G.R. No.

L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC.,
plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio
R Matol and Assistant Solicitor General Conrado T. Limcaoco & Solicitor
Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte
in its Civil Case No. 3294, which was certified to Us by the Court of
Appeals on October 6, 1969, as involving only pure questions of law,
challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19,
1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte for that
court to declare Section 2 of Republic Act No. 2264. 1 otherwise known
as the Local Autonomy Act, unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos. 23 and 27, series
of 1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the
material portions of which state that, first, both Ordinances Nos. 23 and
27 embrace or cover the same subject matter and the production tax
rates imposed therein are practically the same, and second, that on
January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant
in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on
September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle
of soft drink corked." 2 For the purpose of computing the taxes due, the
person, firm, company or corporation producing soft drinks shall submit

to the Municipal Treasurer a monthly report, of the total number of

bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on
October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax of
ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing soft
drinks shall submit to the Municipal Treasurer a monthly report of the
total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
"municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the constitutionality of
[Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27
legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed
to the Court of Appeals, which, in turn, elevated the case to Us pursuant
to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and
impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of powers.
The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated
to local governments in respect of matters of local concern. 7 This is
sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local
self-government carries with it the power to confer on such local
governmental agencies the power to tax. 9 Under the New Constitution,

local governments are granted the autonomous authority to create their

own sources of revenue and to levy taxes. Section 5, Article XI provides:
"Each local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law." Withal, it cannot be said that Section 2 of Republic Act
No. 2264 emanated from beyond the sphere of the legislative power to
enact and vest in local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to
plaintiff-appellant's pretense, would not suffice to invalidate the said law
as confiscatory and oppressive. In delegating the authority, the State is
not limited 6 the exact measure of that which is exercised by itself. When
it is said that the taxing power may be delegated to municipalities and
the like, it is meant that there may be delegated such measure of power
to impose and collect taxes as the legislature may deem expedient.
Thus, municipalities may be permitted to tax subjects which for reasons
of public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction
against deprivation of property without due process of law may be
passed over under the guise of the taxing power, except when the taking
of the property is in the lawful exercise of the taxing power, as when (1)
the tax is for a public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the jurisdiction
of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for
a private as distinguished from a public purpose; a tax is imposed on
property outside the State, i.e., extraterritorial taxation; and arbitrary or
oppressive methods are used in assessing and collecting taxes. But, a
tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather
than a benefit to such taxpayer. Due process does not require that the
property subject to the tax or the amount of tax to be raised should be
determined by judicial inquiry, and a notice and hearing as to the amount
of the tax and the manner in which it shall be apportioned are generally
not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be
declared unconstitutional on the theory of double taxation. It must be
observed that the delegating authority specifies the limitations and

enumerates the taxes over which local taxation may not be exercised. 13
The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden
by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United
States and some states of the Union. 14 Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State and
the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover the
same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and
legally enforceable. This is not so. As earlier quoted, Ordinance No. 23,
which was approved on September 25, 1962, levies or collects from soft
drinks producers or manufacturers a tax of one-sixteen (1/16) of a
centavo for .every bottle corked, irrespective of the volume contents of
the bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle and still
pay the same tax rate, the Municipality of Tanauan enacted Ordinance
No. 27, approved on October 28, 1962, imposing a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
difference between the two ordinances clearly lies in the tax rate of the
soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for
every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of
the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus
clear: it was intended as a plain substitute for the prior Ordinance No.
23, and operates as a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees
are only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer
of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant
of the provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27, series of
1962 is being enforced by defendants-appellees. Even the Provincial
Fiscal, counsel for defendants-appellees admits in his brief "that Section

7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23

as the provisions of the latter are inconsistent with the provisions of the
former."
That brings Us to the question of whether the remaining Ordinance No.
27 imposes a percentage or a specific tax. Undoubtedly, the taxing
authority conferred on local governments under Section 2, Republic Act
No. 2264, is broad enough as to extend to almost "everything, accepting
those which are mentioned therein." As long as the text levied under the
authority of a city or municipal ordinance is not within the exceptions and
limitations in the law, the same comes within the ambit of the general
rule, pursuant to the rules of exclucion attehus and exceptio firmat
regulum in cabisus non excepti 19 The limitation applies, particularly, to
the prohibition against municipalities and municipal districts to impose
"any percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except gasoline, under
the provisions of the National Internal Revenue Code." For purposes of
this particular limitation, a municipal ordinance which prescribes a set
ratio between the amount of the tax and the volume of sale of the
taxpayer imposes a sales tax and is null and void for being outside the
power of the municipality to enact. 20 But, the imposition of "a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity" on all soft drinks produced or manufactured under Ordinance
No. 27 does not partake of the nature of a percentage tax on sales, or
other taxes in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are
those imposed on specified articles, such as distilled spirits, wines,
fermented liquors, products of tobacco other than cigars and cigarettes,
matches firecrackers, manufactured oils and other fuels, coal, bunker
fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs. 22 Soft drink is not one of those
specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or an
equivalent of 1- centavos per case, 23 cannot be considered unjust and

unfair. 24 an increase in the tax alone would not support the claim that
the tax is oppressive, unjust and confiscatory. Municipal corporations are
allowed much discretion in determining the reates of imposable taxes. 25
This is in line with the constutional policy of according the widest
possible autonomy to local governments in matters of local taxation, an
aspect that is given expression in the Local Tax Code (PD No. 231, July
1, 1973). 26 Unless the amount is so excessive as to be prohibitive,
courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as
Ordinance No. 27 if the purpose of the law to further strengthen local
autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with
five but not more than ten crowners or P2,000.00 with ten but not more
than twenty crowners imposed on manufacturers, producers, importers
and dealers of soft drinks and/or mineral waters under Ordinance No.
54, series of 1964, as amended by Ordinance No. 41, series of 1968, of
defendant Municipality, 29 appears not to affect the resolution of the
validity of Ordinance No. 27. Municipalities are empowered to impose,
not only municipal license taxes upon persons engaged in any business
or occupation but also to levy for public purposes, just and uniform
taxes. The ordinance in question (Ordinance No. 27) comes within the
second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No.
2264, otherwise known as the Local Autonomy Act, as amended, is
hereby upheld and Municipal Ordinance No. 27 of the Municipality of
Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23,
same series, is hereby declared of valid and legal effect. Costs against
petitioner-appellant.
SO ORDERED.

