trans-Oceanic Steamship Lines and
the Company itself, and with other entities regarding the shipment in question, the real
nature of the agency may be gleaned. Thus, in the letter of West Coast Trans-Oceanic
Steamship Lines, dated October 20, 1951 (Exh. 30), giving instructions to the master of
its vessel "SS Portland Trader", it referred to respondent Company as the "Owner's
agents" at the loading point (Masinloc) to which the vessel had to be consigned. In line
with its designation as the "Owner's agent" and the vessel's consignee, respondent
Company wrote the master of the vessel (Exh. 23) advising him that it had secured
Customs authority for the vessel to proceed to Masinloc, as well as the Export Entry
covering the loading of ore, giving instructions how to proceed with the loading and to
keep it closely advised of all movements and daily tonnages laden. It also undertook to
and did in fact prepare all the cargo documents. The corresponding bill of lading for the
cargo was prepared and signed by the respondent Company "As Agent for West Coast
Trans-Oceanic Steamship Lines" wherein it acknowledged the receipt of 9,900 long tons
of chrome, a prerogative act of a common carrier itself. (p. 114, BIR record). Again,
signing "As Agents for West Coast Trans-Oceanic Steamship Lines", respondent
Company transmitted the shipping documents covering the shipment of ore to Castle
Cooke, Ltd., the vessel's agent at Honolulu (Exh. 20). All these were in respect to the
first shipment on November 27, 1951.chanroblesvirtualawlibrarychanrobles virtual law
library

Concerning the second shipment, we have first the letter of West Coast Trans-Oceanic
Steamship Lines, dated February 21, 1952 addressed to respondent Company,
advising it of the second trip of "SS Portland Trader" and stating: "We trust that you will
handle the vessel at Manila and that your usual fee will apply", and requesting
respondent Company to act also as supervisory agent at Saigon and Haiphong (p. 57,
BIR records). The steamship company, likewise, advised the master of its vessel that
"its agents for Masinloc" will be the respondent Company from which "full assistance
and information" could be obtained (Exh. 18, dated March 12, 1952). Evidently
accepting the designation, respondent Company, representing itself as "the local
agents" of the vessel (Exh. 21, dated March 26, 1952), secured the entry and clearance
of the vessel at the customs. After the loading of ore at Masinloc, again respondent
Company prepared the shipping documents and signed the bill of lading "As Agent for
the West Coast Trans-Oceanic Steamship Lines" (p. 114, BIR record).

All these documents show that respondent Company clearly acted - as it held itself to
the public and to the Government (specifically the Bureau of Customs) - as the
shipowner's local agent or the ship agent representing the ownership of the vessel. To
adopt the view of the trial court would be to sanction the doing of business in the
Philippines by non-resident corporations over which we have no jurisdiction, without
subjecting the same to the operation of our revenue and tax laws, to the detriment and
discrimination of local business enterprises. We, therefore, hold that in the
circumstances, said respondent is under obligation to pay, for and in behalf of its
principal, the tax due from the latter. And, this is but logical, because, as provided in
Article 595 of the Code of Commerce, "the ship agent shall represent the ownership of
the vessel, and may, in his own name and in such capacity, take judicial and
extrajudicial steps in matters relating to commerce". If the shipping agent represents the
ownership of the vessel in matters relating to commerce, then any liability arising in
connection therewith may be enforced against the agent who is, as a consequence
thereof, authorized to take judicial or extrajudicial steps, either in the prosecution or
defense of the owner's rights or interests. As a matter of fact, if a foreign shipping
company has a claim against the Government in relation to commerce, its local shipping
agent, by virtue of Article 595 of the Code of Commerce, can file such a claim in his own
name. Conversely, and logically, it must be admitted, the Government can hold the local
shipping agent liable for the taxes due from his, principal. This is, of course, without
prejudice to the right of the agent to seek reimbursement from his principal.

The contention that the agreement between the principal and agent solely determines
the liability of the agent, is not tenable. Any agreement or contract to be enforceable in
this jurisdiction is understood to incorporate therein the provision or provisions of law
specifying the obligations of the parties under such contract. The contract between
herein respondent Company and its principal consequently imposed upon the parties
not only the rights and duties delineated therein, but also the provisions of law such as
that of the Code of Commerce aforecited

As to the third assigned error, i.e., the amount of taxable receipts, the records are not
clear. Petitioner Commissioner of Internal Revenue claims that there are contradictions
in and among the three sets of summaries submitted by the respondent Company and
they should not have been considered by the trial court. On the other hand, we find also
that the assessments issued by the Commissioner are, likewise, conflicting. In his
present petition, the prayer sets the tax delinquency of the respondent Company at
P26,436.17, which is the amount demanded in his letter of June 6, 1952, (Exh. E, also
marked as Exh. 34). In his brief, the Commissioner prays that respondent Company be
ordered to pay the sum of P25,769.41, the amount demanded in his letter of June 28,
1956 (Exh. A, also marked as Exh. 26). In view of these discrepancies, a re-
examination and verification of the records is necessary to determine the exact taxable
amount on which the 2% common carrier's percentage tax is to be computed in
accordance with the terms of this decision.

WHEREFORE, the decision of the Court of Tax Appeals in this case is modified at
above-indicated, and the records remanded to the court a quo for the purpose herein
directed. No costs. So ordered.
 EN BANC

[G.R. No. L-21832. May 29, 1971.]

VISAYAN ELECTRIC COMPANY, INC., Petitioner, v. COMMISSIONER, OF

INTERNAL REVENUE, Respondent.

Vicente L. Faelnar & Jesus P. Garcia for Petitioner.

Solicitor General Arturo A. Alafriz Solicitor Alejandro B. Afurong and Special

Attorney Lolita O. Gal-lang for Respondent.

SYLLABUS

1. TAXATION; SECTION 259 OF THE NATIONAL INTERNAL REVENUE CODE; IN

CASE AT BAR, PETITIONER’S FRANCHISE NOT A BAR TO IMPOSITION OF
HIGHER RATE OF FRANCHISE TAX. — Petitioner’s franchise does not, as the
franchises involved in Hoa Hin and Lealda did not, contain any provision to the effect
that the payment of the franchise tax therein prescribed shall be "in lieu of all taxes of
every name and nature — municipal, provincial or central — upon its capital stock,
franchise, right of way, earnings, and all other property owned or operated by the
grantee under this concession or franchise." The absence of such provision clearly
indicates — as We held in the two cases mentioned heretofore — that petitioner’s
franchise is not a bar to the imposition of a higher rate of franchise tax. Accordingly,
Section 259 of the Tax Code which applies to franchises existing at the time of its
enactment as well as to future franchises, should apply to petitioner herein.

2. REMEDIAL LAW; CIVIL PROCEDURE; PRESCRIPTION AS A DEFENSE DEEMED

WAIVED IF NOT SEASONABLY RAISED. — Upon the facts disclosed by the record,
this point merits no extensive discussion as it appears that petitioner did not raise the
defense of prescription neither in the Bureau of Internal Revenue, nor in the Court of
Tax Appeals, nor in the petition for review filed in this case. It is the settled law in this
jurisdiction that prescription as a defense is deemed waived if not seasonably raised
(Section 2, Rule 9, Rules of Court; Republic of the Philippines v. Mambulao Lumber
Company, Et Al., G.R. No. L-18942, November 30, 1962).

3. ID.; ID.; PRAYER FOR GENERAL RELIEF; DOES NOT FORM PART OF BODY OF
PLEADING; LEGAL EFFECT THEREOF. — Well known is the rule that the prayer for
relief made in a pleading (complaint or petition for review) does not form part of the
body thereof where the ultimate facts constituting the cause of action or defense must
be set forth. The only legal effect of a prayer for general relief is to authorize the court,
upon rendering judgment, to grant such relief as may be justified by the pleadings and
the evidence, although such relief was not one of those specifically prayed for in the
winning party’s affirmative pleading.

DECISION

DIZON, J.:

This is an appeal from a decision of the Court of Tax Appeals in C.T.A. Case No. 1105
sentencing petitioner to pay respondent Commissioner of Internal Revenue or his
authorized representative the sum of P78,670.55 as deficiency franchise tax and
surcharge.

The material facts are not disputed, the case having been submitted for decision on the
pleadings.

According to the record, Petitioner, a holder of a legislative franchise (Act No. 2701)

authorizing it to operate and maintain an electric light, heat and power system in the
City of Dumaguete, Oriental Negros, realized more than two million pesos as gross
receipts from the operation of its electrical plant during the period from April 1, 1952 to
December 31, 1959, having paid thereon the 2% franchise tax prescribed in its
franchise (Section 8 of Act 2701) instead of the 5% franchise tax prescribed in Section
259 of the National Internal Revenue Code, as amended by Republic Act 418.
Accordingly, on December 14, 1960, the respondent Commissioner assessed and
demanded from petitioner the payment of the sum of P62,936.44 as deficiency
franchise tax, plus the sum of P15,734.11 as 26% surcharge, or a total sum of
P78,670.55. Upon denial of petitioner’s request for a reconsideration of the assessment
it interposed an appeal to the Court of Tax Appeals where, as already stated, the parties
submitted the case for decision on the pleadings. Thereafter the Court of Tax Appeals
rendered the appealed decision, and subsequently also denied the motion for
reconsideration seasonably filed by petitioner. Petitioner contends (First Assignment of
Error) that the Court of Tax Appeals erred in holding that it should pay the 5% franchise
tax prescribed in Section 259 of the National Internal Revenue Code instead of the 2%
tax provided for in its franchise. It is its contention in this connection that our ruling in
Hoa Hin Co., Inc. (G.R. Nos. L-9616 and 11783, May 25, 1959) and Lealda Electric Co.,
Inc. (G.R. L-16428, April 30, 1963) does not apply to the instant case because its
franchise is different from the franchise of the taxpayers involved in said cases.

We find petitioner’s contention to be without merit, it appearing that the provisions

concerning the imposition and collection of taxes contained in the franchise involved in
the two cases mentioned above and in the present case are substantially the same.

Section 7 of Act No. 1256 (Hoa Hin Franchise) provides:

"The grantee of this license, his lessees, grantees, or successors in interest, shall pay
annually to the Government of the Philippine Islands one-half of one per centum per
annum of the gross receipts derived from the operation of said slipway or marine railway
from and after the date of the acceptance of this license. Said payment shall be made in
the fifteenth day of January of each and every year for the year preceding and any
accredited officer of the Insular Government shall, upon demand, have the right to
examine and inspect the books of the grantee, his successors or assigns, for the
purpose of ascertaining the gross receipts of the said slipway or marine railway for any
year; but nothing in this section shall be construed to interfere with the rights of the
municipal, provincial or Insular Government to assess taxes upon the land in question
or improvements thereon, nor shall it affect the right of the Government to assess and
collect any business or income tax on his business." (Emphasis ours.)."cralaw virtua1aw
library

It is obvious that the section of the law quoted above does not contain any provision to
the effect that the franchise tax imposed upon the grantee shall be "in lieu of all taxes of
every name and nature — municipal, provincial or central —, upon its capital stock,
franchise, right of way, earnings. and all other property owned or operated by the
grantee under this concession or franchise." For this reason, We ruled that the franchise
holder Hoa Hin was subject to the higher rate of franchise tax prescribed in Section 259
of the Tax Code. Stating the reasons in support of our ruling, We said:

"While the then Philippine Commission fixed the yearly tax to be paid to the Government
by the original grantee, his successor and assigns at the rate of 1/2 of 1% of the gross
earnings derived from the operation of the slipway or marine railway, the grantor
reserved its right to assess and collect other business or income tax on the grantees’
business. Section 259 of the National Internal Revenue Code, as amended, provides
that whichever is higher between the rate imposed by the special charter of the grantee
and the National Internal Revenue Code, shall apply to and be imposed upon, and paid
by, the grantee of the franchise. The rate imposed by Section 259 of the National
Internal Revenue Code, as amended, being higher than that imposed in the petitioner’s
charter, Act No. 1256, the petitioner has to pay the rate imposed by Section 259 of the
National Internal Revenue Code, as amended. The rule in Manila Railroad Company v.
Rafferty, 40 Phil. 224; Philippine Railway Company v. Collector of Internal Revenue,
G.R. No. L-3859, 25 March 1952; Visayan Electric Company v. David, 49 Off. Gaz.
1385; and Carcar Electric and Ice Plant v. Collector of Internal Revenue, 53 Off. Gaz.
1068, cannot be invoked by the petitioner, because in the grantee’s respective
franchises there is a provision that ‘Such annual payments, when promptly and fully
made by the grantee, shall be in lieu of all taxes of every name and nature — municipal,
provincial or central —, upon its capital stock, franchise, right of way, earnings, and all
other property owned or operated by the grantee under this concession or franchise.’
The petitioner’s franchise, Act No. 1256, does not embody such exemption clause."
(Emphasis ours.)."
In the Lealda case, the relevant provision of the taxpayer’s franchise (Act No. 2475)
reads as follows:

". . . Entendiendose, que en consideracion del privilegio concedido por la presente el

concesionario, sus sucesores, o cesionarios abonara trimestralmente a la tesoreria de
Albay o en la de Daraga y Legaspi en el caso de que estos dos ultimos fuesan
segregados por autoridad competente en municipios independiente, con rentas
correspondientes de acuerdo con la ley, por sus entradas en bruto tales como se
exigen a las demas franquicias y privilegios hoy existentes."cralaw virtua1aw library

Petitioner’s franchise does not, as the franchises involved in Hoa Hin and Lealda did
not, contain any provision to the effect that the payment of the franchise tax therein
prescribed shall be "in lieu of all taxes of every name and nature — municipal, provincial
or central — , upon its capital stock, franchise, right of way, earnings, and all other
property owned or operated by the grantee under this concession or franchise." The
absence of such provision clearly indicates — as We held in the two cases mentioned
heretofore — that petitioner’s franchise is not a bar to the imposition of a higher rate of
franchise tax. Accordingly, Section 259 of the Tax Code which applies to franchises
existing at the time of its enactment as well as to future franchises, should apply to
petitioner herein.

Petitioner’s second contention is that the Court of Tax Appeals erred in holding that
petitioner’s franchise was deemed amended by Section 259 of the Tax Code, said
franchise being in the nature of a contract between the State and the franchise holder.

It is enough to say in this connection, that petitioner’s franchise (Article 11, Act No.
2701) allows amendments or even repeal. Petitioner and its predecessor in interest, the
original grantee "La Electra" were fully aware of and accepted this condition, and have
no reason to complain.

Petitioner’s last contention is that the Court of Tax Appeals erred in requiring it to pay
deficiency taxes, with penalties, for the years already barred by prescription.

Upon the facts disclosed by the record, this point merits no extensive discussion as it
appears that petitioner did not raise the defense of prescription neither in the Bureau of
Internal Revenue, nor in the Court of Tax Appeals, nor in the petition for review filed in
this case. It is the settled law in this jurisdiction that prescription as a defense is deemed
waived if not seasonably raised (Section 2, Rule 9, Rules of Court; Republic of the
Philippines v. Mambulao Lumber Company, Et Al., G.R. No. L-18942, November 30,
1962).
Petitioner’s contention that the defense of prescription assumed subsidiary and
alternative role because of the prayer for general relief made in its petition for review in
the Court of Tax Appeals is, likewise, without merit. Well known is the rule that the
prayer for relief made in a pleading (complaint or petition for review) does not form part
of the body thereof where the ultimate facts constituting the cause of action or defense
must be set forth. The only legal effect of a prayer for general relief in to authorize the
court, upon rendering judgment, to grant such relief as may be justified by the pleadings
and the evidence, although such relief was not one of those specifically prayed for in the
winning party’s affirmative pleading.

WHEREFORE, the decision appealed from being in accordance with law, the same is
hereby affirmed, with costs.
 G.R. No. 117982 February 6, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA INDUSTRIES,
INC., respondents.

