CTA Case No. 1573 (Decision)

HF.PUrH .JI OF �1 tl t~ PtllLJPPll'\!l:S COURT OF TAX APPEALS OUI�ZON cny Nl\'l'JONAL DEVELOPMENT COMPANY, Petitioner, - versus - C. T .A. CAS E NO. 1573 COr-11-HSS lONER OF INTERNAL REVENUE, Respondent . X- - - - - - - - - - - - - X TI ECI SION For fai lure to comply with the provisions of Section 54 of the Na tion al Internal Revenue Code, in re lat i on to Section 53 thereof, respondent Com- missioner of Ihternal Revenue assessed petit ioner Na tion a l De ve lopment Company fo r th e years 1960 , 1961 and 196~ withholding income tax, including surcharge , de ficiency inte rest and compromi se penalty , on the interest payments remitted by the latter to Japanese shipbu ilders in Japan on the unpaid balance of the purchase price of twe l ve ocean-going vesse ls acquired _, from them , computed as follows : 1960 Interests; remitted abroad --�---------------- ~2, 611,8 39. 81 ------------------ "P--:m3;55J~OO Tax due iliereon Add : 25% surchar ge ---------------- ---- 195 , 887.75 1/2% monthly i nter.est fr om April 18 , 1961 to April 18, 1964 - 141,039 . 18 Compromise for non-filing of return -- _ 300.00 TOTAL Al>'IOUNT Df.JE & COI.LEC'riBLE - - - -- - -- ~_b: 120 , 777.:.Jl. 1961 Interests remitted abroad - --------------- ~4,964,809 . 56 Ta:x: due thereon ---------------- ~1,489,442~0 �1 J1. n,.:.,

. DB':ISION - CTA Cl\SE NG . 1573 - 2- Add: 25% surcha�ge ----- - -------- --- P 372 ~ 360.50 l/2% n~onthly interest fran 186,420.48 Apr iJ. 17, 1962 to M.ay 18, 1964 300.00 Ccmpromise for non-filing of return - 'IOrAL l'JiiOlJNT DUE E~ COL.LE.'C'l'IBLE - - -- - - f..l2 , 048, 522. 98 1962 Inter est r emitted abroad ~-�:-:��-�----:--:--:--:-:- ?4t931,~ Ta..'{ due thereon ----------------~- . 1: 479, 388.00 Add : 25% surcharge --�- --�----�--- -�---- - 369 , 8<17 .00 l/2% n1<.:mthl y interest from April 17, 1.963 to M-::ty 18, 1964 96,398.83 Comprom j.se for� non-fil ing of return- ~--..::~ 0 'IDIAL l\VDIJN'I' DUE & COLLECTIBLE - - The follo,d.ng are t.l.-::e r-ertinent f c:,cts stipulated and sub- mitted by ~he parties: l. That pe titioner _s a government- owned and controlled cor poration , d~ly organized a nd ex i sting under and by vi rtue of the laws of t he Philippines , au thori ze d under Repub li c Act No . 140 7 ~o acquire ocean-go ing ve ssels for t he purpose of resale, lease or c harter t o per sons; associat ions or corporations prga nized unde r th e la ~s of t he Philippi nes, a t l eas t 60% of "th e capi tal of which i s owned b y citi ze ns of t he Philippines , with its principal office at Pureza St. , Manil a ; 2 . That responden t is a public officer, en trusted with t he proper collection of inter - nal r evenue taxes ; 3. That pursuant to the provis ions of Rep ublic Act No . 14 07 , t he pet it i o ner on May 30 and 31~ 19 59 e ntere d in to contr acts with t he f ollowing Japanese shipbuilders to wit: (a) Kure Shi pbuilding and Enginee ring Co . , Ltd. ( b ) Uraga uock Co :, Ltd. (c) Hitachi Shipbuilding and Engineer ing Co . (d) Mitsubi shi Heavy Industries Reorgan- ized, Ltd. (e) Mi tsubishi Nippon Heavy Industr ies , Ltd. , and -1 fi <"') - � U'