G.R. No. L-28271 July 25, 1975

SMITH, BELL AND CO. (PHIL.), INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Hildawa and Gomez for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Antonio A. Torres, Solicitor Lolita O. Gal-lang and Special
Attorney Gamaliel H. Mantolino for respondent.
CASTRO, J.:
This is a petition for review of the decision of the court of Tax Appeals in
case 1733 which affirms the deficiency assessment made by the
Commissioner of Internal Revenue against the petitioner Smith, Bell &
Co. in the amount of P11,713.90.
We affirm the decision of the Court of Tax Appeals.
From August 1963 to August 1965 the petitioner imported 119 cases of
"Chatteau Gay" wine which it declared as "still wine" under Section
134(b)of the Tax Code and paid thereon the specific tax of P1.00 per liter
of volume capacity. To determine the correct amount of the specific tax
due on the petitioner's importation, the Commissioner of Internal
Revenue (hereinafter referred to as the Commissioner) ordered it tested
and analyzed in the Bureau of Internal Revenue Laboratory Center. The
analyst who conducted the laboratory test reported that Chatteau Gay "is
a delicate table wine, with an alcohol content of 9.5% by volume (volume
745 cc @ 290C), characterized with explosion upon opening and
effervescence due to CO2 (residual)," and concluded that it should be
classified as "sparkling wine." The analyst's conclusion is supported by
Herstein and Jacobs who, in their book entitled "Chemistry & Technology
of Wines and Liquors," wrote:
(f) Sparkling wines are bottled before the fermentation has ceased so
that they contain carbon dioxide gas in solution at greater than
atmospheric pressure. When they are served, the carbon dioxide is
liberated with effervescence. These gas and alcoholic contents vary
according to the market for which they are intended. They may be dry or
sweet, light or strong. Champagne, sparkling Burgundy, and AstiSpumante are examples of sparkling wines.
On the basis of the analyst's report and recommendation, the
Commissioner, on October 11, 1965, assessed the petitioner a
deficiency specific tax on the 119 cases of imported Chatteau Gay in the

sum of P11,713.90 under Section 134(a) of the Tax Code which imposes
a specific tax of P12.00 per liter of volume capacity on sparkling wines.
The petitioner does not dispute the mathematical correctness of the
Commissioner's assessment, but contends that the assessment is
unconstitutional because Section 134(a) of the Tax Code under which it
was issued lays down an insufficient and hazy standard by which the
policy and purpose of the law may be ascertained and as well gives the
Commissioner blanket authority to decide what is or is not the meaning
of "sparkling wines." The argument is thus advanced that there is here
an abdication of legislative power violative of the established doctrine,
delegata potestas non potest delegate, and the due process clause of
the Constitution. The Commissioner disagrees on the ground that
Chapter I, Title IV of the Tax Code in no uncertain terms specifies the
articles subject to specific taxes, among which are wines, and Section
134 does no more than classify wines in several categories and
prescribe the corresponding amounts of tax to be paid. The
Commissioner's position was sustained by the Court of Tax Appeals in
its decision dated October 5, 1967.
The contention that in regard to Section 134(a) of the Tax Code there is
an unconstitutional surrender of legislative powers and a failure of due
process, need not give us more than a momentary pause.
Section 134 of the Tax Code provides: 1
Specific tax on wines. On wines and imitation wines there shall be
collected, per liter of volume capacity, the following taxes:
(a) Sparkling wines, regardless of proof, twelve pesos.
(b) Still wines containing fourteen per centum of alcohol or less, except
those produced from casuy and duhat, one peso.
(c) Still wines containing more than fourteen per centum of alcohol, two
pesos.
Imitation wines containing more than twenty-five per centum of alcohol
shall be taxed as distilled spirits.
There can be no uncertainty that the purpose of the abovequoted
provision is to impose a specific tax on wines and imitation wines. The
first clause of Section 134 states so in plain language. The sole object of
the sub-enumeration that follows is in turn unmistakably to prescribe the
amount of the tax specifically to be paid for each type of wine and/or
imitation wine so classified and described. The section therefore clearly
and indubitably discloses the legislative will, leaving to the officers
charged with implementation and execution thereof no more than the

administrative function of determining whether a particular kind of wine

or imitation wine falls in one class or another. In the performance of this
function, the internal revenue officers are demonstrably guided by the
sound established practices and technology of the wine industry, an
industry as aged and widely dispersed as one can care to know.
In the case at bar, the Commissioner had the petitioner's wine examined
and analyzed. The petitioner, on the other hand, does not appear to
have made a similar effort. On the bases of the test thus made and the
authoritative and published work on the subject of wines, the
Commissioner ordered the corresponding deficiency assessment to be
issued. Having chosen to engage in the wine trading business, the
petitioner is duty bound to know the kinds of wine it deals in, particularly
insofar as such knowledge may be relevant to the proper appreciation of
its tax liabilities, and cannot take comfort in its pretended ignorance of
what sparkling wine is.
ACCORDINGLY, the decision of the Court of Tax Appeals is affirmed, at
petitioner's cost.
Makalintal, C.J., Fernando, Barredo, Makasiar, Antonio, Esguerra,
Muoz Palma, Aquino, Concepcion, Jr., and Martin, JJ, concur.
Teehankee, J., is on leave.

G.R. No. L-46720

June 28, 1940
WELLS FARGO BANK & UNION TRUST COMPANY, petitionerappellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
De Witt, Perkins and Ponce Enrile for appellant.
Office of the Solicitor-General Ozaeta and Assistant Solicitor-General
Concepcion for appellee.
Ross, Lawrence, Selph and Carrascoso, James Madison Ross and
Federico Agrava as amici curi.
MORAN, J.:
An appeal from a declaratory judgment rendered by the Court of First
Instance of Manila.
Birdie Lillian Eye, wife of Clyde Milton Eye, died on September 16, 1932,
at Los Angeles, California, the place of her alleged last residence and
domicile. Among the properties she left her one-half conjugal share in
70,000 shares of stock in the Benguet Consolidated Mining Company,
an anonymous partnership (sociedad anonima), organized and existing
under the laws of the Philippines, with is principal office in the City of
Manila. She left a will which was duly admitted to probate in California
where her estate was administered and settled. Petitioner-appellant,
Wells Fargo Bank & Union Trust Company, was duly appointed trustee
of the created by the said will. The Federal and State of California's
inheritance taxes due on said shares have been duly paid. Respondent
Collector of Internal Revenue sought to subject anew the aforesaid
shares of stock to the Philippine inheritance tax, to which petitionerappellant objected. Wherefore, a petition for a declaratory judgment was
filed in the lower court, with the statement that, "if it should be held by a
final declaratory judgment that the transfer of the aforesaid shares of
stock is legally subject to the Philippine inheritance tax, the petitioner will
pay such tax, interest and penalties (saving error in computation) without
protest and will not file to recover the same; and the petitioner believes
and t herefore alleges that it should be held that such transfer is not
subject to said tax, the respondent will not proceed to assess and collect
the same." The Court of First Instance of Manila rendered judgment,
holding that the transmission by will of the said 35,000 shares of stock is
subject to Philippine inheritance tax. Hence, this appeal by the petitioner.