BELLOSILLO, J.:

ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture

and sale of cigar and cigarette products. On 7 May 1991 private respondent received a
letter dated 26 April 1991 from the Commissioner of Internal Revenue assessing it
deficiency Ad Valorem Tax (AVT) in the total amount of Four Hundred Eighty-Eight
Thousand Three Hundred Ninety-Six Pesos and Sixty-Two Centavos (P488,396.62),
inclusive of increments, on the removals of cigarette products from their place of
production during the period 2 November 1990 to 22 January 1991. 1 Petitioner
computes the deficiency thus —

Total AVT due per manufacturer's declaration P 4,279,042.33

Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85
—————— 
Deficiency AVT 373,693.48

Add: Penalties:

25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37

20% Interest (P467,116.85 x 82/360 days) 21,279.27
——————
Total Amount Due P 488,396.62

In a letter dated 22 May 1991 received by petitioner on even date, private respondent
thru counsel filed a protest against the proposed assessment with a request that the
same be withdrawn and cancelled. On 31 May 1991 private respondent received
petitioner's reply dated 27 May 1991 denying its protest and request for cancellation
stating that the decision was final, and at the same time requesting payment of the
revised amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos
and Twenty-Nine Centavos (P520,835.29), with interest updated, within ten (10) days
from receipt thereof. In a letter dated 10 June 1991 which petitioner received on the
same day, private respondent requested for the reconsideration of petitioner's denial of
its protest. Without waiting for petitioner's reply to its request for reconsideration, private
respondent filed on 19 June 1991 a petition for review with the Court of Tax Appeals.
On 25 June 1991 private respondent received from petitioner a letter dated 21 June
1991 denying its request for reconsideration declaring again that its decision was final.
On 8 July 1991 private respondent paid under protest the disputed ad valorem tax in the
sum of P520,835.29.2

In its Decision3 of 1 December 1993 the Court of Tax Appeals ordered petitioner to
refund to private respondent the amount of Five Hundred Twenty Thousand Eight
Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29) representing
erroneously paid ad valorem tax for the period 2 November 1990 to 22 January 1991.

The Court of Tax Appeals explained that the subject deficiency excise tax assessment
resulted from private respondent's use of the computation mandated by BIR Ruling 473-
88 dated 4 October 1988 as basis for computing the fifteen percent (15%) ad valorem
tax due on its removals of cigarettes from 2 November 1990 to 22 January 1991. BIR
Circular 473-88 was issued by Deputy Commissioner Eufracio D. Santos to Insular-
Yebana Tobacco Corporation allowing the latter to exclude the value-added tax (VAT) in
the determination of the gross selling price for purposes of computing the ad valorem
tax of its cigar and cigarette products in accordance with Sec. 127 of the Tax Code as
amended by Executive Order No. 273 which provides as follows:

Sec. 127. Payment of excise taxes on domestic products. — . . . . (b)

Determination of gross selling price of goods subject to ad valorem tax. —
Unless otherwise provided, the price, excluding the value-added tax, at
which the goods are sold at wholesale in the place of production or
through their sales agents to the public shall constitute the gross selling
price.

The computation, pursuant to the ruling, is illustrated by way of example thus —

P 44.00x1/1 = P 4.00 VAT

P 44.00 - P 4.00 = P 40.00 price without VAT
P 40.00 x 15% = P 6.00 Ad Valorem Tax

For the period 2 November 1990 to 22 January 1991 private respondent paid
P3,905,348.85 ad valorem tax, applying Sec. 127 (b) of the NIRC as interpreted
by BIR Ruling 473-88 by excluding the VAT in the determination of the gross
selling price.

Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana

Tobacco Corporation revoking BIR Ruling 473-88 for being violative of Sec. 142 of the
Tax Code. It included back the VAT to the gross selling price in determining the tax
base for computing the ad valorem tax on cigarettes. Cited as basis by petitioner is Sec.
142 of the Tax Code, as amended by E.O. No. 273 —

Sec. 142. Cigar and cigarettes — . . . For purposes of this section,

manufacturer's or importer's registered. wholesale price shall include the
ad valorem tax imposed in paragraphs (a), (b), (c) or (d) hereof and the
 amount intended to cover the value added tax imposed under Title IV of
this Code.

Petitioner sought to apply the revocation retroactively to private respondent's removals

of cigarettes for the period starting 2 November 1990 to 22 January 1991 on the ground
that private respondent allegedly acted in bad faith which is an exception to the rule on
non-retroactivity of BIR Rulings. 4

On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the
retroactive application of BIR Ruling 017-91 cannot be allowed since private respondent
did not act in bad faith; private respondent's computation under BIR Ruling 473-88 was
not shown to be motivated by ill will or dishonesty partaking the nature of fraud; hence,
this petition.

Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private
respondent's reliance on BIR Ruling 473-88 being contrary to Sec. 142 of the Tax Code
does not confer vested rights to private respondent in the computation of its ad valorem
tax; (2) in failing to consider that good faith and prejudice to the taxpayer in cases of
reliance on a void BIR Ruling is immaterial and irrelevant and does not place the
government in estoppel in collecting taxes legally due; (3) in holding that private
respondent acted in good faith in applying BIR Ruling 473-88; and, (4) in failing to
consider that the assessment of petitioner is presumed to be regular and the claim for
tax refund must be strictly construed against private respondent for being in derogation
of sovereign authority.

Petitioner claims that the main issue before us is whether private respondent's reliance
on a void BIR ruling conferred upon the latter a vested right to apply the same in the
computation of its ad valorem tax and claim for tax refund. Sec. 142 (d) of the Tax
Code, which provides for the inclusion of the VAT in the tax base for purposes of
computing the 15% ad valorem tax, is the applicable law in the instant case as it
specifically applies to the manufacturer's wholesale price of cigar and cigarette products
and not Sec. 127 (b) of the Tax Code which applies in general to the wholesale of
goods or domestic products. Sec. 142 being a specific provision applicable to cigar and
cigarettes must perforce prevail over Sec. 127 (b), a general provision of law insofar as
the imposition of the ad valorem tax on cigar and cigarettes is
concerned.5 Consequently, the application of Sec. 127 (b) to the wholesale price of
cigar and cigarette products for purposes of computing the ad valorem tax is patently
erroneous. Accordingly, BIR Ruling 473-88 is void ab initio as it contravenes the
express provisions of Sec. 142 (d) of the Tax Code.6

Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec.
142 (b) of the Tax Code does not confer any vested right to private respondent as to
exempt it from the retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the
New Civil Code is explicit that "(n)o vested or acquired right can arise from acts or
omissions which are against the law . . . " 7 It is argued that the Court of Appeals erred in
ruling that retroactive application cannot be made since private respondent acted in
good faith. The following circumstances would show that private respondent's reliance
on BIR Ruling 473-88 was induced by ill will: first, private respondent despite
knowledge that Sec. 142 of the Tax Code was the specific provision applicable still
shifted its accounting method pursuant to Sec. 127 (b) of the Tax Code; and, second,
the shift in accounting method was made without any prior consultation with the BIR. 8

It is further contended by petitioner that claims for tax refund must be construed against
private respondent. A tax refund being in the nature of a tax exemption is regarded as in
derogation of the sovereign authority and is strictly construed against private
respondent as the same partakes the nature of a tax exemption. Tax exemptions cannot
merely be implied but must be categorically and unmistakably expressed. 9

We cannot sustain petitioner. The deficiency tax assessment issued by petitioner

against private respondent is without legal basis because of the prohibition against the
retroactive application of the revocation of BIR rulings in the absence of bad faith on the
part of private respondent.

The present dispute arose from the discrepancy in the taxable base on which the excise
tax is to apply on account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated
4 October 1988 which excluded the VAT from the tax base in computing the fifteen
percent (15%) excise tax due; and, (2) BIR Ruling 017-91 dated 11 February 1991
which included back the VAT in computing the tax base for purposes of the fifteen
percent (15%) ad valorem tax.

The question as to the correct computation of the excise tax on cigarettes in the case at
bar has been sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991
which revoked BIR Ruling 473-88 dated 4 October 1988 —

It is to be noted that Section 127 (b) of the Tax Code as amended applies
in general to domestic products and excludes the value-added tax in the
determination of the gross selling price, which is the tax base for purposes
of the imposition of ad valorem tax. On the other hand, the last paragraph
of Section 142 of the same Code which includes the value-added tax in
the computation of the ad valorem tax, refers specifically to cigar and
cigarettes only. It does not include/apply to any other articles or goods
subject to the ad valorem tax. Accordingly, Section 142 must perforce
prevail over Section 127 (b) which is a general provision of law insofar as
the imposition of the ad valorem tax on cigar and cigarettes is concerned.

Moreover, the phrase unless otherwise provided in Section 127 (b)

purports of exceptions to the general rule contained therein, such as that
of Section 142, last paragraph thereof which explicitly provides that in the
case of cigarettes, the tax base for purposes of the ad valorem tax shall
include, among others, the value-added tax.
Private respondent did not question the correctness of the above BIR ruling. In fact,
upon knowledge of the effectivity of BIR Ruling No. 017-91, private respondent
immediately implemented the method of computation mandated therein by restoring the
VAT in computing the tax base for purposes of the 15% ad valorem tax.

However, well-entrenched is the rule that rulings and circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue would have no retroactive
application if to so apply them would be prejudicial to the taxpayers. 10

The applicable law is Sec. 246 of the Tax Code which provides —

Sec. 246. Non-retroactivity of rulings. — Any revocation, modification, or

reversal of any rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner of Internal Revenue shall not be given retroactive
application if the revocation, modification, or reversal will be prejudicial to
the taxpayers except in the following cases: a) where the taxpayer
deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; b) where the
facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or c) where
the taxpayer acted in bad faith.

Without doubt, private respondent would be prejudiced by the retroactive application of

the revocation as it would be assessed deficiency excise tax.

What is left to be resolved is petitioner's claim that private respondent falls under the
third exception in Sec. 246, i.e., that the taxpayer has acted in bad faith.

Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of
wrong. It partakes of the nature of fraud; a breach of a known duty through some motive
of interest or ill will. 11 We find no convincing evidence that private respondent's
implementation of the computation mandated by BIR Ruling 473-88 was ill-motivated or
attended with a dishonest purpose. To the contrary, as a sign of good faith, private
respondent immediately reverted to the computation mandated by BIR Ruling 017-91
upon knowledge of its issuance on 11 February 1991.

As regards petitioner's argument that private respondent should have made

consultations with it before private respondent used the computation mandated by BIR
Ruling 473-88, suffice it to state that the aforesaid BIR Ruling was clear and categorical
thus leaving no room for interpretation. The failure of private respondent to consult
petitioner does not imply bad faith on the part of the former.

Admittedly the government is not estopped from collecting taxes legally due because of
mistakes or errors of its agents. But like other principles of law, this admits of exceptions
in the interest of justice and fair play, as where injustice will result to the taxpayer. 12
WHEREFORE, there being no reversible error committed by respondent Court of
Appeals, the petition is DENIED and petitioner COMMISSIONER OF INTERNAL
REVENUE is ordered to refund private respondent ALHAMBRA INDUSTRIES, INC., the
amount of P520,835.29 upon finality of this Decision.

SO ORDERED.

G.R. No. 146749               June 10, 2003

CHINA BANKING CORPORATION, Petitioner, 

vs.
 COURT OF APPEALS, COURT OF TAX APPEALS, and COMMISSIONER OF
INTERNAL REVENUE, Respondents.

x-----------------------x

G.R. No. 147938               June 10, 2003

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
CHINA BANKING CORPORATION, Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court are the consolidated petitions for review 1 assailing the Decisions2 of 16
October 2000 and 15 November 2000, and the Resolutions of 25 April 2001 and 8
January 2001 of the Court of Appeals in CA-G.R. SP No. 50790 and in CA-G.R. SP No.
50839, respectively. The Court of Appeals affirmed the Decision 3 of 30 September 1998
and the Resolution of 15 January 1999 of the Court of Tax Appeals in CTA Case No.
5405. The Court of Tax Appeals granted China Banking Corporation ("CBC") a tax
refund or credit of ₱123,278.73 but denied due to insufficiency of evidence the
remainder of CBC’s claim for ₱1,140,623.82.

Antecedent Facts

CBC is a universal banking corporation organized and existing under Philippine law. On
20 July 1994, CBC paid ₱12,354,933.00 as gross receipts tax on its income from
interests on loan investments, commissions, services, collection charges, foreign
exchange profits and other operating earnings during the second quarter of 1994.

On 30 January 1996, the Court of Tax Appeals in Asian Bank Corporation v.

Commissioner of Internal Revenue4 ruled that the 20% final withholding tax on a
bank’s passive interest income does not form part of its taxable gross receipts. 5 

On 19 July 1996, CBC filed with the Commissioner of Internal Revenue

("Commissioner") a formal claim for tax refund or credit of ₱1,140,623.82 from the
₱12,354,933.00 gross receipts tax that CBC paid for the second quarter of 1994. To
ensure that it filed its claim within the two-year prescriptive period, 6 CBC also filed on
the same day a petition for review with the Court of Tax Appeals. Citing Asian
Bank, CBC argued that it was not liable for the gross receipts tax - amounting to
₱1,140,623.82 - on the sums withheld by the Bangko Sentral ng Pilipinas as final
withholding tax on CBC’s passive interest income 7 in 1994.
Disputing CBC’s claim, the Commissioner asserted that CBC paid the gross receipts tax
pursuant to Section 119 (now Section 121) of the National Internal Revenue Code ("Tax
Code") and pertinent Bureau of Internal Revenue ("BIR") regulations. The
Commissioner argued that the final withholding tax on a bank’s interest income forms
part of its gross receipts in computing the gross receipts tax. 8 The Commissioner
contended that the term "gross receipts" means the entire income or receipt, without
any deduction.

The Ruling of the Court of Tax Appeals

The Court of Tax Appeals ruled in favor of CBC and held that the 20% final withholding
tax on interest income does not form part of CBC’s taxable gross receipts. The tax court
based its decision mainly on its earlier ruling in Asian Bank9 which the tax court quoted
extensively, as follows:

That petitioner is liable for gross receipts tax is not disputed. The question that is now
left for our determination is the basis of the said tax which issue has already been
settled in the case cited by petitioner, Asian Bank Corporation vs. Commissioner of
Internal Revenue, supra. In said case, this Court held:

We agree with the petitioner that the 20% final withholding tax on its interest income
should not form part of its taxable gross receipts.

Revenue Regulations No. 12-80 dated Nov. 7, 1980 on Taxation of Certain Income
Derived from Banking Activities provides that the rates of tax to be imposed on the
gross receipts of such financial institution shall be based on all items on income actually
received, thus:

SEC. 4. xxx

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing

companies, and other non-bank financial intermediaries not performing quasi-banking
activities. - The rates of taxes to be imposed on the gross receipts of such financial
institutions shall be based on all items of income actually received. Mere accrual shall
not be considered, but once payment is received on such accrual or in cases of
prepayment, then the amount actually received shall be included in the tax base of such
financial institutions, as provided hereunder. (Underscoring supplied)

From the foregoing, it is but logical to infer that the final tax, not having been received
by the petitioner but instead went to the coffers of the government, should no longer
form part of its gross receipts for the purpose of computing the GRT. This conclusion is
in accord with the interpretation of the Supreme Court in the case entitled Collector of
Internal Revenue vs. Manila Jockey Club, 108 Phil. 821, as quoted by this Court in
disposing of a similar issue in the case entitled Compania Maritima vs. Acting
Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1966,
thus:
In the second place, the highest tribunal of the land interpreted the term "gross receipts"
to mean all receipts of a taxpayer excluding those which have been especially
earmarked by law or regulation for the government or some person other than the
taxpayer. Thus, it was held:

xxx xx. The Government could not have meant to tax as gross receipts of the Manila
Jockey Club the 1/2% which it directs same Club to turn over to the Board of Races.
The latter being a Government institution, there would be double taxation, which should
be avoided unless the statute admits of no other interpretation. In the same manner, the
Government could not have intended to consider as gross receipts the portion of the
funds which it directed the Club to give, or know the Club would give, to winning horses
and Jockeys – admitted 5%. It is true that the law says that out of the total wager funds
12 1/2% shall be set aside as the ‘commission’ of the track owners but the law itself
takes official notice, and virtually approves or directs payment of the portion that goes to
owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out
of the 12 1/2% commission. As it did not at that time contemplate the application of
‘gross receipts’ revenue principle, the law in making a distribution of the total wager
funds, took no trouble of separating one item from the other; and for convenience,
grouped three items under one common denomination.

