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.

Facts:

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.

From 1959 to 1972, except for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit by the CAB, BOAC had no landing rights
for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to
or from the Philippines but maintained a general sales agent in the Philippines - Warner
Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC
tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed
deficiency income taxes against BOAC.

Issues:

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 is a resident foreign
corporation doing business in the Philippines or has an office or place of business
in the Philippines.
Rulings:

1. The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The 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.

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. Unquestionably, the passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived from an activity regularly
pursued within the Philippines. And, even if the BOAC tickets sold covered the
"transport of passengers and cargo to and from foreign cities", 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.

2. BOAC is a resident foreign corporation. 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. BOAC, during the periods covered by
the subject - assessments, maintained a general sales agent in the Philippines. That
general sales agent was engaged in selling and issuing tickets, among others. Such
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.

SECOND DIVISION
G.R. No. 195909 : September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ST. LUKE'S
MEDICAL CENTER, INC., Respondent.
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.

Facts:

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-
profit corporation. The Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency
taxes amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-
added tax, withholding tax on compensation and expanded withholding tax.

St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section
228 of the NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new
provision intended to amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code
x x x." It is a specific provision which prevails over the general exemption on income tax
granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and
civic organizations promoting social welfare.

The BIR claimed that St. Luke's was actually operating for profit. St. Luke's contended
that the BIR should not consider its total revenues, because its free services to patients
was 65.20% of its 1998 operating income and that making profit per se does not destroy
its income tax exemption.

Issue:

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.

Ruling:

Yes. St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
St. Luke's failed to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits
to its members and such profits are reinvested pursuant to its corporate purposes. As a
proprietary non-profit hospital, St. Luke's is entitled to the preferential tax rate of 10% on
its net income from its for-profit activities. The Court finds that St. Luke's is a corporation
that is not "operated exclusively" for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned.

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary educational
institution" as "any private school maintained and administered by private individuals or
groups" with a government permit. "Non-profit" means no net income or asset accrues to
or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes.
This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property "actually, directly and exclusively" for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be "organized and operated exclusively" for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be "operated exclusively" for social welfare. If a tax exempt charitable
institution conducts "any" activity for profit, such activity is not tax exempt even as its
not-for-profit activities remain tax exempt.

EN BANC
G.R. No. 95022 March 23, 1992
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL
RETIREMENT PLAN, represented by its Trustee-Director, respondents.

Facts:
GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement,
pension, disability and death benefits to its employees. As such, it was exempt from
income tax.

GCL made investments and earned interest income from which was withheld the fifteen
per centum (15%) final withholding tax. GCL filed with CIR a claim for refund for the
amounts withheld. GCL disagreed with the collection of the 15% final withholding tax
from the interest income as it is an entity fully exempt from income tax.

The request for refund was denied. GCL elevated the matter to the CTA, which ruled in
favor of GCL, holding that employees' trusts are exempt from the 15% final withholding
tax on interest income and ordering a refund of the tax withheld.

Issue:

Whether or not GCL is exempt from the final withholding tax on interest income from
money placements and purchase of treasury bills required by Pres. Decree No. 1959.

Ruling:

Yes. GCL Plan was qualified as exempt from income tax by the Commissioner of Internal
Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far as
employees' trusts are concerned, Sec. 1 of RA No. 4917 should be taken in relation to then
Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No.
1983, supra, which took effect on 22 June 1957. This provision specifically exempted
employee's trusts from income tax.

Employees' trusts or benefit plans normally provide economic assistance to employees

upon the occurrence of certain contingencies, particularly, old age retirement, death,
sickness, or disability. It provides security against certain hazards to which members of
the Plan may be exposed. It is an independent and additional source of protection for the
working group. What is more, it is established for their exclusive benefit and for no other
purpose.

There can be no denying either that the final withholding tax is collected from income in
respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax
Code). The application of the withholdings system to interest on bank deposits or yield
from deposit substitutes is essentially to maximize and expedite the collection
of income taxes by requiring its payment at the source. If an employees' trust like the GCL
enjoys a tax-exempt status from income, we see no logic in withholding a certain
percentage of that income which it is not supposed to pay in the first place.

