CTA Case No. 3346 (Decision)

. /iORI ENT OVERSEAS CONT I NER LINE and F.E. ZUELLIG {M) , I NC ., Petit oners , - .v�ersus - C.T. A. CASE NO . 3346 � COMMISSIONER OF _�I NTERNAL REVENUE , Respondent . X - .. - - .- .� .- .- . . . .- ._. .- .X ., DE C I S 1 0 N The sole issue in this case as posed by t he pa ttie s is: Wha t is the corr ec t c C'r rsion r ate of t he u.s. (Un ited States ) .dol l ar t o the Ph ilippine peso f or purposes of determining petitioners ' .com- puted annual i ncome tax. l iabi l ity f or: fisca l year ended March 31, 97p? In paying the 2!a!i i ncome tax provided for under Section 2 4 (b) {2) _of the National I nterna l Revenue Code on i t s decl ared gross Philippine billings of US$2 ,889 , 717.69 fo r fisca year ended Mar c h 31, 1976 , pe titione r Orient Overseas Con tainer Line , t hrough its s h ip agent F.E. Zuellig (M) '� I nc., used the c on- . ver sion r ate of P7. 00 to US$1 . 00 . espondent Com- . missioner of I nternal Revenue asse rts, however, ~h a t the proper exchange rate of t he u.s . dollar t o the . 241 '.

,. \ DEC I SION - CTA CASE 0 4 334 iJ .2 - .' Ph i lipp ine peso a t that time was P7 . 50 and not P7 ~ 0 ~ .. t o a dell a~ , and the g_,ross Ph ilipp i ne bil lings shoul be US$2,8 97 ,73.7 838 as shown in petitioners8 �_quarterly . business (percentag. e ) tax. r eturns fo r the s ame period .. Hence , t he def iciency i ncom t ax. fo th~ fisca ear � ended March 31 , 1976 i the amount o P47 , 801.85, now under review, the de tails of which are as follows : ACR-25-6~04A-002953-76/78 Gross Phil . Billings - ~ ; ; ~ .. ; . ; ~ . P21,690,805.55 Tax due therecn - - . ~ - ~ ~ ; ; ; ; ; ' 542,270.00 Less: Aroount already assessed - . ; ; ~ ; ; 505,701.00 - ; ; ; ; ; ; - ; ; ; ; Jl 36, 569. 00 B a1anc e Add: 14% i nt. fr . 7-16-7~ to 9-2~7~ - ; - 11,232 �.fl~ TOTAL AMXJNT DUE & COLLECTIBLE - - ; ; . ; :- !,__ 47 ,801.�l :i The f ac ts are not in dispute , t he parties aving submitted t h i s c ase for decision or: . h ~ basis of .t he pleadings and the r ecords of the Bureau of Internal Revenue bearing on the case , after pe titi oners waived t heir protest on the undeclared billings of US$8,019.69 . As narrated by r espondent i n his memorandum dated Fe bru ary 1 0 , ~9S 3 (pp . 65-~7, CTA r ecords ):. Orient Ove rseas Conta iner Line (referred to as Orient Over seas ) is a forei gn co~po- . ration engaged in international shipping . It i s r epresented in the Ph ilippines by i ts agen ~ petitioner F.E. Zuellig (M), I nc . The Ph ilip- . pines is one of its ports of c all whe~e it l oads cargoes fo~ t r ansport t o f oreign ports . Freigh is e ithei" fr ee on board (FOB ) , r at destination f oE" acc:oun of the f or eign buye rs* (Memorandum fo r Commissionei" , pages 111-1.13 B.. I ., R., records) . For f iscal year ended March 31 , 1976 , � petitioner Ori~nt Ove r seas declar ed in it