Needless to say, gross receipts of the proprietor of the amusement place should not
include any money which although delivered to the amusement place has been
especially earmarked by law or regulation for some person other than the proprietor."
(The Commissioner of Internal Revenue vs. Manila Jockey Club, Inc., G.R. Nos. L-
13890 & L-13887, June 30, 1960)

It is to be noted that, under Section 260 of the Tax Code, a racetrack is subject to an
amusement tax of 20% of its gross receipts and the term ‘gross receipts’ embraces all
the receipts of the proprietor, lessee, or operator of the amusement place."
Notwithstanding the broad and all-embracing definition of the term "gross receipts"
found in our amusement tax law, our Supreme Court did not adopt a literal interpretation
of the said term in the case of the Manila Jockey Club, Inc., x x x. 10 

Thus, the Court of Tax Appeals granted CBC a partial refund of ₱123,778.73 since the
tax court found that the evidence of CBC was sufficient only to support the payment of
the gross receipts tax on its medium term investments. The dispositive portion of the tax
court’s Decision of 30 September 1998 states as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering the

respondent to REFUND or ISSUE a tax credit certificate in the reduced amount of
₱123,778.73 representing the overpaid GRT payments for the second quarter of 1994.
The remaining amount claimed by petitioner is DENIED for insufficiency of evidence.

SO ORDERED.11 
However, Associate Judge Amancio Q. Saga dissented to the exclusion of the final
withholding tax from the bank’s taxable gross receipts. He opined that: (1) Section 4(e)
of Revenue Regulations No. 12-80 did not prescribe the manner of computing the tax
base for the gross receipts tax but merely authorized the cash basis as the method of
accounting in reporting the interest income; (2) the exclusion was effectively an
exemption from tax, and there is no specific provision of law clearly granting such
exemption; (3) no law or regulation specifically earmarked the final withholding tax for
some other person than CBC, thus the Supreme Court decisions cited in Asian
Bank are not applicable; and (4) there is no double taxation if the law imposes different
taxes on the same income.

Both CBC and the Commissioner filed motions for reconsideration from the tax court’s
decision. CBC argued that the tax court should have given proper weight to the
testimony of the witnesses that CBC presented on the computation and payment of its
gross receipts tax. CBC pointed out that the Commissioner did not controvert such
testimony. On the other hand, the Commissioner maintained that the final withholding
tax forms part of the taxable gross receipts. However, the tax court dismissed both
motions in its Resolution of 15 January 1999.12 

The CBC and the Commissioner both filed petitions for review under Rule 43 of the
Rules of Court, appealing the tax court’s decision and resolution to the Court of
Appeals.

The Ruling of the Court of Appeals

The Court of Appeals did not consolidate the petitions for review filed by CBC and the
Commissioner. The parties apparently failed to move for the consolidation of the two
petitions. The 14th Division of the Court of Appeals, in its Decision of 15 November
200013 in CA-G.R. SP No. 50839, affirmed the tax court’s ruling on the ground that
substantial evidence supported the factual findings of the tax court. The 13th Division of
the Court of Appeals, in its Decision of 16 October 2000 14 in CA-G.R. SP No. 50790,
also affirmed the tax court’s ruling on the ground that the 20% final withholding tax does
not form part of CBC’s taxable gross receipts.

The 14th Division of the appellate court denied CBC’s subsequent motion for
reconsideration in its Resolution of 8 January 2001. 15 Likewise, the 13th Division of the
appellate court denied the Commissioner’s motion for reconsideration in its Resolution
of 25 April 2001.16 

On 6 February 2001, CBC filed with the Court a petition for review assailing the decision
of the Court of Appeals in CA-G.R. SP No. 50839, and prayed that the Court render a
decision awarding CBC’s full claim for the refund of ₱1,140,623.82. CBC claimed that
since it did not actually receive the final withholding tax, the same should not form part
of its taxable gross receipts. CBC also asserted that it had presented sufficient evidence
to prove its overpayment of the gross receipts tax, and that it had a right to a refund of
the full ₱1,140,623.82 overpayment.
On 25 June 2001, the Commissioner filed with the Court a petition for review
questioning the decision of the Court of Appeals in CA-G.R. SP No. 50790, and prayed
that the Court deny CBC’s claim for refund. The Commissioner pointed out that the
Court of Appeals had already reversed the Asian Bank decision of the Court of Tax
Appeals in Commissioner of Internal Revenue v. Asian Bank
Corporation,17 promulgated by the Court of Appeals earlier on 22 November 1999. The
Commissioner further manifested that the Court of Tax Appeals subsequently rendered
two decisions reversing its ruling in Asian Bank. In Far East Bank and Trust Co. v.
Commissioner of Internal Revenue18 and Standard Chartered Bank v.
Commissioner of Internal Revenue,19 the tax court ruled20 that the 20% final
withholding tax on a bank’s interest income forms part of its gross receipts in computing
the gross receipts tax.

During the oral arguments of this case on 21 April 2003, the Court ordered the
consolidation21 of the petition filed by CBC in G.R. No. 146749 and the petition filed by
the Commissioner in G.R. No. 147938.

The Issues

The consolidated petitions raise the following issues:

1. Whether the 20% final withholding tax on interest income should form part of
CBC’s gross receipts in computing the gross receipts tax on banks;

2. Whether CBC has established by sufficient evidence its right to claim the full
refund of ₱1,140,623.82 representing alleged overpayment of the gross receipts
tax.

The Ruling of the Court

We rule that the amount of interest income withheld in payment of the 20% final
withholding tax forms part of CBC’s gross receipts in computing the gross receipts tax
on banks.

Section 12122 of the Tax Code provides as follows:

Sec. 121. Tax on Banks and Non-bank Financial Intermediaries. – There shall be

collected a tax on gross receipts derived from sources within the Philippines by all
banks and non-bank financial intermediaries in accordance with the following schedule:

(a) On interest, commissions and discounts from lending activities as well as

income from financial leasing, on the basis of remaining maturities on
instruments from which such receipts are derived.

Short-term maturity –
 (not in excess of two [2] years)…..………… 5%

Medium-term maturity –

(over two [2] years but not

exceeding four [4] years).………………… 3%

Long-term maturity –

(i) over four (4) years but not exceeding

seven (7) years ..……………………… 1%

(ii) over seven (7) years) …………….…… 0%

(b) On dividends …………………………………. 0%

(c) On royalties, rentals of property, real or personal, profits from exchange and
all other items treated as gross income under Section 32 of this Code
……………………..……………………………..…. 5%;

Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pretermination, then the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction as short, medium
or long term and the correct rate of tax shall be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.

The gross receipts tax on banks was first imposed on 1 October 1946 by Republic Act
No. 39 ("RA No. 39") which amended Section 249 23 of the Tax Code of 1939. Interest
income of banks, without any deduction, formed part of their taxable gross receipts.
From October 1946 to June 1977, there was no withholding tax on interest income from
bank deposits.

On 3 June 1977, Presidential Decree No. 1156 required the withholding at source of a
15% tax on interest on bank deposits. This tax was a creditable, not a final withholding
tax. Despite the withholding of the 15% tax, the entire interest income, without any
deduction, formed part of the bank’s taxable gross receipts. On 17 September 1980,
Presidential Decree No. 1739 made the withholding tax on interest a final tax at the rate
of 15% on savings account, and 20% on time deposits. 24 Still, from 1980 until the Court
of Tax Appeals decision in Asian Bank on 30 January 1996, banks included the entire
interest income, without any deduction, in their taxable gross receipts.
In Asian Bank, the Court of Tax Appeals held that the final withholding tax is not part of
the bank’s taxable gross receipts. The tax court anchored its ruling on Section 4(e) of
Revenue Regulations No. 12-80,25 which stated that the gross receipts "shall be based
on all items actually received" by the bank. The tax court ruled that the bank does not
actually receive the final withholding tax. As authority, the tax court cited Collector of
Internal Revenue v. Manila Jockey Club,26 which held that "gross receipts of the
proprietor should not include any money which although delivered to the amusement
place has been especially earmarked by law or regulation for some person other than
the proprietor." In effect, the tax court considered Section 4(e) of Revenue Regulations
No. 12-80 as earmarking by regulation the final withholding tax in favor of the
government. This earmarking, according to the tax court, prevented the final withholding
tax from being "actually received" by the bank. The tax court adopted the Asian Bank
ruling in succeeding cases involving the same issue. 27 

Subsequently, the Court of Tax Appeals reversed its ruling in Asian Bank. In Far East
Bank & Trust Co. v. Commissioner 28 and Standard Chartered Bank v.
Commissioner,29 both promulgated on 16 November 2001, the tax court ruled that the
final withholding tax forms part of the bank’s gross receipts in computing the gross
receipts tax. The tax court held that Section 4(e) of Revenue Regulations No. 12-80 did
not prescribe the computation of the gross receipts but merely authorized "the
determination of the amount of gross receipts on the basis of the method of accounting
being used by the taxpayer."

The tax court also held in Far East Bank and Standard Chartered Bank that the
exclusion of the final withholding tax from gross receipts operates as a tax exemption
which the law must expressly grant. No law provides for such exemption. In addition,
the tax court pointed out that Section 7(c) of Revenue Regulations No. 17-84 had
already superseded Section 4(e) of Revenue Regulations No. 12-80. Section 7(c) of
Revenue Regulations No. 17-84, the existing applicable regulation, states:

Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes -

xxx

(c) If the recipient of the above-mentioned items of income are financial institutions, the
same shall be included as part of the tax base upon which the gross receipts tax is
imposed. (Emphasis supplied)

The items of income referred to in Section 7(c) are interest on bank deposits and yield
from deposit substitutes.

from deposit substitutes.

There are two related legal concepts that come into play in the resolution of the first
issue raised in the instant case. First is the meaning of the term "gross receipts."
Second is the determination of the circumstance when interest income becomes part of
gross receipts for tax purposes.

The Tax Code does not define the term "gross receipts" for purposes of the gross
receipts tax on banks. Since 1 October 1946 when RA No. 39 first imposed the gross
receipts tax on banks until the present, there has been no statutory definition of the term
"gross receipts." Absent a statutory definition, the BIR has applied the term in its plain
and ordinary meaning.

On 12 July 1952, four years after RA No. 39 imposed the gross receipts tax on banks,
the defunct Board of Tax Appeals30 had occasion to interpret the term "gross receipts."
In National City Bank v. Collector of Internal Revenue, 31 the bank contended that the
amortized premium costs in buying U.S. Government bonds should be deducted from
the interest income from the bonds in computing the bank’s gross receipts tax. On the
other hand, the Collector of Internal Revenue argued that "gross receipts should be
interpreted as the whole amount received as interests without deductions, otherwise, if
deductions are made from gross receipts, it will be considered as ‘net’ receipts." The
Board of Tax Appeals agreed with the Collector, ruling that –

Conceding that the premiums amortized form part of the capital invested by the
petitioner, to deduct same from the accrued interests of the bonds would result in the
realization of the net interests and not the gross receipts on the interests earned by the
petitioner in its investments as provided for in Section 249 of the Tax Code. The denial,
therefore, of the respondent in allowing the deduction of the amortized premium in the
amount of ₱239,678.41 from the accrued interest of the bonds, is in order.

The National City Bank ruling remained unchallenged from 1952 until January 1996
when the Court of Tax Appeals rendered its decision in Asian Bank. In November 2001,
however, the same tax court, citing National City Bank among other authorities,
reversed Asian Bank in the twin cases of Far East Bank and Standard Chartered Bank.

As commonly understood, the term "gross receipts" means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v.
Koppers Company, Inc.,32 -

Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation.
However, this in no way should affect or control the normal usage of words in the
construction of our statutes; and we see nothing that would require us not to include the
proceeds here in question in the gross receipts allocation unless statutorily such
inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term
gross receipts, in the absence of any statutory definition of the term, must be taken to
include the whole total gross receipts without any deductions. x x x. [Citations omitted]
(Emphasis supplied)

Likewise, in Laclede Gas Co. v. City of St. Louis, 33 the Supreme Court of Missouri held:

The word ‘gross’ appearing in the term ‘gross receipts,’ as used in the ordinance, must
have been and was there used as the direct antithesis of the word ‘net.’ In its usual and
ordinary meaning ‘gross receipts’ of a business is the whole and entire amount of the
receipts without deduction. x x x On the contrary ‘net receipts’ usually are the receipts
which remain after deductions are made from the gross amount thereof of the expenses
and cost of doing business, including fixed charges and depreciation. Gross receipts
become net receipts after certain proper deductions are made from the gross. And in
the use of the words ‘gross receipts,’ the instant ordinance, of course, precluded plaintiff
from first deducting its costs and expenses of doing business, etc., in arriving at the
higher base figure upon which it must pay the 5% tax under this ordinance. (Emphasis
supplied)

Absent a statutory definition, the term "gross receipts" is understood in its plain and
ordinary meaning. Words in a statute are taken in their usual and familiar signification,
with due regard to their general and popular use. 34 The Supreme Court of Hawaii held in
Bishop Trust Company v. Burns35 that -

x x x It is fundamental that in construing or interpreting a statute, in order to ascertain

the intent of the legislature, the language used therein is to be taken in the generally
accepted and usual sense. Courts will presume that the words in a statute were used to
express their meaning in common usage. This principle is equally applicable to a tax
statute. [Citations omitted] (Emphasis supplied)

The Tax Code does not also define the term "gross receipts" for purposes of the
common carriers’ tax,36 the international carriers’ tax,37 the tax on radio and television
franchises,38 and the tax on finance companies.39 All these business taxes under Title V
of the Tax Code are based on gross receipts. Despite the absence of a statutory
definition, these taxes have been collected in this country for over half a century on the
general and common understanding that they are based on all receipts without any
deduction.

Since 1 October 1946 when RA No. 39 first imposed the gross receipts tax on banks
under Section 249 of the Tax Code, the legislature has re-enacted several times this
section of the Tax Code. On 24 December 1972, Presidential Decree No. 69, which
enacted into law the Omnibus Tax Bill of 1972, re-enacted Section 249 of the Tax Code.
Then on 11 June 1977, Presidential Decree No. 1158, otherwise known as the National
Internal Revenue Code of 1977, re-enacted Section 249 as Section 119 of the Tax
Code. Finally on 11 December 1997, Republic Act No. 8424, otherwise known as the
Tax Reform Act of 1997, re-enacted Section 119 as the present Section 121 of the Tax
Code. Throughout these re-enactments, the legislature has not provided a statutory
definition of the term "gross receipts" for purposes of the gross receipts tax on banks,
common carriers, international carriers, radio and television operators, and finance
companies.

Under Revenue Regulations Nos. 12-80 and 17-84, as well as in several numbered
rulings,40 the BIR has consistently ruled that the term "gross receipts" does not admit of
any deduction. This interpretation has remained unchanged throughout the various re-
enactments of the present Section 121 of the Tax Code. The only conclusion that can
be drawn is that the legislature has adopted the BIR’s interpretation, following the
principle of legislative approval by re-enactment. In Inte-provincial Autobus Co., Inc. v.
Collector of Internal Revenue,41 the Court declared:

Another reason for sustaining the validity of the regulation may be found in the principle
of legislative approval by re-enactment. The regulations were approved on September
16, 1924. When the National Internal Revenue Code was approved on February 18,
1939, the same provisions on stamp tax, bills of lading and receipts were reenacted.
There is a presumption that the Legislature reenacted the law on the tax with full
knowledge of the contents of the regulations then in force regarding bills of lading and
receipts, and that it approved or confirmed them because they carry out the legislative
purpose.

The presumption is that the legislature is familiar with the contemporaneous

interpretation of a statute given by the administrative agency tasked to enforce the
statute.42 The subsequent re-enactments of the present Section 121 of the Tax Code,
without changes on the term interpreted by the BIR, confirm that the BIR’s interpretation
carries out the legislative purpose.