Petitioner concedes (1) that the Philippine inheritance tax is not a tax
property, but upon transmission by inheritance (Lorenzo vs. Posadas, 35
Off. Gaz., 2393, 2395), and (2) that as to real and tangible personal
property of a non-resident decedent, located in the Philippines, the
Philippine inheritance tax may be imposed upon their transmission by
death, for the self-evident reason that, being a property situated in this
country, its transfer is, in some way, defendant, for its effectiveness,
upon Philippine laws. It is contended, however, that, as to intangibles,
like the shares of stock in question, their situs is in the domicile of the
owner thereof, and, therefore, their transmission by death necessarily
takes place under his domiciliary laws.
Section 1536 of the Administrative Code, as amended, provides that
every transmission by virtue of inheritance of any share issued by any
corporation of sociedad anonima organized or constituted in the
Philippines, is subject to the tax therein provided. This provision has
already been applied to shares of stock in a domestic corporation which
were owned by a British subject residing and domiciled in Great Britain.
(Knowles vs. Yatco, G. R. No. 42967. See also Gibbs vs. Government of
P. I., G. R. No. 35694.) Petitioner, however, invokes the rule laid down by
the United States Supreme Court in four cases (Farmers Loan & Trust
Company vs. Minnesota, 280 U.S. 204; 74 Law. ed., 371; Baldwin vs.
Missouri, 281 U.S., 586; 74 Law. ed., 1056, Beidler vs. South Carolina
Tax Commission 282 U. S., 1; 75 Law. ed., 131; First National Bank of
Boston vs. Maine, 284 U. S., 312; 52 S. Ct., 174, 76 Law. ed., 313; 77 A.
L. R., 1401), to the effect that an inheritance tax can be imposed with
respect to intangibles only by the State where the decedent was
domiciled at the time of his death, and that, under the due-process
clause, the State in which a corporation has been incorporated has no
power to impose such tax if the shares of stock in such corporation are
owned by a non-resident decedent. It is to be observed, however, that in
a later case (Burnet vs. Brooks, 288 U. S., 378; 77 Law. ed., 844), the
United States Supreme Court upheld the authority of the Federal
Government to impose an inheritance tax on the transmission, by death
of a non-resident, of stock in a domestic (America) corporation,
irrespective of the situs of the corresponding certificates of stock. But it is
contended that the doctrine in the foregoing case is not applicable,
because the due-process clause is directed at the State and not at the
Federal Government, and that the federal or national power of the United

States is to be determined in relation to other countries and their

subjects by applying the principles of jurisdiction recognized in
international relations. Be that as it may, the truth is that the due-process
clause is "directed at the protection of the individual and he is entitled to
its immunity as much against the state as against the national
government." (Curry vs. McCanless, 307 U. S., 357, 370; 83 Law. ed.,
1339, 1349.) Indeed, the rule laid down in the four cases relied upon by
the appellant was predicated on a proper regard for the relation of the
states of the American Union, which requires that property should be
taxed in only one state and that jurisdiction to tax is restricted
accordingly. In other words, the application to the states of the dueprocess rule springs from a proper distribution of their powers and
spheres of activity as ordained by the United States Constitution, and
such distribution is enforced and protected by not allowing one state to
reach out and tax property in another. And these considerations do not
apply to the Philippines. Our status rests upon a wholly distinct basis and
no analogy, however remote, cam be suggested in the relation of one
state of the Union with another or with the United States. The status of
the Philippines has been aptly defined as one which, though a part of the
United States in the international sense, is, nevertheless, foreign thereto
in a domestic sense. (Downes vs. Bidwell, 182 U. S., 244, 341.)
At any rate, we see nothing of consequence in drawing any distinct
between the operation and effect of the due-process clause as it applies
to the individual states and to the national government of the United
States. The question here involved is essentially not one of due-process,
but of the power of the Philippine Government to tax. If that power be
conceded, the guaranty of due process cannot certainly be invoked to
frustrate it, unless the law involved is challenged, which is not, on
considerations repugnant to such guaranty of due process of that of the
equal protection of the laws, as, when the law is alleged to be arbitrary,
oppressive or discriminatory.
Originally, the settled law in the United States is that intangibles have
only one situs for the purpose of inheritance tax, and that such situs is in
the domicile of the decedent at the time of his death. But this rule has, of
late, been relaxed. The maxim mobilia sequuntur personam, upon which
the rule rests, has been described as a mere "fiction of law having its
origin in consideration of general convenience and public policy, and
cannot be applied to limit or control the right of the state to tax property

within its jurisdiction" (State Board of Assessors vs. Comptoir National

D'Escompte, 191 U. S., 388, 403, 404), and must "yield to established
fact of legal ownership, actual presence and control elsewhere, and
cannot be applied if to do so result in inescapable and patent injustice."
(Safe Deposit & Trust Co. vs. Virginia, 280 U. S., 83, 91-92) There is
thus a marked shift from artificial postulates of law, formulated for
reasons of convenience, to the actualities of each case.
An examination of the adjudged cases will disclose that the relaxation of
the original rule rests on either of two fundamental considerations: (1)
upon the recognition of the inherent power of each government to tax
persons, properties and rights within its jurisdiction and enjoying, thus,
the protection of its laws; and (2) upon the principle that as o intangibles,
a single location in space is hardly possible, considering the multiple,
distinct relationships which may be entered into with respect thereto. It is
on the basis of the first consideration that the case of Burnet vs. Brooks,
supra, was decided by the Federal Supreme Court, sustaining the power
of the Government to impose an inheritance tax upon transmission, by
death of a non-resident, of shares of stock in a domestic (America)
corporation, regardless of the situs of their corresponding certificates;
and on the basis of the second consideration, the case of Cury vs.
McCanless, supra.
In Burnet vs. Brooks, the court, in disposing of the argument that the
imposition of the federal estate tax is precluded by the due-process
clause of the Fifth Amendment, held:
The point, being solely one of jurisdiction to tax, involves none of the
other consideration raised by confiscatory or arbitrary legislation
inconsistent with the fundamental conceptions of justice which are
embodied in the due-process clause for the protection of life, liberty, and
property of all persons citizens and friendly aliens alike. Russian
Volunteer Fleet vs. United States, 282 U. S., 481, 489; 75 Law ed., 473,
476; 41 S. Ct., 229; Nicholas vs. Coolidge, 274 U. S., 531; 542, 71 Law
ed., 1184, 1192; 47 S. Ct., 710; 52 A. L. R., 1081; Heiner vs. Donnon,
285 U.S., 312, 326; 76 Law ed., 772, 779; 52 S. Ct., 358. If in the instant
case the Federal Government had jurisdiction to impose the tax, there is
manifestly no ground for assailing it. Knowlton vs. Moore, 178 U.S., 41,
109; 44 Law. ed., 969, 996; 20 S. Ct., 747; MaGray vs. United States,
195 U.S., 27, 61; 49 Law. ed., 78; 97; 24 S. Ct., 769; 1 Ann. Cas., 561;
Flint vs. Stone Tracy Co., 220 U.S., 107, 153, 154; 55 Law. ed., 389,