,. �. DECISION - CTA CASE NO . 15 73 ~- 3 .- (f) Mits ubishi Sh ipbuilding and Engi- ne er i ng Co ., Ltd. for the construction by said Japan ese s h ipbuilders of twelve (12) ocean - going Vf~ssels fo r the sum of $43 , 200,000 . 00 ; 4. That the twe lve (12 ) contracts were s iq : ed by t he r e pres2ntatives of tbe petitioner and the Japanese s hipbuilde rs in Tokyo , Japan , each contract covering each of the twelve (1 2) ve sse ls: 5 . That the stipulations , t erms and con- ditions of the said contracts are all the ~arne, except that the s ubject matter of e ach contract is identified by the hull number of the vessels , and the place of delivery thereof are in t he respect i ve shipyards of the shipbuilders ~ that a representative copy of the said contracts is l1e r e t o a t ta.c i.1e(3 c.~s :Ei:l1ibit "AH fo1: t.:.h e peti- tioner and made an in tegr al pa rt hereof; 6 o Tha t �the I-!!11.1 n L,mber s of tl1e t..\�.Jt~lTJe (12) vessels a nd the dates of execu tion of t hei i corresponding covering contracts are as follC,YdS ~ Hull No . D a te t oEc�oEn tx.reac:cutt$sio�n- v 835 r.Ia y 30 , 1959 906 - ditto�- 152 3 - ditoo- 44 111ay 31, 1959 764 -ditto- 765 - ditto- 76 6 767 - d itto ~ 763 769 - c]i t tc~�- 388 9 -di tt~O - 3390 -� ditto-- -ditto- -. ait t.o-�� 7 . Tha t the said twelve (12) ocean- going vessels were all const ru cted in Ja~a n b y the J apane se sh i pbu ilder s and were delivered to the p e t it i oner at t he Builder 1 s yards, a ll located in .Japan; B. That the money u sed by the petitioner for the acquisition of said vessels came from .li..1I ��l

�. DECISION - CTA CASE lO. 1573 -4 - funds ~ealize d from the sale of bonds issued by the Central Bank of ~he Republic of the Philippines, appropriated for that purpose by Section 3 of Republic Act No. 1407; 9 . That on various dates, the Nat ional Treasurer of the Philiopines remitted to the petitioner, out of the National Treasury and coming from the proceeds of the sale of said bonds, the necessary money corresponding to the installments due on the contract price of the ve ssels. Said remittances made by the National Treasurer to the petitioner are eridenced by the attached copies of the Official Receipts therefor, which are mwrked Exhibits "B"; "B-l" to "B-37"; 10. Tha t the first in~tallment of 7.5% of t ne contract p rice payable within three (3) .week s after the signing of the contra0 t S, were paid in cash at Tokyo, while the second installment , payable to the builders upon the delivery of the vessels, ~ere mqde by the issuance of irrevocable lettera of credit established in favor of the builders and payable at Tokyo, Japan~ 11. That the balance of the contract price then remaining af ter the payment of the two afore- sale installments were secured by 14 promissory notes for eac:1 vessel, each note succesively maturing every six (6) months with the last note mat.ur ing in seven (7) .':lear s; 12. Tha t during the negotiations prior to the execution of the s aid contracts , the Japanese shipbuilders required of the petitioner that an opinion of the Secretary of Just ice be secured on the authority of the Secr etary of Finance to guarantee the payment by the Philippine Government of the negotiable promissory notes to be issued by the petitioner in connection with its acqui- sition of the twelve (12) ocean-going vessels ; that on April 10 , 1959, ttien Secreta y of Justice Jesus G. Barrera rendered the required opinion, copy of vJhich is hereto attached as Exhib it "C" and made integral part hereof; 13. That in 1960, the petitioner remitted to the Japanese shipbuilders the sum of $870 , 613.27 as interest on the unpaid balance of the purchase price of the aforesaid vessels, p . 3, BIR rec. Vol. II ; 11 5

