G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS,respondent.

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit.

SO ORDERED. 5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom) filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments — can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two years but ten (10). 7

II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were taxes due in 1987 and that PBCom availed of tax-crediting that year. 8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

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The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide;

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It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10petitioner claims that rulings or circulars promulgated by the Commissioner of

Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue;

b). where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12Respondent Commissioner

also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due

process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause

that may arise after payment;Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court

explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total

quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for

taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.1âwphi1.nêt

SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

R E S O L U T I O N

FELICIANO, J.:p

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended

by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this Resolution resolving that Motion.

I

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The question was not raised by the Commissioner on the administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time on appeal questions which had not been litigated either in the lower court or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner may:

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(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus becomes important

to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed

conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a

withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent 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 constituted the agent of both the Government 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 withholding 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 and his deputies are not made liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax

obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all sources within the Philippines, as . . . dividends . . .Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US

"shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart,the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income,war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

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Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall —

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(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess

profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

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(c) Applicable Rules

(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess profitstaxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8for a proportionate part of the corporate income tax actually

paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-

Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil. x 35% — Regular Philippine corporate income tax rate ——— P35.00 — Paid to the BIR by P&G-Phil. as Philippine corporate income tax.

P100.00 -35.00 ——— P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USA x 35% — Regular Philippine dividend tax rate under Section 24 ——— (b) (1), NIRC P22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC ——— P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC -9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC

——— P13.00 — Amount of dividend tax waived by Philippine ===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA - 9.75 — Dividend tax withheld at the reduced (15%) rate ——— P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil. to the BIR

Dividends actually remitted by P&G-Phil. to P&G-USA P55.25 ——————— = ——— x P35.00 = P29.75 10

Amount of accumulated P65.00 ====== profits earned by P&G-Phil. in excess of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation

declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750 ——— 100,000 **

(2) The amount of 15% of P75,000 withheld = 11,250 ——— P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .

(c) Taxes. — . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government—e.g., for taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included.The term "accumulated profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRCto have paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of

particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine

corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We should leave details relating to administrative implementation where they properly belong — with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy foremost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 — Dividends remittable to P&G-USA (please see page 392 above - 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.

——— P55.25 — Dividends actually remitted to P&G-USA

P55.25 x 46% — Maximum US corporate income tax rate ——— P25.415—US corporate tax payable by P&G-USA without tax credits

P25.415 - 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil. at 15% (Section 901, US Tax Code) ——— P15.66 — US corporate income tax payable after Section 901 ——— tax credit.

P55.25 - 15.66 ——— P39.59 — Amount received by P&G-USA net of R.P. and U.S. ===== taxes without "deemed paid" tax credit.

P25.415 - 29.75 — "Deemed paid" tax credit under Section 902 US ——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends ====== remitted by P&G-Phil. to P&G-USA after Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US ====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should encourage additional investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty

percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend ifduring the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] —.16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code,

discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

G.R. No. 104151 March 10, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and COURT OF TAX APPEALS, respondents.

G.R No. 105563 March 10, 1995

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,respondents.

REGALADO, J.:

Atlas Consolidated Mining and Development Corporation (herein also referred to as ACMDC) is a domestic corporation which owns and operates a mining concession at Toledo City, Cebu, the products of which are exported to Japan and other foreign countries. On April 9, 1980, the Commissioner of Internal Revenue (also Commissioner, for brevity), acting on the basis of the report of the examiners of the Bureau of Internal Revenue (BIR), caused the service of an assessment notice and demand for payment of the amount of P12,391,070.51 representing deficiency ad valorem percentage and fixed taxes, including increments, for the taxable year 1975 against ACMDC. 3

Likewise, on the basis. of the BIR examiner's report in another investigation separately conducted, the Commissioner had another assessment notice, with a demand for payment of the amount of P13,531,466.80 representing the 1976 deficiency ad valorem and business taxes with P5,000.00 compromise penalty, served on ACMDC on September 23, 1980. 4

ACMDC protested both assessments but the. same were denied, hence it filed two separate petitions for review in the Court of Tax Appeals (also, tax court) where they were docketed as C.T.A. Cases Nos. 3467 and 3825. These two cases, being substantially identical in most respects except for the taxable periods and the amounts involved, were eventually consolidated.

On May 31, 1991, the Court of Tax Appeals rendered a consolidated decision holding, inter alia, that ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975 and 1976 in the respective amounts of P11,276,540.79 and P12,882,760.80 thereby effectively sustaining the theory of ACMDC that in computing the ad valorem tax on copper mineral, the refining and smelting charges should be deducted, in addition to freight and insurance charges, from the London Metal Exchange (LME) price of manufactured copper.

However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive of interest, consisting of 25% surcharge for late payment of the ad valorem tax and late filing of notice of removal of silver, gold and pyrite extracted during certain periods, and for alleged deficiency manufacturer's sales tax and contractor's tax.