However, for the amusement tax, which is also a business tax under the same Title V,
the Tax Code makes a special definition of the term "gross receipts." The term "gross
receipts" for amusement tax purposes "embraces all receipts of the proprietor, lessee or
operator of the amusement place."43 The Tax Code further adds that "[s]aid gross
receipts also include income from television, radio and motion picture rights, if
any."44 This definition merely confirms that the term "gross receipts" embraces the entire
receipts without any deduction or exclusion, as the term is generally and commonly
understood.

Even without a statutory definition, the term "gross receipts" will have to exclude any
deduction of the withholding tax. Otherwise, other items of income in Section 121 would
also be subject to deductions despite the absence of a specific provision of law
excluding any portion of such items of income from taxable gross receipts. Section 121
refers not only to interest income, but also to "dividends, x x x rentals of property, real or
personal, profits from exchange and all other items treated as gross income under
Section 32 of this Code."

Under Revenue Regulations No. 13-78,45 rental income received by a bank is subject to

a creditable withholding tax. Under Section 121, such rental income, without any
deduction of the withholding tax, forms part of the bank’s taxable gross receipts. The
amount of the creditable withholding tax is indubitably part of the bank’s rental income.
The creditable withholding tax is merely an advance payment by the bank of its tax on
the rental income. The amount of the withholding tax comes from the bank’s rental
income and its payment extinguishes the bank’s tax liability. The amount deducted by
the payor-lessee and remitted to the government, representing the creditable
withholding tax, is money the bank owns that is used to pay the bank’s tax liability. The
amount deducted and remitted as creditable withholding tax patently comes from the
bank’s rental income, and correctly forms part of the bank’s gross receipts.

In the same manner, the amount of the final withholding tax on interest income should
not be deducted from the bank’s interest income for purposes of the gross receipts tax.
The final withholding tax on interest, like the creditable withholding tax on rentals,
comes from the bank’s income and is money the bank owns that is used to pay the
bank’s tax liability. The final withholding tax and the creditable withholding tax constitute
payment by the bank to extinguish a tax obligation to the government. The bank can
only pay with money it owns, or with money it is authorized to spend. In either case,
such money comes from the bank’s revenues or receipts, and certainly not from the
government’s coffers.

CBC’s argument will create tax exemptions where none exist. If the amount of the final
withholding tax is excluded from taxable gross receipts, then the amount of the
creditable withholding tax should also be excluded from taxable gross receipts. For that
matter, any withholding tax should be excluded from taxable gross receipts because
such withholding would qualify as "earmarking by regulation." Under Section 57(B) of
the Tax Code, the Commissioner, with the approval of the Secretary of Finance, may by
regulation impose a withholding tax on other items of income to facilitate the collection
of the income tax. Every time the Commissioner expands the withholding tax, he will
create tax exemptions where the law provides for none. Obviously, the Court cannot
allow this.

Under Section 27(D)(4) of the Tax Code, dividends received by a domestic corporation
from another corporation are not subject to the corporate income tax. Such
intracorporate dividends are some of the passive incomes that are subject to the 20%
final tax, just like interest on bank deposits. Intracorporate dividends, being already
subject to the final tax on income, no longer form part of the bank’s gross income under
Section 32 of the Tax Code for purposes of the corporate income tax. However, Section
121 expressly states that dividends shall form part of the bank’s gross receipts for
purposes of the gross receipts tax on banks. This is the same treatment given to the
bank’s interest income that is subject to the final withholding tax. Such interest income,
being already subject to the final tax, no longer forms part of the bank’s gross income
for purposes of the corporate income tax. Section 121, however, expressly includes
such interest income as part of the bank’s gross receipts for purposes of the gross
receipts tax.

Whether an item of income is excluded from gross income or is subject to the final
withholding tax has no bearing on its inclusion in gross receipts if Section 121 expressly
includes such income as part of gross receipts. As held in Commonwealth of
Pennsylvania, "[t]he exemption of dividends and interest from taxation, through their
exclusion from net income to be allocated, does not also exclude those items from the
gross receipts from business activity of the corporation." 46 

There is a policy objective why no deductions, exemptions or exclusions are normally

allowed in a gross receipts tax. The gross receipts tax, as opposed to the income tax,
was devised to maintain simplicity in tax collection and to assure a steady source of
state revenue even during periods of economic slowdown. 47 Such a policy frowns upon
erosion of the tax base. Deductions, exemptions or exclusions complicate the tax
system and lessen the tax collection. By its nature, a gross receipts tax applies to the
entire receipts without any deduction, exemption or exclusion, unless the law clearly
provides otherwise.

CBC cites Collector of Internal Revenue v. Manila Jockey Club 48 as authority that the
final withholding tax on interest income does not form part of a bank’s gross receipts
because the final tax is "earmarked by regulation" for the government. CBC’s reliance
on the Manila Jockey Club is misplaced. In this case the Court stated that Republic Act
No. 309 and Executive Order No. 320 apportioned the total amount of the bets in horse
races as follows:

87 1/2% as dividends to holders of winning tickets; 12 1/2% as ‘commission’ of the

Manila Jockey Club, of which 1/2% was assigned to the Board of Races and 5% was
distributed as prizes for owners of winning horses and authorized bonuses for jockeys. 49 

A subsequent law, Republic Act No. 1933 ("RA No. 1933"), amended the sharing by
ordering the distribution of the bets as follows:

Sec. 19. Distribution of receipts. — The total wager funds or gross receipts from the
sale of pari-mutuel tickets shall be apportioned as follows: eighty-seven and one-half
per centum shall be distributed in the form of dividends among the holders of win, place
and show horses, as the case may be, in the regular races; six and one-half per centum
shall be set aside as the commission of the person, racetrack, racing club, or any other
entity conducting the races; five and one-half per centum shall be set aside for the
payment of stakes or prizes for win, place and show horses and authorized bonuses for
jockeys; and one-half per centum shall be paid to a special fund to be used by the
Games and Amusements Board to cover its expenses and such other purposes
authorized under this Act. x x x. (Emphasis supplied)

Under the "distribution of receipts" expressly mandated in Section 19 of RA No. 1933,

the gross receipts "apportioned" to Manila Jockey Club referred only to its own 6 1/2%
commission. There is no dispute that the 5 1/2% share of the horse-owners and
jockeys, and the 1/2% share of the Games and Amusement Board, do not form part of
Manila Jockey Club’s gross receipts. RA No. 1933 took effect on 22 June 1957, three
years before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 1/2%
commission. Manila Jockey Club owned, and could keep and use, only 7% of the total
bets. Manila Jockey Club merely held in trust the balance of 5 1/2% for the benefit of the
Board of Races and the winning horse owners and jockeys, the real owners of the 5
1/2% share.

The Court in Manila Jockey Club quoted with approval the following Opinion of the
Secretary of Justice made prior to RA No. 1933:

There is no question that the Manila Jockey Club, Inc. owns only 7- 1/2% [sic] of the
total bets registered by the Totalizer. This portion represents its share or commission in
the total amount of money it handles and goes to the funds thereof as its own property
which it may legally disburse for its own purposes. The 5% [sic] does not belong to the
club. It is merely held in trust for distribution as prizes to the owners of winning horses. It
is destined for no other object than the payment of prizes and the club cannot otherwise
appropriate this portion without incurring liability to the owners of winning horses. It can
not be considered as an item of expense because the sum used for the payment of
prizes is not taken from the funds of the club but from a certain portion of the total bets
especially earmarked for that purpose. 50 (Emphasis supplied)

Consequently, the Court ruled that the 5 1/2% balance of the commission, not being
owned by Manila Jockey Club, did not form part of its gross receipts for purposes of the
amusement tax. Manila Jockey Club correctly paid the amusement tax based only on its
own 7% commission under RA No. 309 and Executive Order No. 320.

Manila Jockey Club does not support CBC’s contention but rather the Commissioner’s
position. The Court ruled in Manila Jockey Club that receipts not owned by the Manila
Jockey Club but merely held by it in trust did not form part of Manila Jockey Club’s
gross receipts. Conversely, receipts owned by the Manila Jockey Club would form part
of its gross receipts.

In the instant case, CBC owns the interest income which is the source of payment of the
final withholding tax. The government subsequently becomes the owner of the money
constituting the final tax when CBC pays the final withholding tax to extinguish its
obligation to the government. This is the consideration for the transfer of ownership of
the money from CBC to the government. Thus, the amount constituting the final tax,
being originally owned by CBC as part of its interest income, should form part of its
taxable gross receipts.

In Commissioner v. Tours Specialists, Inc.,51 the Court excluded from gross receipts

money entrusted by foreign tour operators to Tours Specialists to pay the hotel
accommodation of tourists booked in various local hotels. The Court declared that Tours
Specialists did not own such entrusted funds and thus the funds were not subject to the
3% contractor’s tax payable by Tours Specialists. The Court held:
x x x [G]ross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not redound to
the taxpayer’s benefit; and it is not necessary that there must be a law or regulation
which would exempt such monies and receipts within the meaning of gross receipts
under the Tax Code.

x x x [T]he room charges entrusted by the foreign travel agencies to the private
respondent do not form part of its gross receipts within the definition of the Tax Code.
The said receipts never belonged to the private respondent. The private respondent
never benefited from their payment to the local hotels. x x x [T]his arrangement was
only to accommodate the foreign travel agencies. (Emphasis supplied)

Unless otherwise provided by law, ownership is essential in determining whether

interest income forms part of taxable gross receipts. Ownership is the circumstance that
makes interest income part of the taxable gross receipts of the taxpayer. When the
taxpayer acquires ownership of money representing interest, the money constitutes
income or receipt of the taxpayer.

In contrast, the trustee or agent does not own the money received in trust and such
money does not constitute income or receipt for which the trustee or agent is taxable.
This is a fundamental concept in taxation. Thus, funds received by a money remittance
agency for transfer and delivery to the beneficiary do not constitute income or gross
receipts of the money remittance agency. Similarly, a travel agency that collects ticket
fares for an airline does not include the ticket fare in its gross income or receipts. In
these cases, the money remittance agency or travel agency does not acquire ownership
of the funds received.

Moreover, when Section 121 of the Tax Code includes "interest" as part of gross
receipts, it refers to the entire interest earned and owned by the bank without any
deduction. "Interest" means the gross amount paid by the borrower to the lender as
consideration for the use of the lender’s money. Section 2(h) of Revenue Regulations
No. 12-80, now Section 2(i) of Revenue Regulations No. 17-84, defines the term
"interest" as "the amount which a depository bank (borrower) may pay on savings and
time deposit in accordance with rates authorized by the Central Bank of the Philippines."
This definition does not allow any deduction. The entire interest paid by the depository
bank, without any deduction, is what forms part of the lending bank’s gross receipts.

To illustrate, assume that the gross amount of the interest income is ₱100. The lending
bank owns this entire ₱100 since this is the amount the depository bank pays the
lending bank for use of the lender’s money. In its books the depository bank records an
interest expense of ₱100 and claims a deduction for interest expense of ₱100. The 20%
final withholding tax52 on this interest income is ₱20, which the law requires the
depository bank to withhold and remit directly to the government. The depository bank
withholds the final tax in trust for the government which then becomes the owner of the
₱20. The final tax is the legal liability of the lending bank as recipient of the interest
income. The payment of the ₱20 final tax extinguishes the tax liability of the lending
bank. The interest income that the depository bank turns over physically to the lending
bank is ₱80, the net receipt after deducting the ₱20 final tax. Still, the interest income
that forms part of the lending bank’s gross receipts for purposes of the gross receipts
tax is ₱100 because the total amount earned by the lending bank from its passive
investment is ₱100, not ₱80.

Stated differently, the lending bank paid ₱20 as final tax which is 20% of the interest
income it received. Logically, the lending bank’s interest income is ₱100 to arrive at a
₱20 final withholding tax. Since what the law includes in gross receipts is the interest
income, then it is ₱100 and not ₱80 which forms part of the lending bank’s gross
receipts. If the lending bank’s interest income is only ₱80, then its 20% final withholding
tax should only be ₱16.

CBC also relies on the Tax Court’s ruling in Asian Bank that Section 4(e) of Revenue
Regulations No. 12-80 authorizes the exclusion of the final tax from the bank’s taxable
gross receipts. Section 4(e) provides that:

Sec. 4. x x x

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing

companies, and other non-bank financial intermediaries not performing quasi-banking
functions. - The rates of taxes to be imposed on the gross receipts of such financial
institutions shall be based on all items of income actually received. Mere accrual shall
not be considered, but once payment is received on such accrual or in cases of
prepayment, then the amount actually received shall be included in the tax base of such
financial institutions, as provided hereunder: x x x. (Emphasis supplied by Tax Court)

Section 4(e) states that the gross receipts "shall be based on all items of income
actually received." The tax court in Asian Bank concluded that "it is but logical to infer
that the final tax, not having been received by petitioner but instead went to the coffers
of the government, should no longer form part of its gross receipts for the purpose of
computing the GRT."

The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No.
12-80. Income may be taxable either at the time of its actual receipt or its accrual,
depending on the accounting method of the taxpayer. Section 4(e) merely provides for
an exception to the rule, making interest income taxable for gross receipts tax purposes
only upon actual receipt. Interest is accrued, and not actually received, when the
interest is due and demandable but the borrower has not actually paid and remitted the
interest, whether physically or constructively. Section 4(e) does not exclude accrued
interest income from gross receipts but merely postpones its inclusion until actual
payment of the interest to the lending bank. This is clear when Section 4(e) states that
"[m]ere accrual shall not be considered, but once payment is received on such accrual
or in case of prepayment, then the amount actually received shall be included in the tax
base of such financial institutions x x x."
Actual receipt of interest income is not limited to physical receipt. Actual receipt may
either be physical receipt or constructive receipt. 53 When the depository bank withholds
the final tax to pay the tax liability of the lending bank, there is prior to the withholding a
constructive receipt by the lending bank of the amount withheld. From the amount
constructively received by the lending bank, the depository bank deducts the final
withholding tax and remits it to the government for the account of the lending bank.
Thus, the interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies that the
amount of the tax withheld comes from the income earned by the taxpayer. 54 Since the
amount of the tax withheld constitutes income earned by the taxpayer, then that amount
manifestly forms part of the taxpayer’s gross receipts. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the government in payment of
his tax liability. The amount withheld indubitably comes from income of the taxpayer,
and thus forms part of his gross receipts.

In addition, Section 8 of Revenue Regulations No. 12-80 expressly states that interest
income, even if subject to the final withholding tax and excluded from gross income for
income tax purposes, should still form part of the bank’s taxable gross receipts. Section
8 of Revenue Regulations No. 12-80 provides that –

Section 8. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes –

(a) The interest earned on Philippine currency, bank deposits and yield from
deposit substitutes subjected to the withholding taxes in accordance with these
regulations need not be included in the gross income in computing the
depositor’s/investor’s income tax liability in accordance with the provision of
Section 29(b), (c) and (d) of the Tax Code.

(b) x x x

(c) If the recipient of the above-mentioned items of income are financial

institutions, the same shall be included as part of the tax base upon which the
gross receipts tax is imposed." (Emphasis supplied)

Thus, interest earned by banks, even if subject to the final tax and excluded from
taxable gross income, forms part of its gross receipts for gross receipts tax purposes.
The interest earned refers to the gross interest without deduction since the regulations
do not provide for any deduction. The gross interest, without deduction, is the amount
the borrower pays, and the income the lender earns, for the use by the borrower of the
lender’s money. The amount of the final tax plainly comes from the interest earned and
is consequently part of the bank’s taxable gross receipts.
In PLDT v. Collector of Internal Revenue,55 the Court ruled that PLDT’s gross receipts
included the uncollected fees from customers because PLDT already earned the
uncollected fees. The Court declared that fees earned, even if not collected, formed part
of PLDT’s gross receipts for purposes of the franchise tax. Construing "‘gross receipts’ x
x x as meaning the same as ‘gross earnings’," the Court refused to allow deductions of
uncollected or bad accounts from the gross receipts in computing the franchise tax.

