CTA Case No. 2728 (Decision)

RBPUBLIC OF THE PHILIPPHJ'8S COURT OF TAX APPSALS QUEZON CITY CHINA MUTUAL STT:',l\N NAVIGATION CO., LTD. represented by A. SORIANO CORPORATIOl\ , PPtitioner, versus /[ COMV'ISSIOKRR OF IN'I?,RNAL REVSI'-JUF., Respondent. X- - - ~ - - - - - - - X D F: C I S I 0 N This involves an appeal interposed by peti- tioner China Hutual Steam Navigation Co., Ltd. from the decision of respondent Commissioner of Internal Revenue, dated July 18, 1975, assessing against and demanding from the former the sum of ~23,061.40, allegedly representing deficiency common carrier's fixed ano percentaee taxes, in- clusiye of increments, for 1963. Petitioner China Mutual Steam Navigation Co., Ltd. (China Mutual for short) is a foreign shipping company of Br itish r~gistry engaged in the shinning business in the Philipnines through its local ship agent. In 1963, petitioner was represented in the Philin �oines by Smith Bell [;: Co. (Phils.) Inc. (Smith Bell for short). In an a~ency agree- ment executed sometime in 1970, among Smith Bell, Blue Funnel Line, China Kutual, Ocean Stearn Ship 88

DECISION - CTA CA.SP. NO 272P 2 Co., Ltd ., and Sor j amont Steamship Agencies ( a division of A. Soriano Corporation), the latter replaced Smith Bell as the local ship agent of the petitioner in the Philippines beginning January 1970 and has taken over the pr ot es t of tax assessm~nts against p~titioner, among others (To' xh � 11 N11 ) � In a letter dated NovembRr 20, 1973 rR- spondent assessed against and deman0P8 from peti- tioner the total sum of ~ 23,061.~0, repr Psen t ing fixed an~ pRrcentag P taxes, includin g increments, for 1963, allPgedly for its failure to file the returns and pay the fixed and pr-rcentagP taxAs on its gross receipts, computed as follows: Fixed tax for 1963 �� � ���� �.oo 20.00 Gross receipts in 1963 t812,_8!: 2% tax therein � 0 � o l1 1S,25f?.SO 25%surcharge for late payment � � � � � � 4,064.20 ~0,321.00 �20,341 . oo 14;'~ interest from 1-1-73 2 ,720.'+0 � to 12-15-73 ��� � � �� . TOTAL AMOU. NT DUS AND PAYABLB �23 , 061.t.1+0 (Ex...'ls. 0 6 11 11 & 11 11 , p. 24, BIR rec.) On De cember 19, 1973 ann January 3, 1974, peti- tionRr through coun sel , protPsted thR above assess- ment on the ground that the ri ght of thP governmrn t to assess has alrea~y prescribed an~ re quRsted can- CE'llation and withdra �.o1al thrreof. (ti'x.l--1. P 11 11 , pp. 26- 27, BI~ rPc.; -n:xh. 11 Q11 .) On August 8, 1975 petitionRr received from re- 89

Dt::CISION - CTA CA~ NO 272P 3 sponrent a l~ttPr nated July 18, 1975, dPnying its protest .. (~xhs. ":t" &"R-1'1 ; 'Sxh. P, pn. 30-31, BIR rec.) On SP.ntembPr 2, 1975, p~titionPr instituted the instant appeal. The plPadings of the parties raised the following issuPs for our resolution, to wit: 1. WnPther or not petitionPr has filPd the rPturns ann pain thP fix~d anr. percPntagP taxPs on its gross r'eceipt-s as comr10n carriPr for 1963, and 2. \�1hPthPr or not the right of thr> gov~">rnment has alrPady prescribPn. At the outsPt, WP ~oul~ likP to str~ss thP tiM~">- to bP correct unlP~S thP contrary is shown ann thP burden of proof rests upon thP taxpayer to ovcrcomP this presumption. ThP determination, howPVPr, of a neficiPncy by the govPrn~ent is only nrima facie correct. (Tan Guan v. Court of Tax A~prals, 19 SCRA 903; Republic of thP Phil. v. Phil. Rabbit Bus LinP, Inc., 32 SCRA 211; Gutierrez v. ~oll. of Int. Rev., 14 SCRA 33.) Based on this legal nresu~otion, we will now nroceed to examine thP evidPnce of the parties ana asc~rtain whether or not petitioner has ovrrcomP thP pr PSUMutive corrPctnPss of the assess- mPnt in question. PetitionPr stoutly maintains that it has filPn 90