The particulars of the reduced amount of said tax obligation is enumerated in detail in the dispositive portion of the questioned judgment of the tax court, thus:

WHEREFORE, petitioner should and is hereby ORDERED to pay the total amount of the following:

a) P297,900.39 as 25% surcharge on silver extracted during the period November 1, 1974 to December 31, 1975.

b) P161,027.53 as 25% surcharge on silver extracted for the taxable year 1976.

c) P315,027.30 as 25% surcharge on gold extracted during the period November 1, 1974 to December 31, 1975.

d) P260,180.55 as 25% surcharge on gold during the taxable year 1976.

e) P53,585.30 as 25% surcharge on pyrite extracted during the period November 1, 1974 to December 31, 1975.

f) P53,283.69 as 25% surcharge on pyrite extracted during the taxable year 1976.

g) P316,117.53 as deficiency manufacturer's sales tax and surcharge during the taxable year 1975; plus 14% interest from January 21, 1976 until fully paid as provided under Section 183 of P.D. No. 69.

h) P23,631.44 as deficiency contractor's tax and surcharge on the lease of personal property during the taxable year 1975; plus 14% interest from January 21, 1976 until fully paid as provided under Section 183 of P.D. 69.

i) P91,883.75 as deficiency contractor's tax and surcharge on the lease of personal property during the taxable year 1976, plus 14% interest from April 21, 1976 until fully paid as provided under. Section 183 of P.D. No. 69.

With costs against petitioner. 5

As a consequence, both parties elevated their respective contentions to respondent Court of Appeals in two separate petitions for review. The petition filed by the Commissioner, which was docketed as CA-G.R. SP No. 25945, questioned the portion of the judgment of the tax court deleting the ad valorem tax on copper and silver, while the appeal filed by ACMDC and docketed as CA-G.R. SP No. 26087 assailed that part of the decision ordering it to pay P1,572,637.48 representing alleged deficiency assessment.

On February 12, 1992, judgment was rendered by respondent Court of Appeals in CA-G.R. SP No. 25945, dismissing the petition and affirming the tax court's decision on the manner of

computing the ad valorem tax. 6 Hence, the Commissioner of Internal Revenue

filed a petition before- us in G.R. No. 104151, raising the sole issue of whether or not, in computing the ad valorem tax on copper, charges for smelting and refining should also be deducted, in addition to freight and insurance costs, from the price of copper concentrates.

On May 22, 1992, judgment was likewise rendered by the same respondent court in CA-G.R. SP No. 26087, modifying the judgment of the tax court and further reducing the tax liability of ACMDC by deleting therefrom the following items:

(1) the award under paragraph (a) of P297,900.39 as 25% surcharge on silver extracted during the period November 1, 1974 to December 31, 1975;

(2) the award under paragraph (c) thereof of P315,027.30 as 25% surcharge on gold extracted during the period November 1, 1974 to December 31, 1975; and

(3) the award under paragraph (e) thereof of P53,585.30 as 24% (sic, 25%) surcharge on pyrite extracted during the period November 1, 1974 to December 31, 1975. 7

Still not satisfied with the said judgment which had reduced its tax liability to P906,124.49, as a final recourse ACMDC came to this Court on a petition for review on certiorari in G.R. No. 105563, claiming that it is not liable at all for any deficiency. tax assessments for 1975 and 1976. In our resolution of September 1, 1993, G.R. No. 104151 was ordered consolidated with G.R. No. 105563. 8

I. G.R No. 104151

The Commissioner of Internal Revenue claims that the Court of Appeals and the tax court erred in allowing the deduction of refining and smelting charges from the price of copper concentrates. It is the contention of the Commissioner that the actual market value of the mineral products should be the gross sales realized from copper concentrates, deducting therefrom mining, milling, refining, transporting, handling, marketing or any other expenses. He submits that the phrase "or any other expenses" includes smelting and refining charges and that the law allows deductions for actual cost of ocean freight and insurance only in instances where the minerals or mineral products are sold or consigned abroad by the lessees or owner of the mine under C.I.F. terms, hence it is error to allow smelting and refining charges as deductions.

We are not persuaded by his postulation and find the arguments adduced in support thereof untenable.

The pertinent provisions of the National Internal Revenue Code (tax code, for facility) at the time material to this controversy, read as follows:

Sec. 243. Ad valorem taxes on output of mineral lands not covered by lease. — There is hereby imposed on the actual market value of the annual gross output of the minerals mineral products extracted or produced from all mineral lands not covered by lease, an ad valorem tax in the amount of two per centum of the value of the output except gold which shall pay one and one-half per centum.

Before the minerals or mineral products are removed from the mines, the Commissioner of Internal Revenue or his representatives shall first be notified of such removal on a form prescribed for the purpose. (As amended by Rep. Act No. 6110.)

Sec. 246. Definitions of the terms "gross output," "minerals" and "mineral products." — Disposition of royalties and ad valorem taxes. The term "gross output" shall be interpreted as the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a separate entity without any deduction from mining, milling, refining, transporting, handling, marketing, or any other expenses: Provided, however, That if the minerals or mineral products are sold or consigned. abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted. The output of any group of contiguous mining claim shall not be subdivided. The word "minerals" shall mean all inorganic substances found in nature whether in solid, liquid, gaseous, or any intermediate state. The term "mineral products" shall mean things produced by the lessee, concessionaire or owner of mineral lands, at least eighty per cent of which things must be minerals extracted by such lessee, concessionaire, or owner of mineral lands. Ten per centum of the royalties and ad valorem taxes herein provided shall accrue to the municipality and ten per centum to the province where the-mines are situated, and eighty per centum to the National Treasury. (As amended by Rep. Acts Nos. 834, 1299, and by Rep. Act No. 1510, approved June 16, 1956)."

To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposed on the actual market value of the annual gross output of the minerals or mineral products extracted or produced from all mineral lands not covered by lease. In computing the tax, the term "gross output" shall be the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a separate entity, without any deduction for mining, milling, refining, transporting, handling, marketing or any other expenses. If the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted.

