CTA Case No. 383 (Decision)

PIEPI 8 L1 1P t PHI l.Pl!"'.l!.:a COURT Ul l.\.A Al'PEALS WANlU LL .NO Sl ; Lit ES , etitioner, - versus - C. T. A. � C ~ ~ NO. 383 THE COLLECTOR I F sf REVEN UE, npondent. X � � � .. .. _. .. ... X D ECI S ! ( N The respondent aG& ss a oinst th peti- t i on 1" th SUI Of 738 , .9. - s defici ncy .:n - f iecal year ending 1 , 1955, including 5G% urcharge and c r p rc~ise� . on failure of pet itioner t sec r e reccnsideration of th d cision of res onrlent, the or.mer has elev t d the c s tu this Court for rev:~~. Couns 1 for xe pond~nt a a fairly c- curat st t n nt of th 1 at rial fact of t case. quote' 11 otitiotler in th � s case is a foreign shipping cor oration org niz d nd xisting und r t e l s of t. Nethcrl nds ith vess ls t c ing hilippine ports. lt tr ns- act d u iness in th hili pineG thr u~h its re sident ag nt , th oyal lnt e - cean Lin s , ~.r& � n Building , Port Ar a , nila (Exh . � �on \ctober 8, 1955, petition r, , through its let 1 o ts, fi1 d its fin 1 incotte x r t rns co~r pond- , !ng to the f i ( c 1 year nding ~~ y 31 , 19~ ( x i bit 1, PP� - 11 , EiR rec . ) , report!n9 th rein ~ e following oat ; 387

c.r I.SA.I c cE c. 38~ - 2- (l) C~oss r c ipts . r outgoin reights ~nd pa eng from ,hil- (2 ) iprpcisns e p crt apt s- - -r-o-�� - - 1 ,943,099. 41 r outgoing fr h end passeng rs from all ports other than t P l i p .n s ------ 12 ,732. 899. 33 (3) Total expenGes and decucticn& of tho o. a a ho e, including thos i nc rr d by 11- ippin office -------- 14.,331,937. 57 plyin t h cti 163 o 1z ticus JO . 2 , w ich i l sicns of Section J7{e ) o! Internal Rev n~e Cod , it clai~ ippine xpen es , t � ount of co uted aa follow t -~=-""~~~~ X 14,331 , 37. 7 : 1 , 897,545. 78 (al- loc t d hil. x- pens s) Philippin c ros ncom - Allocated Phil.- PP ne n , 0 , SY/ , 45. 78 a 45, ~53. 3 Phil. n t incoc ) ur u nt to t t bli hed policy of the Bureau o nt rn l v nue to verify inco e tax ret rn of tnis n tur , n inv atig tion s conducted to v rify the c rr ctn as of p itioner 'a t rn for t sc 1 ye r n ing .ay 31 , 19 5 (Exh. 2, p. 13 , Bl rec. )� .� 3

DECISICW - C. 1 �� CASE NO. 383 - 3- �The exa i ner roceed ith the veri- ficaticm applying t r in the n.w t �ory that unless a forei n corp r ion is regis- tore to do bu iness in the P ilippines p ursuant to ction 8 of ~h Corpor tion La it is not entitl d to de ucti ns nor to the aoplication of ection 63 of v- nue e lations No. 2. vnse u nt!y , the all eated e nses claim b) tn peti- tioner as � uc ion its F �i ippin in- co was disallowed c .. l tely an e de- fi ci ncy aG& &ir. ont for th am unt of 738,509. ~ (Lxh. 4 , P� 6 , BIR re � ) w iasu ~ aya nst p t tion r, it iz d follows� Gr s fro fr ights nd p ' ngera p r r turn �� -�943.099. 41 L ass � 2nses incurred local- ly$ (1) Loc 1 int r- ialand fr ig ts ... {? ) Li~hterage------...-.::;....&:.;:::;.;;.:;..;;.;.;;::;. Total adjust ent et income as p r in- v tigati n ��������������� ount subject t tax �� � ���� nd 28/ incc t x th ron ��� ������ ������ 1, 384. 00 L s ,ount of tax elready aR s d paid �� � fici ncy inco e tax � � ����� surchar e �������� ������� Compromis �������������� ���� TAL TAX DUE ����� �� �� ��� ��� nal com- 389

