CTA Case No. 1152 (Decision)

REPlJ!'\T, C OF TiRE HILl.P PIN E OOtJ rr TAX .PE UEZ PHILIPPINE POWER & DEVELOPMENT CO., INC., Petitioner, . ...... C.T.A. CASE NO. 1152 - versus - CO~R1ISSIONER OF INTERNAL REVENUE, Respondent. X~- - - - - ~ - - - - - ~- X DE CI S I 0 N This is an appeal from a decision of res- pondent holding petitioner liable for the sum of Pl41,469.40 as deficiency franchise tax for the taxable period from October 1, 1955 to June 30, 1960, plus the sum of P39,930.76, representing franchise tax erroneously credited to petitioner, �' or a total amount of Pl81 ,300.16. Petitioner, a corporation duly organized and existing under the laws of the Philippines, is en- gaged in the business of supplying electric light, heat and power in the municipalities of Bay, Ca- lamba, Lilia, Los Banos, Magdalena , Hajayjay, Nag- carlan, Fila, Rizal, and Sta. Cruz, all in the Pro- vince of Laguna, and in the municipalities of Sto. Tomas and Tanauan, in the Province of Batangas, pur- suant to the municipal franchises granted under Act No . 667 of the Philippine Commission. The said municipal franchises , follow a standard form or pattern and contain similar provisions. Paragraphs 10 and 13, of Resolution No . 81, dated October 21, 1929, of the Uunicipal Council

DECISION - C.T.A. CASE NO. 1152 - 2 .. of Bay, Laguna, one of the franchise involved herein, provide in part: "Par. 10. x x x The said grantee, in consideration of the franchise here- by granted, shall pay quarterly into the Provincial Treasury of Laguna , one percentum of the gross earnings, ob- tained thru this privilege during the first twenty years (20) and two percen- tum during the remaining fitteen (15) years of the life of said franchise." (Exhibit uA-1 11 , p. 61, C.T.A. record.s.) 11 Par. 13. This franchise is granted with the understanding and upon the con- dition that it shall be subject to amendment, alteration or repeal by the Congress of the United States as pro- vided in section 28 of the Act of Con- gress approved ATOu gDuEsCt LA29R~1 1916 1PUeRnPO- SE titled � AN ACT THE OF THE PEOPLE OF THE UNITED STATES AS TO FUTURE POLITICAL STATES OF THE PEOPLE OF THE PHILIPPINE ISLANDS, AND TO PRO- VIDE A MORE AUTONOMOUS GOVERNMENT FOR THOSE ISLANDS' and that it shall be sub- ject moreover to the provisions of Act No . 3108 as amended. x x x" (Par. 13, Exhibit 11 A", p. 62 C. T.A. rec,ords.) In the light of the decision of the SUpreme Court in the cases entitled Hoa Hin Co., Inc. vs. Saturnino David and Hoa Hin Co., Inc. ~.- Blaquera , G.R. Nos . L-9616 and L-11783, May 25, 1959, the field corporation au~itor of the General Auditing Office made a recomputation of the franchise tax liability of peti- tioner based on the gross earnings of its operation, which recomputation is contained in a report submitted to the Auditor General. In a letter dated November 15, 1960, the Auditor General furnished respondent

'� . .. DECISION - C. T. A. CASE NO. 1152 - 3- with said audit report , which reads: ''Pursuant to the provisions of Sec- tion 259 of the Tax Code, as amended , the utility �had been paying its fran- chise tax at the rate of 5% on its gross receipts up to March 31 , 1955. By vir- tue of the letter of the Collector of Int ernal Revenue dated April ~ ' 195!, the utility ' s franchise tax rate was declared to be 2% and not 5% in con- formity with its franchise authorized under Act 667 , as amended . Following the ruling of the Collector of Internal Revenue, our audit report dated May 18, . 1955 was based on the tax rate of 2%. Accordingly, the utility requested t he r efund of its tax overpayment for the first quarter of 1953 and for the period from July 1, 1953 to t1arch 31,� 1955, in its letters dated Harch 18 , 1955 and July 18 , 1955, and the Collector of In- ternal Revenue in its letter dated June 15 and July 12, 1955, granted a tax credit in the amount of ?30,178 . 28 and P9,652 . ~8 or a total amount of P39 , 830. 76 for the said p eriods . Since April 1 , 1955, therefore , the utility had been paying franchise tax at the rate of 2%. 11 On the basis of said audit report, respondent , on November 29 , 1960, assessed and demanded from petitioner the total amount of ~201 , 627 . 21, repre- senting deficiency franchise tax for the period from January 1, 19~7 to June 30, 1960, inc l usive of the 25% surcharge and the Mlount of ~39 , 830. 76 alleged to have been erroneously credit ed in favor of petitioner. This assessment was received by pe t itioner on December 19 , 1960. In a letter , dated January 5, 1961 , petiti oner protested and requested the cancellation and withdrawal thereof. This re-