In other words, the assessment shall be based, not upon the cost of production or extraction of said minerals or mineral products, but on the price which the same — before or without undergoing a process of manufacture — would command in the ordinary course of business. 9

In the instant case, the allowance by the tax court of smelting and refining charges as deductions is not contrary to the above-mentioned provisions of the tax code which ostensibly prohibit any form of deduction except freight and insurance charges. A review of the records will show that it was the London Metal Exchange price on wire bar which was used as tax base by ACMDC for purposes of the 2%ad valorem tax on copper concentrates since there was no available market price quotation in the commodity exchange or markets of the world for copper concentrates nor was there any market quotation locally

obtainable. 10 Hence, the charges for smelting and refining were assessed not on the basis of the price of the copper extracted at the mine site which is prohibited by law, but on the basis of the actual market value of the manufactured copper which in this case is the price quoted for copper wire bar by the London Metal Exchange.

The issue of whether the ad valorem tax should be based upon the value of the finished product, or the value upon extraction of the raw materials or minerals used in the manufacture of said finished products, has been passed upon by us in several cases wherein we held that the ad valorem tax is to be computed on the basis of the market value of the mineral in its condition at the time of such removal and before it undergoes a chemical change through manufacturing process, as distinguished from a purely physical process which does not necessarily involve the change or transformation of the raw material into a composite distinct product. 11

Thus, in the case of Cebu Portland Cement Co. vs. Commissioner of Internal

Revenue, 12 this Court ruled:

. . . ad valorem tax is a tax not on the minerals, but upon the privilege of severing or extracting the same from the earth, the government's right to exact the said impost springing from the Regalian theory of State ownership of its natural resources.

. . . While cement is composed of 80% minerals, it is not merely an admixture or blending of raw materials, as lime, silica, shale and others. It is the result of a definite the crushing of minerals, grinding, mixing, calcining, cooling, adding of retarder or raw gypsum. In short, before cement reaches its saleable form, the minerals had already undergone a chemical change through manufacturing process, This could not have been the state of mineral products' that the law contemplates for purposes of imposing the ad valorem tax. . . . this tax is imposed on the privilege of extracting or severing the minerals from the mines. To our minds, therefore the inclusion of the term mineral products is intended to comprehend cases where the mined or quarried elements may not be usable in its original state without application of simple treatments . . . which process does not necessarily involve the change or transformation of the raw materials into a composite, distinct product. . . . While the selling price of cement may reflect the actual market value of cement, said selling price cannot be taken as the market value also of the minerals composing the cement. And it was not the cement that was mined, only the minerals composing the finished product.

This view was subsequently affirmed in the resolution of the Court denying the motion for

reconsideration of its aforesaid decision, 13 reiterated that the pertinent part of which reiterated that —

. . . the ad valorem tax in question should be based on the actual market value of the quarried minerals used in producing cement, . . . the law intended to impose the ad valoremtax upon the market value of the component mineral products in their original state before processing into cement. . . . the law does not impose a tax on cement qua cement, but on mineral products at least 80% of which must be minerals extracted by the lessee, concessionaire or owner of mineral lands.

The Court did not, and could not, rule that cement is a manufactured product subject to sales tax, for the reason that such liability had never been litigated by the parties. What it did declare is that, while cement is a mineral product, it is no longer in the state or condition contemplated by the law; hence the market value of the cement could not be the basis for computing the ad

valorem tax, since the ad valorem tax is a severance tax i.e., a charge upon the privilege of severing or extracting minerals from the earth, (Dec. p. 4) and is due and payable upon removal of the mineral product from its bed or mine (Tax Code s. 245).

Therefore, the imposable ad valorem tax should be based on the selling price of the quarried minerals, which is its actual market value, and not on the price of the manufactured product. If the market value chosen for the reckoning is the value of the manufactured. or finished product, as in the case at bar, then all expenses of processing or manufacturing should be deducted in order to approximate as closely as is humanly possible the actual market value of the raw mineral at the mine site.

It was copper ore that was extracted by ACMDC from its mine site which, through a simple physical process of removing impurities therefrom, was converted into copper concentrate In turn, this copper concentrate underwent the process of smelting and refining, and the finished product is called copper cathode or copper wire bar.

The copper wire bar is the manufactured copper. It is not the mineral extracted from the mine site nor can it be considered a mineral product since it has undergone a manufacturing process, to wit:

I. The physical process involved in the production of copper concentrate are the following (p. 19, BIR records; Exh. ‘H’, p. 43, Folder I of Exhibits.)

A Mining Process —

(1) Blasting — The ore body is broken up by blasting.

(2) Loading — The ore averaging about 1/2 percent copper is loaded into ore trucks by electric shovels.

(3) Hauling — The trucks of ore are hauled to the mill.

B Milling Process —

(1) Crushing — The ore is crushed to pieces the size of peanuts.

(2) Grinding — The crushed ore is ground to powder form.

(3) Concentrating — The mineral bearing particles in the powdered ore are concentrated.

The ores or rocks, transported by conveyors, are crushed repeatedly by steel balls into size of peanuts, when they are ground and pulverized. The powder is fed into concentrators where it is mixed with water and other reagents. This is

known in the industry as a flotation phase. The copper-bearing materials float while the non-copper materials in the rock sink. The material that floats is scooped and dried and piled. This is known as copper concentrate. The material at the bottom is waste, and is known in the industry as tailings. In Toledo City, tailings are disposed of through metal pipes from the flotation mills to the open sea. Copper concentrate of petitioner contains 28-31% copper. The concentrate is loaded in ocean vessels and shipped to Mitsubishi Metal Corporation mills in Japan, where the smelting, refining and fabricating processes are done. (Memorandum of petitioner, p. 71, CTA records.)