.l DECISIO . � CTA CASE NO 3346 .3 - income tax return gr os s Ph i l i ppine bi llings of US . $2 , 689,717.69 , equiva l e nt toP20,228 , J 2J : B3 f converted a t the e xchang r a te o f P7 .. 00 t o US $1 . 00 (Pages 8 5-106 , B. I . R. r ecords )~ J n i ts quarterly business (percentage) t ax r e t urns foe t he same period, pet i tioner � r i ent Over seas decl ar ed gross rece i pts of US $2,897, 7J7 . 38, equivalent to 21 , 690 , 80 . ss, � on the basi a of the f~~: ee mar ket ra te of ex- . change at the time of he vesse l 9 � sai ling, pur suant to Par. No . 4 of Revenue Memorandum Circular No . 1-7.5 (Pages 66- S.l , B. I . R. reco rds ) �. The differ ence between t he amount of US $2, 897 , 737 . 38 declared as gross r ece i pts i n petiti oner Orient over seas ' quart erly business (per centage) tax r eturns , f or the f iscal year . ended March 31 , 1976, and the amoun t of US $2 , 889,717 . 69 decl ared as gross Phi lippine billings in i t s i ncome t ax r etur n fo r the s ame fi scal year wa s US $8 , 019 . 69 . In a l etter and assessment not i ce , both dated Septembe r 26, 1978 , r espondent assessed and demanded f rom pe t i tioners � ' ,.c amoun t of P47, 801 . 85 , as defic"ency inc <.. ...~ tax , i nclu- . sive of int erest f or t he fiscal year ended March 31 , 1976 , based on pet i tione r Orient Overse as ' gr oss Phil i ppine bi l lings of� P 2 1 , 690 , BO~ . S5 (Pages 119 -~20 , B. I. R. r eco r ds ) ~ I n a l etter da t ed Oc t obec 24 , 1978 , pe ti- . tionecs protested t he assessment on the ground that t he r ate of exchange a ppl i ed by r espondent in converting Or ient Over seas � g ross Philippine b illings was P7 . 50 t o US $1. 00 , nder Revenue Memor andum Ci rc ul a r No . 9-76 dated March 10, 197 6 (Pages 1 65-~66 , B. I . R. r ec ords ) . They reiterated t hei r prot es t i n a letter "dated Decembe r 7 , 197 9 (Page 177, B. I . R. re cords ) ~ In a le tte r dated Apri l 30 , 1981 , r espondent den i ed petitioners � p r otes t on t he ground t hat pe ti t i oner Orien t Overseas had undec lar ed b il l - i ngs i n t he amoun t of US $8 , 019 . 69 and t ha t t ransactions i nvolving outbound r evenues in t he case of i nte rna t ional shipp ing a r e no t amon t he c ategor ies s t a ed "n Reve nu Memor andum Ci r c ular No . 1~7 5 , par . 2 (b ) ~ a ted J anuary . l J , 1975 (p . 181 , B.I.R. r eco r d s )~ 24J )

--.r �- .r �� u' DEC I SION - CTA CASE O . 33 46 At t he hearing of Septembe 16, 1982, petitioners manifested that t hey wer e aivi ng protes t on the i ncome ta due on t he amoun of us i S,Ol9 . 69 which was the nde~aecla red .� billings o f Orien Overseas i n i t s i ncome tax r eturn fo r t he fisc a l yea r ended March 31 , 1 976 . In effect, petitioners admitted t hat the a ctual gross Phil ipp ine b 'll i ngs of pe ti tione r Orient Overse as for purposes of income � tax was us � 2,897 ,737.38 u no t us $2,889 , 717 . 69 . The parti es do not quarrel that Revenue Memorandum :. Circular No. 1- rs dated J anu ar y 1 3, 1 ~75 , which pres- . cri bes a uniform e xchange r a te of u. s .. dolla rs a nd other f oreign currencies to Philippine pesos for inter na r evenue t ax l'urposes for t he calendar year 1975 and all .. fisca l years up to J une 30 , 1976 , is the appl icable ; reference and guide line for the schedu le of the c onver- sion t ate of computing the incc:ne t..o � 1.iab ili t y of peti t ionets involved i n this c ase . To q uote Memorandum circulat No . 1- rs: � J anua ry 13, 1975 REVENUE MEMORANDUM CI RCULAR NO ,. -7.5 SUBJECT: Prescr ibing a uni f orm exchange rate Ef u. s . dollars and other foreig n currencies to Philippine pesos f or internal revenue tax purposes for t he calendar yea r 197 5 and all f isc a l years up to June 30, 1976 . TO : All I nterna Revenue Off i cers and Others Concerned: For t he purpose of establishing a uniform rate of e xchange of u8s . dol l ars or o the r f ore ign currenc ies to Philippine peso fo interna re- venu ax pu poses for he cal endar year 1975 � !_!?. al l the f isca l years up to J une 30, 1 97.6 , t he followi ng schedu le of exchange r ates are hereby presc rioed f or reference and gu idel ines of a ll concerned:

I � t: t 1,' � y' OECISIO .. CTA CASE NO . 346 5- 1. n t he case of regular or habitua t ransact i ons nvolving actual r emittances o~ accepLince s of U. Se dollars or other m: e ign currencies such as s alar ies, ages , f ees or other renumer ation f or pe r s onal s ervices , r oyalt i es , r ents, interests or other f ixed 1 or determ inable annual or period i c a l i ncome n '! .' � the following rules shall govern : a .. Whe r e actua l remittance is � made t o t axpaye rs abroad , the bank �s_ se ll i ng r ate of exchange of t he f oreign cu rrency i nvolved a t t he t ime o s uch remittance shal be used for the pur- . pose of arriving at t he tax base1 b . Whe re acceptance i s made by t axpayers in the Philippines nd there is an actual conversion of he f oreign c ur rency to Philippine pesos a t any t ime duri ng t he year , t he bank u&. buy- . i ng rate of e xchange at the time of such c onversion shall be used f or the purpose of ar rivi ng at t he t ax base7 2. In the case of reqular 0r habitual tr ansact i 0i1"5" where there-�a i:':::.. -�;�)-:-- -~~�.::t:ual remit- tances or acceptances of U . s;~�- aciTia~ s or other [9reign currencies such as salari~s , wages, fee s , or other remunerations for P0.E_sonal ser- v ices, royalties , rents, i nterests, or o~ fixed or determinable annual or periodical income, the following rules shall govern : (emphasis s uppl i ed. a . Where i ncome accr ui ng t o tax- . payers abroad is credited t o their account by me re book keep i ng entries and suc h income i s s ubject t o withhold- i ng tax in t he Philippine s , t he r ate of exchange quoted by t he Foreign Ex- . change Department of t he Central Ban on t he da t e the wi thholding t ax accrue s shal l be used f or the purpose of c om- . puting t he t ax base , b. Where s uc h income accru ing to ~axpayers abroad is not subject to with- holding tax but is l iable t o i ncome tax after t he close of the taxable year, the r ate of P7.00 to u.so $1.00 shall � be used .In t he case of non-~es iden t