Presidential Decree No. 1739 ("PD No. 1739"), which took effect on 17 September
1980, made the withholding tax on interest from bank deposits a final tax. To implement
PD No. 1739, the then Ministry of Finance, upon recommendation of the BIR, issued
Revenue Regulations No. 12-80 "to govern the manner of taxation of certain income
derived from banking activities as provided for by Presidential Decree No. 1739."
Subsequently, Presidential Decree No. 1959, which took effect on 10 October 1984,
amended PD No. 1739. The Ministry of Finance, upon recommendation of the BIR,
issued on 12 October 1984 Revenue Regulations No. 17-84 "to govern the manner of
taxation of interest income derived from deposit and deposit substitutes as provided for
by Presidential Decree No. 1959." Thus, as early as 12 October 1984 Revenue
Regulations No. 17-84 had supplanted Revenue Regulations No. 12-80.

Among the changes introduced by PD No. 1959 was the reduction of the final
withholding tax on time deposits and yield on deposit substitutes to 15% from the 20%
rate in PD No. 1739. Revenue Regulations No. 17-84 readopted verbatim Section 2(h)
on the definition of "interest," 56 as well as Section 8(c) on the computation of the taxable
base of the bank’s gross receipts,57 found in Revenue Regulations No. 12-80. However,
Revenue Regulations No. 17-84 did not readopt Section 4(e) of Revenue Regulations
No. 12-80, which was the regulation cited in Asian Bank as basis for excluding the final
withholding tax from the bank’s taxable gross receipts. As early as 12 years before the
tax court decided Asian Bank, the revenue regulations already required interest income,
whether actually received or merely accrued, to form part of the bank’s taxable gross
receipts.

On the other hand, Section 7 of Revenue Regulations No. 17-84, which replaced
Section 4 of Revenue Regulations No. 12-80, provides that –

Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes. —

(a) The interest earned on Philippine Currency bank deposits and yield from
deposit substitutes subjected to the withholding taxes in accordance with these
regulations need not be included in the gross income in computing the
depositor's/investor's income tax liability in accordance with the provision of
Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended.

(b) Only interest paid or accrued on bank deposits, or yield from deposit
substitutes declared for purposes of imposing the withholding taxes in
 accordance with these regulations shall be allowed as interest expense
deductible for purposes of computing taxable net income of the payor.

(c) If the recipient of the above-mentioned items of income are financial

institutions, the same shall be included as part of the tax base upon which the
gross receipt tax is imposed. (Emphasis supplied)

Thus, the Tax Court, which decided Asian Bank on 30 January 1996, not only
erroneously interpreted Section 4(e) of Revenue Regulations No. 12-80, it also cited
Section 4(e) when it was no longer the applicable revenue regulation. To reiterate, the
revenue regulations applicable at the time the tax court decided Asian Bank was
Revenue Regulations No. 17-84, not Revenue Regulations No. 12-80.

The argument that Section 7(c) of Revenue Regulations No. 17-84 does not apply to
banks but only to finance companies deserves scant consideration. This argument
proceeds from the interpretation58 that the term "financial institutions" in Section 7(c) is
the equivalent of the term "finance companies." Section 7(c) states as follows:

If the recipient of the above-mentioned items of income are financial institutions, the
same shall be included as part of their tax base upon which the gross receipts tax is
imposed." (Emphasis supplied)

However, the immediately succeeding section belies this interpretation. Section 8 of

Revenue Regulations No. 17-84 states:

Section 8. Statement to be attached to the corporate tax return of financial institutions. -

There shall be attached to the final consolidated corporate return of the authorized
agent bank or non-financial intermediaries for each taxable year, a statement
summarizing the pertinent information required by these regulations with respect to the
computation of the aggregate interest paid on savings, time deposits and deposit
substitutes and taxes withheld therefrom and paid to the Bureau, during the year (B.I.R.
Form No. ___). (Emphasis supplied)

Section 8 expressly specifies banks and non-bank financial intermediaries as the

"financial institutions" that should attach to their corporate tax returns statements
summarizing certain pertinent information on the computation of their interest income
subject to the final tax. Revenue Regulations No. 17-84 applies to "banks, non-bank
financial intermediaries," "finance companies," "lending investors, investment houses,
trust companies and similar institutions and corporations." 59 Obviously, the term
"financial institutions" is not the same as the term "finance companies," but signifies a
broader meaning to embrace banks.

Of course, the term "financial institutions" also covers finance companies since Section
7(c) uses this term to refer to institutions that are subject to the "gross receipts tax."
Section 7(c) states that interest income received by financial institutions shall form part
of their "tax base upon which the gross receipts tax is based." Under Sections 121 and
12260 of the Tax Code, the financial institutions that are subject to the gross receipts tax
are banks, non-bank financial intermediaries and finance companies. These financial
institutions are taxable on the same class of interest income and at the same tax rates.
Evidently, the term "financial institutions" refers to banks, non-bank financial
intermediaries, and finance companies.

CBC’s contention that it can deduct the final withholding tax from its interest income
amounts to a claim of tax exemption. The cardinal rule in taxation is exemptions are
highly disfavored and whoever claims an exemption must justify his right by the clearest
grant of organic or statute law.61 CBC must point to a specific provision of law granting
the tax exemption.62 The tax exemption cannot arise by mere implication and any doubt
about whether the exemption exists is strictly construed against the taxpayer and in
favor of the taxing authority.63 

Section 121 of the Tax Code expressly subjects interest income to the gross receipts
tax on banks. Such express inclusion of interest income in taxable gross receipts
creates a presumption that the entire amount of the interest income, without any
deduction, is subject to the gross receipts tax. As ruled by the Supreme Court of New
Mexico in Kewanee Industries, Inc. v. Reese,64 -

x x x There is a presumption that receipts of a person engaging in business are subject

to the gross receipts tax. For Kewanee to prevail, it must clearly overcome this
presumption. Additionally, where an exception is claimed, the statute is construed
strictly in favor of the taxing authority. The exemption must be clearly and
unambiguously expressed in the statute, and must be clearly established by the
taxpayer claiming the right thereto. Thus, taxation is the rule and the claimant must
show that his demand is within the letter as well as the spirit of the law. (Citations and
quotations omitted)

To overcome this presumption, CBC must point to a specific provision of law allowing
the deduction of the final withholding tax from its taxable gross receipts. CBC has failed
to cite any provision of law allowing the final tax as an exemption, deduction or
exclusion. Thus, CBC’s claim has no legal leg to stand on.

In Asian Bank, the Court of Tax Appeals quoted Manila Jockey Club that the legislature
could not have intended the Board of Races’ 1/2% share to be subjected to the
amusement tax because it would constitute double taxation. The Court in Manila Jockey
Club explained that "double taxation x x x should be avoided unless the statute admits
of no other interpretation." This statement was not the ratio decidendi in Manila Jockey
Club. There, the Court found that the Board of Races’ 1/2% share, and the horse-
owners’ and jockeys’ 5% share, were not owned by the Manila Jockey Club and thus
did not form part of the Manila Jockey Club’s gross receipts.

Nevertheless, the tax court quoted with approval this particular statement in Manila
Jockey Club, thus implying two interpretations. One, the court should avoid an
interpretation that will tax twice the same interest income, first to the 20% final tax and
then to the gross receipts tax. Two, the court should avoid an interpretation that will
impose a "tax on a tax," such as subjecting the final tax to the gross receipts tax.

The first interpretation raises the bogey of a constitutional prohibition on double

taxation.1âwphi1 The rule, however, is well-settled that there is no constitutional
prohibition against double taxation. As the Court aptly explained in City of Baguio v. De
Leon65 -

To repeat, the challenged ordinance cannot be considered ultra vires as there is more
than ample statutory authority for the enactment thereof. Nonetheless, its validity on
constitutional grounds is challenged because the allegation that it imposed double
taxation, which is repugnant to the due process clause, and that it violated the
requirement of uniformity. We do not view the matter thus.

As to why double taxation is not violative of due process, Justice Holmes made clear in
this language: "The objection to the taxation as double may be laid down on one
side . . . . The 14th Amendment [the due process clause] no more forbids double
taxation than it does doubling the amount of a tax, short of confiscation or proceedings
unconstitutional on other grounds." With that decision rendered at a time when
American sovereignty in the Philippines was recognized, it possesses more than just a
persuasive effect. To some, it delivered the coup de grace to the bogey of double
taxation as a constitutional bar to the exercise of the taxing power. It would seem
though that in the United States, as with us, its ghost, as noted by an eminent critic, still
stalks the juridical stage. In a 1947 decision, however, we quoted with approval this
excerpt from a leading American decision: ‘Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation
results.’

Besides, there is no double taxation when Section 121 of the Tax Code imposes a
gross receipts tax on interest income that is already subjected to the 20% final
withholding tax under Section 27 of the Tax Code. The gross receipts tax is a business
tax under Title V of the Tax Code, while the final withholding tax is an income tax under
Title II of the Code. There is no double taxation if the law imposes two different taxes on
the same income, business or property.

The second interpretation, of a prohibition on "a tax on a tax," is as illusory as the

prohibition on double taxation. The gross receipts tax falls not on the final withholding
tax, but on the amount of the interest income withheld as the final tax. What is being
taxed is still the interest income. The law imposes the gross receipts tax on that portion
of the interest income that the depository bank withholds and remits to the government.
Consequently, the entire amount of the interest income is taxable and not only the net
interest income.

Moreover, whenever the legislature excludes a certain tax from gross receipts, the
legislature states so clearly and unequivocally. Thus, for purposes of the value-added
tax, Section 10666 of the Tax Code expressly excludes the value-added tax from the
"gross selling price" to avoid a "tax on the tax." To clarify that only the value-added tax
does not form part of the gross selling price, Section 106 expressly states that the gross
selling price shall include any excise tax, effectively resulting in a "tax on a tax." Of
course, the "tax on a tax" is in reality a tax on the portion of the income or receipt that is
equivalent to the tax, usually withheld and remitted to the government.

There is no constitutional prohibition on subjecting the same income or receipt to an

income tax and to some other tax like the gross receipts tax. Similarly, the same income
or receipt may be subject to the value-added tax and the excise tax like the specific tax.
If the tax law follows the constitutional rule on uniformity, making all income, business or
property of the same class taxable at the same rate, there can be no valid objection to
taxing the same income, business or property twice.

In summary, CBC has failed to point to any specific provision of law allowing the
deduction, exemption or exclusion, from its taxable gross receipts, of the amount
withheld as final tax. Such amount should therefore form part of CBC’s gross receipts in
computing the gross receipts tax. There being no legal basis for CBC’s claim for a tax
refund or credit, the second issue raised in this petition is now moot.

WHEREFORE, the Petition for Review filed by China Banking Corporation in G.R. No.
146749 is DENIED for lack of merit. The Petition for Review filed by the Commissioner
of Internal Revenue in G.R. No. 147938 is GRANTED. The assailed decisions and
resolutions of the Court of Tax Appeals in CTA Case No. 5405 and those of the Court of
Appeals in CA-G.R. SP No. 50839 and CA-G.R. SP No. 50790 are SET ASIDE.

G.R. No. 147375             June 26, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

TINGA, J.:

At issue is the question of whether the 20% final tax on a bank’s passive income,
withheld from the bank at source, still forms part of the bank’s gross income for the
purpose of computing its gross receipts tax liability. Both the Court of Tax Appeals
(CTA) and the Court of Appeals answered in the negative. We reverse, in favor of
petitioner, following our ruling in China Banking Corporation v. Court of Appeals.1

A brief background of the tax law involved is in order. 

Domestic corporate taxpayers, including banks, are levied a 20% final withholding tax
on bank deposits under Section 24(e)(1)2 in relation to Section 50(a)3 of Presidential
Decree No. 1158, otherwise known as the National Internal Revenue Code of 1977
("Tax Code"). Banks are also liable for a tax on gross receipts derived from sources
within the Philippines under Section 119 4 of the Tax Code, which provides, thus:

Sec. 119. Tax on banks and non-bank financial intermediaries. — There shall be
collected a tax on gross receipts derived from sources within the Philippines by all
banks and non-bank financial intermediaries in accordance with the following schedule: 

(a) On interest, commissions and discounts from lending activities as well as

income from financial leasing, on the basis of remaining maturities of instruments
from which such receipts are derived. 

Short-term maturity — not in excess of two (2) years . . . . . . . . 5% 

Medium-term maturity — over two (2) 

years but not exceeding four (4) years . . . . . . . . . . . . . . . . . . . 3% 

Long term maturity — 

(i) Over four (4) years but 

not exceeding seven (7) years . . . . . . . . . . . . . . . . . . . . . 1% 

(ii) Over seven (7) years . . . . . . . . . . . . . . . . . . . . . . . . . . 0%

(b) On dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 

(c) On royalties, rentals of property, real or personal, 

profits from exchange and all other items treated as gross 
income under Section 28 of this Code . . . . . . . . . . . . . . . . . . . . . . . . . 5% 

Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pretermination, then the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction as short, medium
or long term and the correct rate of tax shall be applied accordingly. 

Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.

As a domestic corporation, the interest earned by respondent Bank of the Philippine

Islands (BPI) from deposits and similar arrangements are subjected to a final
withholding tax of 20%. Consequently, the interest income it receives on amounts that it
lends out are always net of the 20% withheld tax. As a bank, BPI is furthermore liable
for a 5% gross receipts tax on all its income. 
For the four (4) quarters of the year 1996, BPI computed its 5% gross receipts tax
payments by including in its tax base the 20% final tax on interest income that had been
withheld and remitted directly to the Bureau of Internal Revenue (BIR). 

On 30 January 1996, the CTA rendered a decision in Asian Bank Corporation v.

Commissioner of Internal Revenue,5 holding that the 20% final tax withheld on a bank’s
interest income did not form part of its taxable gross receipts for the purpose of
computing gross receipts tax. 

BPI wrote the BIR a letter dated 15 July 1998 citing the CTA Decision in Asian
Bank and requesting a refund of alleged overpayment of taxes representing 5% gross
receipts taxes paid on the 20% final tax withheld at source.

Inaction by the BIR on this request prompted BPI to file a Petition for Review against the
Commissioner of Internal Revenue (Commissioner) with the CTA on 19 January 1999.
Conceding its claim for the first three quarters of the year as having been barred by
prescription, BPI only claimed alleged overpaid taxes for the final quarter of 1996. 

Following its own doctrine in Asian Bank, the CTA rendered a Decision,6 holding that
the 20% final tax withheld did not form part of the respondent’s taxable gross receipts
and that gross receipts taxes paid thereon are refundable. However, it found that
only P13,843,455.62 in withheld final taxes were substantiated by BPI; it awarded a
refund of the 5% gross receipts tax paid thereon in the amount of P692,172.78. 

On appeal, the Court of Appeals promulgated a Decision 7 affirming the CTA. It cited this
Court’s decision in Commissioner of Internal Revenue v. Tours Specialists, Inc.,8 in
which we held that the "gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong to them and do not
redound to the taxpayer’s benefit" in concluding that "it would be unjust and confiscatory
to include the withheld 20% final tax in the tax base for purposes of computing the gross
receipts tax since the amount corresponding to said 20% final tax was not received by
the taxpayer and the latter derived no benefit therefrom." 9

The Court of Appeals also held that Section 4(e) of Revenue Regulations No. 12-80
mandates the deduction of the final tax paid on interest income in computing the tax
base for the gross receipts tax. Section 4(e) provides, thus:

Gross receipts tax on banks, non-bank financial intermediaries, financing companies,

and other non-bank financial intermediaries, not performing quasi-banking activities. –
The rates of taxes to be imposed on the gross receipts of such financial institutions shall
be based on all items of income actually received. Mere accrual shall not be considered,
but once payment is received on such accrual or in case of prepayment, then the
amount actually received shall be included in the tax base of such financial institutions,
as provided hereunder. (Emphasis supplied.)
The present Petition for Review filed by the Commissioner seeks to annul the adverse
Decisions of the CTA and the Court of Appeals and raises the sole issue of whether the
20% final tax withheld on a bank’s passive income should be included in the
computation of the gross receipts tax. 

