PRINCIPLES 1. Territoriality Principle and Ne!" to t#e Sit!" R!le" SITUS O$ TAXATION - place of taxation % Ba"ic R!le : The State where the subject to be taxed has a situs, may rightfully levy and collect the tax. - The situs is necessarily in the sate which has jurisdiction or which exercises dominion over the subject in question. SITUS O$ SUB&ECTS O$ TAXATION - Taxable situs will depend upon various factors including the nature of the tax and the subject matter thereof, the possible protection and the benet that may accrue both to the government and the tax payer, the residence or the citi!enship of the taxpayer and source of income. a. PERSONS " poll tax may be properly levied upon persons who are inhabitants or residents of the state whether citi!ens or not '. REAL PROPERT( ) LEX REI SITAE - with respect to property taxes " #$%& $ST%T$ 'S S()*$+T T, T%-%T',. in the state in which it is located, whether the owner is a resident or non-resident and is taxable ,.&/ there. c. TAN*IBLE PERSONAL PROPERT( - it is taxable in the state where it has actual situs " where it is physically located " although the owner resides in another jurisdiction - #eal property as well as personal property is subject to the law of the country where it is situated. d. INTAN*IBLE PERSONAL PROPERT( - does not admit actual location - *ENERAL RULE: situs for purposes of property taxation is at the domicile of the owner. i.e. credits, bills receivable, ban0 deposits, bonds, promissory notes, mortgage loans, judgements and corporate stoc0 PRINCIPLE O$ MOBILIA SE+UNTUR PERSONAM - The situs of personal property is the domicile of the owner - $xception : with the express provision of a statute or when justice demand that it should be as where the property has in fact a situs elsewhere. - i.e. shares of stoc0 in a domestic corporation of a non-resident foreigner are taxable in the 1hilippines #eason : said shares recieve the protection and benet of our laws e. INCOME - exacted from persons who are residents or citi!ens in the taxing jurisdiction - even from those who are neither residents nor citi!ens in the taxing jurisdiction, provided, that the income is derived from sources within the taxing state. ,. BUSINESS- OCCUPATION AND TRANSACTION - *ENERAL RULE : the power to levy an excise tax depends upon the place where the business is done or the occupation is engaged in or the transaction too0 place. .. *RATUITOUS TRANS$ER O$ PROPERT( - transmission of property from donor to donee or from decedent to heirs may be subject to taxation in the state where the transferor is2was a citi!en or resident or where the property is located MULTIPLICIT( O$ SITUS 1. E$$ECT - due to the variance in the concept of 3domicile4 for tax purposes and considering the multiple distinct relationships that may arise with respect to intangible personal property and the use which the property may have been devoted and all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner, the same income or intangible may be subject to taxation in several taxing jurisdictions /. REMED( a. provide for exemptions or allowance of deduction or tax credit for foreign taxes b. enter into treaties with other states RETURN ON CAPITAL 0". INCOME CAPITAL INCOME fund 5ow % fund of property existing at an instant of time % 5ow of services rendered by that capital by the payment of money from it or any other benet rendered by a fund of capital in relation to such fund through a period of time wealth Service of wealth tree fruit .ot subject to income tax Subject to income tax INCOME - gain derived from capital, from labor, or from both combined - including prots gained from dealings in property or as well as any asset clearly reali!ed whether earned or not - refers to all wealth which 5ows ito the taxpayer other than as a mere return on capital. - .ot all receipts of a person constitute income. RETURN ON CAPITAL - not subject to income tax INCOME $ROM 1IT2IN AND 1IT2OUT T2E P2ILIPPINES *.R. No. L%1//34 A!.!"t 4- 1513 6ICENTE MADRI*AL and #i" 7i,e- SUSANA PATERNO- plainti6s- appellants, vs. &AMES &. RA$$ERT(- Collector o, Internal Re0en!e- and 6ENANCIO CONCEPCION- Dep!ty Collector o, Internal Re0en!e- defendants- appellees. $ACTS8 1. 7icente 8adrigal and Susana 1aterno were legally married prior to *anuary 9, 9:9; and such was contracted under the provisions of law concerning conjugal partnerships <sociedad de gananciales=. /. >ebruary ?@, 9:9@ - 7icente 8adrigal led sworn declaration on the prescribed form with the +ollector of 'nternal #evenue, showing, as his total net income for the year 9:9;, the sum of 1?:A,BC?.DB. 9. Subsequently 8adrigal submitted the claim that the said 1?:A,BC?.DB did not repre"ent #i" inco:e ,or t#e year 151;, '!t 7a" in ,act t#e inco:e o, t#e con<!.al partner"#ip ei"tin. 'et7een #i:"el, and #i" 7i,e S!"ana Paterno, and that in computing and assessing the additional income tax provided by the %ct of +ongress of ,ctober B, 9:9B, t#e inco:e declared 'y 6icente Madri.al "#o!ld 'e di0ided into t7o e=!al part", one%#al, to 'e con"idered t#e inco:e o, 6icente Madri.al and t#e ot#er #al, o, S!"ana Paterno. ;. The general question had in the meantime been submitted to the %ttorney-Eeneral of the 1hilippine 'slands who in an opinion dated, held with the petitioner 8adrigal. >. The revenue oFcers still unsatised, the correspondence together with this opinion was forwarded to Gashington for a decision by the (nited States Treasury Hepartment. ?. The (S +ommissioner of 'nternal #evenue reversed the opinion of the %ttorney-Eeneral, and thus decided against the claim of 8adrigal. 