-.--{,.'; � j," ' . .! �.~ DECISI ON - CTA CASE o. 3346 _6 - cit i zens taxable unde r Section 2 . b. Qf t he Nationa l In t erna Revenue Code , as ame nde b President ial Decree No . 69 , the i ncome t ax li a-bili t y c ompu t e in dol a rs '. s hall be c onverted t o Phi lippine ;' pesos ca t the guid in<;J r ate of ex . :~ ~ change quoted by t he Cent r a l Bank ' at t he time of payment if t he tax- . � paye r c hooses to pay hi s t ax liab- . ility i Phi lippine pesos# (under- . s cor i ng supplied. ) � c. Whe r e t axpaye r s i n the Ph ilippine s a r e e ntitled to receive i ncome from a broad and there i no actual conve r s ion of th f or eign currency to Philippine pesos du ri ng th e . y ear 0 0 t he same e ' a te of P7 .0 0 t o $1. sh all b used f or income u. s 0 tax purpose s . 3. In t he case of tr ansactions involv ing the computat ion of advance sal es or compen- s ating t axes , the r a t e of exchange used by t he Bur eau o f Cus t oms at t he t ime ,- r the paymen t of s uch t axes shall preva i l. 4. In the c.as e o f tr an s ac tions i nvo l=ying t he computation of per c entage taxes , the rate o f exchange quot ed by the Foreign Exch an~ pepartmen t o f t he_Central Bank on t he da te t he percentage t ax acc r ues shall be used . "(under scoring suppl ied. ) . S. I n t he case of an i solated or casual tr ansact iuon.s i. nvo lv ing emittances or ac cep t - . ances of dollar s or other f or e ign cur - rencies s uch as d ividends , i nt e r ests , c ap i t al ga i ns or other gains from occasional s al es of pr ope rty a nd the like , t he s ame rules promu l - . gat ed i n parag raphs 1 and 2 s hall apply . 6. Whe re an al l ocat i on of i ncome a nd expenses is either required or al lowed , for income t ax pur pose s, unde r Section 37 of t he Tax Code and the egulat i ons promul gated nder i t , t h s am r ate of P 7o 0 0 to U s . $l o00 shall be used . . 7 Where t he c ur renc y i nvo l ved is other than u. s . dollars, the f ore i gn c urre ncy shall 24'6

. ..... . .~�. ~ - ~ J '.-f.!J. ' ~ . �' - - '< I "�. ' �~ , DE C I S I ON 'I CTA CASE NO - .1 .. ' fi r st be c onverted o u ~s . do llars a t t he pr evailing r a te of e xchange betwe:en t he '. two cur r en ci es ~ The r e su lti ng amount shall . .~.. t hen be converted t o Phil ippine pesos in accordance with the a bove p romulgate ru les � . '~ : ENFORCEMENT AND PUB LICITY 1 Al l Inter nal Re venue Of ficer s and other s � charged wi th the enforcemen of intern a l r e- venue laws are enj oined to e nforc e t he pro- . visions of t his Circular accordingly and t o give it as wide a publ ici ty as possible. . (sgd .) MISAEL P. VERA Comm i ss i oner o f I nterna l Reven ue TAN-~601- S,93-~ ! 'j c- ~ - r:LC /Aio APPROVED : (sgd .) ALFREDO PI O DE RODA , J R. ~cting Secr etary of Finance� The coll ision occurs a t t he pa r t J~ a r pr ovi s i on o r par agraph of the memorandum circular s e cif i cally appli- . cable . Petitioners contend tha as proper basis fo t he conversion rate of u.s . dol lars t o Philippine pesos of the g ross Philippine b i ll i ngs of the Or i ent Ove r seas Con tainer Line f or i ncome tax purpose s f or the fisc a l yea r e nded Marc h 3.1 , 1976 , Paragraph 2 (b) .of Revenue Memorandum Ci rcu l a r No . 1-rs is con trol l ing. On the other hand , respondent ins i sts that Paragr aph 4 governs the case . Back to Par agr aph 2(b o f the r eve nue memor andum ci r- .0 regu ar or ha itual tr an- cul ar .. I say �x t he case sact ions where t her e are no dc tua r emittances or accept- ances o f u.s. dollars or other forei gn currencies uch � 24 '1