II. The chemical or manufacturing process in the production of wire bar is as follows: (Exh. 'H', p. 43, Folder I of exhibits.)

A. Smelting —

(1) Drying — The copper concentrates (averaging about 30 percent copper) are dried.

1. Flash Furnace — The dried concentrate is smelted autogenously and a matte containing 65 percent is produced.

2. Converter — The matte is converted to blister copper with a purity of about 99 per cent.

B. Refining —

(1) Casting Wheel — Blister copper is treated in an anode furnace where. copper requiring further treatment is sent to the casting wheel to produce cathode copper.

(2) Electrolytic Refining — Anode copper is further refined by electrolytic refining to produce cathode copper.

C. Fabricating —

(1) Rolling — Fire refined or electroly-tic copper-and/or brass (a mixture Of copper and zinc) is made into tubes, sheets, rods and wire.

(2) Extruding — Sheet tubes, rods and wire are further fabricated into the copper articles in everyday use.

The records show that cathodes, with purity of 99.985% are cast or fabricated into various shapes, depending on their industrial destination. Cathodes are metal sheets of copper 1 meter x 1 meter x 16-16 millimeter thick and 160 kilograms in weight, although this thickness is not uniform for all the sheets. Cathodes sheets are not suitable for direct fabrication, hence, are further fabricated into the desired shape, like wire bar, billets and cakes. (p. 1, deposition, London,) Wire bars are rectangular pieces, 100 millimeter x 100 millimeter x 1.37 meters long and weigh some 125 kilos. They are suited for copper wires and copper rods. Billets are fabricated into tubes and heavy electric sections. Cakes are in the form of thick sheets and strips. (pp. 13, 18-

21, deposition, Japan, Exhs. "C" & "G", Japan, pp. 1-2, deposition, London, see pp. 70-72, CTA records.) 14

Significantly, the finding that copper wire bar is a product of a manufacturing process finds support in the definition of a "manufacturer" in Section 194 (x) of the aforesaid tax code which provides:

"Manufacturer" includes every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such a manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials: or products of the same or different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption.

Moreover, it is also worth noting at this point that the decision of the tax court was based on its previous ruling in the case of Atlas Consolidated Mining and Development Corporation vs.

Commissioner of Internal Revenue, 15 dated January 23, 1981, which we quote with approval:

. . . The controlling law is clear and specific; it should therefore be applied as Since the mineral or mineral product removed from its bed or mine at Toledo City by petitioner is copper concentrate as admitted by respondent himself, not copper wire bar, the actual market value of such copper concentrate in its condition at the time of such removal without any deduction from mining, milling, refining, transporting, handling, marketing, or any other expenses should be the basis of the 2% ad valorem tax.

The conclusion reached is rendered clearer when it is taken into consideration that the ad valorem tax is a severance tax, a charge upon the privilege of severing or extracting minerals from the earth, and is due and payable upon removal of the mineral product from its bed or mine, the tax being computed on the basis of the market value of the mineral in its condition at the time of such removal and before its being substantially changed by chemical or manufacturing (as distinguished from purely physical) processing. (Cebu Portland Cement Co. vs. Commissioner of Internal Revenue, supra.) Copper wire bars, as discussed above,, have already undergone chemical or manufacturing processing in Japan, they are not extracted or produced from the earth by petitioner in its mine site at Toledo City. Since the ad valorem tax is computed on the basis of the actual market value of the mineral in its condition at the time of its removal from the earth, which in this case is copper concentrate, there is no basis therefore for an assertion that such tax should be measured on the basis of the London Metal Exchange price quotation of the manufactured wire bars without any deduction of smelting and refining charges.

In resume:

1. The mineral or mineral product of petitioner the extraction or severance from the soil. of which the ad valorem tax is directed is copper concentrate.

2. The ad valorem tax is computed on the basis of the actual market value of the copper concentrate in its condition at the time of removal from the earth and before substantially changed by chemical or manufacturing process without any deduction milling, refining, from mining, transporting, handling, marketing, or any other expenses. However, since the copper concentrate is sold abroad by petitioner under C.I.F. terms, the actual cost of ocean freight and insurance is deductible.

3. There being no market price quotation of copper concentrate locally or in the commodity exchanges or markets of the world, the London Metal Exchange price quotation of copper wire bar, which is used by petitioner and Mitsubishi Metal Corporation as reference to determine the selling price of copper concentrate, may likewise be employed in this case as reference point in ascertaining the actual market value of copper concentrate for ad valorem tax purposes. By deducting from the London Metal Exchange price quotation of copper wire bar all charges and costs incurred after the copper concentrate has been shipped from Toledo City to the time the same has been manufactured into wire bar, namely, smelting, electrolytic refining and fabricating, the remainder represents to a reasonable degree the actual market value of the copper concentrate in its condition at the time of extraction or removal from its bed in Toledo City for the purposes of the ad valorem tax.

The Commissioner of Internal Revenue argues that the ruling in the case above stated is not binding, considering that the incumbent Commissioner of Internal Revenue is not bound by decisions or rulings of his predecessor when he finds that a different construction of the law should be adopted, invoking therefor the doctrine enunciated in Hilado vs. Collector of

internal Revenue, et a1, 16 This trenches on specious reasoning. What was involved in the Hilado case was a previous ruling of a former Commissioner of Internal Revenue. In the case at bar, the Commissioner based his findings on a previous decision rendered by the Court of Tax Appeals itself.