DRCISION - CTA CA~ NO 2728 the required returns an~ pai~ the fixPd and percentage taxes on its gross receints as com~on carriPr for 1961. In support of these co!ltent'ions, petitioner alleges: (a) that petitionPr ana OcPan Steam Shi r Co., Ltd. (Ocean Steam Shin for short) are the only two constituent companies operating un~er the tra~e narr~ Blue. Funnel Line; (b) that Blue Funnel Line was not a s~parate trading entity in the Philipnines but m~rely a trade ndme of petitioner an~ Ocean Steam Ship; (c) that Blue Funnel Line has no ve~sel of its own operating in the Philippines but oneratPd only the vessels owned either by patitionar or Ocean Steam Ship; and (d) that the monthly ~ross receipts Cleclared by BluP .r'unnPl Line in 1963 an~ on which the percPntage taxes wPre paid incluf.~d the receipts of petitioner . Petitioner like~ise asserts that pursuant to Section 331 of the Tax Co~e (Sec. 318 , 1977 Tax Co~e), the ri~ht of the government to assess thP deficiPncy fixed and percantaga taxes has already prescribad considering that it was issued after the lapse of 5 years from th~ rate the return �~tas filed. On the other han~, respon~ent counters that petitioner failed to present evidence proving that it filed the required returns an~ paid fixed and per- centage taxes for 1963. He argues that petitioner is a separate or distinct corporation frorn BluP Funnel Line and the receints of the latte r arr ~iffprent 9J

DBCISIO!': - CTA CAS~ NO 2728 5 from thP rPceints of the form~r. HP thr- n concludes that the tax could be assessr-d within t~n years from the discovery of the omission to fil~ the return and since it was only on July 25, 1967 that the omission was discovr-red, the assessmf'nt i ssued on Nov~mber 20, 1973 \.Jas i..rPll within thP prr-scriotiv~ period prPscribed in Section 31 2(a) of the Tax Code . (SPc. 319, 1977 Tax Core.) � There seems to be no qt1arre 1 that Blue Funnel Line fil~d the monthly perc~ntage tax returns and pain thr- fixed anc percenta ge taxes on the monthly gross receipts of various vessels in 1963. (r.:xhs. F 11 11 , "F-1" to 11 F-11 ".) In fact, re- spondent, in pffect, admitted this in his memorannurn, the p~rtinent nortionsof which are quotf'd hereunder for facility: 11 � � � On the other hand, ~x- hibits 'F', 'F-1 ' to 'F-11 ' -State- ment of Gross Fre i ght on Cargo Loa~ ~ d at Ph111nninP Ports on S tPa~Prs of Blue FunnPl Line f or the month of January to DecPmbPr 1963, clearly show that Blup Funnel Line Ltd. han stea!!I,ers lqad i ng cargoes in the Phil- inninPs, thereby sunnort~n~ our con- tPntion that the return fi l~d in th~ name of said corporation anr thP nay- m~rt of the n~ rcenta~P tax nuP thPrP- on wPrP for the account of the afore- namPd cornoration and did not includP the pprcentage tax due from h~rein netitionPr." (Mr-morandu~ for Respon- dent, p. 101, CTA rPc.; underscoring supnlir-a.) At any ratp, we arp more than convinced from th~ following facts which show clearly that Blue Funne l Line actually fil~d the returns and paid fixed ana percentage taxes on thP gross receipts

Dt::CISION - CTA CASB NO 2728 6 of various VP.ssels in 1963. In two letters daten July 7, 1965 and September 29, 1966, respondent . assessed BluP l<'unnel Line the sums of �10,767.26 and �13,567.84, respectively, representing defi- ci~ncy percentage taxes, inclusive of 25% surcharge, for the 1st anc 2nd semesters of 1963, or a total of �24,335.10, for its allPged failure to nay the correct percentage ta~es based on the ~ree market rate Of excnangP ~hen prevailing. (~XhS � 11 J-1 11 , "K-1 11 & 11 K-2-A 11 .) The said assessments \vere duly protested by BluP .i!'unnel Lin~ but the coi"Jsidera- tion thPreof was held in abeyance until after the Supreme Court shall have .necined the case of Commissioner of Internal Revenue v. Royal InterocPan LinPs (GR No. L-26806) \vhich involved idPntical is- sues. vfuen the Sunreme Court finally decided the Royal Interocean case on July 30, 1970 (34 SCRA 9), respondent assessed Blue ~unnel Line on January 28, 1971 th~ total sum of �147,691.02 as deficiency common carrier's taxes and penalties for the period from 1960 to June 1966, which included the assess- ment of �24,335.10 for 1963. (~xh. "L".) In comnliance with the said decision of the Suureme Court, Blue Funnel Line pain on February 17, 1971 the total amount of �140,191.02, exclusive of com- nromise penalty, which payment included the deficiency assessment of �24,335.10 6or 1963. (~xhs. �11�, 11M-1 1 & 111-!-2 11 .) These facts clearly show that Blue Funnel Line had paid the common carrier's tax for 93