.� ... �� OEC l SION - CTA CASE NO. 3346 .. .8 - !� as salar ie s , wages , f ees , or other r emuner at ions f o ' . .. er sonal s ervices , roya ties , r ents, i nterests 6 or .�'. other f ixed or de t erminable annual or periodical income, .: x x x� the rate of P7.00 to u.s . $1.00 shall be used, ., "Where such i ncome ac c r uing o t axpayers abr oad i s no � sub ' ect o wi thholding ta but s i ah le to income ,I tax afte r t he close o f the taxable year . " Paragraph 2 b) .gives t he r eady answe r when the c onvers on rate .. of P7.. 00 t o u .. s .. $1 . 00 is to be u�sed .. He re , in t he ease a t ba r t he gross Philippine billings i n question o f peti t ioner Or i en t Ove rsea Con taine r Line we r e re a l ized i n the c ou r se o f i ts re9ular or habitual transactions as a for e i gn corporation engaged in i nte rnat i ona�l shipping \. _ch do not i nvolve, adm i ttedly , actual r emittances o r acceptances of u. s . I dollars or other f oreign cur r enc es such as salaries , wages , fe es, o r othe r r emunerations f or personal ser - vices , royalties , rents , i nterests or other f i xe or determinable annua l or periodic a l i ncome . Neither wer e such gross Phili ppine bi l l ings i ncome subject to wi th� hol d i ng t ax but pet itione rs a r e l i ab l e to i ncome ta after the close of t he t axabl e year . The empha s es ar e - � no actual remittances or acceptances of u.s . dolla r s " and "no t subject to withhold ing t ax " e Par agraph 2( b) . i!ii c lea t and spe if c ., The re is o r om f o i nterpre t~ . ation . Accor dingly , pe�t i t ' one s � .r igh t s and l icibil i t i ea

' 11 .-~ IQ .. _,_..,. � .t 1 ~~ _,. � l ~ ,- l 4I ~'� OEC IS .i:ON .... " I CTA CASE NO . 346 ' -.9 1 shou l d b gau<j~ed by Pa r agraph 2 (b) .0 Revenue emo .� ' 'f randum Cir ~ u l a r No . 1-rs. The onversion r ate of t he u.s doll a r t o Philippine peso i n deter mi n ing peti- . i. t ioners 0 ~omputed annua l i ncome t ax l iabil ity f or 1 fi sca l yea r ended Mat ch 31 , 1976 s hou ld t he refor e be � 'I P7 . 00 t o u.. s. $1. 00 as specified there in . : 0 the a s sumption t ha t freigh was eithe f ree on ' board (FOB) _or a t destinat i on f or accoun t of t he f ore i gn buyers , as conte nded by r esponden t , we c annot infer -~ and ' mply t hat Pa r agraph 4 of Memo r andum Ci rcula r No . 1- r , in the c ase of t r ans actions involv i ng t he c om- . putati on of pe rcentage t axes , � may be appli ed in a s uppletor y manner f or t he sake of niform ity and e quity . (pp . 6-S-6_9 , CTA records . . Adve r tir1 ~ t�:) the ter ms of Par ag r a ph 4, i seems pla in an~ clear t hat ~he r ate o exc hange quoted by the Foreign Exchange Departmen t of the Central Bank appl ie s only in t he c ase of t rans- ac t i ons i nvol v i ng the c ompu t ation of pe rcen t age taxe s . The paragr ap employs t he t erm wtr ansac t ions i nvol v i ng the c om utation of percentage taxes .� Nothi ng t he r e sa id speaks of compu tation of i ncome t ax on gr os s Ph ilipp i ne billings . We c anno t i gnore the pri nciple t ha t express ment i on i n a s ta t ur e , or i n t he i mpl emen t- . i ng memor andum c i r c ula r , pr ec lude s r eading oth ers i nto i � An e ven mor e , ho c an we us e t he r a te of exchange ~uoted by the Forei gn Exc hange Departme nt of th e. Ce tral 24 ~