DECISION - C.T.A. CASE NO. 1152 - 4- quest was partially granted in a revised assessment, dated October 18, 1961, reducing the original assess- ment of ~201 ,627.21 to Pl81,300,16 by eliminating therefrom the alleged deficiency corresponding to the period beyond five years from the date of the original assessment, that is, the period from January 1, 1947 to September 30, 1955, and limiting the assess- ment to the period from October 1, 1955 to June 30, 1960. This revised assessment is itemized as fol- lows: Total gross re- ceipts per audit ��� f.4233,619 1 69 5% tax due thereon.. 18o,680.98 Less: Amount paid ... 73,502,4� Balance ������������ 113,17~.,2 Add}; 25% surcharge �� ---=2:.;:::8.a.,2::::.9"-3~�..:::8.;::.8 !1'141 ,469.40 Tax erroneously credited ������������������� 39,830.?6 Total amount due ����������������� flB1 1]qO.l6 The issues raised for our consideration are: 1. Whether or not respondent has jurisdiction, power and authority to assess and collect the fran- chise tax in question; 2. Whether the correct rate of franchise tax payable by petitioner is the 2% prescribed in its municipal franchises or the 5% provided for in Sec- tion 259 of the Tax Code, as amended; 3. Whether or not petitioner is liable for the 25% surcharge on the alleged deficiency franchise tax; 11

DECISION - C.T.A. CASE NO. 1152 - 5- ~. Whether or not respondent can recover the amount of 139,830.76 alleged to have been erroneously credited to the petitioner for the period from Jan- uary 1, 1953 to March 31,1955; and 5. Whether or not the income of the employees' retirement fund, the interest on savings account, the gain in the sale of fixed assets and cars, and the proceeds on sales of materials and supplies form part of the gross receipts subject to franchise tax. On the first issue, petitioner contends that the powers and duties of the Commissioner of Internal Revenue comprehend only "the collection of all ~ tional internal revenue taxes, fees and charges, and the enforcement of all forfeitures, penalties, and fines in connection therewithu, and do not include the collect.ion of franchise tax under Act No. 667, as amended, which by the terms of the municipal franchises is paid by the grantee to the Provincial Treasurer, who acts, not as deputy of the respon- dent, but solely in behalf of and for the benefit of the local governments (Par. 1, p. ~, Petitioner's Memorandum). In �short, petitioner claims that the franchise tax i n question is a municipal tax, not an internal revenue tax, and therefore, respon- dent has no power and authority to assess and col- lect the same. I l;

DECISION - C.T . A. CASE NO . 1152 - 6- This contention is untenable. Sections 3 and 18 of the Tax Code respectively provide: "SEC. 3� Powers and duties � of Bureau. - The p01vers and duties of the Bureau of In- ternal Revenue shall comprehend the col- lection of all natiQUal internal revenue t~es , fees and c4arges, and the enforce- ment of all forfeitures, penalties , and fines connected therewith. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other laws 11 � (Under- scoring 011rs . ) 11 SEC. 18 . Sources of revenue .- The following taxes , fees, and charges are deemed to be national internal revenue taxes: X X X X X (g) !..Jiscellaneous taxes , fees and charges , n~~ely , taxes on banks, and insurance companies, ~ ghises taxes , taxes on amusements , charges on forest products, fees . for sealing weights and measures , firearms license fees , radio re- gistration fees , tobacco inspec- tion fees , and water rentals 11 � (Underlining ours. ) It will be noted that in the above enumerated sources of revenue , franchise taxes are deemed to be nat ional internal revenue taxes . And before its amendment by Section 5 of Republic Act No . 2655, Section 6 of the Tax Code designated provincial and city treasurers as deputies of the Commissioner of Internal Revenue in the collection of national internal revenues , of which franchise tax is one . But with the said amendment : "Any and all references in the National Internal Re- I