DECISI~ - C. T. A. CASE tO. 383 Dep rt ent to th Collector rnal vtn dat d c .b r 24 , 1957 , co y of hieh is h reto ttac ed s /~n X t J\ t and .�de n int gr 1 p xt hertof � (1) Foieign snipping co ~ni st submit �t tern.nts of world o eration6 duly cartifi d by t he tax authoriti of t hei r respect v governments or, if the am are not v llabl , f ln~neiel s ate. nts certified by independent certified pu lie accountants. In both eases , the state- ments must bo uthenticat ed by Philippin cons 1 r � Fer i n ffai~s Offi ci ls. In th~ absence thereof , only v .rified Philip ine deductions shculd b all � (2) Every foreign sh!pping co any with stips touchina Philip ine ports sh uld r gistcr Nith th� Bur au of lnt~rnal ev- enu , pur uant to S ctio ? of the T x Cca , tating also the nam and ddress of ita a ent in this country. " s r gards the fir t re uir , nt, th Bureau of Internal evenu h ub- use. qs.ueCnotlnysuallaltoewwedh authentication by the n there a1e no Philip- pine Ccnsu ar or other for ign aff�irs of- ficl.als l.n t e coun,.y v.111er such corpora ... tions are domiciled. � {pp. l-4 , orandum for Respondent. ) Petition r is a foreign s ipping co ny which transact bu&ine~s ..:.n th l ilio ine t ugh it local a nt , th Royal Inter- ce~n Lines. It d rives its inc me mainly from t ut o el'ati of ts v ssela wnich tt uch Philippir oorts. Ther is no qu stion t1at sa foreign corpo.r tion trans- acting business in th~ Phil ppin s, it l.S s ject to incon tax at th rates cf 20 and 28% provided - in Section 24 of th ~etional Internal Revenu Code , and t t it s tax ble only on its inco e from source 'ithin t Philippines. � ( ecticn 16, Hev. Regs. o. 2, 39 � � 325. ) ,> 3 9 0

DECISICN � C. T . A. C E NO. 383 - 5- S ctiun 37 of t he Revenue Cod defines �gross i nc u* and �net income� frorn sources within the Phi l ip ines and ross incot.e" and "net income� fro soc.cces withcut the Philippines. '~1 t h respect t income frou scurccc cartly wit. in and pa t l y wit out t h Ph~lip�inos, ~in thP- c o cf t he in- com of putH.icnc_ from the ooc::ati.on of it int er- ace n vessels, p ~agr ph (e) of said s ction pro- vides J X X X X � ( ) n o~e f ro s !!w!n pf\rt.bY.�w:}.j; o__t _the h j li()p ;l.ne~ . - t erns of gros i ncorn , xpens os , losses and deduct ions , other than t hose speci- fied in subs ction~ (a) and (c ) of thi section shall be allocated or ao or t i oned t o s ourc s fit hin Ol' 11�1t .out the hilip- pin r- , und r t he rul s ~nd r egulations r escribed hy t l Secretary c� Finance. Vhero i t r:.s of gr ss inccne ar e s ep r at - l y allocat ed to uources ~i t in the Phil - ippines , ttcrc ~ ~ 11 be d ducted (f r he pu pos of co ut ing t he n t incorr.e th . ef~ o .) t~e xpcnses . l oe ses, and other d ductions properly apporti on d or allocat #d ther to and a at able pert of other exp ns .-, loss ~s or ot her d - ~ ~ tlon hich c nnot d fi nitely b a l- located t s o .e item or clasG of ross i r e . e. Th remai nder , if any , sh ll be in luded i n xull as n t income f ro ourc s with n the Philip ines. I n t h case of r os inco � derived from s ourc es artly i t hin and pertly without the Philippines , th 1 t !n�co may first be computed by deducting th� xn ns es , lOS$ 8S , or oth r de uc ion& apportion d -ex alloc t d th re t and r atable rt of any exoense s , l osa �� ox other de- ction~ hich can ot defi ni tel y be 1- locat d to o e i teus or class f groa �nco e ; and th port ion o! uch n t inc- co. ttributab e t o &ourc s wit hin th the hi l ippi nes may be d t ermined by ro- ~e s se s or f r mulas f gon ra! a port on- ment preacrib d by the Seer t ary of 1 1- nance. Gains . profit , and i ncom fr o 391 L

DECISI - -.- C . T� � CA E NO. 383 (1) t r n~portotion or other s ervice ren - de= d portly withln .nJ artly without the P ilipo!nes , or (2) .rom ~h~ sal of per onal '1rC",e. ty prt~duced (in w1c1e or in part ) by the taxpayar ~ithin nd sold �ithout the �h.i.lippines. or produced (i n whole or in part) by th taxpayer �ithout nd sold ittdn t. � hili pines , shell treated 8 der1v d p rtly fr om sourco !thin and �rtly .rc. so r c _s with ut the Philippines. Gains , refits, and inc me deriv from t. e p ure.. se of personal property \tithin and 1tG sale �rithout the hil Jines o from th p r- chas of personal ro r t y witn t and it sal \athin t c Philippines s all be tre t d as derived entire! from urces wit in tha country in whi h old. " In vi w ~f the diffi cu l y of providitg in the law in� precis -te:rr:1 '.That portion of t 1e inco derived partly fro �~thin nd pertly rom itho t the Philip ines is inco 10 fr m sourc s ithin t e Philippin � and tho expens s, losses nd deductions allocable ther to, ~ection 37{e ) provid that "t he potticn of tch net incc~ ottribur ble to sources within the hilip ines may b& eterminecl by proc ss s ox for ulas of general a portionment prescrib d by tho Secretary of Finance. � Pursuant to S ction 27 and 33 , th eecretary of "inane � upon r~co ndstion of th Collector of Internal evenue, promul ted Re ulations o. 2 , p blish d in t he Cff1cial zette of �ebruary 11, 1941 (39 O. G. 325), ..ection 163 of which pro- vide t of f ship cc pnni s \.', osc v ssel touch port of the Philip lnes should includ , a~ 392

' OECI I QI - C. T. A. C S& NO. 383 gross incom , the total rece pts of 11 o t;oing busin s wh ther freight or passengers. i th t e ross inccme thus ascertained, the ratio exi ting between it and t he gross inco e from all ports , both thin and ithout the Phil ip inea of all ve sel � w th r touching ports of t. ilip ines or not , hould b determined as th ba is upon �hich al- low ble deduction y be co ut d, the pr1nc1pl~ b ing th t Slowable doductiona shall b c uted u on a basis thich recogniz 1 t at tne income arising nd accruing r b in ss done in ny fr this country sh 11 r its are , d no or , of er.pe , incident t e earning or ere tio of uch income , in the ratio that th~ ross inc~ ri in in and fro this co try bear to th entire ross inco ri ng fro buai- ness don both within and ithou this country. In other words , th n t in- co.e of � foreign &te oship co any doin businea in or from this count%y is sc rtain f r the purp se of the income tax, by deducting fro the groa r cei ts f ro outgoing busin ss such a portion f th 9 r g te xpens s, lo es , etc . , as ch recei t be to the a gr te rece1 ts from al l port of all Yes els, including in each case in- co o of a nonshipping character but in- cidental to the shi ping business s ch as dividends fro inv t nts , intez sta on d po its , tc. or x mpl -- a) ro r ceipt fr out- goi n freight nd p s- a n era fro . I . ports � � � it20 , COO. OO � '~b) ross receipts from out- going freig ts nd pas- sengers fro 11 orts oth r th n tlose of P. i ���� {c) Interests n other non- s ipping inc re eived by P. I . offic � � � � � � � � � � � � 5, d) I nterests , dividends, and oth r nonshi ing in- COl eceived by all of- fices other tl n tho e n � I . � � � � � � � � � � � � � � � � � � ~ . . oo (a) ot l expe sea nd d due- ions of the c any as w. ole, incl uding thoa incurred by � I . office �� 1 . oo 393

DECISI - C. t.A. CAS O. 3 3 ~f) � I . groes incomes 20,000. 00 Pr 1 hta nd paaaen era... I nter sta nd other in- co ��������.�� .� ��� � ���� Tot l ������� �������� " (,�.,) P. I . expan ' exp a , or v, : 13 ,6 b) � I. net i co t P. l. gro incorr 1 P. I. .'" or 2~,0 le s 13. : spon th t h d tor '� titlon nco s & in it its fisc 1 year ending y co t � urn t 31, 1 5 i in cc~r . nee wit ction 37( ) 0 the Co nd cti n 1 3 of v nu t gul - tiona o. 2 . It is, h v r , cent nd h t n formul f r d to n..ng n inc un cti n 163 of v �2 y v ilea f by a f r 1 in eo r.y, it 1 necesaary that t o c itl n b co li ith, viz~ (1) su saion cf � st t nt of orld ope~ tion c rtified t. t x uthoriti a oft ov .rn nt countr in i eh th fo~ ign corpor - a ia not vail 1 , a fineneial tat ent c rti i d by an in nd nt certified pu lie ccount t, nd auth nt c t d in both caaea by a P li pi � consu r or for i f-

DECISIW - C. T . � CASE NO. 383 - 9- fairs official or , in the absence thereof , by an American consul r official J and (2) re istration of t he forei n shipping eo any with tne ureau of Internal Revenue , pursuant to Section 203 of the venue Code. Thes condition r e 1~odied in a memorandum of the Chief, Legal artment of the Bureau of Internal venue dat d Dec M� ber 24 , 1957 and epprov by th Collector of In- terna1 evenue. They are n ing apPli~d to the ineo~~ ta retu~n of p titi n r for the fis - cal y ar ending ay 31, 19o5, wnich return was filed with the Bur au of Internal Rev nue on ct- ober 8 , 19~5. y zeapondent limit t he applica- tion of ection 1 3 of venu Aeg lations No. 2 by 1 osing additional con itiona or r equir nta and r� Jlying th n require. nts retxoaetiv ly? ~ection 37(e) of the ~v nue Cod authorizes the S crt ry of _inance to pr scribe the proc as- es or formulas oi ene~al pportionment for t e purp s of d termining t e t income of foreign corpol.'ations tran acting bus.~.ness in t Philip- pin s whose gioss iDcome is derived fr sources p rtly w1 thin and partly dt out th Philippines. N si ilar authority ls grant d to th 11 etor (no Commis ioner) of In rnal venue. ection 163 of nu gulati na o. 2 was pro ulgated by virtue of such authority. Th authoxity o prescribe th processes or fo ula& fer deter- .� 395 \

DECISI CN - C. T. A. C ~e NO. 383 - 10- mining the net income .of foreign corporat ions transacting busi ness in the Philippines having been confer red by Congress; on the Secretary of Finance, and the said Secratary having coxercieed such authority, x s pondent has no powor to l i t or enlarge tne application of 'Che processes or formulas prescribed by his superior officer . If respondent believes t t Section 163 of .~venu Regulations o. 2 has out liv d its usefulness , the roper procedur is for him to r co nd ita r.- repeal or amendment.j Not only h re$pondent encroached upon tho power of t e eeer tary of Finance hut he s sought to pply to petition r's incor e tax return for 1955 the n w requirements d v!s~d and c n- ceived only in ce ber , 19~7. To cnp i t all , respondent con iders t e incowe tax rQturn of peti- tioner for 19 5 fraudulent for failure t co ply with the n requirement$ and is seeking to c ollect fro petitioner the ~ fraud nalty. In addi- tion , petitio r is bain required to pay . 00 as �co romis � for an une~~laine violation of the Nation 1 lnt ernal I~venue C d , hich we as- sum . is also for non.co li nee t h the new r - quire ents , ~ca �se respondent mit that pet i - tioner's i nc tax return was filed in accor dance with law and the reg'..tl tion h for the advent of the new requirements. (S p. 3 , supra. ) The sole nuroose of respondent in prescrib- ing t he new r equirement s 1�� as admitted by r es - 396

DECISION ... C. T�� CASH NO. 383 - ll - pendent t hr ou h his counse l , � the de!ii! to ;ai�l � W do not bcl i ev that r pondent has power or authority t o raise more r venue f or the support o t he overru nt by eans or m t ds which the Constitution and t h laws do not per- mit. lfh p~ver to rair.e r ev nue is an exclusive prerogative of Congress . ut ven Congres s y not , for the purpose of reiaing r v nu , r vide for t he retroactive pplie ion of a t xing �t t- ute and p ' alize axpay r for vio t i. n t r of in resp ct to pa&t transact ions . Th reaaon ia obvious . Sue a st~t te would � an ex post fa ,~o l a\V. Ass ing t. a the ne requirements ~r val d , petitioner conwends t t t has fully complied with th S3 . � spond nt , however , claim th t while petition r A& t;Oft!J')lied ith the s cond re- quirement (. egistration under Section 2 3 o the venue ode ) , 1t s failed to co~ply :~ith the fir st by not submittlng a stotement of .or ld ope.ratio s . P tition .r su mitte xniblt G, a statement of its wor ld income for fis cal year 19~-1955, cert ifi by "I ember of the ed r- l ands Instituut van Ac ount nts , nd Exhibit G-1. a &tat em nt of �orld exp nse s for fisc~l year 1954- 1955. also certified by a �~ mber of the Ne- derl nd Instit ut van ceo ntants . Both st t - ments wer auth~ntic t d by a lc Consul of t l uP!ted t ate$ (Exhs. G- 2 and - 3). o q ti n ,I 3 9 7

- C. T. A. C~! NO. 393 - 12 - has een r !sed a to the corr etne a of the en- trie� eont incd in s aid t~te .ents , Exh~. G and G-1. Aft r goin ov ~ the said statements , we fin that th y are in for and i n substance in accordanc ith tho roquir ~en t of respondent. inding the defici ncy inco~ t~x aosess- m nt against titioner rbitrary and ill gal . th decision appealed from is h roby r versed. No ronounc r.1 nt t costs. 60 0 ERED. nila, August ~. 1958. ca c � ... 398