DECISION -- CTA CASE NO . 1573 �- 5 - 14 . That in 1961 , petition.er: remitted t o the Japanese shipbuilders the sum of $1,654 , 936.52 as interest of the unpaid balance of the purchase price of the aforesaid vessels, p. 2 , BIR reo . Vol. II ; 15 . That in 1 962, the petitione~ remitted to the Japanese shipbuilders the sum of $1,54 1 ,031.00 as interest on the unpai~ balance of the purchase price of the said vessels, p. 2 , BIR rec. Vol. I I; 16. That on June 17, 1964, pe � itioner received a letter from the respondent, dated May 18 , 1964, assessing the petitioner the sum of P5,115,234.74 as withholding income tax! surchar ge, compromise and interesWallegedly due on t'1e s<:lid interests remitta:1ces mude by petitioner to the Japanese shipbuilders for the years 1960 , 1961 and 1962 ; 17. That in the 5th lndorse,�nt dated June 3 , 1965 of M~. J.N . Panganiban , the then Gene r al Manager of the National Development Company, addres~ed to the respondent, petitioner requested reconsideration of the aforesaid withholding tax assessment (pp . 248-249, BIR, r ec. VoL II); 18. That respondent issued, and petitioner was served on January 18, 1965, a warrant of distraint and levy to distraint the goods , chDttels or effects and other personal properties , of whatever charac~er and to levy upon the real property of the petitioner, in order to enforce the collection of the aforernent irn ed withholding taxes (p. 254 , BIR rec . Vol. II) claimed by il"e� r�he i� -Y'-'-"S:n::"o;-'r-'i-r:">-1�1-t ~ "' ...., _ _ ._. f'Y'Qn' ..... ... ... l ,_. ..... i T�).r_-.>. -.t.-... ~_ J_�.i_ 'n. r� ):."_ Y_ ' . The parties are not in dispute on ~he computQ ti ons of the amounts of the withholding incone tax, surcharge ar1d interest assessed r espondent agQinst petitioner for the years 1960 , 1961 and 1962 shou l d the l~tter be found liable thereto. Is petitioner National Development Company liable for the withho l ding income tax, including surcharge , 11. G

DECISION - CTA CASE NO. 1573 - 6- inter est and compromise penalty , assessed by respondent on the interest remittances made by petitioner to the / Japanese sh i pbuilders in Japan f or the years 1960 , 1961 a11d 1962? In contending that the interest income involved herein has its si tus outside the Philippines and is t herefore not subj ect to Ph il i ppine income tax, pe t i t ione r argues that : The in teres t s income of the Japanese shipbuil-de r s upon \'!.. ich the respondent assessed wi thholding income tax was real ized from the act or activity of the Japanese ship- b� i lders of con stru.'-'ting and selling the twelve qcean-going vesse l s to the petitioner . The source of the Sdid i nc ome is that. activity of the Japanese shipbui l ders which was performed outside the territorial lirrits of the Philip- pines. As pointed out herein befor e, the Japanese s hipbuilder s signed t he contractc with the petitione r i n Tokyo, Japan~ the y constructed the vessels in Japan ; and they /de l ivered the ve sse ls to the petitioner in t h2ir re spec t ive shipyards in Japan . The Japanese shipbuilders therefor e did no t perform any act in t he Philipp ines . Hence, t he source of the int<:.rests income in i_] Uestion is outside tle Philippines since t he activity or the labor and the sale fr om which the income f l owed had its si tu s in Jupan. (pp. 136-137, CTA Re c ord s .) Peti tione r mis ses t' .e point. Foreign c orporations not doing business in the Philippines, like the J apanese shipbu i l de rs invol ved herei n , are taxa b le on income from - - - - - a ll sources within the Philipoines, a s interest, div i - _ ... dends , rents, salaries, wages , premiums, ann uities , comp ensa t ion s , remun eration s, emol uments, ol othe r fi xed or determinable annua l or periodica l or c as ual gains, pr of i ts and income, and c apital gains . The tax the n was '1' J(...'r'l"i

DECISION - crm G'.SE NO . 1573 - 7- 30% of such gross income. (Section 24 (b) (1) ~ . National - - -- Internal Revenue Code.) And interest is income from sources within t.hc: Philippines if it :Ls derived or earned from / /sources within the Philippines , or iEter_~_�..!::. on bonds, nd.Bs: or other interest-bearing obl igations of residents, cotpo- rate or otherwise. (Section 37'a) (1) '� National Internal Revenue Code ; Section 153, Revenue Regulations No. 2. ) It is quite apparent , under the terms of the law , the Governmentis right to levy and collect income tax on interest received by foreign corporations not engaged in trade o= business wi t hin the Ph ili ppines is not ~) lanted upon the condition that. "the activity or: labor and the sale f r om which the (interest) income flowed had " Intc- rest derived from sources within the Philippines , and interest on bonds , notes , or other interest-bearing obli gations of residents, corporate or otben;i;::~c . '' Nothinq there speak s of the ~>act o:: activi)cy" of non-..::e~:; ident corporations in the Philippines, or place where the c ontrac t is sigr1ed . The rcsi.de~1cr;; o--f---th--e�-�-o~-b..lZi:o.::o:.r- who p~'.ys the interest, rathe1: than the pbys.1caJ. locu.tion of the securities, bonds or notes or the pl ace of payment, is the determining factor of the source of interest / income. (Mer tens, Lav1 of Federal Income 'I'a:,:.a t:i. on, Vol. 8 1 p . 128, citing A.C. Monk & Co. Inc., 10 T.C . 77; Sumitomo Bank , Ltd., 19 BTA 480; Estate of L. E. Mckinnon,