414, 415; 31 S. Ct., 342; Ann. Cas., 1912B, 1312; Brushaber vs. Union
p. R. Co., 240 U.S., 1, 24; 60 Law. ed., 493, 504; 36 S. Ct., 236; L. R. A.,
1917 D; 414, Ann. Cas, 1917B, 713; United States vs. Doremus, 249 U.
S., 86, 93; 63 Law. ed., 439, 496; 39 S. Ct., 214. (Emphasis ours.)
And, in sustaining the power of the Federal Government to tax properties
within its borders, wherever its owner may have been domiciled at the
time of his death, the court ruled:
. . . There does not appear, a priori, to be anything contrary to the
principles of international law, or hurtful to the polity of nations, in a
State's taxing property physically situated within its borders, wherever its
owner may have been domiciled at the time of his death. . . .
As jurisdiction may exist in more than one government, that is,
jurisdiction based on distinct grounds the citizenship of the owner, his
domicile, the source of income, the situs of the property efforts have
been made to preclude multiple taxation through the negotiation of
appropriate international conventions. These endeavors, however, have
proceeded upon express or implied recognition, and not in denial, of the
sovereign taxing power as exerted by governments in the exercise of
jurisdiction upon any one of these grounds. . . . (See pages 396-397;
399.)
In Curry vs. McCanless, supra, the court, in deciding the question of
whether the States of Alabama and Tennessee may each constitutionally
impose death taxes upon the transfer of an interest in intangibles held in
trust by an Alabama trustee but passing under the will of a beneficiary
decedent domiciles in Tennessee, sustained the power of each State to
impose the tax. In arriving at this conclusion, the court made the
following observations:
In cases where the owner of intangibles confines his activity to the place
of his domicile it has been found convenient to substitute a rule for a
reason, cf. New York ex rel., Cohn vs. Graves, 300 U.S., 308, 313; 81
Law. ed., 666, 670; 57 S. Ct., 466; 108 A. L. R., 721; First Bank Stock
Corp. vs. Minnesota, 301 U. S., 234, 241; 81 Law. ed., 1061, 1065; 57 S.
Ct., 677; 113 A. L. R., 228, by saying that his intangibles are taxed at
their situs and not elsewhere, or perhaps less artificially, by invoking the
maxim mobilia sequuntur personam. Blodgett vs. Silberman, 277 U.S.,
1; 72 Law. ed., 749; S. Ct., 410, supra; Baldwin vs. Missouri, 281 U. S.,
568; 74 Law. ed., 1056; 50 S. Ct., 436; 72 A. L. R., 1303, supra, which
means only that it is the identify owner at his domicile which gives

jurisdiction to tax. But when the taxpayer extends his activities with
respect to his intangibles, so as to avail himself of the protection and
benefit of the laws of another state, in such a way as to bring his person
or properly within the reach of the tax gatherer there, the reason for a
single place of taxation no longer obtains, and the rule even workable
substitute for the reasons may exist in any particular case to support the
constitutional power of each state concerned to tax. Whether we regard
the right of a state to tax as founded on power over the object taxed, as
declared by Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat.,
316; 4 Law. ed., 579, supra, through dominion over tangibles or over
persons whose relationships are source of intangibles rights, or on the
benefit and protection conferred by the taxing sovereignty, or both, it is
undeniable that the state of domicile is not deprived, by the taxpayer's
activities elsewhere, of its constitutional jurisdiction to tax, and
consequently that there are many circumstances in which more than one
state may have jurisdiction to impose a tax and measure it by some or all
of the taxpayer's intangibles. Shares or corporate stock be taxed at the
domicile of the shareholder and also at that of the corporation which the
taxing state has created and controls; and income may be taxed both by
the state where it is earned and by the state of the recipient's domicile.
protection, benefit, and power over the subject matter are not confined to
either state. . . .(p. 1347-1349.)
. . . We find it impossible to say that taxation of intangibles can be
reduced in every case to the mere mechanical operation of locating at a
single place, and there taxing, every legal interest growing out of all the
complex legal relationships which may be entered into between persons.
This is the case because in point of actuality those interests may be too
diverse in their relationships to various taxing jurisdictions to admit of
unitary treatment without discarding modes of taxation long accepted
and applied before the Fourteen Amendment was adopted, and still
recognized by this Court as valid. (P. 1351.)
We need not belabor the doctrines of the foregoing cases. We believe,
and so hold, that the issue here involved is controlled by those doctrines.
In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled therein. And besides, the
certificates of stock have remained in this country up to the time when
the deceased died in California, and they were in possession of one
Syrena McKee, secretary of the Benguet Consolidated Mining Company,

to whom they have been delivered and indorsed in blank. This

indorsement gave Syrena McKee the right to vote the certificates at the
general meetings of the stockholders, to collect dividends, and dispose
of the shares in the manner she may deem fit, without prejudice to her
liability to the owner for violation of instructions. For all practical
purposes, then, Syrena McKee had the legal title to the certificates of
stock held in trust for the true owner thereof. In other words, the owner
residing in California has extended here her activities with respect to her
intangibles so as to avail herself of the protection and benefit of the
Philippine laws. Accordingly, the jurisdiction of the Philippine
Government to tax must be upheld.
Judgment is affirmed, with costs against petitioner-appellant.
Avancea, C.J., Imperial, Diaz and Concepcion, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent
British Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on
certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent
British Overseas Airways Corporation (BOAC) for the fiscal years 1959
to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and
existing under the laws of the United Kingdom It is engaged in the
international airline business and is a member-signatory of the Interline
Air Transport Association (IATA). As such it operates air transportation
service and sells transportation tickets over the routes of the other airline
members. During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board
(CAB), except for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the
Philippines, although during the period covered by the assessments, it