G.R. No. L-54108 January 17, 1984

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS CO.
(PHILIPPINE BRANCH), respondents.

Facts:

Smith Kline and French Overseas Company, a multinational firm domiciled in

Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is engaged in
the importation, manufacture and sale of pharmaceuticals, drugs and chemicals.

In its 1971 original ITR, Smith Kline declared a net taxable income of P1,489,277 and paid
P511,247 as tax due. Among the deductions claimed from gross income was P501+k as its
share of the head office overhead expenses. However, there was an overpayment of
P324,255 "arising from underdeduction of home office overhead" in its amended return.
It made a formal claim for the refund of the alleged overpayment.

Smith Kline later received from its international independent auditors an authenticated
certification to the effect that the Philippine share in the unallocated overhead expenses
of the main office for the year was significantly lower. By reason of the new adjustment,
Smith Kline's tax liability was greatly reduced from P511,247 to P186,992 resulting in an
overpayment of P324,255. Without awaiting the action of the Commissioner of Internal
Revenue on its claim, Smith Kline filed a petition for review with the CTA. The CTA
ordered the CIR to refund the overpayment or grant a tax credit to Smith Kline. The
Commissioner appealed to the SC.

Issue:

Whether or not Smith Kline is entitled for the refund or grant of tax credit for the
overpayment.

Ruling:

Yes, Smith Kline is entitled. Smith Kline's amended 1971 return is in conformity with the
law and regulations. The Tax Court correctly held that the refund or credit of the resulting
overpayment is in order.

Under section 37(b) of the Revenue Code and section 160 of R.R. No. 2, Smith Kline can
claim as its deductible share a ratable part of such expenses based upon the ratio of the
local branch's gross income to the total gross income, worldwide, of the multinational
corporation.

The governing law is found in section 37 of the old National Internal Revenue Code,
Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the
National Internal Revenue Code of 1977 and which reads:

SEC. 37. Income from sources within the Philippines.

xxx xxx xxx
(b) Net income from sources in the Philippines. From the items of gross
income specified in subsection (a) of this section there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated
thereto and a ratable part of any expenses, losses, or other deductions
which cannot definitely be allocated to some item or class of gross income.
The remainder, if any, shall be included in full as net income from sources
within the Philippines.
xxx xxx xxx
Revenue Regulations No. 2 of the Department of Finance contains the following
provisions on the deductions to be made to determine the net income from Philippine
sources:

SEC. 160. Apportionment of deductions. From the items specified in

section 37(a), as being derived specifically from sources within the
Philippines there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of
any other expenses, losses or deductions which cannot definitely be
allocated to some item or class of gross income. The remainder shall be
included in full as net income from sources within the Philippines. The
ratable part is based upon the ratio of gross income from sources within the
Philippines to the total gross income.

Where an expense is clearly related to the production of Philippine-derived income or to

Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the
Philippines), that expense can be deducted from the gross income acquired in the
Philippines without resorting to apportionment.

The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which direct benefit its branches all
over the world, including the Philippines, fall under a different category however. These
are items which cannot be definitely allocated or Identified with the operations of the
Philippine branch.

EN BANC
G.R. No. L-5896 August 31, 1955
A. SORIANO Y CIA., petitioner-appellant,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

Facts:
Petitioner was engaged in the business of selling surplus goods acquired from the Foreign
Liquidation Commission pursuant to an agreement with the United States Government.
Part of the surplus goods consisted of tractors which were then in the various U. S.
military bases or depots in the Philippines. The United Africa Co., Ltd. sent its
representative, Gibson, to the Philippines to look into the availability of tractors for sale
in the Philippines. Gibson learned of the petitioner's business and contracted to buy
tractors from the latter, to be delivered f.a.s. (free alongside ship), Manila. Fifty seven (57)
tractors acquired from the petitioner were shipped from the port of Manila to United
Africa Co., Ltd. at Dares Salaem, East Africa.

Issue:

Whether or not petitioner is liable for the payment of percentage or sales tax on its gross
sales of the 57 tractors in question to the United Africa Co., Ltd. under the provisions of
Sec. 186 of the National Internal Revenue Code.