In assailing the findings of the lower courts, the Commissioner makes the following
arguments: (1) the term "gross receipts" must be applied in its ordinary meaning; (2)
there is no provision in the Tax Code or any special laws that excludes the 20% final tax
in computing the tax base of the 5% gross receipts tax; (3) Revenue Regulations No.
12-80, Section 4(e), is inapplicable in the instant case; and (4) income need not actually
be received to form part of the taxable gross receipts. Additionally, petitioner points out
that the CTA Asian Bank case cited by petitioner BPI has already been superseded by
the CTA decisions in Standard Chartered Bank v. Commissioner of Internal Revenue
and Far East Bank and Trust Company v. Commissioner of Internal Revenue, both
promulgated on 16 November 2001.

The issues raised by the Commissioner have already been ruled upon in his favor by
this Court in China Banking Corporation v. Court of Appeals 10 and reiterated
in Commissioner of Internal Revenue v. Solidbank Corporation 11and more recently
in Commissioner of Internal Revenue v. Bank of Commerce.12 Consequently, the
petition must be granted. 

The Tax Code does not provide a definition of the term "gross receipts." 13 Accordingly,
the term is properly understood in its plain and ordinary meaning 14 and must be taken to
comprise of the entire receipts without any deduction. 15 We, thus, made the following
disquisition in Bank of Commerce:16

The word "gross" must be used in its plain and ordinary meaning. It is defined as
"whole, entire, total, without deduction." A common definition is "without deduction."
"Gross" is also defined as "taking in the whole; having no deduction or abatement;
whole, total as opposed to a sum consisting of separate or specified parts." Gross is the
antithesis of net. Indeed, in China Banking Corporation v. Court of Appeals, the Court
defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v.
Koppers Company, Inc., —

Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation.
However, this in no way should affect or control the normal usage of words in the
construction of our statutes; and we see nothing that would require us not to include the
proceeds here in question in the gross receipts allocation unless statutorily such
inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term
gross receipts, in the absence of any statutory definition of the term, must be taken to
include the whole total gross receipts without any deductions, x x x. [Citations omitted]
(Emphasis supplied)"

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word "gross" appearing in the term "gross receipts," as used in the ordinance, must
have been and was there used as the direct antithesis of the word "net." In its usual and
ordinary meaning "gross receipts" of a business is the whole and entire amount of the
receipts without deduction, x x x. On the contrary, "net receipts" usually are the receipts
which remain after deductions are made from the gross amount thereof of the expenses
and cost of doing business, including fixed charges and depreciation. Gross receipts
become net receipts after certain proper deductions are made from the gross. And in
the use of the words "gross receipts," the instant ordinance, of course, precluded
plaintiff from first deducting its costs and expenses of doing business, etc., in arriving at
the higher base figure upon which it must pay the 5% tax under this ordinance.
(Emphasis supplied)

Absent a statutory definition, the term "gross receipts" is understood in its plain and
ordinary meaning. Words in a statute are taken in their usual and familiar signification,
with due regard to their general and popular use. The Supreme Court of Hawaii held
in Bishop Trust Company v. Burns that —

x x x It is fundamental that in construing or interpreting a statute, in order to ascertain

the intent of the legislature, the language used therein is to be taken in the generally
accepted and usual sense. Courts will presume that the words in a statute were used to
express their meaning in common usage. This principle is equally applicable to a tax
statute. [Citations omitted] (Emphasis supplied)

Additionally, we held in Solidbank, to wit:17"[W]e note that US cases have persuasive

effect in our jurisdiction, because Philippine income tax law is patterned after its US
counterpart. 

"‘[G]ross receipts’ with respect to any period means the sum of: (a) The total amount
received or accrued during such period from the sale, exchange, or other disposition of
x x x other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of its trade or business, and (b)
The gross income, attributable to a trade or business, regularly carried on by the
taxpayer, received or accrued during such period x x x." 

"x x x [B]y gross earnings from operations x x x was intended all operations x x x
including incidental, subordinate, and subsidiary operations, as well as principal
operations." 
"When we speak of the ‘gross earnings’ of a person or corporation, we mean the entire
earnings or receipts of such person or corporation from the business or operations to
which we refer."

From these cases, "gross receipts"] refer to the total, as opposed to the net, income.
These are therefore the total receipts before any deduction for the expenses of
management. Webster’s New International Dictionary, in fact, defines gross as "whole
or entire."

The legislative intent to apply the term in its ordinary meaning may also be surmised
from a historical perspective of the levy on gross receipts. From the time the gross
receipts tax on banks was first imposed in 1946 under R.A. No. 39 and throughout its
successive reenactments,18 the legislature has not established a definition of the term
"gross receipts." Absent a statutory definition of the term, the BIR had consistently
applied it in its ordinary meaning, i.e., without deduction. On the presumption that the
legislature is familiar with the contemporaneous interpretation of a statute given by the
administrative agency tasked to enforce the statute, subsequent legislative
reenactments of the subject levy sans a definition of the term "gross receipts" reflect
that the BIR’s application of the term carries out the legislative purpose. 19

Furthermore, Section 119 (a)20 of the Tax Code expressly includes interest income as
part of the base income from which the gross receipts tax on banks is computed. This
express inclusion of interest income in taxable gross receipts creates a presumption
that the entire amount of the interest income, without any deduction, is subject to the
gross receipts tax.21

The exclusion of the 20% final tax on passive income from the taxpayer’s tax base is
effectively a tax exemption, the application of which is highly disfavored. 22 The rule is
that whoever claims an exemption must justify this right by the clearest grant of organic
or statute law.23 Like the other banks who have asserted a right tantamount 

to exception under these circumstances, BPI has failed to present a clear statutory
basis for its claim to take away the interest income withheld from the purview of the levy
on gross tax receipts. 

Bereft of a clear statutory basis on which to hinge its claim, BPI’s view, as adopted by
the Court of Appeals, is that Section 4(e) of Revenue Regulations No. 12-80 establishes
the exclusion of the 20% final tax withheld from the bank’s taxable gross receipts. 

However, we agree with the Commissioner that BPI’s asserted right under Section 4(e)
of Revenue Regulations No. 12-80 presents a misconstruction of the provision. While,
indeed, the provision states that "[t]he rates of taxes to be imposed on the gross
receipts of such financial institutions shall be based on all items of income actually
received," it goes on to distinguish actual receipt from accrual, i.e., that "[m]ere
accrual shall not be considered, but once payment is received on such accrual or
in case of prepayment, then the amount actually received shall be included in the
tax base of such financial institutions x x x."

Section 4(e) recognizes that income could be recognized by the taxpayer either at the
time of its actual receipt or its accrual,24 depending on the accounting method used by
the taxpayer,25 but establishes the rule that, for purposes of gross receipts tax, interest
income is taxable upon actual receipt of the income, as opposed to the time of its
accrual. Section 4(e) does not exclude accrued interest income from gross receipts but
merely postpones its inclusion until actual payment of the interest to the lending bank,
thus mandating that "[m]ere accrual shall not be considered, but once payment is
received on such accrual or in case of prepayment, then the amount actually received
shall be included in the tax base of such financial institutions x x x."26

Even if Section 4(e) had been properly construed, it still cannot be the basis for
deducting the income tax withheld since Section 4(e) has been superseded by Section
7 of Revenue Regulations No. 17-84, which states, thus: 

SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes. — 

(a) The interest earned on Philippine Currency bank deposits and yield

from deposit substitutes subjected to the withholding taxes in accordance
with these regulations need not be included in the gross income in
computing the depositor's/investor's income tax liability in accordance with
the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code,
as amended. 

(b) Only interest paid or accrued on bank deposits, or yield from deposit
substitutes declared for purposes of imposing the withholding taxes in
accordance with these regulations shall be allowed as interest expense
deductible for purposes of computing taxable net income of the payor. 

(c) If the recipient of the above-mentioned items of income are financial

institutions, the same shall be included as part of the tax base upon which
the gross receipt tax is imposed. (Emphasis supplied.)

The provision categorically provides that if the recipient of interest subjected to

withholding taxes is a financial institution, the interest shall be included as part of
the tax base upon which the gross receipts tax is imposed.

The implied repeal of Section 4(e) is undeniable. Section 4(e) imposes the gross
receipts tax only on all items of income actually received, as opposed to their mere
accrual, while Section 7 of Revenue Regulations No. 17-84 includes all interest income
(whether actual or accrued) in computing the gross receipts tax. 27 Section 4(e) of
Revenue Regulations No. 12-80 was superseded by the later rule, because Section 4(e)
thereof is not restated in Revenue Regulations No. 17-84. 28 Clearly, then, the current
revenue regulations requires interest income, whether actually received or merely
accrued, to form part of the bank’s taxable gross receipts. 29

The Commissioner correctly controverts the conclusion made by the Court of Appeals
that it would be "unjust and confiscatory to include the withheld 20% final tax in the tax
base for purposes of computing the gross receipts tax since the amount corresponding
to said 20% final tax was not received by the taxpayer and the latter derived no benefit
therefrom."30

Receipt of income may be actual or constructive. We have held that the withholding
process results in the taxpayer’s constructive receipt of the income withheld, to wit:

By analogy, we apply to the receipt of income the rules on actual and constructive
possession provided in Articles 531 and 532 of our Civil Code. 

Under Article 531:

"Possession is acquired by the material occupation of a thing or the exercise of a right,

or by the fact that it is subject to the action of our will, or by the proper acts and legal
formalities established for acquiring such right."

Article 532 states:

"Possession may be acquired by the same person who is to enjoy it, by his legal
representative, by his agent, or by any person without any power whatever; but in the
last case, the possession shall not be considered as acquired until the person in whose
name the act of possession was executed has ratified the same, without prejudice to the
juridical consequences of negotiorum gestio in a proper case."

The last means of acquiring possession under Article 531 refers to juridical acts—the
acquisition of possession by sufficient title—to which the law gives the force of acts of
possession. Respondent argues that only items of income actually received should be
included in its gross receipts. It claims that since the amount had already been withheld
at source, it did not have actual receipt thereof.

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right
of possession is through the proper acts and legal formalities established therefor. The
withholding process is one such act. There may not be actual receipt of the income
withheld; however, as provided for in Article 532, possession by any person without any
power whatsoever shall be considered as acquired when ratified by the person in whose
name the act of possession is executed.

In our withholding tax system, possession is acquired by the payor as the

withholding agent of the government, because the taxpayer ratifies the very act of
possession for the government. There is thus constructive receipt. The
processes of bookkeeping and accounting for interest on deposits and yield on
deposit substitutes that are subjected to FWT are indeed—for legal purposes—
tantamount to delivery, receipt or remittance. 31 (Emphasis supplied.)

Thus, BPI constructively received income by virtue of its acquiescence to the

extinguishment of its 20% final tax liability when the withholding agents remitted BPI’s
income to the government. Consequently, it received the amounts corresponding to the
20% final tax and benefited therefrom. 

The cases cited by BPI, Commissioner of Internal Revenue v. Tours Specialists,

Inc.32 and Commissioner of Internal Revenue v. Manila Jockey Club, Inc., 33 in which this
Court held that "gross receipts subject to tax under the Tax Code do not include monies
or receipts entrusted to the taxpayer which do not belong to them and do not redound to
the taxpayer's benefit,"34 only further substantiate the fact that BPI benefited from the
withheld amounts.

In Tours Specialists and Manila Jockey Club, the taxable entities held the subject

monies not as income earned but as mere trustees. As such, they held the money
entrusted to them but which neither belonged to them nor redounded to their benefit. On
the other hand, BPI cannot be considered as a mere trustee; it is the actual owner of the
funds. As owner thereof, it was BPI’s tax obligation to the government that was
extinguished upon the withholding agent’s remittance of the 20% final tax. We
elucidated on BPI’s ownership of the funds in China Banking, to wit:

Manila Jockey Club does not support CBC’s contention but rather the Commissioner’s
proposition. The Court ruled in Manila Jockey Club that receipts not owned by the
Manila Jockey Club but merely held by it in trust did not form part of Manila Jockey
Club’s gross receipts. Conversely, receipts owned by the Manila Jockey Club would
form part of its gross receipts. 

In the instant case, CBC owns the interest income which is the source of payment
of the final withholding tax. The government subsequently becomes the owner of
the money constituting the final tax when CBC pays the final withholding tax to
extinguish its obligation to the government. This is the consideration for the
transfer of ownership of the money from CBC to the government. Thus, the
amount constituting the final tax, being originally owned by CBC as part of its
interest income, should form part of its taxable gross receipts.

In Commissioner v. Tours Specialists, Inc., the Court excluded from gross receipts
money entrusted by foreign tour operators to Tours Specialists to pay the hotel
accommodation of tourists booked in various local hotels. The Court declared that Tours
Specialists did not own such entrusted funds and thus the funds were not subject to the
3% contractor’s tax payable by Tours Specialists. The Court held:

x x x [G]ross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not redound to
the taxpayer’s benefit; and it is not necessary that there must be a law or regulation
which would exempt such monies and receipts within the meaning of gross receipts
under the Tax Code.

x x x [T]he room charges entrusted by the foreign travel agencies to the private
respondent do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent. The private
respondent never benefited from their payment to the local hotels. x x x [T]his
arrangement was only to accommodate the foreign travel agencies. 

Unless otherwise provided by law, ownership is essential in determining whether

interest income forms part of taxable gross receipts. Ownership is the
circumstance that makes interest income part of the taxable gross receipts of the
taxpayer. When the taxpayer acquires ownership of money representing interest,
the money constitutes income or receipt of the taxpayer.

In contrast, the trustee or agent does not own the money received in trust and such
money does not constitute income or receipt for which the trustee or agent is taxable.
This is a fundamental concept in taxation. Thus, funds received by a money remittance
agency for transfer and delivery to the beneficiary do not constitute income or gross
receipts of the money remittance agency. Similarly, a travel agency that collects ticket
fares for an airline does not include the ticket fare in its gross income or receipts. In
these cases, the money remittance agency or travel agency does not acquire ownership
of the funds received.35 (Emphasis supplied.)

BPI argues that to include the 20% final tax withheld in its gross receipts tax base would
be to tax twice its passive income and would constitute double taxation. Granted that
interest income is being taxed twice, this, however, does not amount to double taxation.
There is no double taxation if the law imposes two different taxes on the same income,
business or property. 36 In Solidbank, we ruled, thus:

Double taxation means taxing the same property twice when it should be taxed only
once; that is, "x x x taxing the same person twice by the same jurisdiction for the same
thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once.
Otherwise described as "direct duplicate taxation," the two taxes must be imposed on
the same subject matter, for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and they must be of the same kind or
character.

First, the taxes herein are imposed on two different subject matters. The subject matter
of the FWT [Final Withholding Tax] is the passive income generated in the form of
interest on deposits and yield on deposit substitutes, while the subject matter of the
GRT [Gross Receipts Tax] is the privilege of engaging in the business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we
have already held that one can be taxed for engaging in business and further taxed
differently for the income derived therefrom. Akin to our ruling in Velilla v. Posadas,
these two taxes are entirely distinct and are assessed under different provisions.

Second, although both taxes are national in scope because they are imposed by the
same taxing authority—the national government under the Tax Code—and operate
within the same Philippine jurisdiction for the same purpose of raising revenues, the
taxing periods they affect are different. The FWT is deducted and withheld as soon as
the income is earned, and is paid after every calendar quarter in which it is earned. On
the other hand, the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by the same
taxing authority, within the same jurisdiction, for the same purpose, in different taxing
periods, some of the property in the territory. Subjecting interest income to a 20% FWT
and including it in the computation of the 5% GRT is clearly not double taxation. 37

Clearly, therefore, despite the fact that that interest income is taxed twice, there is no
double taxation present in this case. 

An interpretation of the tax laws and relevant jurisprudence shows that the tax on
interest income of banks withheld at source is included in the computation of their gross
receipts tax base.

WHEREFORE, the Petition is GRANTED. The assailed Decisions of the Court of

Appeals and the Court of Tax Appeals are REVERSED AND SET ASIDE. Petitioner
Commissioner of Internal Revenue’s denial of respondent Bank of Philippine Islands’
claim for refund is SUSTAINED. No costs.
 THIRD DIVISION

[G.R. No. 175108, February 27, 2013]

CHINA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondents.