The Court of Tax Appeals is not a mere superior administrative agency or tribunal but is a

part of the judicial system of the Philippines. 17 It was created by Congress pursuant to Republic Act No. 1125, effective June 16, 1954, as a centralized court specializing in tax cases. It is a regular court vested with exclusive appellate jurisdiction over cases arising under the

National Internal Revenue Code, the Tariff and Customs Code, and the Assessment Law. 18

Although only the decisions of the Supreme Court establish jurisprudence or doctrines in this jurisdiction, nonetheless the decisions of subordinate courts have a persuasive effect and may serve as judicial guides. It is even possible that such a conclusion or pronouncement can be raised to the status of a doctrine if, after it has been subjected to test in the crucible of analysis and revision the Supreme Court should find that it has merits and qualities sufficient for its consecration as a rule of jurisprudence. 19

Furthermore, as a matter of practice and principle, the Supreme Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part.20

II. G.R. No. 105563

The petition herein raises the following issues for resolution:

A. Whether or not petitioner is liable for payment, of the 25% surcharge for alleged late filing of notice of removal/late payment of the ad valorem tax on silver, gold and pyrite extracted during the taxable year 1976.

B. Whether or not petitioner is liable for payment of the manufacturer' s sales tax and surcharge during the taxable year 1975, plus interest, on grinding steel balls borrowed by its competitor; and

C. 'Whether or not petitioner is liable for payment of the contractor's tax and surcharge on the alleged lease of personal property during the taxable years 1975 and 1976 plus interest. 21

A. Surcharge on Silver, Gold and Pyrite

ACMDC argues that the Court of Appeals erred in holding it liable to pay 25% surcharge on silver, gold and pyrite extracted by it during tax year 1976.

Sec. 245 of the then tax code states:

Sec. 245. Time and manner of payment of royalties or ad valorem taxes. — The royalties or ad valorem taxes as the case may be, shall be due and payable upon the removal of the mineral products from the locality where mined. However, the output of the mine may be removed from such locality without the pre-payment of such royalties or ad valorem taxes if the lessee, owner, or operator shall file a bond in the form and amount and with such sureties as the Commissioner of Internal Revenue may require,. conditioned upon the payment of such royalties or ad valorem taxes, in which case it shall be the duty of every lessee, owner, or operator of a mine to make a true and complete return in duplicate under oath setting forth the quantity and the actual market

value of the output of his mine removed during each calendar quarter and pay the royalties or ad valorem taxes due thereon within twenty days after the close of said quarter.

In case the royalties or ad valorem taxes are not paid within the period prescribed above, there shall be added thereto a surcharge of twenty-five per centum. Where a false or fraudulent return is made, there shall be added to the royalties or ad valorem taxes a surcharge of fifty per centum of their amount. The surcharge So, added: shall be collected in the same manner and as part of the royalties or ad valorem taxes, as the case may be.

Under the aforesaid provision, the payment of the ad valorem tax shall be made upon removal of the mineral products from the mine site or if payment cannot be made, by filing a bond in the form and amount to be approved by the Commissioner conditioned upon the payment of the said tax.

In the instant case, the records show that the payment of the ad valorem tax on gold, silver and pyrite was belatedly made. ACMDC, however, maintains that it should not be required to pay the 25% surcharge because the correct quantity of gold and silver could be determined only after the copper concentrates had gone through the process of smelting and refining in Japan while the amount of pyrite cannot be determined until after the flotation process separating the copper mineral from the waste material was finished.

Prefatorily, it must not be lost sight of that bad faith is ; not essential for the imposition of the 25% surcharge for late payment of the ad valorem tax. Hence,

The above-quoted testimony accordingly supports these findings of the tax court in its decision in this case:

We see it (sic) that even if the silver and gold cannot as yet be physically separated from the copper concentrate until the process of smelting and refining was completed, the estimated commercial quantity of the silver and gold could have been determined in much the same way that petitioner is able to estimate the commercial quantity of copper during the assay. If, as stated by petitioner, it is able to estimate the grade of the copper ore, and it has determined the grade not only of the copper but also those of the gold and silver during the assay (Petitioner's Memorandum, p. 207, Record), ergo, the estimated commercial quantity of the silver and gold subject to ad valorem tax could have also been determined and provisionally paid as for copper. 25

The other allegation of ACMDC is that there was no removal of pyrite from the mine site because the pyrite was delivered to its sister company, Atlas Fertilizer Corporation, whose plant is located inside the mineral concession of ACMDC in Sangi, Toledo City. ACMDC, however, is already barred by estoppel in pais from putting that matter in issue.