Ban k in dete~mini ng petitioner s 0 ~omputed a nn ua l ncome tax l iability for. t he fis c a l year ende Ma r c h 31 , 1976 whe n no evidence was presented by r espondent as to the r a te of exchange quoted by the Foreign Exchange Depat men t on the date the i ncome tax i nvolved herein accrued . � '. The r ule has been established that the application of ax l aws, and i mpl ementing revenue memorandum cir- . cular f ot t hat matter , �f t he meaning is doubtfu l , shoul not be extended by i mplica ion beyond the c lear i mport of t he l anguage used. ln f act , if t he i ntent or meaning thereof is doubtfu l, the same should be construed mos t strongly ag ai ns t t he gove rnme nt and in f avor of t he taxpaye r . (Kuttner vs. Collector of In t erna Revenue , 18 Phil . 46�11 Stevedor ing vs . TrinL ,.:i , 43 Ph i l . 803 . ) To apply Paragraph 4 of Revenue Memorandum Ci rcula r N l - 7.S to the � nstan case " in a suppletory manner for the s ake of uniformity and equ i t y" , as re s ponden t a vers , whe n the applicability of Paragr aph 2 (b) .ther eof is ve ry expl icit and unequ ivocal, i s the&:efore lltto f orce a square peg i nto a round hole " . Revenue Memorandum Ci rcula r o . l-7.5 was issued by re spondent Comm issioner of Internal Revenue fo r t he e nfor cement and i mplementation of i nte rna l r evenue l aws . It i s thus t o be fairly and j ustly presumed tha t r espondent , who possesse s such a unilatera and one- sided a uthorit , has so shaped Par agraph 4 as , withou t ambigu ity oa: doubt , to bring wi thin i� " tran s actions 250

a- .' . DECIS ON - CTA CASE N � 3 4: - 11 - invo l v in t he computa t ion o ercentage axes only as plain 'I a nd specif i edly s t ated therei n . Un e r he circums anc es , the ecision of r e spondent d ated Ap r il 30 8 198 1 holding peti t ione rs li a ble f or the amount of 4,7 ,801. 85 a s ef i c i ency income tax i nclus1.ve o f i nteres fo . f iscal yea r e nded arch 1 , 197 c annot ! b s ustained . Instead, considering tha pe titioner \. f Orient Ove~ seas Container Line's r css Ph ilipp i ne bi l lings amoun t ed to US$ 2,897, 737 . 38 in fi s.ca l year ended Ma r ch 31 , 197 6 , i ts defic i e ncy i ncome tax. l i ab ili t y i s c om- puted as fol l ows : Gross Phil . Billings (US$2, 897 , 737. S P20 ,28 4,161 . 60 converted at P7.00 to U. $1 00 ) p 507 , 104.00 Tax due t hereon Less : Amoun t already a ssess�.ed 505 , 70 l.OQ. Ba l anc e Add 14\ i nt . from 7-16-76 t o ~ -26-78 p 1, 403 .. 00 TOTAL AMOUNT DUE AND COLLECTIBLE 431 .0 3 1 , 834.. 03 Accord ing l y , pet itioners Orien t overseas Container Line a nd F.E . Zue l lig ( M) ~ Inc . , are here by ordered t o pay to r e:spondent Commissione r of In terna l Reven e the amoun o f Pl , 8 l 4 03 plus 5~ su rch ar ge and 1 4\ a nnua l i nteres t f rom Septembe r 26 , 197S up to J uly . 31 , 960 and 20i annual i n terest f rom Augus t 1 , 1980 unti l ful l y paid pucsuan t to Section Sl (e ) (_ 2) (_3) .of the Na tiona l I nternal Revenue Code o f 19 77 , as amended by Pr e s i den t ia l Decr e e No . 1705 , provided t ha t t he maximum amoun t ha t may be c o l ec ed as i nte t est on de f ic ienc y shal l n no

.,�. .: . , .. iJ.' DE ISIO - C'l' CASE 0,. 3 - 12 - case e xceed t e amo nt corresp nding to a perio . three year s � HEREFORE , the ' udgment unde r r ev i ew is mod i i ed as ind ' cated i n he above o in on of t he Cou rt . Wi th costs ., � SO ORDERED . � Que zon City , Metro Man ila, September 5, 198 3. WE CONCUR : � (r;.j. !v; ;'.",.