4. %fter payment under protest, and after the protest of 8adrigal had been decided adversely by the +ollector of 'nternal #evenue, action was begun by 7icente 8adrigal and his wife Susana 1aterno in the +>' of 8anila against +ollector of 'nternal #evenue and the Heputy +ollector of 'nternal #evenue ,or t#e reco0ery o, t#e "!: o, P9-43?.@3- alle.ed to #a0e 'een 7ron.,!lly and ille.ally collected 'y t#e de,endant" ,ro: t#e plaintiA- 6icente Madri.al- !nder t#e pro0i"ion" o, t#e Act o, Con.re"" Bno7n a" t#e Inco:e Ta La7. 3. The burden of the complaint was that i, t#e inco:e ta ,or t#e year 151; #ad 'een correctly and la7,!lly co:p!ted t#ere 7o!ld #a0e 'een d!e paya'le 'y eac# o, t#e plaintiA" t#e "!: o, P/-5/1.@5- 7#ic# taBen to.et#er a:o!nt" o, a total o, P>-3;/.13 in"tead o, P5-??3./1 7#ic# 7a" "aid to 'e erroneo!"ly and !nla7,!lly collected ,ro: t#e plaintiA 6icente Madri.al- 7it# t#e re"!lt t#at plaintiA Madri.al #a" paid a" inco:e ta ,or t#e year 151;- P9-43?.@3- in ece"" o, t#e "!: la7,!lly d!e and paya'le. 5. the basis of defendants - The income of 7icente 8adrigal and his wife Susana 1aterno of the year 9:9; was made up of three items: <9= 1BA?,;CD.AD, the prots made by 7icente 8adrigal in his coal and shipping businessI <?= 1;,CJA.@C, the prots made by Susana 1aterno in her embroidery businessI <B= 19A,AJD.JC, the prots made by 7icente 8adrigal in a pawnshop company. The sum of these three items is 1BJB,9J9.:D, the gross income of 7icente 8adrigal and Susana 1aterno for the year 9:9;. Eeneral deductions were claimed and allowed in the sum of 1JA,JD:.?;. The resulting net income was 1?:A,BC?.DB. >or the purpose of assessing the normal tax of one per cent on the net income there were allowed as specic deductions the following: <9= 19A,AJD.JC, the tax upon which was to be paid at source, and <?= 1J,CCC, the specic exemption granted to 7icente 8adrigal and Susana 1aterno, husband and wife. The remainder, 1?D9,A9;.:B was the sum upon which the normal tax of one per cent was assessed. The normal tax thus arrived at was 1?,D9A.9@. T#'%& +,(#T " ruled in favor of the defendants ISSUE8 Ghether or not the additional income tax should be divided into two equal parts because of the conjugal partnership existing between the plainti6s. 2ELD8 NO. The husband, as the head and legal representative of the household and general custodian of its income, should ma0e and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. 'f a wife has a separate estate managed by herself as her own separate property, and receives an income of more than KB,CCC, she may ma0e return of her own income, and if the husband has other net income, ma0ing the aggregate of both incomes more than K;,CCC, the wifeLs return should be attached to the return of her husband, or his income should be included in her return, in order that a deduction of K;,CCC may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of the aggregate income of both shall exceed K;,CCC. 'f either husband or wife separately has an income equal to or in excess of KB,CCC, a return of annual net income is required under the law, and such return must include the income of both, and in such case the return must be made even though the combined income of both be less than K;,CCC. 'f the aggregate net income of both exceeds K;,CCC, an annual return of their combined incomes must be made in the manner stated, although neither one separately has an income of KB,CCC per annum. They are jointly and separately liable for such return and for the payment of the tax. The single or married status of the person claiming the specic exemption shall be determined as one of the time of claiming such exemption which return is made, otherwise the status at the close of the year.M Mprior to the liquidation the interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement Susana 1aterno, wife of 7icente 8adrigal, has an inchoate right in the property of her husband 7icente 8adrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. S!"ana Paterno #a" no a'"ol!te ri.#t to one%#al, t#e inco:e o, t#e con<!.al partner"#ip. .ot being sei!ed of a separate estate, S!"ana Paterno cannot :aBe a "eparate ret!rn in order to recei0e t#e 'eneCt o, t#e ee:ption 7#ic# 7o!ld ari"e 'y rea"on o, t#e additional ta. A" "#e #a" no e"tate and inco:e- act!ally and le.ally 0e"ted in #er and entirely di"tinct ,ro: #er #!"'andD" property- t#e inco:e cannot properly 'e con"idered t#e "eparate inco:e o, t#e 7i,e ,or t#e p!rpo"e" o, t#e additional ta. 8oreover, the 'ncome Tax &aw does not loo0 on the spouses as individual partners in an ordinary partnership. T#e #!"'and and 7i,e are only entitled to t#e ee:ption o, P3-@@@ "peciCcally .ranted 'y t#e la7. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our +ivil +ode dealing with the conjugal partnership and having no application to the 'ncome Tax &aw. The aims and purposes of the 'ncome Tax &aw must be given e6ect. The separate estate of a married woman within the contemplation of the 'ncome Tax &aw is that which belongs to her solely and separate and apart from her husband, and over which her husband has no right in equity. 't may consist of lands or chattels. Ghere the wife has income from a separate estate ma0es return made by her husband, while the incomes are added together for the purpose of the normal tax they are ta0en separately for the purpose of the additional tax. 'n this case, however, the wife has no separate income within the contemplation of the 'ncome Tax &aw. The 'ncome Tax &aw was drafted by the +ongress of the (nited States and has been by the +ongress extended to the 1hilippine 'slands. )eing thus a law of %merican origin and being peculiarly intricate in its provisions, the authoritative decision of the oFcial who is charged with enforcing it has peculiar force for the 1hilippines. 't has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution. *.R. No. L%?