maintained a general sales agent in the Philippines Wamer Barnes

and Company, Ltd., and later Qantas Airways which was responsible
for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for
brevity) assessed BOAC the aggregate amount of P2,498,358.56 for
deficiency income taxes covering the years 1959 to 1963. This was
protested by BOAC. Subsequent investigation resulted in the issuance of
a new assessment, dated 16 January 1970 for the years 1959 to 1967 in
the amount of P858,307.79. BOAC paid this new assessment under
protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of
P858,307.79, which claim was denied by the CIR on 16 February 1972.
But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and
praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes,
interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the
aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of
Section 46 (requiring the filing of corporation returns) penalized under
Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972,
however, the CIR not only denied the BOAC request for refund in the
First Case but also re-issued in the Second Case the deficiency income
tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code.
BOAC's request for reconsideration was denied by the CIR on 24 August
1973. This prompted BOAC to file the Second Case before the Tax Court
praying that it be absolved of liability for deficiency income tax for the
years 1969 to 1971.
This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision
reversing the CIR. The Tax Court held that the proceeds of sales of
BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in
question, do not constitute BOAC income from Philippine sources "since
no service of carriage of passengers or freight was performed by BOAC
within the Philippines" and, therefore, said income is not subject to
Philippine income tax. The CTA position was that income from
transportation is income from services so that the place where services
are rendered determines the source. Thus, in the dispositive portion of
its Decision, the Tax Court ordered petitioner to credit BOAC with the
sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal
years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax
Court.
The Solicitor General, in representation of the CIR, has aptly defined the
issues, thus:
1. Whether or not the revenue derived by private
respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources,
and, accordingly, taxable.
2. Whether or not during the fiscal years in question
BOAC s a resident foreign corporation doing business in
the Philippines or has an office or place of business in
the Philippines.
3. In the alternative that private respondent may not be
considered a resident foreign corporation but a nonresident foreign corporation, then it is liable to Philippine
income tax at the rate of thirty-five per cent (35%) of its
gross income received from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in

trade or business within the Philippines or having an
office or place of business therein.
(i) The term "non-resident foreign corporation" applies to
a foreign corporation not engaged in trade or business
within the Philippines and not having any office or place
of business therein
It is our considered opinion that BOAC is a resident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging
in" or "transacting" business. Each case must be judged in the light of its
peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment of
a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general sales
agent, from 1959 to 1971, "was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip into series of trips each trip in
the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services
rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those
activities were in exercise of the functions which are normally incident to,
and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no
doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its
total net income received in the preceding taxable year from all sources
within the Philippines. 5

Sec. 24. Rates of tax on corporations. ...

The records show that the Philippine gross income of BOAC for the
fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7

(b) Tax on foreign corporations. ...

Did such "flow of wealth" come from "sources within the Philippines",
(2) Resident corporations. A corporation organized,
authorized, or existing under the laws of any foreign
country, except a foreign fife insurance company,
engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this
section upon the total net income received in the
preceding taxable year from all sources within the
Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue
from sales of tickets by BOAC in the Philippines constitutes income from
Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income
derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form
paid, or from profession, vocations, trades,business,
commerce, sales, or dealings in property, whether real
or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents,
dividends, securities, or thetransactions of any business
carried on for gain or profile, or gains, profits,
and income derived from any source whatever (Sec.
29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from
sales of transport documents. "The words 'income from any source
whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws." Income
means "cash received or its equivalent"; it is the amount of money
coming to a person within a specific time ...; it means something distinct
from principal or capital. For, while capital is a fund, income is a flow. As
used in our income tax law, "income" refers to the flow of wealth. 6

The source of an income is the property, activity or service that produced

the income. 8 For the source of income to be considered as coming from
the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth
should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a
common carrier, it constitutes the contract between the ticket-holder and
the carrier. It gives rise to the obligation of the purchaser of the ticket to
pay the fare and the corresponding obligation of the carrier to transport
the passenger upon the terms and conditions set forth thereon. The
ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid
contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross
income from sources within the Philippines, namely: (1) interest, (21)
dividends, (3) service, (4) rentals and royalties, (5) sale of real property,
and (6) sale of personal property, does not mention income from the sale
of tickets for international transportation. However, that does not render it
less an income from sources within the Philippines. Section 37, by its
language, does not intend the enumeration to be exclusive. It merely
directs that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will show
that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived
from transportation is income for services, with the result that the place
where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines,

the income derived is from sources without the Philippines and,

therefore, not taxable under our income tax laws. The Tax Court upholds
that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income taxation.
Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the "source"; and the
source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases
were sold in the Philippines and the revenue therefrom was derived from
a activity regularly pursued within the Philippines. business a And even if
the BOAC tickets sold covered the "transport of passengers and cargo to
and from foreign cities", 12 it cannot alter the fact that income from the
sale of tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the income
herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein
apply only to the fiscal years covered by the questioned deficiency
income tax assessments in these cases, or, from 1959 to 1967, 1968-69
to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on
24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall
pay a tax of 2- per cent on their cross Philippine
billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a
statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue
realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of
passage documents sold therein, whether for
passenger, excess baggage or mail provided the cargo
or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are taxed on

their income from Philippine sources. The 2- % tax on gross Philippine
billings is an income tax. If it had been intended as an excise or
percentage tax it would have been place under Title V of the Tax Code
covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for
lack of merit by this Court of the appeal inJAL vs. Commissioner of
Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case was
to the effect that the mere sale of tickets, unaccompanied by the physical
act of carriage of transportation, does not render the taxpayer therein
subject to the common carrier's tax. As elucidated by the Tax Court,
however, the common carrier's tax is an excise tax, being a tax on the
activity of transporting, conveying or removing passengers and cargo
from one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of
the case under consideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever form
derived from any source." Since the two cases treat of a different subject
matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals
is hereby SET ASIDE. Private respondent, the British Overseas Airways
Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to
1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972
for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is
hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22074

April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF
TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts, on various dates, with foreign
insurance companies not doing business in the Philippines namely:
Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas
Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio
Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has originally underwritten in the
Philippines, in consideration for the assumption by the latter of liability on
an equivalent portion of the risks insured. Said reinsurrance contracts
were signed by Philippine Guaranty Co., Inc. in Manila and by the
foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers'
liability simultaneous with that of Philippine Guaranty Co., Inc. under the
original insurance. Philippine Guaranty Co., Inc. was required to keep a
register in Manila where the risks ceded to the foreign reinsurers where
entered, and entry therein was binding upon the reinsurers. A
proportionate amount of taxes on insurance premiums not recovered

from the original assured were to be paid for by the foreign reinsurers.
The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the
Philippine Guaranty Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences between the parties
under the reinsurance contracts were to be arbitrated in Manila.
Philippine Guaranty Co., Inc. and Swiss Reinsurance Company
stipulated that their contract shall be construed by the laws of the
Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty
Co., Inc. ceded to the foreign reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .

P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . .

721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its
gross income when it file its income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on them. Consequently, per
letter dated April 13, 1959, the Commissioner of Internal Revenue
assessed against Philippine Guaranty Co., Inc. withholding tax on the
ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .

P768,580.00

Withholding tax due thereon at 24% . . . . . . . .

P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
1954

46,114.00
100.00

P230,673.00
==========

Gross premium per investigation . . . . . . . . . .

P780.880.68

Withholding tax due thereon at 24% . . . . . . . .

P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .

P184,411.00

Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .

100.00

P234,364.00
==========

Philippine Guaranty Co., Inc., protested the assessment on the ground

that reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are not subject to withholding tax. Its protest
was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this
dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00
as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against
petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
Commissioner of Internal Revenue's assessment for withholding tax on
the reinsurance premiums ceded in 1953 and 1954 to the foreign
reinsurers.
Petitioner maintain that the reinsurance premiums in question did not
constitute income from sources within the Philippines because the
foreign reinsurers did not engage in business in the Philippines, nor did
they have office here.
The reinsurance contracts, however, show that the transactions or
activities that constituted the undertaking to reinsure Philippine Guaranty

Co., Inc. against loses arising from the original insurances in the
Philippines were performed in the Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability of Philippine
Guaranty Co., Inc. under the original insurances. Philippine Guaranty
Co., Inc. kept in Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the foreign resinsurers,
localizing in the Philippines the actual cession of the risks and premiums
and assumption of the reinsurance undertaking by the foreign reinsurers.
Taxes on premiums imposed by Section 259 of the Tax Code for the
privilege of doing insurance business in the Philippines were payable by
the foreign reinsurers when the same were not recoverable from the
original assured. The foreign reinsurers paid Philippine Guaranty Co.,
Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of the
affairs of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were
subject to arbitration in the City of Manila. All the reinsurance contracts,
except that with Swiss Reinsurance Company, were signed by Philippine
Guaranty Co., Inc. in the Philippines and later signed by the foreign
reinsurers abroad. Although the contract between Philippine Guaranty
Co., Inc. and Swiss Reinsurance Company was signed by both parties in
Switzerland, the same specifically provided that its provision shall be
construed according to the laws of the Philippines, thereby manifesting a
clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their
income from sources within the Philippines. The word "sources" has
been interpreted as the activity, property or service giving rise to the
income. 1 The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc., against liability for loss under original insurances.
Such undertaking, as explained above, took place in the Philippines.
These insurance premiums, therefore, came from sources within the
Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their
place of activity. Business should not be continuity and progression of
transactions 2 while activity may consist of only a single transaction. An
activity may occur outside the place of business. Section 24 of the Tax
Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines. What is

controlling, therefore, is not the place of business but the place

ofactivity that created an income.

from the total amount ceded. And since it did not remit any amount to its
foreign insurers in 1953 and 1954, no withholding tax was due.

Petitioner further contends that the reinsurance premiums are not

income from sources within the Philippines because they are not
specifically mentioned in Section 37 of the Tax Code. Section 37 is not
an all-inclusive enumeration, for it merely directs that the kinds of income
mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not
be considered likewise.1wph1.t

The pertinent section of the Tax Code States:

The power to tax is an attribute of sovereignty. It is a power emanating

from necessity. It is a necessary burden to preserve the State's
sovereignty and a means to give the citizenry an army to resist an
aggression, a navy to defend its shores from invasion, a corps of civil
servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities
and protection which a government is supposed to provide. Considering
that the reinsurance premiums in question were afforded protection by
the government and the recipient foreign reinsurers exercised rights and
privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the
rulings of the Commissioner of Internal Revenue requiring no withholding
of the tax due on the reinsurance premiums in question relieved it of the
duty to pay the corresponding withholding tax thereon. This defense of
petitioner may free if from the payment of surcharges or penalties
imposed for failure to pay the corresponding withholding tax, but it
certainly would not exculpate if from liability to pay such withholding tax
The Government is not estopped from collecting taxes by the mistakes
or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded
to foreign reinsurers not doing business in the Philippines are subject to
withholding tax under Section 53 and 54 of the Tax Code, suffice it to
state that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed
from the amount actually remitted to the foreign reinsurers instead of

Sec. 54. Payment of corporation income tax at source. In the

case of foreign corporations subject to taxation under this Title
not engaged in trade or business within the Philippines and not
having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and
upon the same items as is provided in Section fifty-three a tax
equal to twenty-four per centum thereof, and such tax shall be
returned and paid in the same manner and subject to the same
conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general
copartnerships (compaias colectivas), in what ever capacity
acting, including lessees or mortgagors of real or personal
property, trustees acting in any trust capacity, executors,
administrators, receivers, conservators, fiduciaries, employers,
and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or
payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual or periodical
gains, profits, and income of any nonresident alien individual,
not engaged in trade or business within the Philippines and not
having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct
and withhold from such annual or periodical gains, profits, and
income a tax equal to twelve per centum thereof: ProvidedThat
no deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such
corporation is engaged in trade or business within the
Philippines or has an office or place of business therein, and (2)
more than eighty-five per centum of the gross income of such
corporation for the three-year period ending with the close of its
taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in
existence)was derived from sources within the Philippines as

determined under the provisions of section thirtyseven: Provided, further, That the Collector of Internal Revenue
may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known
to the withholding agent.
The above-quoted provisions allow no deduction from the income therein
enumerated in determining the amount to be withheld. According, in
computing the withholding tax due on the reinsurance premium in
question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine
Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of
Internal Revenue the sums of P202,192.00 and P173,153.00, or a total
amount of P375,345.00, as withholding tax for the years 1953 and 1954,
respectively. If the amount of P375,345.00 is not paid within 30 days
from the date this judgement becomes final, there shall be collected a
surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a
month from the date of delinquency to the date of payment, provided that
the maximum amount that may be collected as interest shall not exceed
the amount corresponding to a period of three (3) years. With costs
againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon and Regala, JJ., concur.
Makalintal and Zaldivar, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila

Thus, it would seem that under the tax ordinance sales of matches
consummated outside of the city are taxable as long as the matches sold
are taken from the company's stock stored in Cebu City.

SECOND DIVISION

The Philippine Match Co., Ltd., whose principal office is in Manila, is

engaged in the manufacture of matches. Its factory is located at Punta,
Sta. Ana, Manila. It ships cases or cartons of matches from Manila to its
branch office in Cebu City for storage, sale and distribution within the
territories and districts under its Cebu branch or the whole VisayasMindanao region. Cebu City itself is just one of the eleven districts under
the company's Cebu City branch office.

G.R. No. L-30745 January 18, 1978

PHILIPPINE MATCH CO., LTD., plaintiff-appellant,
vs.
THE CITY OF CEBU and JESUS E. ZABATE, Acting City
Treasurer, defendants-appellees.
Pelaez, Pelaez & Pelaez for appellant.
Nazario Pacquiao, Metudio P. Belarmino & Ceferino Jomuad for
appellees.

The company does not question the tax on the matches of matches
consummated in Cebu City, meaning matches sold and delivered within
the city.

AQUINO, J.:

It assails the legality of the tax which the city treasurer collected on outof- town deliveries of matches, to wit: (1) sales of matches booked and
paid for in Cebu City but shipped directly to customers outside of the
city; (2) transfers of matches to newsmen assigned to different agencies
outside of the city and (3) shipments of matches to provincial customers
pursuant to salesmen's instructions.

This case is about the legality of the tax collected by the City of Cebu on
sales of matches stored by the Philippine Match Co., Ltd. in Cebu City
but delivered to customers outside of the City.

The company paid under protest to the city t the sum of P12,844.61 as
one percent sales tax on those three classes of out-of-town deliveries of
matches for the second quarter of 1961 to the second quarter of 1963.

Ordinance No. 279 of Cebu City (approved by the mayor on March 10,
1960 and also approved by the provincial board) is "an ordinance
imposing a quarterly tax on gross sales or receipts of merchants,
dealers, importers and manufacturers of any commodity doing business"
in Cebu City. It imposes a sales tax of one percent (1%) on the gross
sales, receipts or value of commodities sold, bartered, exchanged or
manufactured in the city in excess of P2,000 a quarter.

In paying the tax the company accomplished the verified forms furnished
by the city treasurers office. It submitted a statement indicating the four
kinds of transactions enumerated above, the total sales, and a summary
of the deliveries to the different agencies, as well as the invoice
numbers, names of customers, the value of the sales, the transfers of
matches to salesmen outside of Cebu City, and the computation of
taxes.

Section 9 of the ordinance provides that, for purposes of the tax, "all
deliveries of goods or commodities stored in the City of Cebu, or if not
stored are sold" in that city, "shall be considered as sales" in the city and
shall be taxable.

Sales of matches booked and paid for in Cebu City but shipped directly
to customers outside of the city refer to orders for matches made in the
city by the company's customers, by means of personal or phone calls,
for which sales invoices are issued, and then the matches are shipped
from the bodega in the city, where the matches had been stored, to the
place of business or residences of the customers outside of the city, duly

covered by bills of lading The matches are used and consumed outside
of the city.
Transfers of matches to salesmen assigned to different agencies outside
of the city embrace equipments of matches from the branch office in the
city to the salesmen (provided with panel cars) assigned within the
province of Cebu and in the different districts in the Visayas and
Mindanao under the jurisdiction or supervision of the Cebu City branch
office. The shipments are covered by bills of lading. No sales invoices
whatever are issued. The matches received by the salesmen constitute
their direct cash accountability to the company. The salesmen sell the
matches within their respective territories. They issue cash sales
invoices and remit the proceeds of the sales to the company's Cebu
branch office. The value of the unsold matches constitutes their stock
liability. The matches are used and consumed outside of the city.
Shipments of matches to provincial customers pursuant to newsmens
instructions embrace orders, by letter or telegram sent to the branch
office by the company's salesmen assigned outside of the city. The
matches are shipped from the company's bodega in the city to the
customers residing outside of the city. The salesmen issue the sales
invoices. The proceeds of the sale, for which the salesmen are
accountable are remitted to the branch office. As in the first and seconds
of transactions above-mentioned, the matches are consumed and used
outside of the city.
The company in its letter of April 15, 1961 to the city treasurer sought the
refund of the sales tax paid for out-of-town deliveries of matches. It
invoked Shell Company of the Philippines, Ltd. vs. Municipality of
Sipocot, Camarines Sur, 105 Phil. 1263. In that case sales of oil and
petroleum products effected outside the territorial limits of Sipocot, were
held not to be subject to the tax imposed by an ordinance of that
municipality.
The city treasurer denied the request. His stand is that under section 9 of
the ordinance all out-of-town deliveries of latches stored in the city are
subject to the sales tax imposed by the ordinance.

On August 12, 1963 the company filed the complaint herein, praying that
the ordinance be d void insofar as it taxed the deliveries of matches
outside of Cebu City, that the city be ordered to refund to the company
the said sum of P12,844.61 as excess sales tax paid, and that the city
treasurer be ordered to pay damages.
After hearing, the trial court sustained the tax on the sales of matches
booked and paid for in Cebu City although the matches were shipped
directly to customers outside of the city. The lower court held that the
said sales were consummated in Cebu City because delivery to the
carrier in the city is deemed to be a delivery to the customers outside of
the city.
But the trial court invalidated the tax on transfers of matches to
salesmen assigned to different agencies outside of the city and on
shipments of matches to provincial customers pursuant to the
instructions of the newsmen It ordered the defendants to refund to the
plaintiff the sum of P8,923.55 as taxes paid out the said out-of-town
deliveries with legal rate of interest from the respective dates of
payment.
The trial court characterized the tax on the other two transactions as a
"storage tax" and not a sales tax. It assumed that the sales were
consummated outside of the city and, hence, beyond the city's taxing
power.
The city did not appeal from that decision. The company appealed from
that portion of the decision upholding the tax on sales of matches to
customers outside of the city but which sales were booked and paid for
in Cebu City, and also from the dismissal of its claim for damages
against the city treasurer.
The issue is whether the City of Cebu can tax sales of matches which
were perfected and paid for in Cebu City but the matches were delivered
to customers outside of the City.
We hold that the appeal is devoid of merit bemuse the city can validly tax
the sales of matches to customers outside of the city as long as the
orders were booked and paid for in the company's branch office in the
city. Those matches can be regarded as sold in the city, as contemplated
in the ordinance, because the matches were delivered to the carrier in

Cebu City. Generally, delivery to the carrier is delivery to the buyer (Art.
1523, Civil Code; Behn, Meyer & Co. vs. Yangco, 38 Phil. 602).

the provisions of the National International Revenue

Code;

A different interpretation would defeat the tax ordinance in question or

encourage tax evasion through the simple expedient of arranging for the
delivery of the matches at the out. skirts of the city through the purchase
were effected and paid for in the company's branch office in the city.

Provided, however, That no city, municipality or

municipal districts may levy or impose any of the
following: (here follows an enumeration of internal
revenue taxes)

The municipal board of Cebu City is empowered "to provide for the levy
and collection of taxes for general and purposes in accordance with law"
(Sec. 17[a], Commonwealth Act No. 58; Sec. 31[l], Rep. Act No. 3857,
Revised Charter of Cebu city).
The taxing power validly delegated to cities and municipalities is defined
in the Local Autonomy Act, Republic Act No. 2264 (Pepsi-Cola Bottling
Co. of the Philippines, Inc. vs. Municipality of Tanauan, Leyte, L-31156,
February 27, 1976, 69 SCRA 460), which took effect on June 19, 1959
and which provides:
SEC. 2. Taxation. Any provision of law to the contrary
notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose
municipal license taxes or fees upon persons engaged
in any occupation or business, or exercising privileges in
chartered cities,. municipalities or municipal districts by
requiring them to secure licenses at rates fixed by the
municipal board or city council of the city, the municipal
council of the municipality, or the municipal district
council of the municipal district; to collect fees and
charges for services rendered by the city, municipality or
municipal district; to regulate and impose reasonable
fees for services rendered in connection with any
business, profession or occupation being conducted
within the city, municipality or municipal district and
otherwise to levy for public purposes, just and uniform
taxes, licenses or fees;
Provided, That municipalities and municipal districts
shall, in no case, impose any percentage tax on sales or
other taxes in any form based thereon nor impose taxes
on articles subject to specific tax, except gasoline, under

xxx xxx xxx *

Note that the prohibition against the imposition of percentage taxes
(formerly provided for in section 1 of Commonwealth Act No. 472) refers
to municipalities and municipal districts but not to chartered cities. (See
Local Tax Code, P.D. No. 231. Marinduque Iron Mines Agents, Inc. vs.
Municipal Council of Hinabangan Samar, 120 Phil. 413; Ormoc Sugar
Co., Inc. vs. Treasurer of Ormoc City, L-23794, February 17, 1968, 22
SCRA 603).
Note further that the taxing power of cities, municipalities and municipal
districts may be used (1) "upon any person engaged in any occupation
or business, or exercising any privilege" therein; (2) for services
rendered by those political subdivisions or rendered in connection with
any business, profession or occupation being conducted therein, and (3)
to levy, for public purposes, just and uniform taxes, licenses or fees (C.
N. Hodges vs. Municipal Board of the City of Iloilo, 117 Phil. 164, 167.
See sec. 31[251, Revised Charter of Cebu City).
Applying that jurisdictional test to the instant case, it is at once obvious
that sales of matches to customers outside oil Cebu City, which sales
were booked and paid for in the company's branch office in the city, are
subject to the city's taxing power. The instant case is easily
distinguishable from the Shell Company case where the price of the oil
sold was paid outside of the municipality of Sipocot, the entity imposing
the tax.
On the other hand, the ruling in Municipality of Jose Panganiban,
Province of Camarines Norte vs. Shell Company of the Philippines, Ltd.,
L-18349, July 30, 1966, 17 SCRA 778 that the place of delivery
determines the taxable situs of the property to be taxed cannot properly
be invoked in this case. Republic Act No. 1435, the law which enabled
the Municipality of Jose Panganiban to levy the sales tax involved in that
case, specifies that the tax may be levied upon oils "distributed within

the limits of the city or municipality", meaning the place where the oils
were delivered. That feature of the Jose Panganiban case distinguished
it from this case.
The sales in the instant case were in the city and the matches sold were
stored in the city. The fact that the matches were delivered to customers,
whose places of business were outside of the city, would not place those
sales beyond the city's taxing power. Those sales formed part of the
merchandising business being assigned on by the company in the city.
In essence, they are the same as sales of matches fully consummated in
the city.
Furthermore, because the sellers place of business is in Cebu City, it
cannot be sensibly argued that such sales should be considered as
transactions subject to the taxing power of the political subdivisions
where the customers resided and accepted delivery of the matches sold.
The company in its second assignment of error contends that the trial
court erred in not ordering defendant acting city treasurer to pay
exemplary damages of P20,000 and attorney's fees.
The claim for damages is predicated on articles 19, 20, 21, 27 and 2229
of the Civil Code. It is argued that the city treasurer refused and
neglected without just cause to perform his duty and to act with justice
and good faith. The company faults the city treasurer for not following
the opinion of the city fiscals, as legal adviser of the city, that all out-oftown deliveries of matches are not subject to sales tax because such
transactions were effected outside of the city's territorial limits.
In reply, it is argued for defendant city treasurer that in enforcing the tax
ordinance in question he was simply complying with his duty as collector
of taxes (Sec. 50, Revised Charter of Cebu City). Moreover, he had no
choice but to enforce the ordinance because according to section 357 of
the Revised Manual of Instruction to Treasurer's "a tax ordinance win be
enforced in accordance with its provisions" until d illegal or void by a
competent court, or otherwise revoked by the council or board from
which it originated.

Furthermore, the Secretary of Finance had reminded the city treasurer

that a tax ordinance approved by the provincial board is operative and
must be enforced without prejudice to the right of any affected taxpayer
to assail its legality in the judicial forum. The fiscals opinion on the
legality of an ordinance is merely advisory and has no binding effect.
Article 27 of the Civil Code provides that "any person suffering material
or moral lose because a public servant or employee refuses or neglects,
without just cause, to perform his official duty may file an action for
damages and other relief against the latter, without prejudice to any
disciplinary administrative action that may be taken."
Article 27 presupposes that the refuse or omission of a public official is
attributable to malice or inexcusable negligence. In this case, it cannot
be said that the city treasurer acted wilfully or was grossly t in not
refunding to the plaintiff the taxes which it paid under protest on out-oftown sales of matches.
The record clearly reveals that the city treasurer honestly believed that
he was justified under section 9 of the tax ordinance in collecting the
sales tax on out-of-town deliveries, considering that the company's
branch office was located in Cebu City and that all out-of-town purchase
order for matches were filled up by the branch office and the sales were
duly reported to it.
The city treasurer acted within the scope of his authority and in
consonance with his bona fide interpretation of the tax ordinance. The
fact that his action was not completely sustained by the courts would not
him liable for We have upheld his act of taxing sales of matches booked
and paid for in the city.
"As a rule, a public officer, whether judicial ,quasi-judicial or executive, is
not y liable to one injured in consequence of an act performed within the
scope of his official authority, and in the line of his official duty." "Where
an officer is invested with discretion and is empowered to exercise his
judgment in matters brought before him. he is sometimes called a quasijudicial officer, and when so acting he is usually given immunity from
liability to persons who may be injured as the result or an erroneous or
mistaken decision, however erroneous his judgment may be. provided
the acts complained of are done within the scope of the officer's
authority and without malice, or corruption." (63 Am Jur 2nd 798, 799

cited in Philippine Racing Club, Inc. vs. Bonifacio, 109 Phil. 233, 240241).
It has been held that an erroneous interpretation of an ordinance does
not constitute nor does it amount to bad faith that would entitle an
aggrieved party to an award for damages (Cabungcal vs. Cordovan 120
Phil. 667, 572-3). That salutary in addition to moral temperate, liquidated
or compensatory damages (Art. 2229, Civil Code). Attorney's fees are
being claimed herein as actual damages. We find that it would not be
just and equitable to award attorney's fees in this case against the City
of Cebu and its (See Art. 2208, Civil Code).

Separate Opinions

BARREDO, J., concurring:

Anent appellant's claim for damages, it should be happy the trial court
did not the city fully, which in my opinion, could have been possible.

WHEREFORE, the trial court's judgment is affirmed. No costs.

SO ORDERED.

Separate Opinions

Fernando (Chairman), Antonio and Concepcion, Jr., JJ., concur.

BARREDO, J., concurring:

Santos, J., is on leave.

Anent appellant's claim for damages, it should be happy the trial court
did not the city fully, which in my opinion, could have been possible.