DECISION

PERALTA, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court
which seeks the review and reversal of the Decision 1 dated June 16, 2006 and
Resolution2 dated October 17, 2006 of the former Fifth Division of the Court of Appeals
(CA).

The factual antecedents follow.

For the four quarters of 1996, petitioner paid P93,119,433.50 as gross receipts tax
(GRT) on its income from the interests on loan investments, commissions, service and
collection charges, foreign exchange profit and other operating earnings.

In computing its taxable gross receipts, petitioner included the 20% final withholding tax
on its passive interest income,3 hereunder summarized as follows:

XXX

On January 30, 1996, the Court of Tax Appeals (CTA) rendered a Decision
entitled Asian Bank Corporation v. Commissioner of Internal Revenue, 4 wherein it ruled
that the 20% final withholding tax on a bank’s passive interest income should not form
part of its taxable gross receipts.

On the strength of the aforementioned decision, petitioner filed with respondent a claim
for refund on April 20, 1998, of the alleged overpaid GRT for the four (4) quarters of
1996 in the aggregate amount of P6,646,829.67, detailed as follows:

Xxx

On even date, petitioner filed its Petition for Review with the CTA.

The CTA, on November 8, 2000, rendered a Decision 5 agreeing with petitioner that the
20% final withholding tax on interest income does not form part of its taxable gross
receipts. However, the CTA dismissed petitioner’s claim for its failure to prove that the
20% final withholding tax forms part of its 1996 taxable gross receipts. The Decision
states in part:

Moreover, the Court of Appeals in the case of Commissioner of Internal Revenue v.

Citytrust Investment Philippines, Inc., CA G.R. Sp No. 52707, August 17, 1999,affirmed
our stand that the 20% final withholding tax on interest income should not form part of
the taxable gross receipts. Hence, we find no cogent reason nor justification to depart
from the wisdom of our decision in the Asian Bank case, supra.

xxxx

Lastly, since Petitioner failed to prove the inclusion of the 20% final withholding taxes as
part of its 1996 taxable gross receipts (passive income) or gross receipts (passive
income) that were subjected to 5% GRT, it follows that proof was wanting that it paid the
claimed excess GRT, subject of this petition.

xxxx

IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is
DISMISSED for insufficiency of evidence.

SO ORDERED.6

Not in conformity with the CTA’s ruling, petitioner interposed an appeal before the CA.

In its appeal, petitioner insists that it erroneously included the 20% final withholding tax
on the bank’s passive interest income in computing the taxable gross receipts.
Therefore, it argues that it is entitled, as a matter of right, to a refund or tax credit.

In a Decision7 dated June 16, 2006, the CA denied petitioner’s appeal. It ruled in this
wise:

x x x Unfortunately for China Bank, it is flogging a dead horse as this argument has
already been shot down in China Banking Corporation v. Court of Appeals (G.R. No.
146749 & No. 147983, June 10, 2003) where it was ruled the Tax Court, which
decided Asia Bank on June 30, 1996 not only erroneously interpreted Section 4(e) of
Revenue Regulations No. 12-80, it also cited Section 4(e) when it was no longer the
applicable revenue regulation. The revenue regulations applicable at the time the tax
court decided Asia Bank was Revenue Regulations No. 17-84, not Revenue Regulation
12-80.

xxxx

WHEREFORE, the instant petition is DENIED DUE COURSE and DISMISSED.

SO ORDERED.8

Petitioner sought reconsideration of the aforementioned decision arguing that Section 4

(e) of Revenue Regulations (RR) No. 12-80 remains applicable as the basis of GRT for
banks in taxable year 1996.

On October 17, 2006, the CA issued a Resolution 9 denying petitioner’s motion for
reconsideration on the ground that no new or compelling reason was presented by
petitioner to warrant the reversal or modification of its decision.

Hence, this petition wherein petitioner contends that:

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS FAILED

TO POINT TO THE LEGAL BASIS FOR THE EXCLUSION OF THE AMOUNT OF TAX
WITHHELD ON PASSIVE INCOME FROM ITS GROSS RECEIPTS FOR PURPOSES
OF TAXATION.10

In essence, the issue to be resolved is whether the 20% final tax withheld on a bank’s
passive income should be included in the computation of the GRT.

Petitioner avers that the 20% final tax withheld on its passive income should not be
included in the computation of its taxable gross receipts. It insists that the CA erred in
ruling that it failed to show the legal basis for its claimed tax refund or credit, since
Section 4 (e) of RR No. 12-80 categorically provides for the exclusion of the amount of
taxes withheld from the computation of gross receipts for GRT purposes.

We do not agree.

In a catena of cases, this Court has already resolved the issue of whether the 20% final
withholding tax should form part of the total gross receipts for purposes of computing
the GRT.

In China Banking Corporation v. Court of Appeals, 11 we ruled that the amount of interest
income withheld, in payment of the 20% final withholding tax, forms part of the bank’s
gross receipts in computing the GRT on banks.  The discussion in this case is
instructive on this score:
The gross receipts tax on banks was first imposed on 1 October 1946 by Republic Act
No. 39 (“RA No. 39”) which amended Section 249 of the Tax Code of 1939. Interest
income on banks, without any deduction, formed part of their taxable gross receipts.
From October 1946 to June 1977, there was no withholding tax on interest income from
bank deposits.

On 3 June 1977, Presidential Decree No. 1156 required the withholding at source of a
15% tax on interest on bank deposits. This tax was a creditable, not a final withholding
tax. Despite the withholding of the 15% tax, the entire interest income, without any
deduction, formed part of the bank’s taxable gross receipts. On 17 September 1980,
Presidential Decree No. 1739 made the withholding tax on interest a final tax at the rate
of 15% on savings account, and 20% on time deposits. Still, from 1980 until the Court of
Tax Appeals decision in Asia Bank on 30 January 1996, banks included the entire
interest income, without any deduction, in their taxable gross receipts.

In Asia Bank, the Court of Tax Appeals held that the final withholding tax is not part of
the bank’s taxable gross receipts. The tax court anchored its ruling on Section 4(e) of
Revenue Regulations No. 12-80, which stated that the gross receipts “shall be based on
all items actually received” by the bank. The tax court ruled that the bank does not
actually receive the final withholding tax. As authority, the tax court cited Collector of
Internal Revenue v. Manila Jockey Club, which held that “gross receipts of the
proprietor should not include any money which although delivered to the amusement
place had been especially earmarked by law or regulation for some person other than
the proprietor. x x x

Subsequently, the Court of Tax Appeals reversed its ruling in Asia Bank. In Far East
Bank & Trust Co. v. Commissioner and Standard Chartered Bank v. Commissioner,
both promulgated on 16 November 2001, the tax court ruled that the final withholding
tax forms part of the bank’s gross receipts in computing the gross receipts tax.
The tax court held that Section 4(e) of Revenue Regulations 12-80 did not prescribe the
computation of the gross receipts but merely authorized “the determination of the
amount of gross receipts on the basis of the method of accounting being used by the
taxpayer.

The tax court also held in Far East Bank and Standard Chartered Bank that the
exclusion of the final withholding tax from gross receipts operates as a tax
exemption which the law must expressly grant. No law provides for such
exemption. In addition, the tax court pointed out that Section 7(c) of Revenue
Regulations No. 17-84 had already superseded Section 4(e) of Revenue
Regulations No. 12-80. x x x12 (Emphasis supplied)

Notably, this Court, in the same case, held that under RR Nos. 12-80 and 17-84, the
Bureau of Internal Revenue (BIR) has consistently ruled that the term gross receipts do
not admit of any deduction. It emphasized that interest earned by banks, even if subject
to the final tax and excluded from taxable gross income, forms part of its gross receipt
for GRT purposes. The interest earned refers to the gross interest without deduction,
since the regulations do not provide for any deduction. 13

Further, in Commissioner of Internal Revenue v. Solidbank Corporation,14 this Court

held that “gross receipts” refer to the total, as opposed to the net, income. These are,
therefore, the total receipts before any deduction for the expenses of management. 15

In Commissioner of Internal Revenue v. Bank of Commerce,16 we again adhered to the

ruling that the term “gross receipts” must be understood in its plain and ordinary
meaning. In this case, we ruled that gross receipts should be interpreted as the whole
amount received as interest, without deductions; otherwise, if deductions were to be
made from gross receipts, it would be considered as “net receipts.”  The Court
ratiocinated as follows:

The word “gross” must be used in its plain and ordinary meaning. It is defined as
“whole, entire, total, without deduction.” A common definition is “without deduction.” x x
x Gross is the antithesis of net. Indeed, in China Banking Corporation v. Court of
Appeals, the Court defined the term in this wise:
As commonly understood, the term “gross receipts” means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v.
Koppers Company, Inc. –
Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation.
However, this in no way should affect or control the normal usage of words in the
construction of our statutes; x x x Under the ordinary basic methods of handling
accounts, the term gross receipts, in the absence of any statutory definition of the term,
must be taken to include the whole total gross receipts without any deductions, x x x.17

Again, in Commissioner of Internal Revenue v. Bank of the Philippine Islands,18 this

Court ruled that “the legislative intent to apply the term in its ordinary meaning may also
be surmised from a historical perspective of the levy on gross receipts. From the time
the gross receipts tax on banks was first imposed in 1946 under R.A. No. 39 and
throughout its successive reenactments, the legislature has not established a definition
of the term ‘gross receipts.’ Absent a statutory definition of the term, the BIR had
consistently applied it in its ordinary meaning, i.e., without deduction. On the
presumption that the legislature is familiar with the contemporaneous interpretation of a
statute given by the administrative agency tasked to enforce the statute, subsequent
legislative reenactments of the subject levy sans a definition of the term ‘gross receipts’
reflect that the BIR’s application of the term carries out the legislative purpose.” 19

In sum, all the aforementioned cases are one in saying that “gross receipts” comprise
“the entire receipts without any deduction.” Clearly, then, the 20% final withholding tax
should form part of petitioner’s total gross receipts for purposes of computing the GRT.

Also worth noting is the fact that petitioner’s reliance on Section 4 (e) of RR 12-80 is
misplaced as the same was already superseded by a more recent issuance, RR No. 17-
84.

This fact was elucidated on by the Court in the case of Commissioner of Internal
Revenue v. Citytrust Investment Phils. Inc.,20 where it held that RR No. 12-80 had
already been superseded by RR No. 17-84, viz.:

x x x  Revenue Regulations No. 12-80, issued on November 7, 1980, had been

superseded by Revenue Regulations No. 17-84 issued on October 12, 1984.
Section 4 (e) of Revenue Regulations No. 12-80 provides that only items of income
actually received shall be included in the tax base for computing the GRT. On the other
hand, Section 7 (c) of Revenue Regulations No. 17-84 includes all interest income
in computing the GRT, thus:
Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit
Substitutes. –

(a)  The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations
need not be included in the gross income in computing the depositor’s/ investor’s
income tax liability. x x x
(b)  Only interest paid or accrued on bank deposits, or yield from deposit substitutes
declared for purposes of imposing the withholding taxes in accordance with these
regulations shall be allowed as interest expense deductible for purposes of
computing taxable net income of the payor.
(c) If the recipient of the above-mentioned items of income are financial institutions, the
same shall be included as part of the tax base upon which the gross receipt tax is
imposed.

Revenue Regulations No. 17-84 categorically states that if the recipient of the above-
mentioned items of income are financial institutions, the same shall be included
as part of the tax base upon which the gross receipts tax is imposed. x x
x.21 (Emphasis supplied)

Significantly, the Court even categorically stated in the aforementioned case that there
is an implied repeal of Section 4 (e).  It held that there exists a disparity between
Section 4 (e) of RR No. 12-80, which imposes the GRT only on all items of income
actually received (as opposed to their mere accrual) and Section 7 (c) of RR No. 17-84,
which includes all interest income (whether actual or accrued) in computing the GRT.  
Plainly, RR No. 17-84, which requires interest income, whether actually received or
merely accrued, to form part of the bank’s taxable gross receipts, should prevail. 22

All told, petitioner failed to point to any specific provision of law allowing the deduction,
exemption or exclusion from its taxable gross receipts, of the amount withheld as final
tax. Besides, the exclusion sought by petitioner of the 20% final tax on its passive
income from the taxpayer’s tax base constitutes a tax exemption, which is highly
disfavored. A governing principle in taxation states that tax exemptions are to be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority and should be granted only by clear and unmistakable terms. 23

WHEREFORE, premises considered, the Decision dated June 16, 2006 and Resolution
dated October 17, 2006 of the former Fifth Division of the Court of Appeals are
hereby AFFIRMED in toto.

SO ORDERED.

First Planters Pawnshop, Inc. v Commissioner of Internal Revenue, GR No.

174134, July 30, 2008
Facts:

The BIR informed the petitioner on its VAT and Documentary Stamp Tax (DST)
deficiency for the year 2000. The petitioner protested after receiving the formal
assessment notice from the BIR directing it to pay its VAT deficiencies with surcharges
and interest. They contend they are not a lending investor within the scope of Section
108 (A) of the National Internal Revenue Code therefore not subject to Vat and that a
pawn ticket is not subject to DST because it is not a proof of pledge of transaction. Their
protest was denied by the BIR Regional Director and their appeal was likewise denied
by the Court of Tax Appeal hence this petition for review. 

Issue:
Whether or not pawnshops maybe subjected to VAT and Documentary stamp tax?

Ruling:

At the time of the disputed assessment in 2000, pawnshops were not subject to 10%
under the general provision on "sale or exchange of services" as defined under Section
108(A) of the Tax Code of 1997 which was amended by the RA 9238 classifying
pawnshops as “Other Non-Bank Financial Intermediaries.” Since petitioner is a non-
bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to
2002; however, with the levy, assessment and collection of VAT from non-bank
financial intermediaries being specifically deferred by law, then petitioner is not
liable for VAT during these tax years. But with the full implementation of the VAT
system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable
for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A.
No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on
gross receipts from 0% to 5 %, as the case may be.

Pawnshops are liable for documentary stamp tax. Subject of DST is not limited to the
document alone. Pledge (which is an exercise of a privilege to transfer obligations,
rights or properties incident thereto) is essentially the business of pawnshops which are
defined under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation
Act, as persons or entities engaged in lending money on personal property delivered as
security for loans. The DST is an excise tax imposed in the exercise of a pledge.
Although the law does not consider a pawn ticket as an evidence of security or
indebtedness, for purposes of taxation it is treated as an exercise of a taxable privilege
of concluding a contract of pledge. 

Thus, the court partially granted the petition where the decision on the BIR assessment
on VAT deficiency is reversed and set aside while the decision on payment for DST is
affirmed.
 G.R. No. 45697             November 1, 1939

MANILA ELECTRIC COMPANY, plaintiff-appellant, 

vs.
A.L. YATCO, Collector of Internal Revenue, defendant-appellee.
Ross, Lawrence, Selph and Carrascoso for appellant.
Office of the Solicitor-General Tuason for appellee.

MORAN, J.:

In 1935, plaintiff Manila Electric Company, a corporation organized and existing under
the laws of the Philippines, with its principal office and place of business in the City of
Manila, insured with the city of New York Insurance Company and the United States
Guaranty Company, certain real and personal properties situated in the Philippines. The
insurance was entered into in behalf of said plaintiff by its broker in New York City. The
insurance companies are foreign corporations not licensed to do business in the
Philippines and having no agents therein. The policies contained provisions for the
settlement and payment of losses upon the occurence of any risk insured against, a
sample of which is policy No. 20 of the New York insurance Company attached to and
made an integral part of the agreed statement of facts.

Plaintiff through its broker paid, in New York, to said insurance company premiums in
the sum of P91,696. The Collector of Internal Revenue, under the authority of section
192 of act No. 2427, as amended, assessed and levied a tax of one per centum on said
premiums, which plaintiff paid under protest. The protest having been overruled, plaintiff
instituted the present action to recover the tax. The trial court dismissed the complaint,
and from the judgment thus rendered, plaintiff took the instant appeal.