DECISION - CTA CASE NO. 1573 - 8- 6 BTA 41? ; 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 inte re st payment paid by him can have no othe r source than within the Philippines . The interes t is pa i d not by the bond, note or other interest-bearing obligations, but by the oblig or . (See Mertens, Id ., Vol . 8, p . 124.) Here in the case at bar, petitioner Natio~al Dev~lop - ment Company , a corporation duly organized and existing under the laws of the Republic of the Philippines, with adar e ss and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines, unconditionallv promised to pay the J2panese shipbuilde rs, as obligor in fourteen (14) .Pro- rnissor y notes fo~ each vessel, the balance of the c o ntract price of the twelve (12) .ocean-goi ng vessels purchased and ~cquired by it from the Japanese corporations, inc l1ding the i nterest on the princ i pal sum at the rate , of five per cent ( 5'{; ) .per annum" Stipulation of Facts .) And pursuant to the terms and conditions of these pro~issory notes , ~hich were duly signed by its Vice Chairman and General Manager, peti- tioner r~mitted to the J apanese shipbuilders in Japan during the years 1960, 1961 and 1962 the s um of $830,613.17, $1,654 , 936 . 5 2 and $1,541,031.00, respe ctively, as interes t on the unpaid balance of the purchase price 118

D�CISIOl~ - CTA CASE NO. 15 73 - 9 -- of the aforesaid vessels. (pars . 13 , 14 & 15 Pa-tial Stipu lation of Facts .) The law is clear. Our pla in duty is to apply it as written . The residence ot the obligor which paid t he inter es t unde r consideration, pe titione r her ein , is Ca lle Pureza , Sta. Mesa , Manila , Philippines; an d as a corporation duly o rganized and existing unde r the laws of the Philippines , it is a domestic cor poration , r esi- dent of the Ph ili pp i ne s . (Sec . 84(c) ~ Nationa l Internal Eeve n ue Code .) The interest paid by petitione~. which is admittedly a r esiden t of the Philip?ines, is en the Clear ly , therefo e , the interest r emit�ed t o the Japanese shipb~ilders in Japan in 1960, 1961 and 1962 on the 1npai d bala ; ce of the purchase pr i ce o f the vessels acquired by pe t itioner is interest de rived from sou rces within the Ph ilippines subj2ct to income tm~ unde r th e t hen Sectit::.m 24 (b) (_1.} of t he Na tlona l Internal Revenue Code. Nonetheless, petitioner would present a thes is that since the promissory notes wore executed by it as admi- nistrator of the funls appropriated by the G ovei~ment under Rep u b lic Act No . 1407 , by au t hority of whi c h petitioner c an acquire ocean-goi. g vessels fo r resale , l ease or c harter to persons or c orpor ations , such notes are go vernmen t securities. As a matter of fact , it is pointed out, t he Government even guaranteed the payment

DECISION - CTA CASE NO. 1573 - 10 - o f both the principa l 2nd interest t he[ cof. Consequent- ly , petitioner a r gues that the in teres t remi t t ed by it to the Japanese shipbuilders on the unpaid balance of the purchase price of the vessels covered by the pr mis- sory notes is exempt fr om income tax pursuant to Sec tion / 29 (b) (4) of tbe National Inte .cnal F.evenue Code , which reads as follows: X X X X X X X X (b) Exclus ions from gross income . - The follor.,.;ing Tt~TI not-SelriCIUde d ..in gross re : income and sha ll be e:empt from taxat i on under t h i s 'r i t X X ..v X X X (4 ) Inte r e~t on Governmen t Securities .- Interest �upon--;}18-oblig-aion s of the Govern- men t of the Republi c o f the Philippine s or any political subdivision thereof, but in t he case of such ob l iga tions issued after the ~pproval of this Code, only to the extent p rov ided in the ctct authoriz ir1g the i ssue tJ1er:eof . (l-~s ame nd ed by Section 6, Republic Act No . 82) X X X X X It has been held that t he bor rowing powe r of the state or its public agencies is so essential to the state tho.t the in terest 1:)ai(J 1 1LJ'"')l1 bon.ds is sued by ti1 0.n1 should be immune from t a xa tion. The bond i ssu ing function "was one thought to be essential to the maintenance of the gcvernm<~nt " and t.bat to tax in come r ecei ved by a pr i vate inves tor on state bonds would "threat en iinpair - ment of the borrowing power of the state. " (See Helvering '1 (:\ 1 . r ol