D~CISION - CTA CA~ NO 272P 7 1963 but was later on asse s s ~ c. f or deficiency co~mon � carrier ' s tax for th~ same year due to 1 s failure to pay the corr~ct p~rcentag~ taxes based o~ the fr~~ market rate then prevailing which i t readi ly pale when the Supreme Court finally r.ecined the Royal Inter- oc~an case The controversy, therefor~, b~tween the parties hinges on the pivot~l issue of whether or not the r~turns filed and paymen~s of fix~d and percentage taxes on th~ gross r~ceints declar~d by Blue iunnel L~ne in 1963 includen those of herein p~titioner. Petitioner presented ~xhibit "C", a statement un0er oath by Jo~n Greenwood, . Director (Secretary in 196)) of China r�~utual Steam Navigation <..o., Ltd. ann Ocoan Stearn Ship ~o., Ltd., duly authenticated by the Phili p- pine Consul in Liverpool, ~nglann, attesting to the following facts: (a) that petitioner and Ocean St~am Ship we r e constituent companies operating as the Blue FunneJ Line; (b) that the business in the Philip- pines or petitioner and Ocean Steam Ship was oprrated . unrer the name Blue r'unnel Line. (c) that Blu~ Funnel Line did not operate as a separate tracing entity in 1963 and has not so operated before or since that nate; and (d) that prr attached certified copy of the Bala nce She~t and Auditors' Report of the blue Fun- ne l Line for the year enred December 31, 1963, it did not trade in that year ne i ther has it rece i ved any i ncome nor incurred any expend i ture to necessitate the filin ~ of a Profit and Loss Account. Witnesses 94

D-r.-crsron - CTA CA~ NO 2728 8 for thP pPtitioner having dirPct and nPrsonal know- lPdgP of pPti tioner 's shipping on~rations and act- ivlti~s during the year in 1u~stioD categorically and unequivocably collaboratPd the above set-up, nature and extent of petitioner's operations when they declared as follows: 1. Mr. Delfin Jimenez- Accountant of the Shipning Department of Smith Bell & Co., local ship agent of petJtioner in 1963, testified that vessels of petitioner and Ocean Steam Ship werP oneratP~ under the name of Blu~ l<'un!"le 1 Line; that Blue .L''unr.e 1 Lir.e has no vessel opPrating in the Philippines; that Blue Funnel Line operated two services, i.e., ~uro- pean services under the agency of Smith Bell and u. s. services un~er De la Rarna Steamship A~encies (De la Rama for shor t) as its local agent; ann that Blue ffunnel Line through Smith Bell filed the returns and paic t~e fixed ann p~rcentage taxes on the freight gross receipt on cargoes loaned in the Philippines ports on the vessels owned by netitioner and Ocean Steam Ship operating un~er the trade name Blue ~~nnel Line. 2. Mr. Remegio Colina - Certified Public Account- ant and Chi~f Accountant of De la Rama in 1963 , te sti- fied that petitioner and Ocean Steam ~hip were two constituent companiPs of Blue iunnel Line operating unner the name of Blue Funnel Line; and that Smith Bell hancled the Buronean service of BluP Funn~l 95

D~CISION - CTA CAS~ NO 2728 9 Lin~, whilP De la Rama represented the U. s. service. 3. Y:rs . Jo~r-fa Constantino - CPrtified Pub- lie Accountant, Chie f Accountant ot Sor i arnont S t~am ship AgPncies since 1974, and Assistant Accountant, Shipning Department of Smith Bell in 1963, nec larr~ that Blue Funnel Line has two constituent companies: petitionr-r and Ocean St~am Shin; that vr-ssr-ls opr- r ater by Blue Punnel Line ~nder its tra~e name were owned either by p~titidner or Ocean Steam Ship: that Smith Be 11 rPpre sr- nted the -c:uropean service of Blue J.''un ne 1 Line while De la Rama handled the c. s. service; a~d that the gross receipts on which Smith Bell paid the 2% common carrjer's tax .refr-rre d to vr-ssr-ls owned by T:"xhibit �'A 11 iJlustrate:>n in graph i c form the or ganizational set-up, nature and extent of op~rations in the Philippines of petitioner in rrlation to Rlur . preparPd an~ identified by Delfin Jimenez. As testi- fied to by Mr. Jirrenez an~ collaborate~ by both Rr-- rnrgio Colina and Josefa Constantino, pr-titionr-r and Ocean Steam Ship were the on l y two .constituent com- pa ni es of Elue funnel Line: Blue funnel Line was not a separate trading entity in 1963, before or after said year; Blue -"'unnel Line had no vessel of its own but operated only the vessels of its constituent com- panie s ; and Blue i unnel Line operated two services, i.e., the f!.uropean service under the agency of Smith