The pertinent portions of the Act here involved read:

SEC. 192. It shall be unlawful for any person, company or corporation, or forward
applications for insurance in or to issue or to deliver or accept policies of or for
any company or companies not having been legally authorized to transact
business in the Philippine Islands, as provided in this chapter; and any such
person, company or corporation violating the provisions of this section shall be
deemed guilty of a penal offense, and upon conviction thereof, shall for each
such offense be punished by a fine of two hundred pesos, or imprisonment for
two months, or both in the discretion not authorized to transact business in the
Philippine Island may be placed upon terms and conditions as follows:

xxx     xxx     xxx

. . . . And provided further, that the prohibitions of this section shall not affect the
right of an owner of property to apply for and obtain for himself policies in foreign
companies in cases were said owner does not make use of the services of any
agent, company or corporation residing or doing business in the Philippine
Islands. In all case where owners of property obtain insurance directly with
foreign companies, it shall be the duty of said owners to report to the insurance
commissioner and to the Collector of Internal Revenue each case where
insurance has been so effected, and shall pay the tax of one per centum on
 premium paid, in the manner required by law of insurance companies, and shall
be subject to the same penalties for failure to do so.

Appellant maintains that the second paragraph of the provisions of the Act aforecited is
unconstitutional, and has been so declared by the Supreme Court of the United States
in the case of Compania General de Tabacos v. Collector of Internal Revenue, 275
U.S., 87, 48 Sup. Ct. Rep., 100, 72 Law. ed., 177.

The case relied upon involves a suit to recover from the Collector of Internal Revenue
certain taxes in connection with insurance premiums which the Tobacco Barcelona,
Spain, paid to the Guardian Insurance Company of London, England, and to Le Comite
des Assurances Maritimes de Paris, of Paris, France. The Tobacco Company, through
its head office in Barcelona, insured against fire with the London Company the
merchandise it had in deposit in the warehouse in the Philippines. As the merchandise
were from time to time shipped to Europe, the head office at Barcelona insured the
same with the Paris Company against marine risks while such merchandise were in
transit from the Philippines to Spain. The London Company, unlike the Paris Company,
was licensed to do insurance business in the Philippines and had an agent therein.
Losses, if any, on policies were to be paid to the Tobacco Company in Paris. The tax
assessed and levied by the Collector of Internal Revenue, under the same law now
involved, was challenged as unconstitutional. The Supreme Court of the united States
sustained the tax with respect to premiums paid to the London Company and held it
erroneous with respect to premiums paid to the Paris Company.lawphi1.net

The factual basis upon which the imposition of the tax on premiums paid to the Paris
Company was declared erroneous, is stated by the Supreme Court of the United States
thus:

Coming then to the tax on the premiums paid to the Paris Company the contract
of insurance on which the premium was paid was made at Barcelona in Spain,
the headquarters of the Tobacco Company between the Tobacco Company and
the Paris Company, and any losses arising thereunder were to be paid in Paris.
The Paris Company had no communication whatever with anyone in the
Philippine Islands. The collection of this tax involves an ex-action upon a
company of Spain lawfully doing business in the Philippine Islands effected by
reason of a contract made by that company with a company in Paris on
merchandise shipped from the Philippine Islands for delivery in Barcelona. It is
an imposition upon a contract not made in the Philippines and having no situs
there and to be measured by money paid as premiums in Paris, with the place of
payment of loss, if any, in Paris. We are very clear that the contract and the
premiums paid under it are not within the jurisdiction of the government of the
Philippine Islands.

And, upon the authority of the cases of Allgeyer v. Lousiana, 165 U.S., 578, 41 Law.
ed., 832, and St. Louis Cotton Compress Company v. Arkansas, 250 U.S., 346, 677
Law. ed., 279, the Supreme Court of the United States held that "as the state is
forbidden to deprive a person of his liberty without due process of law, it may not
compel anyone within its jurisdiction to pay tribute to it for contracts or money paid to
secure the benefits of contract made and to be performed outside of the state."

On the other hand, the Supreme Court of the United States, in sustaining the imposition
of the tax upon premiums paid by the assured to the London Company, says:

. . . . Does the fact that while the Tobacco Company and the London Company
were within the jurisdiction of the Philippines they made a contract outside of the
Philippines, prevent the imposition upon the assured of a tax of 1 per cent upon
the money paid by it as a premium to the London Company? We may properly
assume that this tax placed upon the assured must ultimately be paid by the
insurer, and treating its real incidence as such, the question arises whether
making and carrying out the policy does not involve an exercise or use of the
right of the London Company to do business in the Philippine Islands under its
license, because the policy covers fire risks no property within the Philippine
Islands which may require adjustment and the activities of agents in the
Philippine Islands with respect to settlement of losses arising thereunder. This we
think must be answered affirmatively under Equitable Life Assur. Soc. v.
Pennsylvania, 238 U.S., 143 Law. ed., 1239, 35 Sup. Ct. Rep., 829. The case is
a close one, but in deference to the conclusion we reached in the latter case, we
affirm the judgment of the court below in respect to the tax upon the premium
paid to the London Company.

The ruling in the Paris Company case is obviously not applicable in the instant one, for
there, not only was the contract executed in a foreign country, but the merchandise
insured was in transit from the Philippines to Spain, and nothing was to be done in the
Philippines in pursuance of the contract. However, the rule laid down in connection with
the London Company may, by analogy, be applied in the present case, the essential
facts of both cases being similar. Here, the insured is a corporation organized under the
laws of the Philippines, its principal office and place of business being in the City of
Manila. The New York Insurance Company and the United States Guaranty Company
may be said to be doing policies issued by them cover risks on properties within the
Philippines, which may require adjustment and the activities of agents in the Philippines
with respect to the settlement of losses arising thereunder. For instance, it is therein
stipulated that "the insured, as often as may be reasonably required, shall exhibit to any
person designated by the company all the remains of any property therein described
and submit to examination under oath by any person named by the company, and as
often as may be reasonably required, shall exhibit to any person designated by the
company all the remains of any property therein described and submit to an
examination all books of accounts . . . at such reasonable time and place as may be
designated by the company or its representative." And, in case of disagreement as to
the amount of losses or damages as to require the appointment of appraisers, the
insurance contract provides that "the appraisers shall first select a competent umpire;
and failure for fifteen days to agree to such umpire, then, on request of the insured or of
the company, such umpire shall be selected by a judge of the court of record in the
state in which the property insured is located.".

True it is that the London Company had a license to do business in the Philippines, but
this fact was not a decisive factor in the decision of that case, for reliance was therein
placed on the Equitable Life Assurance Society v. Pennsylvania, 238 U.S., 143, 59 Law.
ed., 1239, 35 Sup. Ct. Rep., 829, wherein it was said that "the Equitable Society was
doing business in Pennsylvania when it was annually paying the dividends in
Pennsylvania or sending an adjuster into the state in case of dispute or making proof of
death," and therefore "the taxpayer had subjected itself to the jurisdiction of
Pennsylvania in doing business there." (See Compañia General de Tabacos v. Collector
of Internal Revenue, 275 U.S., 87, 72 Law. ed., 177, 182.)

The controlling consideration, therefore, in the decision of the London Company case
was that said company, by making and carrying out policies covering risks located in
this country which might require adjustment or the making of proof of loss therein, did
business in the Philippines and subjected itself to its jurisdiction, a rule that can perfectly
be applied in the present case to the new York Insurance Company and the United
States Guaranty Company.

It is argued, however, that the sending of an unjuster to the Philippines to fix the amount
of losses, is a mere contingency and not an actual fact, as such, it cannot be a ground
for holding that the insurance companies subjected themselves to the taxing jurisdiction
of the Philippines. This argument could have been made in the London Company case
where no adjuster appears to have ever been sent to the Philippines nor any adjustment
ever made, and yet the stipulations to that effect were held to be sufficient to bring the
foreign corporation within the taxing jurisdiction of the Philippines.

In epitome, then, the whole question involved in this appeal is whether or not the
disputed tax is one imposed by the Commonwealth of the Philippines upon a contract
beyond its jurisdiction. We are of the opinion and so hold that where the insured against
also within the Philippines, the risk insured against also within the Philippines, and
certain incidents of the contract are to be attended to in the Philippines, such as,
payment of dividends when received in cash, sending of an unjuster into the Philippines
in case of dispute, or making of proof of loss, the Commonwealth of the Philippines has
the power to impose the tax upon the insured, regardless of whether the contract is
executed in a foreign country and with a foreign corporation. Under such circumstances,
substantial elements of the contract may be said to be so situated in the Philippines as
to give its government the power to tax. And, even if it be assumed that the tax imposed
upon the insured will ultimately be passed on the insurer, thus constituting an indirect
tax upon the foreign corporation, it would still be valid, because the foreign corporation,
by the stipulations of its contract, has subjected itself to the taxing jurisdiction of the
Philippines. After all, Commonwealth of the Philippines, by protecting the properties
insured, benefits the foreign corporation, and it is but reasonable that the latter should
pay a just contribution therefor. It would certainly be a discrimination against domestic
corporations to hold the tax valid when the policy is given by them and invalid when
issued by foreign corporations.

Judgment affirmed, with costs against appellant.

EN BANC

[G.R. No. L-6931. April 30, 1955.]

STANDARD-VACUUM OIL COMPANY, Plaintiff-Appellant, v. M. D. ANTIGUA, as

Municipal Treasurer of Opon and the MUNICIPALITY OF OPON, Defendants-
Appellees. 

Ross, Selph, Carrascoso & Janda for Appellant. 

 Provincial Fiscal Jose C. Borromeo and Assistant Provincial Fiscal Ananias V.
Maribao for Appellees. 

SYLLABUS

TAXATION; OCCUPATION TAX TO BE IMPOSED ON MAIN BUSINESS ONLY. —

When a person or company is already taxed on its main business, it may not be further
taxed for doing something or engaging in an activity or work which is merely part of,
incidental to and is necessary to its main business. 

DECISION

MONTEMAYOR, J.:

This is an action to recover from the Municipal Treasurer of Opon, Cebu, the sum of
P26,639.50 collected by said town official from the plaintiff-appellant Standard Vacuum
Oil Company and paid by the latter under protest. The facts in this case are simple and
not disputed. Section 1 of Commonwealth Act 472 known as the Municipality Autonomy
Act reads thus:
"SECTION 1. A municipal council or municipal district council shall have authority to
impose municipal license taxes upon person engaged in any occupation or business, or
exercising privileges in the municipality or municipal district, by requiring them to secure
licenses at rates fixed by the municipal council, or municipal district council, and to
collect fees and charges, for service rendered by the municipality or municipal district
and shall otherwise have power to levy for public local purposes, and for school
purposes, including teacher’s salaries, just and uniform taxes other than percentages
taxes and taxes on specified articles."

Under the above reproduced legal provision, the municipal council of Opon passed
Ordinance No. 9, series of 1949, imposing a graduated license tax on the business of
manufacturing tin cans based on the maximum output capacity of the factory. Said
ordinance was duly approved by the Department of Finance. 

The plaintiff-appellant Standard Vacuum Oil Company, a foreign corporation duly

licensed to transact business in the Philippines, having its principal office in the City of
Manila and with branch office in the City of Cebu, is engaged in the importation,
distribution and sale of gasoline, kerosene and other fuel oils. Some of its products,
especially kerosene are placed in 5-gallon tin cans and then distributed and sold
throughout the Philippines. The company’s branch in Cebu operates and maintains an
establishment in the Municipality of Opon known as Opon Terminal where it stores the
gasoline, kerosene and other fuel oils it imports from abroad and where it manufactures
5-gallon tin cans. To give an idea of the output of its tin can factory, the evidence shows
that for the years 1950 and 1951 appellant company manufactured 2,796,911 and
2,523,975 tin cans, respectively, or a total of 5,320,886. This will explain the relatively
large amount of tax collected by the defendant Municipal Treasurer for two years. 

Appellant contends that the municipal ordinance is null and void because the graduated
license tax imposed is said to partake of the nature of a percentage or specific tax,
being an indirect percentage tax on specified articles, namely, the tin cans, and as such
percentage tax is outside the powers of a municipal corporation to impose under the
above-cited legal provision; and that assuming that it is not a percentage but an
occupation tax, still it does not apply to the tin can factory of plaintiff-appellant because
it is not a business operated for profit but is merely incidental to its main business of
importing gasoline, kerosene and other fuel oils and later placing them in tin cans for
distribution and sale. 

The trial court held that the manufacture of tin cans by plaintiff company to be used as
containers of its gasoline, kerosene and other fuel oils is an occupation by itself from
which the plaintiff derives benefit by not buying said tin cans from other persons who
would otherwise manufacture them; and that were the plaintiff exempted from paying
the tax on the cans manufactured and used for the distribution of its commodity while
others engaged in the manufacture of tin cans are required to pay the tax, then the said
tax ceases to be just and uniform. Plaintiff is now appealing from that decision of the
trial court holding that the municipal ordinance was not only valid but was also
applicable to the plaintiff and that consequently, the amount of the tax should not be
refunded to it. 

We are satisfied that the graduated license tax imposed by the ordinance in question is
an occupation tax, imposed not under the police or regulatory power of the municipality
but by virtue of its taxing power for purposes of revenue, and is in accordance with the
last part of section 1 of Commonwealth Act 42. It is, therefore, valid. The question now
to be determined is whether it is applicable to the plaintiff corporation. To us, it is clear
that if a company manufactures tin cans to be sold to the public or to companies
engaged in the sale and distribution of liquids, then said manufacture would be a
business or occupation subject to the tax imposed by the ordinance. However, where
the manufacture of tin cans as in the present case is conducted not as an independent
business, and for profit but merely as an incident to or part of its main business, then it
may not be considered as an occupation or business which may be taxed separately.
The plaintiff company as already stated, is engaged in the importation, distribution and
sale of gasoline, kerosene and other fuel oils and it is already paying the specific tax of
two centavos and seven centavos per liter of kerosene and gasoline, respectively, being
sold by it. While gasoline may be sold and distributed to its dealers and to the public at
gasoline stations and without the use of tin cans this may not be done with kerosene or
petroleum which is being sold not only in small towns which have no kerosene stations
but in distant barrios; hence the necessity of providing suitable containers such as 5-
gallon tin cans. According to the findings of the trial court which we must accept here,
because the appeal was made directly to this Tribunal on purely questions of law, the tin
cans in question were not manufactured by the appellant company "for sale to the
public, but for the purpose of distributing its products which are in liquid form."

The case of Smith, Bell & Co. v. Municipality of Zamboanga reported in 55 Phil., 466,
involved a company engaged in the purchase and sale of hemp which operated a motor
engine used for baling hemp for shipment. The Municipality of Zamboanga enacted an
ordinance requiring payment. of a license fee of P100 a year for every motor engine
used for baling hemp. The company objected to the payment of the fee saying that the
use of its motor engine was an incident to its business of purchase and sale of hemp.
After paying the fee under protest the company brought an action to recover the same
from the municipality. This Tribunal affirming the judgment of the lower court which
decided in favor of the company said that a company that has already paid taxes or
impost for the operation of its main business of purchase and sale of hemp may not be
further taxed for its possession and operation of a motor engine to bale hemp for the
reason that the baling of hemp is connected with, incidental to and part of plaintiff’s
business, particularly its sale and shipment of said commodity. 

In the case of Craig v. Ballard & Ballard Co., 196 Sc. 238, it was held that:
"Where a person or corporation is engaged in a distinct business and, as a feature
thereof, in an activity merely incidental which serves no other person or business, the
incidental and restricted activity is not to be considered as intended to be separately or
additionally taxed."
In conclusion, we hold that when a person or company is already taxed on its main
business, it may not be further taxed for doing something or engaging in an activity or
work which is merely a part of, incidental to and is necessary to its main business. 

In view of the foregoing, the decision appealed from is hereby reversed, and the
Municipal Treasurer of Opon Cebu, is hereby ordered to return to the plaintiff-appellant
the sum of P26,639.50, without interest, but with costs. 

Pablo, Acting C. J., Bengzon, Reyes, A., Bautista Angelo, and Labrador, JJ., concur.