DECISIOI'~ - CT.!\ CASE NO :L573 - l.l - vs. Gerhardt, 304 U.S . 405, 82 L. Ed. 1427, citing Pollock vs. Farmers Loan & Trust Co. , 157 u.s. 429 , 39 L . Ed . 7 59 ; see 2.lso Hale vs . IOvla S t<:t te Boa.rd of 1\ssess- ment & Rev i ew , 302 u.s . 95, 82 L. Ed . 72. ) Lowever, worthwhile noting in this case is th2t the promissory notes in question (See E..~hs. " D", "D-1" to "D - 13 11 , suprc-) are not bonds or certificates of indebtedness which a~e instruments having the character of investment securities issued by the Government of the Republic of the Philipines or any political subdivision thereof, but merely instru- me nt3 evidencing debts arising in ordinary business transactions between petitioner National Development Development Comp~ny may be an agency of the Government 1 i t does not exercise governmental or sovereign powers but merely a n entity fur the performance of purely corpo- rate , proprietary or business functions ~s is apparent from its organic act - Commonvie.::d.th Act L'Jo . 182 , a.s amended by Commonwealth Act No. 31!. Pursuant to Section 3 thereof , i.t 11 Shal.l be SLbjcct to the provisions of the (:orporatior1 LH3\�l in so far: as they are nc)t irlcor1sistentn with provisions of said Ccm:nonwea1th Ac �t ''and shal l h ave the general powers rnen tioned in said" Corp0.r at ion minin g , agricultural, anc other enterpr i~es which may be necessary or con tributory to the economic development

DECISION - CTA CASE NO . 1573 �- 12 - of the country , or impor:t21nt to public interest ," a s well as " pe :: form any and all acts which 2.. co.rporat i 6n or na t ural person lS authorized to p~rform under t he .. laws now exist~ng 0 ,. 8nact~d hereafter." Pursuant to Republic Act No. 104, petitioner is therefore liable , l i ke <1ll c orporations, agencies or instr1 mental- controlled the Government for s uch "i o�� / i ( - !.-_,_._0.:;:c.�) r~.'J'V�lr:' 0'-�~ (J.1 .r-- by 6 duties , taxes ; fees an.d otl1er cha1:ges tJpon i. ts tra 11 sactions, business , industry, sale or income as are imposed by laws upon private persons engaged in business. note~ e�ecuted by petitioner are government securi t ies within th�2 purv::.e\'7 of t~1e law , Sect i on 29(b) (4) _of the N~tional Internal Revenue Code expressly provides t hQt interest on obligations issued by the Gove~nrnent o f the Republic of the Ph i lippines after the approval of s aid Code on June 15, 1939 shall be exempt from tax only to tl1e extG n �t p.rc>'1 ic1ec1 in tl1e luv; au tllf)r i zing the issue thereof . Petitioner has not eve~ shown under what law vier-c~ the promissory notes in question i:;:,;sued: and wh &...cJ.er such lav; authc::izing it to exec~ute promissory notes p ro�- vides for exemption from taxation of the interest payable the r eon , and trw ext.ent of the e�'ernption provided t herein. I t bears emphasis that he who claims to be exempt from t he payment of a particular tax must do so under c l ear and vnmistakable terms found in the statute. Tax