Ruling:

Yes, petitioner is liable. The tax in dispute is one on transaction (sales) and not a tax on
the property sold. The sale of the tractors was consummated in the Philippines, for title
was transferred to the foreign buyer at the pier in Manila; hence, the situs of the sale is
Philippines and it is taxable in this country.

NIRC, Sec. 186. Percentage tax on sales of other articles. There is levied,
assessed and collected once only on every original sale, barter, exchange,
and similar transaction intended to transfer ownership of, or title to, the
articles not enumerated in sections 184 and 185, a tax equivalent to five per
centum of the gross selling price or gross value in money of the articles so
sold, bartered, exchanged, or transferred, such tax to be paid by the
manufacturer, producer, or importer; xxx

Under the above provisions, petitioner's liability would thus depend on first, whether or
not it was an importer of the 57 tractors in question, and second, whether it made an
original sale thereof in the Philippines.
In the cases of Go Chen Tee vs. Meer,1 L-2825 ( July 7, 1950) and Saura Import and
Export Co. vs. Meer,2 L-2927 (February 26, 1951), this Court has already held that one
who acquires title to surplus equipment found in U. S. army bases or installations within
the Philippines by purchase, and then brings them out of those bases or depots, is an
importer, and sales made by him by such surplus goods to the general public are taxable
under sections 185 and 186 of the Tax Code.

The delivery of the tractors was made by the petitioner to the carrier f.a.s. Manila. The
rule is that where the contract is to deliver goods f.a.s, the property passes on delivery at
the wharf or the dock (II Williston on Sales, pp. 120-121; 46 Am. Jur. 608-609). Otherwise
stated, delivery to the carrier is delivery to the buyer, (Behn, Meyer & Co., Ltd. vs. Yangco,
38 Phil., 602; 46 Am. Jur. 605). True that this rule yields to evidence of a contrary intent
between the parties, but there is here no proof to show that petitioner and its foreign buyer
intended otherwise, that is, that delivery and the passing of title to its buyer should take
place right in the army bases where the tractors were located.

The law subjects to the payment of the sales tax not to the buyer who intends to export
what he buys, but the seller, because such sale is domestic and therefore liable for the
payment of sales tax in this country.

EN BANC
June 30, 1987
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Facts:

The National Development Company (NDC) entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going vessels and
unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14)
promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-
going vessels purchased and acquired by it from the Japanese corporations, including the
interest on the principal sum at the rate of five per cent (5%) per annum.. The vessels
were eventually completed and delivered to the NDC in Tokyo. The NDC remitted to the
shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of
the purchase price. No tax was withheld. The Commissioner then held the NDC liable on
such tax in the total sum of P5,115,234.74.

Issue:

Whether or not NDC is liable for its failure to withhold the income tax on interest due
from the Japanese shipbuilders.

Ruling:

Yes. The petitioner was remiss in the discharge of its obligation as the withholding agent
of the government and so should be held liable for its omission.

The Japanese shipbuilders were liable to tax on the interest remitted to them under
Section 37 of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. (a) Gross income
from sources within the Philippines. The following items of gross income
shall be treated as gross income from sources within the Philippines:

(1) Interest. Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise; xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC were done in Tokyo.
The law, however, does not speak of activity but of "source," which in this case is the NDC.
This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right
to levy and collect income tax on interest received by foreign corporations
not engaged in trade or business within the Philippines is not planted upon
the condition that 'the activity or labor and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies:
'Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income. (Mertens, Law of
Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C.
77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA
867.) Accordingly, if the obligor is a resident of the Philippines the interest
payment paid by him can have no other source than within the Philippines.
The interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan on the
unpaid balance of the purchase price of the vessels acquired by petitioner is interest
derived from sources within the Philippines subject to income tax under the then Section
24(b)(1) of the National Internal Revenue Code.

It is not the NDC that is being taxed. The tax was due on the interests earned by the
Japanese shipbuilders. It was the income of these companies and not the Republic of the
Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its
failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by
Section 53(c) of the Tax Code.