DECISION - C. T. A. CASE NO. 1152 - 7- venue Code to the provincial and city treasurers and their deputies , their functions and duties in connection with internal revenue shall x x x be deemed to refer to the collecti on agents of the \ Bureau of Internal Revenue." From these provisions , it is clear that respondent Commissioner of Internal Revenue is empowered or authorized to assess and collect franchise taxes due under Act No. 667. Petitioner' s claim that it is liable only for 2% franchise tax is likewise without merit . Nowhere in the franchi ses of petitioner can be found a pro- vision to the effect that the franchise tax pres- cribed therein "shall be in lieu of all other taxes . " Inasmuch as said franc hises do not preclude the im- position of a higher franchise tax , petitioner- grantee is subject tofue 5% franchise tax provided in Sec tion 259 of the Tax Code, as amended , and not to the lower rate of franchise tax prescribed in the franchises in question. This doctrine has been consistently upheld in previous cases involving franchises of similar nature (Balanga Po'\.;er Plant Co., Inc . vs . Commissioner of Internal Revenue , G. R. No . L-20499 , June 30, 1965; Lealda Electric Co., Inc . vs . Commissioner of Internal Revenue , G. R. No . L- 16428 , April 30, 1963 ; Hoa Hin Co ., Inc. vs . David etc . and Hoa Hin Co ., Inc . vs . Blaquera etc ., G. n. Nos . L-9616 and 11783 , May 25 , 1959; also , Imus Electric Co ., Inc . vs . Commissioner

DECISION � C. T. A. CASE NO. 1152 - 8- of Internal Revenue, C. T. A. Case No . 1144, Decem- ber 16 , 1963 ; Escudero Electric Service Co . vs . Helecio R. Domingo etc ., C. T. A. Case No . 1026 , December 26, 1963 ; and Guagua Electric Plant Co., Inc . vs . Commissioner of Internal Revenue , C. T. A. Case No . 1175, Augu st 29 , 1964) . More so, because each franchise was granted with the express "under- standing and upon the condition that i t shall be subject to an1endrnent , alterat ion or repeal by t he Congress of the United States" , now ( the Congress of the Philippines) . And having accepted said franchises subject to the afore- mentioned terms and conditions , peti- tioner cannot now assert that the imposition and collection of the higher r ate of 5~ is in violation of the non-impairment clause of our constitution (Lealda Electric Co . ; Inc . vs . Commissioner of In- ternal Revenue , supra ; Balanga Power Plant Co ., Inc . vs . Commissioner of Internal Revenue , supra) . f On the third issue , petitioner contends that he is not liable for the sum of ~28 , 293 . 88 , repre- senting the 25% surcharge , for the reason that the failu re to pay the 5% franchise tax was due to res- pondent ' s let ter s , dated June 15, 1955 and July 13 , 1955, respectively, which led him to believe that the correct rate of percentage tax due was only 2$,

,� DECISION - C. T. A. CASE NO. 1152 - 9- and in consequence of which it was granted a tax credit of F39 , 830. 76 , or the difference between the 5% prescribed in Sec tion 259 of the Tax Code ~d t he 2% provided in its franchises . This contention is well taken. Having acted in good faith and having been misled by the respon- dent, i t v1ould n o-t -be- f-a-iL a n d equitable to impose ,- -- �--�-�-� uponfue petitioner the 25% surcharge . In the case of Ilagan Electric & Ice Plant , Inc. vs . the Com- missioner of Internal Revenue, C. T. A. Case No . 1178 , May 18 , 1964, this Court held : "It is undisputed that petitioner pai d the 2fl franchise tax in accordance with the vievT of respondent's deputy that the former was liable only for the 2% franchise tax. It may, therefore , be said that the failure� to pay the correct amount r:� tax is clearly and directly attributable to the mistaken view of respondent's deputy regarding the rate of tax applicable to petitioner ' s gross receipts . In paying 2% franchise tax petitioner vJaS acting in good faith . fiaving thus acted, it would not be just to penalize petitioner with 25% surcharge for falling into the err6r to which i t has been led by respondent_!.s deputy. (See Connell Bros . Co . LPhil . / vs. Collector of Internal Revenue , G. R. j No . L- 15470, December 26 , 1963 . )" The defense of prescription interposed by peti- tioner against the collection and/or recovery of the sum of P39,830. 76 , which toJas credited as overpaymen.t, is well taken. It is the rule that where deficiencies in taxes arise as a result of erroneou,s refunds made by respondent , he may make a new or deficiency assess-