DrCISION - CTA CASF. NO 2728 10 Bell and the U. s. s~rvice rrpresentPd by De la Rama. ' t s ~xhibi Ill;' II "F-1" to "F-11"� are Statement of ~ Gross FrPight on Cargo Loa~ed at Philippine Ports on StPam~rs of Blue 1"unnel LinP for the Month of Jan- uary to December 1963. These monthly statements containec the name of the vessels, gross receipts of ~ach, computation of� 2% co~~on carrier ' s tax and annotation �at thP bottom of the first page the nunbPr of the official receipt evidencing payment of the p~rcentage taxes to the BIR. Delfin Jimenez testi- fied that he was the one who prepared these state- mPnts in liPU of the st~n~ar~ BIR form for pPrcentage tax return which was not then available and which accompanied the payments for percPntage taxes. He also explained and was collaborated by Josefina Con- stantino, that the caption Cargo Loaded at Philipnine Ports - on Stea~ers of Blue ~~nnel Line onerating in ~xhibits ''F 11 , "F-1 11 to "F-11", actually and in reality m~ans the cargo loaded on vessels of either petition~r or Ocean Steam Ship since Blue funnel Line had no vessel of its own op~rating . in the Philip- Josefina Constantino who was the Assistant Accountant of Delfin JimenP.z. in the Shipping Depart- ment of Smith Bell in 1963 also testified ' that she participated in the preparation and filing of returns and payment of fixen and percentage taxes on the gross 97

D~CISION - CTA CAS'P. NO 2728 11 receipts of BluP Funn~l Line in 1963. On cross examination, she declared that petition~r paic the p~rcPntage taxes "on the basis" of' payment mane by Blue Funnel Line and explained it by saying that "Since the vess~l onerated by Blu~ l:"unnel L~_ ne is ownPd ei th Pr by China Mutual or OcPan StParn Ship, paymPnt ~ade by Blue Funnel Line is paym~nt for China Mutual or Ocean Stearn Ship." To furth~r oolst~r its stand, petitioner pr~s- ented ~xhibits 11 11", "JJ", "KK", "LL" ann "~�"Y 11 which are V:anifcst of vessel, Carg0 Re cPipt of ves- sel, Fleet Particulars ann Annual Report and Account, respectively. Although . these ~xhibits referred to years othPr than the year in question, it was satis- factorily shown during th~ trial that the records anc other documents on petitioner ' s operations filed with its agent Smith Bell ann those forwa r 0en to its principal abroad have already been destroyed and/or lost being more than 13 years old then. ~~~ibit II is the Manifest of the vessel Antilochus which was the same form of manifPst used in 1963, captionN~ "0cPan St~amship Company . Limited and China !-1utual Stparn Navigation Company Lit, c-:1"; Bxhibit "JJ" -/ is thP Cargo RecPipt of vessPl Antilochus under the bannPr of Blue Funnel Line and iremPniat~ly benPath wPre the barnes Ocean St~am Ship Co. Ltd. and China Mutua 1 StPam Navigation Co., Ltd.; ~xhi bits uKY. 11 98

D'r'CISION - CTA CA~ NO 2728 12 and 11 LL'' are Fl,Pt Particulars of petitioner and Ocean Stpam Ship showing t~e name of vessPls owned by ,ithPr pPtitionPr �or Ocean Steam Ship� and Bx- hibit "NM" is the Annual Report and Accounts of OcPari Steam Ship anc its subsid~ary companies showing on page 22 thereof mark~d Exhibit "MH-1 11 the heading Fl~et as at 1st May 1920, and the sub-heading BluP Funnel LinP (shins owneo by: The Oc~an Steam Shin Co. Ltc'l. - � The China V.utual StPAm Nav:tgation Co. , Ltc � � � ) and then followed by name of vess~ls. RPsponfent's evidencP are exclusively found in the records of the Bureau of Internal Revenue for- warded to us and the te~tirnomy of his lone witness, Revenue ~xamin~r Armando GarcPs. Mr. Garces testi- fie~, among others, that on July 25, 1967 h~ was given authority to investigate the income and business tax liabilities of pptitioner; that after conducting the ipvestigation, he recommend~d dpficien cy income tax and percPntage taxes against pPtitioner for 1963 in the respPctive sums of P759,736.10 and �20 , - 351.00. and that his recommendation for deficiency ' income tax assessment was not given due course by responcent on the ground that the right of the government t o assess has already prescribed. Based on the face of~xh ibits "F", "F-1 11 to "F- 11 11 , there- seems to be justification for re- spondent s conclusion that the returns filed and payment of fixed and percentage t a xes made by Blue Funne l Line were for its own account ann did not includP those of petitioner. Carefully analyzing,