An ad valorem tax on pyrite for the same tax year was already declared and paid by ACMDC. In fact, that payment was used as the basis for computing the 25% surcharge. It was only when ACMDC was assessed for the 25% surcharge that said issue was raised by it. Also, the evidence shows that deliveries of pyrite were not exclusively made to its sister company, Atlas Fertilizer Corporation. There were shipments of pyrite to other companies located outside of its mine site, in addition to those delivered to its aforesaid sister company. 26

B. Manufacturer's Tax and Contractor's Tax

The manufacturer's tax is imposed under Section 186 of the tax code then in force which provides:

Sec. 186. Percentage tax on sales of other articles. — There shall be levied, assessed and collected once only on every original sale, barter, exchange, or similar transaction either for nominal or valuable consideration, intended to transfer ownership of, or title to, the articles not enumerated in sections one hundred and eighty-four-A, one hundred and eighty five, one hundred and eighty-five-A, one hundred eighty-five-B, and one hundred eighty-six-B, a tax equivalent to seven per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged, or transferred, such tax to be paid by the manufacturer or producer: Provided, That where the articles subject to tax under this Section are manufactured out of materials likewise subject to tax under this section and section one hundred eighty-nine, the total cost of such materials, as duly established, shall be deductible from the gross selling price or gross value in money of such manufactured articles. (As amended by Rep. Act No. 6110 and by Pres. Decree No. 69.)

On the other hand, the contractor's tax is provided for under Section 191 of the same code, paragraph 17 of which declares that lessors of personal property shall be subject to a contractor's tax of 3% of the gross receipts.

Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes on Business and Occupation." These "privilege taxes on business" are taxes imposed upon the privilege

of engaging in business. They are essentially excise taxes. 27 To be held liable for the payment of a privilege tax, the person or entity must be engaged in business, as shown by the fact that the drafters of the tax code had purposely grouped said provisions under the general heading adverted to above.

"To engage" is to embark on a business or to employ oneself therein. The word "engaged" connotes more than a single act or a single transaction; it involves some continuity of action. "To engage in business" is uniformly construed as signifying an employment or occupation which occupies one's time, attention, and labor for the purpose of a livelihood or profit. The expressions "engage in business," "carrying on business" or "doing business" do not have different meanings, but separately or connectedly convey the idea of progression, continuity, or sustained activity. "Engaged in business" means occupied or employed in business; carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting, and continuing business by performing progressively all the acts normally incident thereto; while "doing business" conveys the idea of business being done, not from time to time, but all the time. 28

The foregoing notwithstanding, it has likewise been ruled that one act may be sufficient to constitute carrying on a business according to the intent with which the act is done. A single sale of liquor by one who intends to continue selling is sufficient to render him liable for "engaging in or carrying on" the business of a liquor dealer. 29

There may be a business without any sequence of acts, for if an isolated transaction, which if repeated would be a transaction in a business, is proved to have been undertaken with the

intent that it should be the first of several transactions, that is, with the intent of carrying on a business, then it is a first transaction in an existing business. 30

Thus, where the end sought is to make a profit, the act constitutes "doing- business." This is not without basis. The term "business," as used in the law imposing a license tax on business, trades, and so forth, ordinarily means business in the trade or commercial sense

only, carried on with a view to profit or livelihood; 31 It is thus restricted to activities or affairs where profit is the purpose, or livelihood is the motive. Since the term "business" is being used without any qualification in our aforesaid tax code, it should therefore be therefore be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. 32

In the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax. It asserts that it is not engaged in the business of selling grinding steel balls, but it only produces grinding steel balls solely for its own use or consumption, However, it admits having lent its grinding steel balls to other entities but only in very isolated cases.

After a careful review of the records and on the basis of the legal concept of "engaging in business" hereinbefore discussed, we are inclined to agree with ACMDC that it should not and cannot be held liable for the payment of the manufacturer's tax.

First, under the tax code then in force, the 7% manufacturer's sales tax is imposed on the manufacturer for every original sale, barter, exchange and other similar transaction intended to transfer ownership of articles. As hereinbefore quoted, and we repeat the same for facility of reference, the term "manufacturer" is defined in the tax code as including "every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw materials or manufactured or partially manufactured products in their original condition could not have been put, and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption.33

Thus, a manufacturer, in order to be subjected to the necessity of paying the percentage tax imposed by Section 186 of the tax code, must be 'engaged' in the sale, barter or exchange of; personal property. Under a statute which imposes a tax on persons engaged in the sale, barter or exchange of merchandise, a person must be occupied or employed in the sale, barter or exchange of personal property. A person can hardly be considered as occupied or employed in the sale, barter or exchange of personal property when he has made one purchase and sale only. 34

Second, it cannot be legally asserted, for purposes of this particular assessment only, that ACMDC was engaged in the business of selling grinding steel balls on the basis of the

isolated transaction entered into by it in 1975. There is no showing that said transaction was undertaken by ACMDC with a view to gaining profit. therefrom and with the intent of carrying on a business therein. On the contrary, what is clear for us is that the sale was more of an accommodation to the other mining companies, and that ACMDC was subsequently replaced by other suppliers shortly thereafter.

This finding is strengthened by the investigation report, dated March 11, 1980, of the B.I.R. Investigation Team itself which found that —

ACMDC has a foundry shop located at Sangi, Toledo City, and manufactures grinding steel balls for use in its ball mills in pulverizing the minerals before they go to the concentrators, For the grinding steel balls manufactured by ACMDC and used in its operation, we found it not subject to any business tax. But there were times in 1975 when other mining companies were short of grinding steel balls and ACMDC supplied them with these materials manufactured in its foundry shop. According to the informant, these were merely accommodations and they were replaced by the other suppliers. 35

At most, whatever profit ACMDC may have realized from that single transaction was just incidental to its primordial purpose of accommodating other mining companies. Well-settled is the rule that anything done as a mere incident to, or as a necessary consequence of, the

principal business is not ordinarily taxed as an independent business in itself. 36 Where a person or corporation is engaged in a distinct business and, as a feature thereof, in an activity merely incidental which serves no other person or business, the incidental and restricted activity is not considered as intended to be separately taxed. 37

In fine, on this particular aspect, we are consequently of the considered opinion and so hold that ACMDC was not a manufacturer subject to the percentage tax imposed by Section 186 of the tax code.