!� DECISION - C. T.A. CASE NO. 11~2 10 - ment against the taxpayer if the statute of limita- tions has not yet set in (Ilagan Electric & Ice Plant , Inc . vs. Co~nissioner of Internal Revenue , - - supra, citing Hay R. Millez , 19 TC 395; Carl H. ~orsell , 13 TC 909; Rothensies v. Electric Storage Battery �co., 329 u. s. 296; Southern Maryland Agri- cultural Fair Association vs . Comr . of Int . Rev., 40 ETA 549, 554). In the case~ bar, petitioner paid fram hise tax and was granted a tax credit in ( the total amount of ?39 ,830. 76 for the period from the first quarter of 1953 to the first quarter of 1955. � From this , we can reasonably assume that quarterly returns were� seasonably filed for that period. Consequently, the right of respondent to assess the amount of P39,830.76 is limited to five (5) years from the filing of the returns (See Sec- tion 331 of the Tax Code) . And it appearing that the assessment in question was made only on Novem- ber 29 , 1960 and rece�i ved by petitioner on December 19, 1960, it is obvious that the assessment was made beyond five (5) years from the filing of the last return for the first quarter of 195,. Hence , the right of respondent to collect the amount of r P39,83 0. 76 has prescribed . But respondent contends that the government is not assessing the deficiency franchise tax, but is recovering tax erroneously credited, and, therefore, J

.. DECISION - C. T. A. CASE NO. 1152 . - 11 - Section 331 of the Tax Code does not apply . In this connection , it must be stated that respondent , himself, has termed the assessments in quest i on , which include the amount of P39 , 830. 76 , as defi- ciency. Horeover , if we were to agree to respon- dent's conte�ntion , then this Court is not the proper forum for recovering the amount allegedly credited as tax . (Guagua Electric Plant Co., Inc . vs . Com- . missioner of Internal Revenue, ~U � ) . Petitioner admits its franchise tax liability on the .income of P7 , 033 . 57 it derived from rental of poles , rental of bulbs , jobbing, and adjustment of accounts receivable � . But, it is contesting the imposition of framchise tax on the interest income on its savings account, earning of the employeest retire- ment fund , profits in the sale�s of fixed 'assets, in- terest in. the sale of cars , and proceeds of sales of materials and, supplies , which amounted to ?57 , 321 . 34, on the ground that these items were not obtained thru the franchise granted to petitioner. The interest income on petitioner ' s savings accounts is subject to franchise tax for the reason � that it represents profit made in the course of re- gular transactions in connection with petitioner' s I franchise (Philippine Long Distance Telephone Co. vs . Collector, 90 Phil . 674). Similarly, the other c.on- tested items , consisting of earning of employees'

DECISION - C. T. A. CASE NO. 1152 - 12 - retirement fund , profits in the sales of fixed assets , interest in the sale of cars , and proceeds of sales of materials and supplies , are earnings or profits in c~dental to and necessarily connected with the operation of its franchises , hence , in- cludible in its taxable gross earnings. WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered to pay respondent Commissioner , within 30 days from the date this decision becomes final , deficiency franchise tax for the period from October 1 , 1955 t o June 30, 1960 in the amount of Pl13 , 175. 52. I f the said amount is not paid within 30 days from t he date this dec ision becomes final , the s arne� shall be subject to the surcharge of 25% for delinquency pursuant to Sect ion 259 of the Revenue Code . SO ORDERED. Quezon Cit y, ctober 31, 1965. I CONCUR: Presiding Judge TEOFILO D. REYES, SR. concurs and dissents in a separate opinion. {

-�.=~_�- --. -,...~ ' PtE'PlTRUC OF THE PHILIPPINES CC GUT OF TAX APPEALS QU EZON CITY PHILI PPI NE POWER & DEVELOPME.H C. I .A. CO., INC ., CASE NO. 1152 Petitioner, - versus - COMMISSIONt:R OF INTERNAL REVENUE , Respondent. X- - - - - - - - - - - - - - - X CONCURRING AND DISSENTING OPINI ON I concur with the majority opinion except on the question of the (a) interest income on the savings account, (b) the earning of the Employees' Retirement Fund, (c) the profits in the sales of fixed assets , (d) the interest in the sale of cars, and (e) the pro- ceeds of sales of materials and supplies . I do not believe that these items are subject to franchise tax. The pertinent provisions of law in this case are the following: "Par. 10. x x x The said grantee , in consideration of the francise hereby grant- ed, shall pay quarterly into the Provincial Trea surer of Laguna , one per centum of the gross earnings, obtained thru this orivile e during the first twenty years 20 and two oer centum during the re maining fifteen (15 ) years of the life of said franchise." {Re soltition No . 81 , dat ed October 21 , 1929 , of the Municipal Council of Bay , Laguna , Exh. ''A-1," p . 61, C.I.A. Records). Under- lining supp lied. " Sec. 259 . Tax on corporate franchises . - There shall be collected in respect to all existing and future franchises , upon the gross earnings or receipts from the bus[ness cov er~ d by the law granting the franchise a tax of five per centum or such taxes , charges, and percentages as are specified in t he special

- 2- charters of th e grantees upon whom such fran- chises are conferred, whichever is higher, unless the provisions ther eof preclude the imposition of a higher tax. x x x . (National Internal Revenue Code) . Underlining supplied. To my mind, it is clear that what is intended to be covered by t he franchise tax is gross earnings or receipts obtained thru th e exercise of the privileg~ o~ the business covered by the law granting the franchise. The privilege or business covered by petitioner 's muni- cipal franchises is limited to the maintenance and op eration of electric light , heat and powe r. Clearly, it is the gross earnings or r eceipts from such operation that must be considered in the computation of the fran- chise tax , and not the non-operating revenues. There- fore, int erest on the savings account , earnings of the Employees' Retirement Fund , profits on the sale of fixed assets, interest in the sale of cars, and the sales of materials and supplies are certainly not earn- ings or receipts obtained thru the exercise of peti- tioner's corporate franchises , nor are they necessary in carrying out the public service to which petitioner is bound to render under the terms and conditions of the franchise . They should not t he refore be considered in the comp utation of the franchise tax. A franchise tax is essentially an imposition for the privilege granted by the corporate franchise. Thus , it has been defined as: "A ' fran~hise tax ' is not a tax on pr operty of corporat i on , but is imposed on corporation for privi lege of carrying . on its business and exercisinq corporate franchise granted by state. City of Chicago v. Chicago Ry . Co ., 245 111. App. 473. 11 (Under lining supp lied). "A franchise tax is a tax imposed di r ectly on the corporation, and not on

- 3- its capital stock, its property, the shares of the stockholders , or the dividends or profits accrui ng . Worth v. Petersburg R. R. Go., 89 N. c. 301, 305." "'Franchise Tax ' is tax imposed on corporation for privilege of being corporation, or of doing business in corporate capacity. Pacific Co . v. Johnson (Cal.) 298 P. 489, 492. "A ' franchise tax' is a tax on the privi lege of doing business under corporate organization . State v. Clement Nat . Bank, 78 A. 944, 949 , 84 Vt. 167, Ann.Cas.l912D, 22." (Word s & Phrases, Vol. 17, pp. 510, 511) Moreover , in accordance with the science of ac- counting, in so far as petitioner's business is con- cerned, these incomes are classified as non-operating or extraneous incomes and are thusly treated in the profit and loss stat eme nt. They are not added to the gross income arising from the operation of electric light, heat and power because they are not re ceipts or earnings from such operation. To consider them as part of the gross receipts or earnings for franchise tax purposes would be to make the phrase "gross earnings, obtained thrp this privilege" meaningless. They may be subject to other taxes, such as sales tax in the case of proceeds of sales of materials and supplies, but certainly not to franchise tax. In view of the foregoing, I vote for the modi- fication of the decision appealed from in the sense that petitioner is liable only for deficiency fran- chise tax in the amount of Pll0 ,609 .46, itemized as follows: Less: Total gross receipts per audit P3,733.619.69 Interest from Savings Account - P6 ,126.44

. -4- Interest earned by employees retirement fund �����.� ~34,219.37 Gains on sales of fixed assets ��������������� 9,704.30 Interest on balances of company financed cars.. 597.60 Proceeds of sales of mat erials and supplies ��������� 673,63 Total 51,221.34 Gross receipts subject to fra nchise tax ?3 ,682 , 298 ,35 5% tax due thereon p 184,114.92 Less: Amount paid 73,505 .46 Amount due ~ 110,609.46 plus the delinquency penalty provided for in Section 259 of the National Internal Revenue Code, in case of non- payment within 30 days from the date this de cision be- <;omes final . 0 D. REYES, SR. esiding Judge