D~CISION - CTA CAS~ NO 2728 13 how~ver, the facts and circumstances of this case as substantially shown and proven by the ~vidence presented by petitioner, WP find that the returns filPd and perc~ntage taxes paid on the monthly gross � . r~ceipts of various vessels declared by Blu~ ~unnel Lin~ in 1963 included pPtitioner's gross receipts. Y.le find no cogent reason why this Court should not give full credence to the certification made by John Greenwood, Director of petitioner and Ocean Steam Ship, duly authenticated by the Philippine Consulate in Liverpool, England, that petitioner and Ocean Steam Ship were the only two constituent com- panies opPrating under �the tra~e name Blue Funnel Line; � that Blue lunnel Line has no vessel of its own or.erating in the Philippines, hPnce, opPrated only the vessels own~n either by petition~r or Oce an Steam Ship; and that BluP Funn~l Line did not r~c~ive any income or incur any exnenditur~ to require making of a Profit and Loss Account. No evidence was prod- uced by respondent to refute this sworn statement; in fact, it was offerPd and admitted in evidence without obje ction on the part of respondent. Scrutinizing and comparjng the evidenc~ pr~sPnted by petitioner, it would appear that the vessPls of Blue Funnel Line which came to the Philipnines in 1963 found in 1":xhi bits "F", 11F-1" to 11 F-11 11 were the very same vessels owned either by petitioner or 1 00

D'SCISION - CTA CASE NO 2728 14 Ocean Steam Ship as opPrating in 'Rxhibits "KK", "LV' and "}1!�!11 � This only lends support to the fact that the vessels referred to in F.xhibits pp�, "F-1 11 to 11 F-11 11 �.NerP actually and in rPali ty w~ssPls owned either by petitioner or Ocean Steam Sh1p anc conse- quently the gross receipts of these vessels on which thP rPquired returns have been filPd anc the fixPd and percentage> taxes� paid inclufled thP gross rPceints of pe>titioner. 1t!P cannot see our way clear as to ,11hy Blue funnel Line would file monthly returns and pay the percentage taxes for its own account when it has no vessel of its own operating in the Philippines anr has therefore no receipts to declarP. The more logical and sound conclusion, as shown by the evidence, is that it filed the returns anfl paid thP fixed and pPrcentage taxes on the gross receipts of ve>ssels owned -by its only two constituent comnanies - petitioner and Ocean Steam Shin. Consequently, since in 1963 Blue ~unnel Line has bPen proven to O\ttn no vessel of its ovm one rating in the Ph1lippines; was only a trace name for its two constituent companies, petitioner and Ocean Steam Ship; and ea r ned no income or incurred expenses, the conclusion becomes inescapable that the returns filed and fixed and percentage taxes paid based on the gross receipts it declared could refer to no other receipts but those of petitioner and Ocean Steam Ship. 1 01

DBCISION - CTA CAS1'i NO 2728 15 It is a recogniz~d principle in taxation that tax law concPrnPd itself vii th actua 1 facts or what actually has transpirPd betWPPn thP parties regarc- lPss of how they may havP named or designated the transa ct ion. In other words, form must give way to substance and true facts. (See Comm. of Int. Rev. v. Constantino, 31 SCRA. 779; Balbas v. Domingo, 21 SCRA 444; Shell Co. of the Phil. Ltr.. v. Fireman's Ins. Co. of Npwark, 100 Phil. 757.) This is what actually happened to herein petitionFr when instead of filing the returns and paying the percentage taxes for its own account, filPd and paid the same in the name or for the account of Blu~ lunnel LinP. In view of our finding that petitioner through Blue ~unnpl had paid the fixPd and percentage taxes in question, it becomes unnecessary for us to dwell on the issue of whether or not the right of the govFrr.ment to assess the deficiency taxes in qu~stion has alreacy prescribed. \-,1I-!t:'R~FOR~, thP decision appealed from should bf-' as it is hereby reversed. No costs. SO ORD~R~D. March 30, 1979. /l Quezon City, �c-;~~ ROAQUIN Associate Judge 7 1 02