>449%4; April 9@- 1534 COMMISSIONER O$ INTERNAL RE6ENUE- petitioner, vs. BRITIS2 O6ERSEAS AIR1A(S CORPORATION and COURT O$ TAX APPEALS- respondents. MELENCIO%2ERRERA- J.: >%+TS : 9. ),%+ is a 9CCN )ritish Eovernment-owned corporation organi!ed and existing under the laws of the (nited Oingdom ?. 't is engaged in the international airline business and is a member- signatory of the 'nterline %ir Transport %ssociation <'%T%=. B. 't operates air transportation service and sells transportation tic0ets over the routes of the other airline members. ;. Huring the periods covered by the disputed assessments, it i" ad:itted t#at BOAC #ad no landin. ri.#t" ,or traEc p!rpo"e" in t#e P#ilippine"- and 7a" not .ranted a CertiCcate o, p!'lic con0enience and nece""ity to operate in t#e P#ilippine" 'y t#e Ci0il Aerona!tic" Board FCABG- ecept ,or a nine%:ont# period- partly in 15?1 and partly in 15?/- 7#en it 7a" .ranted a te:porary landin. per:it 'y t#e CAB. @. +onsequently, it did not carry passengers and2or cargo to or from the 1hilippines, although during the period covered by the assessments, it maintained a general sales agent in the 1hilippines P Gamer )arnes and +ompany, &td., and later Qantas %irways P which was responsible for selling ),%+ tic0ets covering passengers and cargoes. A. ,n D 8ay 9:AJ, petitioner +'# assessed ),%+ the aggregate amount of 1?,;:J,B@J.@A for deciency income taxes covering the years 9:@: to 9:AB which was protested by ),%+. D. Subsequent investigation resulted in the issuance of a new assessment, dated 9A *anuary 9:DC for the years 9:@: to 9:AD in the amount of 1J@J,BCD.D:. ),%+ paid this new assessment under protest. J. D ,ctober 9:DC - ),%+ led a claim for refund of the amount of 1J@J,BCD.D:, which was denied by the +'#. )ut before said denial, ),%+ had already led a petition for review with the Tax +ourt assailing the assessment and praying for the refund of the amount paid. :. ,n 9D .ovember 9:D9, ),%+ was assessed deciency income taxes, interests, and penalty for the scal years 9:AJ-9:A: to 9:DC-9:D9 in the aggregate amount of 1@;:,B?D.;B, and the additional amounts of 19,CCC.CC and 19,JCC.CC as compromise penalties for violation of Section ;A <requiring the ling of corporation returns= penali!ed under Section D; of the .ational 'nternal #evenue +ode <.'#+=. 9C. ?@ .ovember 9:D9, ),%+ requested that the assessment be countermanded and set aside. 99. 'n a letter, +'# not only denied the ),%+ request for refund in the >irst +ase but also re-issued in the Second +ase the deciency income tax assessment for 1@B;,9B?.CJ for the years 9:A: to 9:DC-D9 plus 19,CCC.CC as compromise penalty under Section D; of the Tax +ode. 9?. BOACD" re=!e"t ,or recon"ideration 7a" denied by the +'# on ?; %ugust 9:DB. 9B. This prompted ),%+ to le the Second +ase before the Tax +ourt praying that it be absolved of liability for deciency income tax for the years 9:A: to 9:D9. 9;. The Tax +ourt reversed the +'# and held that the proceeds of sales of ),%+ passage tic0ets in the 1hilippines by Garner )arnes and +ompany, &td., and later by Qantas %irways, during the period in question, do not constitute ),%+ income from 1hilippine sources Msince no service of carriage of passengers or freight was performed by ),%+ within the 1hilippinesM and, therefore, said income is not subject to 1hilippine income tax. 9@. The +T% position was that income from transportation is income from services so that the place where services are rendered determines the source. 9A. Thus, in the dispositive portion of its Hecision, the Tax +ourt ordered petitioner to credit ),%+ with the sum of 1J@J,BCD.D:, and to cancel the deciency income tax assessments against ),%+ in the amount of 1@B;,9B?.CJ for the scal years 9:AJ-A: to 9:DC-D9. 'SS($S: 9. Ghether or not the revenue derived by )ritish ,verseas %irways +orporation <),%+= from sales of tic0ets in the 1hilippines for air transportation, while having no landing rights here, constitute income of ),%+ from 1hilippine sources, and are taxable. ?. Ghether or not during the scal years in question ),%+ s a resident foreign corporation doing business in the 1hilippines or has an oFce or place of business in the 1hilippines. /$S B. 'n the event that private respondent may not be considered a resident foreign corporation but a non-resident foreign corporation, then it is liable to 1hilippine income tax at the rate of thirty-ve per cent <B@N= of its gross income received from all sources within the 1hilippines. R$&H (nder Section ?C of the 9:DD Tax +ode: <h= the term resident foreign corporation engaged in trade or business within the 1hilippines or having an oFce or place of business therein. <i= The term Mnon-resident foreign corporationM applies to a foreign corporation not engaged in trade or business within the 1hilippines and not having any oFce or place of business therein 't is our considered opinion that ),%+ is a resident foreign corporation. There is no specic criterion as to what constitutes MdoingM or Mengaging inM or MtransactingM business. $ach case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or wor0s or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organi!ation. M'n order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. 9 ),%+, during the periods covered by the subject - assessments, maintained a general sales agent in the 1hilippines, That general sales agent, from 9:@: to 9:D9, Mwas engaged in <9= selling and issuing tic0etsI <?= brea0ing down the whole trip into series of trips P each trip in the series corresponding to a di6erent airline companyI <B= receiving the fare from the whole tripI and <;= consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by %rticle 7' of the #esolution .o. J@C of the '%T% %greement.M ; Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organi!ation as an international air carrier. 