The same conclusion; however, cannot be made with respect to the contractor's tax being imposed on ACMDC. It cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts shows that several distinct payments were made for the use of its personal properties such as its plane, motor boat and dump

truck. 38 The series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that for the tax years 1975 and 1976 there were profits earned and reported therefor. It received a rental income of P630,171.56 for tax year 39 and P2,450,218.62 for tax year 1976. 40

Considering that there was a series of transactions involved, plus the fact that there was an apparent and protracted intention to profit from such activities, it can be safely concluded that ACMDC was habitually engaged in the leasing out of its plane, motor boat and dump truck, and is perforce subject to the contractor's tax.

The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal properties, since its income therefrom covered only the costs of operation such as

salaries and fuel, is not supported by any documentary or substantial evidence. We are not, therefore, convinced by such disavowal.

Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has the duty of proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions

are in favor of tax assessments. 41 Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment. 42

Finally, we deem it opportune to emphasize the oft-repeated rule that tax statutes are to receive a reasonable construction with a view to carrying out their purposes and

intent. 43 They should not be construed as to permit the taxpayer to easily evade the payment of the tax. 44On this note, and under the confluence of the weighty. considerations and authorities earlier discussed, the challenged assessment against ACMDC for contractor's tax must be upheld.

WHEREFORE, the impugned judgment of respondent Court of Appeals in CA-G.R. SP No. 25945, subject of the present petition in G.R. No. 104151 is hereby AFFIRMED; and its assailed judgment in CA-G.R SP No. 26087 is hereby MODIFIED by exempting Atlas Consolidated Mining and Development Corporation, petitioner in G.R. No. 105563 of this Court, from the payment of manufacturer's sales tax, surcharge and interest during the taxable year 1975.

SO ORDERED.

G.R. No. L-38540 April 30, 1987

REPUBLIC OF THE PHILIPPINES, petitioner, vs. THE COURT OF APPEALS, and NIELSON & COMPANY, INC., respondents.

The Solicitor General for petitioner.

Quasha, Aspillera, Zafra, Tayag and Ancheta for respondents.

PADILLA, J.:

This is a petition for review on certiorari of the decision of the respondent Court of Appeals 1 in CA G.R.

No. 37417-R, dated 3 April 1974, reversing the decision of the then Court of First Instance of Manila which ordered private respondent Nielson & Co., Inc. to pay the Government the amount of P11,496.00 as ad valorem tax, occupation fees, additional residence tax and 25% surcharge for late payment, for the years 1949 to 1952, and costs of suit, and of the resolution of the respondent Court, dated 31 May 1974, denying petitioner's motion for reconsideration of said decision of 3 April 1974.

In a demand letter, dated 16 July 1955 (Exhibit A), the Commissioner of Internal Revenue assessed private respondent deficiency taxes for the years 1949 to 1952, totalling P14,449.00, computed as follows:

1-1/2% ad valorem tax on P448,000.00..........................P7,320.00

25% surcharge for late payment......................................1,830.00

Occupation fees for the years 1949

to 1952 at P1.00 per ha. per

year on 1, 230 hectares.....................................4,920.00

Additional residence tax on P79,000.00

at P1.00 per every P5,000.00

per year or P75.00 x 4 years................................303.20

25% surcharge for late payment.........................................75.00

TOTAL AMOUNT DUE............................ P14,449.00 2

Petitioner reiterated its demand upon private respondent for payment of said amount, per letters dated 24 April 1956 (Exhibit D), 19 September 1956 (Exhibit E) and 9 February 1960 (Exhibit F). Private respondent did not contest the assessment in the Court of Tax Appeals. On the theory that the assessment had become final and executory, petitioner filed a complaint for collection of the said amount against private respondent with the Court of First Instance of Manila, where it was docketed as Civil Case No. 42911. However, for failure to serve summons upon private respondent, the complaint was dismissed, without prejudice, in the Court's order dated 30 June 1961. On motion, the

order of dismissal was set aside, at the same time giving petitioner sixty (60) days within which to serve summons upon private respondent.

For failure anew to serve summons, the Court of First Instance of Manila issued an order dated 4 October 1962 dismissing Civil Case No. 42911 without prejudice. The order of dismissal became final on 5 November 1962.

On 15 November 1962, the complaint against private respondent for collection of the same tax was refiled, but the same was erroneously docketed as Civil Case No. 42911, the same case previously dismissed without prejudice. Without correcting this error, another complaint was filed on 26 November 1963, docketed as Civil Case No. 55817, the subject matter of the present appeal.

As herein earlier stated, the Court a quo rendered a decision against the private respondent. On appeal to the respondent Court of Appeals, the decision was reversed. Petitioner, Republic of the Philippines, filed a motion for reconsideration which was likewise denied by said Court in a resolution dated 31 May 1974. Hence, this petition, with the following assignment of errors:

I

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE LETTER OF ASSESSMENT DATED JULY 16, 1955, EXHIBIT "A," WAS RECEIVED BY PRIVATE RESPONDENT IN THE ORDINARY COURSE OF THE MAIL PURSUANT TO SECTION 8, RULE 13 OF THE REVISED RULES OF COURT.