DECISION �� CTA CASE NO 1 57 3 ~ xe mp t i ons ar e s t r ict ly c ons true d a ga i ns t th e t axpa ye r, th ey bei.n9 1 i qh l y d i sfa vor e d an d may a l mos t be s a i d 11 to be odiou s to t.he l a,,.;. a He \vho cla ims a n exe mpt ion mu st be a ble to p o int to some p o s i ti v e p~ov i sio n o f law cr eating the r i g h t ; i t canno t be a llowed to ex i s t upon a me re vague i mplic ation or inference . (Asia t i c ~ 2 tro le u m v s . Lla nes , 49 Phil. 466 , 471 ; Un ion Garme n t Co . , Inc . vs . Co u r t o f Ta x Appea ls , L- 168 09, Janu a ry 31 , 196 2, 4 SCRA 30 4 ; Ph i lipp in e Ac etylene Co. , Inc. vs . Comrnlssion2 r of I nte rn a l Rev e nue , L- 197 07, Augus t 17 , 19 67 , 20 SChA 1 056; Repub l i c. Flour Mills , Inc. vs . CornmisF i oner of Inter nal Re ven ue , L- 256 02 , February lP , 1970, 31 SCRA 52 0; Comm i ss i one r of Customs vs . Philippi ne Ac e t ylene Co. & Cou rt of Tax Appeals , L-221 4 3 , May 19 ?1 ; 39 SCRA 71~ Dava o Ligh t Co e 1 Inc:. Commissioner o f Cus t oms , L- 28 90 2 , March 2 9, 1 97 2, 44 SCRA 122.) Th e right o f t axation wi ll no t be held to ha v e been sur r end~red un l e ss t he i n tention to Gu r r ende r i s man i fest e d by words too p lain to b e n i stal<c:n (Ohio L i fe Insu r a n ce & 'l"rust. Co . v s . De bo l t, 60 Howard , 41 6) '� for t he state c an no t s trip its el f of the mos t essentia l power of t axa t ion b y I d o u btfu l \vo r ds ; i t c an no t , by ambi �;1 uou ~�- la nguag e , be depr ived of thi s highest a t tribu t e of sove reignty. (Erie Rai lw a y Co. v s. Common wealth 0 .,._. Pe nnsylvania , 21 Wallac e , 49 2 , 49 9 ) . So , when exemption is cl a imed , it mus t be shown ind ubitab l y to ex i st , for e very pre -

. DECISION - CTA CASE NO. 1573 - 14 - sumption is against i t, and a well-~ounded doubt is fatal to the claim (Farr ington vs . Tennessee & County of Shelby , 95 u . s . 679, 686) �. (Asiatic Petroleum Co . vs . Llanes , 49 Phil. 466, 471; Manila Electric Company vs . Commissioner of Internal Revenue, L-29987 & L- 23844, October 22 , 1975 , 67 SCRA 351 . ) The net result is that the promissory notes executed by petitioner as security for the payment of t he unpaid balance of the purchase price of the vessels acquired from the Japanese shipbuilders are not government secu- rities within the meaning of Section 24(b) (4) of the Na tional Internal Revenue Code , and the interest payments thereon are not therefore exempt from income tax under the said section of the law . / It appearing that the Japanese shipbuilders referred to in this case are foreign corporations not engaged in trade or business within the Philippines and n� having any off ice or place of business in the Philippines; and having reached the conclusion that : (a) The interest payments on the purchase price of the twelve ocean- going vessels remitted by petitioner to the aforesaid Japan ese shipbuilders in Japan fr om 1960 to 1962 are income to the said shipbuilders from sources within the Philippines un de r Section 37 of the Na tional Internal Revenue Code , and therefore , subject to Philippine income tax pursuant to Section 24(b) of the said Code ,

DECISION - CTA CASE NO. 1573 - 15 - as amended ; (b) The interest on the purchase price of the twelve ocean-going vessels remitted by petitioner t o the Japanese shipbuilaers in Japan is not exempt from income tax und e r Section 29 (b) (4) of the National I n ternal Revenue Code; The interest payments on the purchase price of the twelve ocea n-going vessels remitted by petitioner to / the aforesaid Japanese shipbuilders in Japan from 1960 to 1962 are fixed and determinable income , and therefore, the income tax due thereon should be withheld in accordance with Section 54 , in relation to Section 53, of the National Internal Revenue Code. The law requires that every individual , person or corporation, in whatever capacity acting , having the control , custody, disposal or payment of compensation or other fixed or determinable annual or periodical or casual gains , profits and income of foreign corporations subject to income tax not engaged in trade or business within the Philippines , to deduct and withhold from such in c ome the tax due thereon , file the requisite with- hol ding return and pay the tax withheld to the Bureau ot Internal t{evenue. (Sees. 53 , 54, Tax Code ; Sec . 205 , Re v. Regs . No. 2) . We quote the pert:in'=nt portiolls of law: "Sec . 54.- Payment of corporation income tax at sour c e . - In the case of foreign corpor ations