'n fact, the regular sale of tic0ets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that ),%+ was Mengaged inM business in the 1hilippines through a local agent during the period covered by the assessments. %ccordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the 1hilippines. > Sec. ?;. #ates of tax on corporations. P ... <b= Tax on foreign corporations. P ... <?= #esident corporations. P % corporation organi!ed, authori!ed, or existing under the laws of any foreign country, except a foreign fe insurance company, engaged in trade or business within the 1hilippines, shall be taxable as provided in subsection <a= of this section upon the total net income received in the preceding taxable year from all sources within the Philippines. <$mphasis supplied= 9. MEross incomeM includes gains, prots, and income derived from salaries, wages or compensation for personal service of whatever 0ind and in whatever form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such propertyI also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profle, or gains, prots, and income derived from any source whatever <Sec. ?:SBTI $mphasis supplied= The denition is broad and comprehensive to include proceeds from sales of transport documents. MThe words Lincome from any source whateverL disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws.M 'ncome means Mcash received or its equivalentMI it is the amount of money coming to a person within a specic time ...I it means something distinct from principal or capital. >or, while capital is a fund, income is a 5ow. %s used in our income tax law, MincomeM refers to the 5ow of wealth. ? The records show that the 1hilippine gross income of ),%+ for the scal years 9:AJ-A: to 9:DC-D9 amounted to 19C,;?J,BAJ .CC. 4 Hid such M5ow of wealthM come from Msources within the 1hilippinesM, The source of an income is the property, activity or service that produced the income. 3 >or the source of income to be considered as coming from the 1hilippines, it is suFcient that the income is derived from activity within the 1hilippines. In BOACD" ca"e- t#e "ale o, ticBet" in t#e P#ilippine" i" t#e acti0ity t#at prod!ce" t#e inco:e. The tic0ets exchanged hands here and payments for fares were also made here in 1hilippine currency. The site of the source of payments is the 1hilippines. The 5ow of wealth proceeded from, and occurred within, 1hilippine territory, enjoying the protection accorded by the 1hilippine government. 'n consideration of such protection, the 5ow of wealth should share the burden of supporting the government. % transportation tic0et is not a mere piece of paper. Ghen issued by a common carrier, it constitutes the contract between the tic0et-holder and the carrier. 't gives rise to the obligation of the purchaser of the tic0et to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary tic0et issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship. 5 True, Section BD<a= of the Tax +ode, which enumerates items of gross income from sources within the 1hilippines, namely: <9= interest, <?9= dividends, <B= service, <;= rentals and royalties, <@= sale of real property, and <A= sale of personal property, does not mention income from the sale of tic0ets for international transportation. Rowever, that does not render it less an income from sources within the 1hilippines. Section BD, by its language, does not intend the enumeration to be exclusive. 't merely directs that the types of income listed therein be treated as income from sources within the 1hilippines. % cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other 0ind of income may be so considered. M 1@ ),%+, however, would impress upon this +ourt that income derived from transportation is income for services, with the result that the place where the services are rendered determines the sourceI and since ),%+Ls service of transportation is performed outside the 1hilippines, the income derived is from sources without the 1hilippines and, therefore, not taxable under our income tax laws. The Tax +ourt upholds that stand in the joint Hecision under review. The absence of 5ight operations to and from the 1hilippines is not determinative of the source of income or the site of income taxation. %dmittedly, ),%+ was an o6-line international airline at the time pertinent to this case. The test of taxability is the MsourceMI and the source of an income is that activity ... which produced the income.11 (nquestionably, the passage documentations in these cases were sold in the 1hilippines and the revenue therefrom was derived from a activity regularly pursued within the 1hilippines. business a %nd even if the ),%+ tic0ets sold covered the Mtransport of passengers and cargo to and from foreign citiesM, 1/ it cannot alter the fact that income from the sale of tic0ets was derived from the 1hilippines. The word MsourceM conveys one essential idea, that of origin, and the origin of the income herein is the 1hilippines. 19 't should be pointed out, however, that the assessments upheld herein apply only to the scal years covered by the questioned deciency income tax assessments in these cases, or, from 9:@: to 9:AD, 9:AJ-A: to 9:DC- D9. >or, pursuant to 1residential Hecree .o. A:, promulgated on ?; .ovember, 9:D?, international carriers are now taxed as follows: ... 1rovided, however, That international carriers shall pay a tax of ?-U per cent on their cross 1hilippine billings. <Sec. ?;SbT S?9, Tax +ode=. 1residential Hecree .o. 9B@@, promulgated on ?9 %pril, 9:DJ, provided a statutory denition of the term Mgross 1hilippine billings,M thus: ... MEross 1hilippine billingsM includes gross revenue reali!ed from uplifts anywhere in the world by any international carrier doing business in the 1hilippines of passage documents sold therein, whether for passenger, excess baggage or mail provided the cargo or mail originates from the 1hilippines. ... The foregoing provision ensures that international airlines are taxed on their income from 1hilippine sources. The ?-U N tax on gross 1hilippine billings is an income tax. 'f it had been intended as an excise or percentage tax it would have been place under Title 7 of the Tax +ode covering Taxes on )usiness. &astly, we nd as untenable the ),%+ argument that the dismissal for lac0 of merit by this +ourt of the appeal in JAL vs. Commissioner of Internal evenue <E.#. .o. &-BCC;9= on >ebruary B, 9:A:, is res !udicata to the present case. The ruling by the Tax +ourt in that case was to the e6ect that the mere sale of tic0ets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrierLs tax. %s elucidated by the Tax +ourt, however, the common carrierLs tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. 't purports to tax the business of transportation. 9; )eing an excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the 1hilippines. The subject matter of the case under consideration is income tax, a direct tax on the income of persons and other entities Mof whatever 0ind and in whatever form derived from any source.M Since the two cases treat of a di6erent subject matter, the decision in one cannot be res !udicata to the other. *.R. No. 13@9>? $e'r!ary 1?- /@1@ SOUT2 A$RICAN AIR1A(S- 1etitioner, vs. COMMISSIONER O$ INTERNAL RE6ENUE- #espondent. H $ + ' S ' , . 6ELASCO- &R.- J.: >%+TS 9. 1etitioner South %frican %irways is a foreign corporation organi!ed and existing under and by virtue of the laws of the #epublic of South %frica. ?. 'ts principal oFce is located at %irways 1ar0, *ones #oad, *ohannesburg 'nternational %irport, South %frica. B. 'n the 1hilippines, it is an internal air carrier having no landing rights in the country. 1etitioner has a general sales agent in the 1hilippines, %erotel &imited +orporation <%erotel=. ;. %erotel sells passage documents for compensation or commission for petitionerVs o6-line 5ights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the 1hilippines. @. 1etitioner is not registered with the Securities and $xchange Thereafter, on >ebruary @, ?CCB, petitioner led with the )ureau of 'nternal #evenue, #evenue Histrict ,Fce .o. ;D, a claim for the refund of the amount of 1h1 9,D?D,DAA.BJ as erroneously paid tax on Eross 1hilippine )illings <E1)= for the taxable year ?CCC. Such claim was unheeded. Thus, on %pril 9;, ?CCB, petitioner led a 1etition for #eview with the +T% for the refund of the abovementioned amount. The case was doc0eted as +T% +ase .o. AA@A. A. ,n 8ay 9C, ?CCA, the +T% >irst Hivision issued a Hecision denying the petition for lac0 of merit. D. The +T% ruled that petitioner is a resident foreign corporation engaged in trade or business in the 1hilippines. 't further ruled that petitioner was not liable to pay tax on its E1) under Section ?J<%= <B=<a= of the .ational 'nternal #evenue +ode <.'#+= of 9::D. J. The +T%, however, stated that petitioner is liable to pay a tax of B?N on its income derived from the sales of passage documents in the 1hilippines and denied petitionerVs claim for a refund basing on this ground. :. 1etitionerVs 8otion for #econsideration of the above decision was denied by the +T% 9C. 1etitioner led a 1etition for #eview before the +T% $n )anc, reiterating its claim for a refund of its tax payment on its E1). This was denied by the +T% in its assailed decision. % subsequent 8otion for 99. #econsideration by petitioner was also denied in the assailed resolution of the +T% $n )anc. 'SS($S 9. Ghether or not petitioner, as an o6-line international carrier selling passage documents through an independent sales agent in the 1hilippines, is engaged in trade or business in the 1hilippines subject to the B?N income tax imposed by Section ?J <%=<9= of the 9::D .'#+. ?. Ghether or not the income derived by petitioner from the sale of passage documents covering petitionerVs o6-line 5ights is 1hilippine-source income subject to 1hilippine income tax. B. Ghether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Eross 1hilippine )illings for the taxable year ?CCC in the amount of 19,D?D,DAA.BJ. @ The +ourtVs #uling This petition must be denied. 1etitioner 's Subject to 'ncome Tax at the #ate of B?N of 'ts Taxable 'ncome 1reliminarily, we emphasi!e that petitioner is claiming that it is exempted from being taxed for its sale of passage documents in the 1hilippines. 1etitioner, however, failed to suFciently prove such contention. 'n +ommissioner of 'nternal #evenue v. %cesite <1hilippines= Rotel +orporation, A we held, MSince an action for a tax refund parta0es of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly.M 1etitioner has failed to overcome such burden. 'n essence, petitioner calls upon this +ourt to determine the legal implication of the amendment to Sec. ?J<%=<B=<a= of the 9::D .'#+ dening E1). 't is petitionerVs contention that, with the new denition of E1), it is no longer liable under Sec. ?J<%=<B=<a=. >urther, petitioner argues that because the ? 92?N tax on E1) is inapplicable to it, it is thereby excluded from the imposition of any income tax. Sec. ?J<b=<?= of the 9:B: .'#+ provided: <?= #esident +orporations. " % corporation organi!ed, authori!ed, or existing under the laws of a foreign country, engaged in trade or business within the 1hilippines, shall be taxable as provided in subsection <a= of this section upon the total net income received in the preceding taxable year from all sources within the 1hilippines: 1rovided, however, that international carriers shall pay a tax of two and one-half percent on their gross 1hilippine billings. This provision was later amended by Sec. ?;<)=<?= of the 9:DD .'#+, which dened E1) as follows: MEross 1hilippine billingsM include gross revenue reali!ed from uplifts anywhere in the world by any international carrier doing business in the 1hilippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the 1hilippines. 'n the 9:JA and 9::B .'#+s, the denition of E1) was further changed to read: MEross 1hilippine )illingsM means gross revenue reali!ed from uplifts of passengers anywhere in the world and excess baggage, cargo and mail originating from the 1hilippines, covered by passage documents sold in the 1hilippines. $ssentially, prior to the 9::D .'#+, E1) referred to revenues from uplifts anywhere in the world, provided that the passage documents were sold in the 1hilippines. &egislature departed from such concept in the 9::D .'#+ where E1) is now dened under Sec. ?J<%=<B=<a=: MEross 1hilippine )illingsM refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the 1hilippines in a continuous and uninterrupted 5ight, irrespective of the place of sale or issue and the place of payment of the tic0et or passage document. .ow, it is the place of sale that is irrelevantI as long as the uplifts of passengers and cargo occur to or from the 1hilippines, income is included in E1). %s correctly pointed out by petitioner, inasmuch as it does not maintain 5ights to or from the 1hilippines, it is not taxable under Sec. ?J<%=<B=<a= of the 9::D .'#+. This much was also found by the +T%. )ut petitioner further posits the view that due to the non-applicability of Sec. ?J<%=<B=<a= to it, it is precluded from paying any other income tax for its sale of passage documents in the 1hilippines. Such position is untenable. 'n +ommissioner of 'nternal #evenue v. )ritish ,verseas %irways +orporation <)ritish ,verseas %irways=, D which was decided under similar factual circumstances, this +ourt ruled that o6-line air carriers having general sales agents in the 1hilippines are engaged in or doing business in the 1hilippines and that their income from sales of passage documents here is income from within the 1hilippines. Thus, in that case, we held the o6-line air carrier liable for the B?N tax on its taxable income. 1etitioner argues, however, that because )ritish ,verseas %irways was decided under the 9:B: .'#+, it does not apply to the instant case, which must be decided under the 9::D .'#+. 1etitioner alleges that the 9:B: .'#+ taxes resident foreign corporations, such as itself, on all income from sources within the 1hilippines. 1etitionerVs interpretation of Sec. ?J<%=<B=<a= of the 9::D .'#+ is that, since it is an international carrier that does not maintain 5ights to or from the 1hilippines, thereby having no E1) as dened, it is exempt from paying any income tax at all. 'n other words, the existence of Sec. ?J<%=<B=<a= according to petitioner precludes the application of Sec. ?J<%=<9= to it. 'ts argument has no merit. >irst, the di6erence cited by petitioner between the 9:B: and 9::D .'#+s with regard to the taxation of o6-line air carriers is more apparent than real. Ge point out that Sec. ?J<%=<B=<a= of the 9::D .'#+ does not, in any categorical term, exempt all international air carriers from the coverage of Sec. ?J<%=<9= of the 9::D .'#+. +ertainly, had legislatureVs intentions been to completely exclude all international air carriers from the application of the general rule under Sec. ?J<%=<9=, it would have used the appropriate language to do soI but the legislature did not. Thus, the logical interpretation of such provisions is that, if Sec. ?J<%=<B=<a= is applicable to a taxpayer, then the general rule under Sec. ?J<%=<9= would not apply. 'f, however, Sec. ?J<%=<B=<a= does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. ?J<%=<9=. +learly, no di6erence exists between )ritish ,verseas %irways and the instant case, wherein petitioner claims that the former case does not apply. Thus, )ritish ,verseas %irways applies to the instant case. The ndings therein that an o6-line air carrier is doing business in the 1hilippines and that income from the sale of passage documents here is 1hilippine-source income must be upheld. 1etitioner further reiterates its argument that the intention of +ongress in amending the denition of E1) is to exempt o6-line air carriers from income tax by citing the pronouncements made by Senator *uan 1once $nrile during the deliberations on the provisions of the 9::D .'#+. Such pronouncements, however, are not controlling on this +ourt. Ge said in $spino v. +leofe: J % cardinal rule in the interpretation of statutes is that the meaning and intention of the law-ma0ing body must be sought, rst of all, in the words of the statute itself, read and considered in their natural, ordinary, commonly-accepted and most obvious signications, according to good and approved usage and without resorting to forced or subtle construction. +ourts, therefore, as a rule, cannot presume that the law-ma0ing body does not 0now the meaning of words and rules of grammar. +onsequently, the grammatical reading of a statute must be presumed to yield its correct sense. x x x 't is also a well-settled doctrine in this jurisdiction that statements made by individual members of +ongress in the consideration of a bill do not necessarily re5ect the sense of that body and are, consequently, not controlling in the interpretation of law. <$mphasis supplied.= 8oreover, an examination of the subject provisions of the law would show that petitionerVs interpretation of those provisions is erroneous. Sec. ?J<%=<9= and <%=<B=<a= provides: S$+. ?J. #ates of 'ncome Tax on >oreign +orporations. - <%= Tax on #esident >oreign +orporations. - <9= 'n Eeneral. - $xcept as otherwise provided in this +ode, a corporation organi!ed, authori!ed, or existing under the laws of any foreign country, engaged in trade or business within the 1hilippines, shall be subject to an income tax equivalent to thirty- ve percent <B@N= of the taxable income derived in the preceding taxable year from all sources within the 1hilippines: provided, That e6ective *anuary 9, 9::J, the rate of income tax shall be thirty-four percent <B;N=I e6ective *anuary 9, 9:::, the rate shall be thirty- three percent <BBN=, and e6ective *anuary 9, ?CCC and thereafter, the rate shall be thirty-two percent <B?N=. x x x x <B= 'nternational +arrier. - %n international carrier doing business in the 1hilippines shall pay a tax of two and one-half percent <? 92?N= on its WEross 1hilippine )illingsV as dened hereunder: <a= 'nternational %ir +arrier. " WEross 1hilippine )illingsV refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the 1hilippines in a continuous and uninterrupted 5ight, irrespective of the place of sale or issue and the place of payment of the tic0et or passage document: 1rovided, That tic0ets revalidated, exchanged and2or indorsed to another international airline form part of the Eross 1hilippine )illings if the passenger boards a plane in a port or point in the 1hilippines: 1rovided, further, That for a 5ight which originates from the 1hilippines, but transshipment of passenger ta0es place at any port outside the 1hilippines on another airline, only the aliquot portion of the cost of the tic0et corresponding to the leg 5own from the 1hilippines to the point of transshipment shall form part of Eross 1hilippine )illings. Sec. ?J<%=<9= of the 9::D .'#+ is a general rule that resident foreign corporations are liable for B?N tax on all income from sources within the 1hilippines. Sec. ?J<%=<B= is an exception to this general rule. %n exception is dened as Mthat which would otherwise be included in the provision from which it is excepted. 't is a clause which exempts something from the operation of a statue by express words.M : >urther, Man exception need not be introduced by the words WexceptV or Wunless.V %n exception will be construed as such if it removes something from the operation of a provision of law.M 9C 'n the instant case, the general rule is that resident foreign corporations shall be liable for a B?N income tax on their income from within the 1hilippines, except for resident foreign corporations that are international carriers that derive income Mfrom carriage of persons, excess baggage, cargo and mail originating from the 1hilippinesM which shall be taxed at ? 92?N of their Eross 1hilippine )illings. 1etitioner, being an international carrier with no 5ights originating from the 1hilippines, does not fall under the exception. %s such, petitioner must fall under the general rule. This principle is embodied in the &atin maxim, exception rmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule. 99 To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains 5ights to and from the 1hilippines, it shall be taxed at the rate of ? 92?N of its Eross 1hilippine )illings, while international air carriers that do not have 5ights to and from the 1hilippines but nonetheless earn income from other activities in the country will be taxed at the rate of B?N of such income. %s to the denial of petitionerVs claim for refund, the +T% denied the claim on the basis that petitioner is liable for income tax under Sec. ?J<%=<9= of the 9::D .'#+. Thus, petitioner raises the issue of whether the existence of such liability would preclude their claim for a refund of tax paid on the basis of Sec. ?J<%=<B=<a=. 'n answer to petitionerVs motion for reconsideration, the +T% >irst Hivision ruled in its #esolution dated %ugust 99, ?CCA, thus: ,n the fourth argument, petitioner avers that a deciency tax assessment does not, in any way, disqualify a taxpayer from claiming a tax refund since a refund claim can proceed independently of a tax assessment and that the assessment cannot be o6set by its claim for refund. 1etitionerVs argument is erroneous. 1etitioner premises its argument on the existence of an assessment. 'n the assailed Hecision, this +ourt did not, in any way, assess petitioner of any deciency corporate income tax. The power to ma0e assessments against taxpayers is lodged with the respondent. >or an assessment to be made, respondent must observe the formalities provided in #evenue #egulations .o. 9?-::. This +ourt merely pointed out that petitioner is liable for the regular corporate income tax by virtue of Section ?J<%=<B= of the Tax +ode. Thus, there is no assessment to spea0 of. 9? 1recisely, petitioner questions the o6setting of its payment of the tax under Sec. ?J<%=<B=<a= with their liability under Sec. ?J<%=<9=, considering that there has not yet been any assessment of their obligation under the latter provision. 1etitioner argues that such o6setting is in the nature of legal compensation, which cannot be applied under the circumstances present in this case. %rticle 9?D: of the +ivil +ode contains the elements of legal compensation, to wit: %rt. 9?D:. 'n order that compensation may be proper, it is necessary: <9= That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the otherI <?= That both debts consist in a sum of money, or if the things due are consumable, they be of the same 0ind, and also of the same quality if the latter has been statedI <B= That the two debts be dueI <;= That they be liquidated and demandableI <@= That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. %nd we ruled in 1hilex 8ining +orporation v. +ommissioner of 'nternal #evenue, 9B thus: 'n several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Hebts are due to the Eovernment in its corporate capacity, while taxes are due to the Eovernment in its sovereign capacity. Ge nd no cogent reason to deviate from the aforementioned distinction. 1rescinding from this premise, in >rancia v. 'ntermediate %ppellate +ourt, we categorically held that taxes cannot be subject to set-o6 or compensation, thus: Ge have consistently ruled that there can be no o6-setting of taxes against the claims that the taxpayer may have against the government. % person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. The ruling in >rancia has been applied to the subsequent case of +altex 1hilippines, 'nc. v. +ommission on %udit, which reiterated that: . . . a taxpayer may not o6set taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-o6. 7erily, petitionerVs argument is correct that the o6setting of its tax refund with its alleged tax deciency is unavailing under %rt. 9?D: of the +ivil +ode. +ommissioner of 'nternal #evenue v. +ourt of Tax %ppeals, 9; however, granted the o6setting of a tax refund with a tax deciency in this wise: >urther, it is also worth noting that the +ourt of Tax %ppeals erred in denying petitionerVs supplemental motion for reconsideration alleging bringing to said courtVs attention the existence of the deciency income and business tax assessment against +itytrust. The fact of such deciency assessment is intimately related to and inextricably intertwined with the right of respondent ban0 to claim for a tax refund for the same year. To award such refund despite the existence of that deciency assessment is an absurdity and a polarity in conceptual e6ects. Rerein private respondent cannot be entitled to refund and at the same time be liable for a tax deciency assessment for the same year. The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deciency assessment, although not yet nal, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund. Section J?, +hapter '- of the .ational 'nternal #evenue +ode of 9:DD, which was the applicable law when the claim of +itytrust was led, provides that M<w=hen an assessment is made in case of any list, statement, or return, which in the opinion of the +ommissioner of 'nternal #evenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluationI but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.M 8oreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. 'f the deciency assessment should subsequently be upheld, the Eovernment will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be led within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved.This would necessarily require and entail additional e6orts and expenses on the part of the Eovernment, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations."avvphi" Thus, to avoid multiplicity of suits and unnecessary diFculties or expenses, it is both logically necessary and legally appropriate that the issue of the deciency tax assessment against +itytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable. 'n fact, as the +ourt of Tax %ppeals itself has heretofore conceded,it would be only just and fair that the taxpayer and the Eovernment ali0e be given equal opportunities to avail of remedies under the law to defeat each otherVs claim and to determine all matters of dispute between them in one single case. 't is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would SbeT necessary to determine how much the Eovernment is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved therein. <$mphasis supplied.= Sec. J?, +hapter '- of the 9:DD Tax +ode is now Sec. D?, +hapter -' of the 9::D .'#+. The above pronouncements are, therefore, still applicable today. Rere, petitionerVs similar tax refund claim assumes that the tax return that it led was correct. Eiven, however, the nding of the +T% that petitioner, although not liable under Sec. ?J<%=<B=<a= of the 9::D .'#+, is liable under Sec. ?J<%=<9=, the correctness of the return led by petitioner is now put in doubt. %s such, we cannot grant the prayer for a refund. )e that as it may, this +ourt is unable to aFrm the assailed decision and resolution of the +T% $n )anc on the outright denial of petitionerVs claim for a refund. $ven though petitioner is not entitled to a refund due to the question on the propriety of petitionerVs tax return subject of the instant controversy, it would not be proper to deny such claim without ma0ing a determination of petitionerVs liability under Sec. ?J<%=<9=. 't must be remembered that the tax under Sec. ?J<%=<B=<a= is based on E1), while Sec. ?J<%=<9= is based on taxable income, that is, gross income less deductions and exemptions, if any. 't cannot be assumed that petitionerVs liabilities under the two provisions would be the same. There is a need to ma0e a determination of petitionerVs liability under Sec. ?J<%=<9= to establish whether a tax refund is forthcoming or that a tax deciency exists. The assailed decision fails to mention having computed for the tax due under Sec. ?J<%=<9= and the records are bereft of any evidence suFcient to establish petitionerVs taxable income. There is a necessity to receive evidence to establish such amount vis-X-vis the claim for refund. 't is only after such amount is established that a tax refund or deciency may be correctly pronounced. GR$#$>,#$, the assailed *uly 9:, ?CCD Hecision and ,ctober BC, ?CCD #esolution of the +T% $n )anc in +T% $.). +ase .o. ?9C are S$T %S'H$. The instant case is #$8%.H$H to the +T% $n )anc for further proceedings and appropriate action, more particularly, the reception of evidence for both parties and the corresponding disposition of +T% $.). +ase .o. ?9C not otherwise inconsistent with our judgment in this Hecision. S, ,#H$#$H.