II

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PRIVATE RESPONDENT FAILED TO REBUT THE PRESUMPTION THAT THE LETTER ASSESSMENT DATED JULY 16, 1955, HAVING BEEN DULY DIRECTED AND MAILED WAS RECEIVED IN THE REGULAR COURSE OF THE MAIL AND THAT OFFICIAL DUTY HAS BEEN REGULARLY PERFORMED.

III

THAT, ASSUMING, WITHOUT ADMITTING, THAT THE LETTER DATED JULY 16, 1955 (EXHIBIT "A") CANNOT BE CONSIDERED AS AN ASSESSMENT, ON THE THEORY THAT THE SAME HAS NOT BEEN RECEIVED BY PRIVATE RESPONDENT, THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE LETTER OF THE DEPUTY COLLECTOR (NOW DEPUTY COMMISSIONER) OF INTERNAL REVENUE DATED SEPTEMBER 19, 1956 (EXHIBIT "E") IS ITSELF AN ASSESSMENT WHICH WAS DULY RECEIVED BY PRIVATE RESPONDENT.

Relying on the provisions of Section 8, Rule 13 and Section 5, paragraphs m & v. Rule 131 of the Revised Rules of Court, petitioner claims that the demand letter of 16 July 1955 showed an imprint indicating that the original thereof was released and mailed on 4 August 1955 by the Chief, Records Section of the Bureau of Internal Revenue, and that the original letter was not returned to said Bureau; thus, said demand letter must be considered to have been received by the private respondent. 3 According to petitioner, if service is made by ordinary mail, unless the actual date of receipt

is shown, service is deemed complete and effective upon the expiration of five (5) days after mailing. 4 As the letter of demand dated 16 July 1955 was actually mailed to private respondent, there arises the presumption that the letter was received by private respondent in the absence of evidence to the contrary. 5 More so, where private respondent did not offer any evidence, except the self-serving testimony of its witness, that it had not received the original copy of the demand letter dated 16 July 1955. 6

We do not agree with petitioner's above contentions. As correctly observed by the respondent court in its appealed decision, while the contention of petitioner is correct that a mailed letter is deemed received by the addressee in the ordinary course of mail, stilt this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee. Thus:

Appellee contends that per Exhibit A, the notice was released and mailed to the appellant by the BIR on Aug. 4, 1955 under the signature of the Chief, Records Section, Office; that since the original thereof was not returned to the appellee, the presumption is that the appellant received the mailed notice. This is correct, but this being merely a mere disputable presumption, the same is subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was received by the addressee. The appellee, however, argues that since notice was rc-,Ieased and mailed and the fact of its release was admitted by the appellant the admission is proof that he received the mailed notice of assessment. We do not think so. It is true the Court a quo made such a finding of fact, but as pointed out by the appehant in its brief, and as borne out by the records, no such admission was ever made by the appellant in the answer or in any other pleading, or in any declaration, oral or documentary before the trial court. We note that the appellee has not met this challenge, and after a review of the records, we find appeflant's assertion well-taken. 7

Since petitioner has not adduced proof that private respondent had in fact received the demand letter of 16 July 1955, it can not be assumed that private respondent received said letter. Records, however, show that petitioner wrote private respondent a follow-up letter dated 19 September 1956, reiterating its demand for the payment of taxes as originally demanded in petitioner's letter dated 16 July 1955. This follow-up letter is considered a notice of assessment in itself which was duly received by private respondent in accordance with its own admission. 8 The aforesaid letter reads:

September 19, 1956

Nielson and Company, Inc.

Ayala Boulevard, Manila

Gentlemen:

In reply to you (sic) letter dated June 1, 1956 relative to your pending internal revenue tax liability involving the amount of P15,649.00 as annual occupation fees, ad valorem and additional residence taxes, surcharges and penalty, originally demanded of you on July 16, 1955, I have the honor to inform you that investigation conducted by an agent of this office show that you and the Hixbar Gold Mining Co., Inc. entered into an agreement in 1938 whereby you were given full exclusive and irrevocable control of all the operations, development, processing and marketing of mineral products from the latter's mines and that au the assessments, taxes and fees of any nature in connection with the said operation, development, proceeding and marketing of these products shall be paid by you. In view thereof, and it appearing that the aforesaid tax liabilities accrued when your contract was in fun force and

effect, you are therefore, the party hable for the payment thereof, notwithstanding the alleged contract subsequently entered into by you and the Hixbar Gold Mining Co., Inc. on September 9, 1954.

It is therefore, again requested that payment of the aforesaid amount of P15,649.00 be made to the City Treasurer, Manila within five (5) days from your receipt hereof so that this case may be closed.

You are further requested to pay the sum of P150.00 as compromise suggested in our letter to you dated February 24, 1955, it appearing that the same has not as yet been paid up to the present.

Very respectfully yours,

JOSE ARANAS

Deputy Collector of Internal Revenue 9

Under Section 7 of Republic Act No. 1125, the assessment is appealable to the Court of Tax Appeals within thirty (30) days from receipt of the letter. The taxpayer's failure to appeal in due time, as in the case at bar, makes the assessment in question final, executory and demandable. Thus, private respondent is now barred from disputing the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits. 10

In Mamburao Lumber Co. vs. Republic, 11 this Court further said:

In a suit for collection of internal revenue taxes, as in this case, where the assessment has already become final and executory, the action to collect is akin to an action to enforce a judgment. No inquiry can be made therein as to the merits of the original case or the justness of the judgment relied upon. ...

ACCORDINGLY, the appealed decision is hereby reversed. The decision of the Court a quo is hereby reinstated. No costs.

SO ORDERED.