DECISION - CTA CASE NO 1573 - 16 -- ~~ubject to taxation under this Title not engaged in trade or business within the Philippines and not having any office or place of business therein , there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in section fifty-three a tax equal to thirty ~ centum thereof , and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section: x x x." "Sec . 53 (b) .- Nonresident aliens.- .All persons , corEoraiions and general co-partner- ships (companias colectivas) , in whatever capacity acting , including lessees or mortgagors of real or personal property, trustees acting in any trust capac ity , executors, administrators , receivers , conservators, fiduciaries, employers, and all officers and employees of the Govern- )Tient of the Philippines having the control , receipt, custody , disposal or payment of interest, dividends, rents, salaries , wages , premiums, annuities, compensations, remune- rations , emoluments, or other fi xed or deter- minable annual or periodical gains, profits and income of any nonresident alie n individual, not engaged in trade or business within the Philippines and not having any o f fice or place of business therein , shall (except in the cases provided for in subsection (a) of this Section) deduct and withhold from such annual or period- ical gains , profits and income a tax equal to twenty (now 30%) -~centum thereof: Provided, That no such deduction or withholding shall be required in the case of dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or busines~ wi thin the Philippines and (2) _more than ei g hty-five ~ centum of the gross income of such corporation ~or the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined by the provisions of section thirty-se ve n : Provided , further, That the Commissioner of Internal Revenue may authorize such tax to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent." "1 ')(,;., r-4"1

DECISION - CTA CASE NO. 1573 - 17 - As a matter of fact, Section 53(c) .of the Tax Code makes .the withholding agent personally liable for the income tax withheld under Section 54 of the same Code. Said section provides: "Sec. 53(c) �.- Return and payment.- Ever y person required to deduct and with- / hold any tax under this section shall make r e turn thereof , in duplicate, on or before the fifteenth day of April of each year, and , on or before the time fixed by law for the payment of the tax , shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any persons for the amount of any payments made in accordance with the provisions of this section . (As amended by Section 9, Republic Act No . 2343 . ) In this connection, the Supreme Court said and we quote: The law sets no condition for the personal liability of the withholding ~gent to attach . The reason is to compel the withholding agent to withhold the tax under all circumstances . In effect , the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is consti t uted the agent of both the Govern- ment and the taxpayer. With respect to the collection and/or withholding of the tax , he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government , he is the agent of the taxpayer. The with- holding agent, therefore, is no ordinary government agent especially because under Section 53(c) he is held personally liable for the tax he is duty bound to withhold, whereas , the Commissioner of Internal Revenue and his deputies are not made liable by law. 1 ~2 s

DECISION - CTA CASE NO. 1573 - 18 - 'X X X X 'In case of doubt , a withholling agent may always protect himself by withholding the tax due, and promptly c a using a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an in- dividual is not subject to withholding . In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding the withholding agent may thereupon remit the amount of tax withheld. ' (2nd par. , Sec. 200, Income Tax Regulations) . "The section above-quoted (Sec . 200 , Income Tax Regulations) relaxes the application of the stringent p r ovisions of Section 53 of the Tax Code. Accordingly, it grants exemption from tax liability , and in so doing, it lays down ~t e ps to be taken hy the withholding agent, namely: (1) that he withholds the tax due; (2) that he promptly addresses a query to the Comciissioner of Internal Revenue for determin- ation whether or not the income paid to an individual is subject to withholding; and (3) that the Commissioner of Internal Revenue decides that such income is not subject to withholding . Strict observance of said steps is required of a withholding agent before he could be released from liability . Generally, the law fr owns upon exemption from taxation, hence , an exempting provision should be construed st r ictissimi juris . " (RESOLUTION , The Phil i ppine Guaranty Co. vs . The Commis- sioner of I nternal Revenue and The Court of Tax Appeals , G.R. No. L-22074 , September 6 , 1965 ; 15 SCRA 1) �. What then is the rationale of the withholding of / the corresponding income tax at source of the income required under Sections 53 and 54 of the Revenue Code? This is important because, as made explicit by the Supreme Court in the case of British Traders' Insurance Co. , Ltd. vs. Co mmissioner of Internal Revenue , G.R . No. L-20501 , Ap ri l 30 , 1965 , 13 SCRA 719:

DECISION - CTA CASE NO. 1573 - 19 - "The taxability of a foreign corporation ' s income depends upon the locus of the activity , property or service giving rise thereto. x x x x Stated otherwise, the flow of wealth proceeded from , and occurr ed within, Philippine territory, enjoying therein the protection accorded by our Government . Such flow of \\7ealth should, in consideration for the protection , share the burden of supporting the Government . x x x Precisely , our legislators adopted the admi- nistrative device in Sections 53 and 54 - withholding of the corresponding income tax at source of the income - to insure collection of whatever tax may be due on income earned in the Philippines by those who are not doing business in the Phi lippines and have no office or agent here . The fact that a foreign corpo- ration does not engage in business here and had no office or agen t is the very reason why its income is subject to withholding tax . (Sec. 54 , Na tional Internal Reve nu e Code) (British Traders' Insurance Co., Ltd . vs. Commissioner of Internal Revenue , G. R . No . L- 20501, Apri l 30 , 1965, 13 SCRA 719) . Petitioner being the withholding agent for the above-mentioned Japanese shipbuilders in connection with the interest payments remitted to the latter in Japan by the former on account of its purchase of twelve ocean-going vessels , pursuant to Section 54 in relation to Section 53 of the Revenue Code, the withholding income tax in question in the agg regate amount of P5,ll5,234.74, inclusive of the 25% s urcha rge and / 1/2% monthly interest computed from l\.pril 18 , J.961 to April 18 , 1964 for 1960 , 1961 and 1962, axcept the com- promise penalty , was assessed in accordance with law . The compr omise penalty for non-filing of return in the sum of P300.00 fo r each yea r, or a total of P9 00.0 0 , suggested by respondent in his assessment should not be t 30

- DECISION - CTA CASE NO . 1573 - 20 - imposed or collected without the agreement and con- formity of petitioner . And it does not appear that petitioner accepted the imposition of the compromise amount . (Wonder Mechanical Engineering Corporation vs . Court of Tax Appeals, L-22805 & 27856, June 30, 1975 , 64 SCRA 555; See also Collecto r of Internal Revenue vs. University of Santo Tomas, L-11274 & 11280 , November 28 , 1958, 104 Phil. 1062 , Unpub.; Philippine International Fair, Inc . vs . Collector of Internal Revenue , L-12928 & 12932, March 31, 1962, 4 SCRA 174 . ) In line with the foregoing , the decision appealed from is modified and petitioner is liable to pay to respondent the amount of ~5 , 114,334.74 , computed as follm..;s: 1960 Interest remitted abroad . � � � . . . ~2 , 611,839.8)._ Ta..'< due th8reon . . � � � . � . � 783 , 551.00 Add: 25% surcharge 195,887.75 !2% monthly interest from April 18, 1961 to May 18, 1964 . . 141,039.18 � ,?.l, 120 , 477-:~)J 'ICTAL Jl.f'.'lOUNT DtJE & COLLECTIBLE 196l Interest remitted abroad �� fz4,964,809.56 Tax due thereon 1,489 ,442.00 Add: 25% surcharge 372,360.50 !2% monthly interest from Apr i1 17 , 1962 to l'1ay 18 , 1964. . 186,420 . 48 � P2 ,048 ,222. 98. 'ID'l'AL P.l'-10U1-JT DUE & COL.illCTIBill 1 3 1_

-- DEC I SION - CTA CASE NO . 1573 - 21 - 1962 Interest remitted abroad . ~4,931,299 . 20 Tax due thereon -i,479,388.00 Add : 25% s;;rcharge 369,847.00 ~% monthly interest from April 17, 1963 to May 18, 1964. . . --~6, 398. ?1. 'lDl'AL AIVJOUi:JT DUE & COLLECTIBLE . . Pl,945,633.8~ Accordingly, petitioner National Development Company is hereby ordered to pay to respondent Commissioner of I. Inte r nal Revenue the total amount of P5,114,334 . 74 as defic iency withHolding income tax for the years 1960 , 1961 and 1 962 , inclusive , plus the surcharg e and interest which have accrued thereon incident to del i nquency , pursuant to Sect i on 51 (e) of the National Internal Revenue Code , as amended . WHEREFORE , the decision appealed from is hereby modified in the sense that the compromise penalty should not be imposed and is affirmed in all other respects . With costs against petitioner . SO ORDE RED . Quezon City , Metro Manila, April 30, 1980 . \Q~~~l�~ AI,1ANri'E . ILLER Acting Pre~iding Judge I CONCUR: