kamote chips

8/18/2019 kamote chips

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Republic of the Philippines

SUPREME COURTManila

EN BANC

G.R. No. L-61632 August 16, 1983

WESTERN MINOLCO CORPORATION, petitioner,vs.

COMMISSIONER OF INTERNAL REENUE !"# COURT OF TA$

APPEALS, respondents.

Raul Correa and Cenon Sorreta for petitioner.

The Solicitor General for respondents.

GUTIERRE% &R., J.:

This is a petition for review on certiorari of a Court of Tax Appeals

decision den!in" the petitioners clai# for the refund of

P$,%$&,'($.(%, representin" Mone! #ar)et transaction taxes which

the petitioner paid fro# *une %, $+&& to Au"ust , $+&&, and the

resolution den!in" its #otion for reconsideration.

Petitioner is a do#estic corporation en"a"ed in #inin", particularl!

copper concentrates for export #ined fro# #ineral lands in Ato) and

-ibun"an, Ben"uet.

n /ctober $+&0, upon application for tax exe#ption filed with the

Bureau of Mines, the petitioner was "ranted Certificate of1ualification for Tax Exe#ption No. %2.

/n 3ece#ber 02, $+&4, the petitioner was also "ranted b! the

5ecurities and Exchan"e Co##ission, under Certificate of Renewal

No. R6$(4, authorit! to borrow #one! and issue co##ercial papers.


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Pursuant to this authorit!, the petitioner borrowed funds fro# several

financial institutions fro# *une, $+&& to /ctober $+&& and paid the

correspondin" %7 transaction tax due thereon in the a#ount of

P$,%$&,'($.(%, The tax was paid pursuant to 5ection 0$( 8b9 of the

National nternal Revenue Code of $+&&.

/n :ebruar! $4, $+&', the petitioner applied for the refund of the

P$,%$&,'($.(% alle"in" that it was not liable to pa! the %7

transaction tax under its Certificate of 1ualification for Tax Exe#ption

No. %2 issued b! the 5ecretar! of A"riculture and Natural Resources,

and pursuant to 5ection &+6A of Co##onwealth Act No. $%&,

otherwise )nown as The Minin" Act and Presidential 3ecree No. 24%,the Mineral Resources 3evelop#ent 3ecree of $+&2, as

i#ple#ented b! Consolidated Mines Ad#inistrative /rder of the

5ecretar! of Natural Resources dated Ma! $&, $+&2.

/n :ebruar! $+, $+&+, the respondent Co##issioner of internal

Revenue denied the petitioners clai# for refund.

/n Ma! 0+, $+&+, the petitioner filed a petition for review with the

respondent Court of Tax Appeals. /n Au"ust 0', $+&+, the

Co##issioner of nternal Revenue filed his answer alle"in" inter alia

that;

xxx xxx xxx

8a9 The %7 transaction tax is actuall! a tax on the

interest earnin"s of the lender who is actuall! the

taxpa!er on whose inco#e, the tax is i#posed<

8b9 Petitioner did not pa! the %=, transaction tax in its

own behalf, as this liabilit! has been full! shifted to

and paid for the account of the lender;

8c9 Petitioner #erel! acted as withholdin" a"ent in

pa!in"


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8d9 the %7 transaction tax based on the "ross

interest inco#e of the

8e9 lender<

8d9 Petitioners exe#ption fro# taxes "ranted under

5ections 0 and % of Presidential 3ecree No. 24%

relates to i#portations of #achineries, tools and

e>uip#ent to be used in the #inin" operations and

taxes on #inin" clai#s, i#prove#ent thereon and

#ineral products, whereas the %7 transaction tax is

levied on transactions pertainin" to co##ercialpapers issued in the pri#ar! #one! #ar)et as

principal instru#ents< in other words, 5ections 0 and

% of P.3. 24% do not appl! to this case of petitioner.

After due hearin" but before the respondent court could render its

decision, the petitioner filed a pleadin" entitled =Re>uest for *udicial

Notice and Re>uest for Ad#ission= alle"in" that the sub?ect tax waspaid in the nature of a business tax, that petitioners clai# for refund

is based on its exe#ption fro# business taxes, and that its exe#ption

is protected b! existin" tax exe#ptions "ranted it under the #inin"

law.

/n *anuar! 0+, $+'0, the respondent court denied the petitioners

=Re>uest for *udicial Notice and Re>uest for Ad#ission. =

/n Ma! 0$, $+'0, the respondent court rendered its decision

dis#issin" the petition for review for lac) of #erit.

The petitioner raised the followin" assi"n#ents of errors;

Assignment of error No. 1

T@AT T@E TA C/RT ERR/NE/5D

C/NC3E3 BD 5PP/RTN RE5P/N3ENT

C/MM55/NER5 C/NTENT/N T@AT T@E %7

TRAN5ACT/N TA /N C/MMERCA PAPER


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8NF/FE3 N T@5 CA5E9 5 AN NC/ME TA

MP/5E3 P/N T@E NTERE5T EARNN5 /:

T@E M/NED EN3ER G@/ 8ACC/R3N T/ T@E

TA C/RT9 5 ACTAD T@E TA PADER /N

G@/5E NC/ME T@E %r&8, TA 5 MP/5E3.

Assignment of Error No. 2

T@AT T@E TA C/RT ERRE3 N T@AT T5

C/NC5/N5 C/NTRAFENE T@E MAN3ATE5 N

5A3 P.3. No. $$2 8particularl! 5EC. 0 /: G@C@9

AMEN3N 5ECT/N 0+$b9 /: T@E $+&&REFENE C/3E BD EC3N :R/M R/55

NC/ME T@E NTERE5T EARNE3 /N

C/MMERCA PAPER 55E3 N T@E PRMARD

MAR-ET 8G@C@9 5@A N/T BE NC3E3 N

T@E 3ETERMNAT/N /: R/55 NC/ME /:

T@E EN3ER :/R PRP/5E5 /: NC/ME

TAAT/N


T@AT T@E TA C/RT ERRE3 N C/N:5N

TG/ 35TNCT AN3 5EPARATE A5PECT5 /: T@E

TAAT/N AN3 T@E PER5/N5 /: T@E TA

PADER A5 : T@ED ARE /NE AN3 T@E 5AMEPER5/N, G@EN T@E AG TREAT5 T@EM A5

T/TAD 35TNCT AN3 5EPARATE PER5/N5

AN3 A5PECT5 T@ERE/:.6NAMED; 8A9 T@E

NC3ENCE /: T@E TA AN3 T@E PER5/N

EAD ABE :/R T@E TA< AN3 T@E 8B9

ACTA PAD/R /R RE5TN PAD/R /: T@E

%, of TRAN5ACT/N TA.


T@AT T@E TA C/RT ERRE3 N RN T@AT

T@E %7 TRAN5ACT/N TA 5 AN NC/ME TA


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:R/M G@C@ MN/C/ 5 N/T EEMPT AN3

N/T A B5NE55 TA.

Assignment of Error No.

T@AT T@E TA C/RT ERRE3 N C/N:5N

T@E NC3ENT /: T@E TA AN3 T@E ACTA

PAD/R /R RE5TN PAD/R /: T@E %7

TRAN5ACT/N TA< T@AT C/N:5/N /: T@E

TG/ 5EPARATE PER5/N5 @A5 RE5TE3 NT/

T@E ERR/NE/5 C/NC5/N T@AT T@E %7

TRAN5ACT/N TA 5 AN NC/ME TA MP/5E3P/N T@E NTERE5T EARNE3 BD T@E M/NED

EN3ER NF/FE3 N T@E 55ANCE /: T@E

C/MMERCA PAPER P/N G@C@ NTERE5T

NC/ME 5 PA3 /R C/ECTE3; T@AT T@5

ERR/R @A5 RE5TE3 N RE5P/N3ENT

C/MM55/NER5 AN3 5@E TA C/RT59 FEG

T@AT PETT/NER MN/C/ 5 A GT@@/3N AENT N RE5PECT /: T@E NC/ME TA 3E

T/ BE GT@@E3 /N NTERE5T NC/ME /:

M/NED EN3ER.

Assign

ment

ofError

No.!

T@AT T@E TA C/RT ERRE3 N :AN T/

REC/NHE T@AT PETT/NER MN/C/ 5 A

1A:E3 MNN E55EE AN3 3EFE/PER

N3ER T@E MNN AG 8C.A. No. t%&, As

A#ended9, AN3 N3ER T@E MNERA

RE5/RCE5 3EFE/PMENT 3ECREE /: $+&2

8P.3. No. 24%, As A#ended9< T@AT A5 5C@

PETT/NER 5 EEMPTE3 :R/M A TAE5

8EEMPT NC/ME TA9 PR5ANT T/ T@E AG


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AN3 T@E MPEMENTN REAT/N5

T@ERE/: 8C/N5/3ATE3 MNE5

A3MN5TRATFE /R3ER, 3ATE3 AN3

E::ECTFE MAD $&,$+&9< :RT@ER, T@AT T@E

TA C/RT @A5 ERR/NE/5D RE3 T/MP/5E T@E NC/ME TA P/N MN/C/

G@C@ 5 BA5E3 /N 5ECT/N 02 /: T@E

REFENE C/3E AN3 MAD N/T BE T@E 5B*ECT

/: T@E TAT/N A5 PART /: PETT/NER5

APPEA BE:/RE T@E TA C/RT.

Assignment of Error No. "

T@AT RE5P/N3ENT @AFE :AE3 T/

C/N53ER T@E G@EREA5 CA5E5 /: T@E

ENABN ACT MP/5N T@E %7

TRAN5ACT/N TA AG 8P.3. No. $$29 N T@E

APPCAT/N /: T@E AG, T/ET@ER GT@ T@E

MPEMENTN REAT/N5 T@ERE/: A5GE A5 T@E G@EREA5 CA5E5 /: T@E

REPEAN AG 8P.3. No. $&%+9 G@C@

REC/NHE5 PETT/NER5 R@T /: REE:

AAN5T T@E TRAN5ACT/N TA 85EE PE/PE

F5. PR5MA, ,620((644< N/F. 0(,$+&'< '4 5CRA

209.

The errors raised b! the petitioner are "rounded on one #ain issue,

whether or not the petitioner is exe#pt fro# the %7 transaction tax.

Ge find the alle"ed errors without #erit.

The petitioner clai#s exe#ption fro# the %7 transaction tax on the

basis of the followin" statutor! provisions;

8$9 5ec. $ of Republic Act No. %'0%, a#endin"

Co##onwealth Act No. $%&, otherwise )nown as the

Minin" Act= which reads;


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5ec. $. There is hereb! inserted after

5ection sevent!6nine, Chapter F of

the Minin" Act, a new section which

shall read as follows;

5ec. &+6A. @owever, new #ines, and

old #ines which resu#e operation,

when certified to as such b! the

5ecretar! of A"riculture and Natural

Resources upon the reco##endation

of the 3irector of Mines, shall be

"ranted five !ears co#plete taxexe#ptions, except inco#e tax, fro#

the ti#e of its actual #ona fide orders

for e>uip#ent for co##ercial

production.

f an! of the tax6exe#pt articles

ac>uired under this provision are sold,transferred or otherwise disposed of

within a period of five !ears fro# such

tax6exe#pt ac>uisition, all taxes and

duties which would have been due at

the ti#e of such ac>uisition shall

beco#e due and pa!able, to"ether

with all interests and surchar"es, andwhich a#ount shall constitute a lien on

these properties.

809 5ec. of Presidential 3ecree No. 0%&, a#endin" the Tax Code,

which reads;

5ection $. The last para"raph of

5ection /ne hundred ninet! of

Co##onwealth Act Nu#bered :our

hundred sixt!6six, otherwise )nown as

the National nternal Revenue Code

is further a#ended to read as follows;


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5ec. $+(. Compensating Ta$.

xxx xxx xxx

The provisions of existin" laws to the contrar!notwithstandin" exe#ption fro# this tax shall be

li#ited to the followin";

xxx xxx xxx

2. Machineries,

e>uip#ent, tools forproduction, plants to

convert #ineral ores

into saleable for#,

spare parts, supplies,

#aterials, accessories,

explosives, che#icals,

and transportation andco##unication

facilities i#ported b!

and for the use of new

#ines and old #ines

which resu#e

operations, when

certified, to as such b!the 5ecretar! of

A"riculture and Natural

Resources upon the

reco##endation of the

3irector of Mines, for a

period endin" five 89

!ears frorn the first

date of actual

co##ercial production

of saleable #ineral

products; %ro&ided Th

at such articles are not


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locall! available in

reasonable >uantit!

>ualit! and price and

are necessar! or

incidental in the proper operation of the #ine;

xxx xxx xxx

8%9 5ec. $ of P. 3. No. 0%', further a#endin" the Tax Code, which

reads;

5ection $. 5ection /ne hundred five of

Republic Act Nu#bered Nineteen

hundred and thirt!6seven, otherwise

)nown as the Tariff and Custo#s

Code of the Philippines, is further

a#ended b! insertin" two new

para"raphs 8u9 and 8v9 therein afterpara"raph 8t9 thereof which shall read

as follows;

5ec. $(. Conditionall!6:ree

#portations

xxx xxx xxx

... Machineries, e>uip#ent, tools for production,

plants to convert #ineral ores into saleable for#,

spare parts, supplies, #aterials, accessories,

explosives, che#icals, and transportation and

co##unication facilities i#ported b! and for the use

of new #ines and old #ines which resu#e

operations, when certified to as such b! the 5ecretar!

of A"riculture and Natural Resources upon the

reco##endation of the 3irector of Mines, for a period

endin" five 89 !ears fro# the first date of actual

co##ercial production of saleable #ineral


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product< %ro&ided That such articles are not locall!

available in reasonable >uantit!, >ualit! and price and

are necessar! or incidental in the proper operation of

the #ine.

829 5ecs. 0 and % of Presidential 3ecree No. 24%, a#endin"

5ection &+6A, Co##onwealth Act No. $%&, which read;

5ec. 0. %o'er to (e&) Ta$es on

*ines. *ining +perations and *ineral

%roducts. I An! law to the contrar!

notwithstandin", no province, cit!,#unicipalit!, barrio or #unicipal district

shall lev! and collect taxes, fees,

rentals, ro!alties or char"es of an!

)ind whatsoever on #ines, #inin"

clai#s, #ineral products, or on an!

operation, process or activit!

connected therewith.

5ec. %. Ta$ E$emptions. ,

*achineries e-uipment , tools for

production, plants to convert #ineral

ores into saleable for#, spare parts,

supplies, #aterials, accessories,

explosives, che#icals andtransportation and co##unication

facilities i#ported b! and for the use of

new #ines and old #ines which

resu#e operation, when certified as

such b! the 5ecretar! upon

reco##endation of the 3irector, are

exe#pt fro# the pa!#ent of custo#s

duties and all taxes except inco#e tax

for a period startin" fro# exploration

and endin" five 89 !ears fro# the first

date of actual co##ercial .production

of saleable #ineral


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products; %ro&ided That such articles

are not locall! available in reasonable

>uantit!, >ualit! and price and are

necessar! or incidental in the proper

operation of the #ine.

xxx xxx xxx

All #inin" clai#s, i#prove#ents

thereon and #ineral products derived

therefro# shall li)ewise be exe#pt

fro# the pa!#ent of all taxes, exceptinco#e tax, for the sa#e period

provided for in the first para"raph of

this section.

xxx xxx xxx

The statutor! provisions on tax exe#ptions clearl! exclude the %7transaction tax.

5ection $ of Presidential 3ecree No. 0%& on Co#pensatin" Tax,

5ection of P.3. No. 0%' on Conditionall! :ree #portations, and

5ection % of P.3. No. 24% all refer to tax exe#ptions for i#portations

of #achineries, tools for production, plants to convert #ineral ores

into saleable for#, spare parts, supplies, #aterials, accessories,explosives, che#icals and transportation and co##unication

facilities, to be used in #inin" operations. 5ection % of P.3. No. 24%

li)ewise refers to tax exe#ptions for #inin" clai#s and i#prove#ents

thereon, and #ineral products, except inco#e tax. The petitioners

Certificate of 1ualification for Tax Exe#ption No. %2 exe#pts =... fro#

pa!#ent of all taxes except inco#e tax, pa!able b! hi# in the

conduct of his business and in the i#portation of #achineries, spare

parts and or e>uip#ent listed in the sta#ped =Annex = which are

considered to be indispensable in the operation and will be used b!

said operator lessee exclusivel! in the #ineral land #entioned above.


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Clearl!, the transaction tax of P$,%$&,'($.(% paid b! the petitioner

was not actuall! i#posed upon it in the conduct of its #inin" business

or in the i#portation of #achiner!, spare parts and or e>uip#ent

listed in the sta#ped =ANNE = of its certificate of >ualification for tax

exe#ption and which are indespensable in the operation and usedexclusivel! on petitioners #ineral land.

Petitioner sub#its that inas#uch as taxes in "eneral constitute

allowable deductions fro# "ross inco#e in the deter#ination of

taxable net inco#e, the %7 transaction tax is a business tax and not

an inco#e tax because the Revenue Code itself classifies it as

=Business Tax= under Title F, and that P. 3. No. $$2 expressl! statesthat the transaction tax shall be allowed as a deductible ite# for

purposes of deter#inin" the borrowers taxable inco#e.

The petitioners contentions deserve scant consideration, The %7,

transaction tax is i#posed on interest inco#e fro# co##ercial

papers issued in the pri#ar! #one! #ar)et. Bein" a tax on interest, it

is a tax on inco#e.

As correctl! ruled b! the respondent Court of Tax Appeals;

Accordin"l!, we need not and do not thin) it

necessar! to discuss further the nature of the

transaction tax #ore than to sa! that the incipient

sche#e in the issuance of etter of nstructions No.%2( on Nove#ber 02, $+& 8/.. 3ec. $, $+&9, i.e.,

to achieve operational si#plicit! and effective

ad#inistration in capturin" the interest6inco#e

windfall fro# #one! #ar)et operations as a new

source of revenue has lost none of its ani#atin"

principle in parturition of a#endator! Presidential

decree No. $$2, now 5ection 0$(8b9 of the Tax

Code. The tax thus i#posed is actuall! a tax on

interest earrin"s of the lenders or placers who are

actuall! the taxpa!er,, in whose inco#e is i#posed.

Thus, =the borrower withholds the tax of %7 fro# the

interest he would have to pa! the lender so that he


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8borrower9 can pa! the %7 of the interest to the

overn#ent.= 8President Marcos, Ti#es *ournal,

*une $&, $+&& cited in Respondents Me#orandu# p.

49 ... 5uffice it to state that the broad concensus of

fiscal and #onetar! authorities is that =even ifno#inall!, the borrower is #ade to pa! the tax,

actuall! the tax is on the interest earnin" of the

i##ediate and an prior lendersJplacers of the

#one! ... 8Rollo, pp. %46%&9

The %7 transaction tax is an inco#e tax on interest earnin"s to the

lenders or placers The latter are actuall! the taxpa!ers. Therefore,the tax cannot be a tax i#posed upon petitioner. n other words, the

petitioner who borrowed funds fro# several financial institutions b!

issuin" co##ercial papers #erel! withheld the %7 transaction tax

before pa!in" to the financial institutions the interests earned b! the#

and later re#itted the sa#e to the respondent Co##issioner of

nternal Revenue. The tax could have been collected b! a different

procedure but the statute chose this #ethod. Ghatever collectin"procedure is adopted does not chan"e the nature of the tax.

:urther#ore, whether or not certain taxes are on inco#e is not

necessaril! deter#ined b! their deductibilit! or non6deductibilit! fro#

"ross inco#e. As correctl! observed b! the 5olicitor eneral, inco#e

in the for# of dividends, capital "ains on real propert! pursuant to

Batas Pa#bansa Bl", %&, shares of stoc) pursuant to Presidential3ecree $&%+, and interests on savin"s in ban) accounts, for

instance, are inco#es, !et the! are not includible in the "ross inco#e

when inco#e taxes are paid because these are sub?ect to final

withholdin" taxes.

The petitioner also sub#its that the %7 transaction tax is a business

tax because it is i#posed under Title F, entitled 6,Taxes on Business=

and classified speciall! under Chapter , entitled =Tax on Business.=

The location of the %7, tax in the Tax Code does not necessaril!

deter#ine its nature, A"ain, we a"ree with the 5olicitor eneral that

the le"islative bod! #ust have realiKed later that. the sub?ect tax was


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inappropriatel! included a#on" the taxes on business because

5ection 0$( of the Tax Code has been repealed b! Presidential

3ecree No. $&%+, which now i#poses a tax of 0(7 on interests fro#

deposits and !ields fro# deposit substitutes such as co##ercial

papers issued in the pri#ar! #ar)et as principal instru#ent andprovides for the# in 5ection 028cc9 under Chapter , Tax on

Corporations, Title 6nco#e. Tax.

Petitioner Gestern Minolco Corporation has failed to ?ustif! its

clai#ed exe#ption fro# the %,&c, transaction tax. The decision of

the Co##issioner of nternal Revenue den!in" the petitioners clai#

for refund is affir#ed. t bears repeatin" that the law loo)s withdisfavor on tax exe#ptions and he who would see) to be thus

privile"ed #ust ?ustif! it b! words too plain to be #ista)en and too

cate"orical to be #isinterpreted.

/Commissioner of 0nternal Re&enue . %. iener Compan) (td

0nternational Construction Corporation et al. (24"4 ul) 15 16"

! SCRA 1427.

G@ERE:/RE, the instant petition is 3ENE3 for lac) of #erit. The

decision of the respondent Court of Tax Appeals is A::RME3;

n toto.

5/ /R3ERE3.


SUPREME COURTManila

EN BANC

G.R. No. L-22''3 M!( 29, 19)1

T*E COMMISSIONER OF CUSTOMS, petitioner,vs.


15/289

P*ILIPPINE ACET+LENE COMPAN+, !"# T*E COURT OF TA$APPEALS, respondents.

+ffice of the Solicitor General Arturo A. Alafri8 Assistant Solicitor

General 9elicisimo R. Rosete and Solicitor Sumilang :. ;ernardo for petitioner.

%once Enrile Siguion Re)na *ontecillo < ;elo for respondent

%hilippine Acet)lene Compan).

MAALINTAL, J.:

This is a petition filed b! the Co##issioner of Custo#s for review of

the decision of the Court of Tax Appeals in its Case No. $$2&,

orderin" the herein petitioner to refund to the Philippine Acet!lene

Co., nc. the a#ount of P%,4'%.(( which it had paid under protest as

special i#port tax on one 8$9 custo# built li>uefied petroleu# "astan).

The facts were stipulated b! the parties as follows;

$. That the Philippine Acet!lene Co#pan! is a

corporation dul! or"aniKed and existin" under the

laws of the Philippines<

0. That said co#pan! is en"a"ed in the #anufacture

of ox!"en, acet!lene and nitro"en and pac)a"in" of

li>uefied petroleu# "as in c!linders and tan)s<

%. That so#eti#e in $+& the protestant i#ported

fro# the nited 5tates one custo#6built li>uefiedpetroleu# "as tan) which arrived via the 5J5

PEA5ANT FE under Re"ister No. $%4, and

declared in #port Entr! No. +2(4(, series of $+&<

and .


16/289

2. That the a#ount of P%,4'%.(( was assessed

thereon as special i#port tax and which 8sic9 was paid

under protest b! the i#porter6protestant as evidenced

b! /fficial Receipt No. $04+( dated :ebruar! 0,

$+'.

Accordin" to Charles . Butler, #ana"er of the Philippine Acet!lene

Co., nc., the i#ported custo#6built li>uefied petroleu# "as tan) is

si#pl! a lar"e c!linder which is used as container for li>uefied

petroleu# "as obtained fro# the CATE Refiner! in Bauan,

Batan"as and transported to the co#pan!s plant in Manila. The "as

does not under"o an! che#ical chan"e and is sold to consu#ers inthe sa#e state as when it was ac>uired fro# the refiner!, except that

before it is sold the "as is pu#ped into s#aller c!linders, which are

labeled with the co#pan!s trade#ar) =Phili"as.=

nder the fore"oin" facts the issue presented for resolution is purel!

one of law, na#el!, whether or not the Philippine Acet!lene Co., nc.,

insofar as its pac)a"in" operation of li>uefied petroleu# "as isconcerned, #a! be considered en"a"ed in an industr! as

conte#plated in section 4 of Republic Act No. $%+2 and therefore

exe#pt fro# the pa!#ent of the special i#port tax in respect of the

"as tan) in >uestion.

5ection 4 of Republic Act No. $%+2, insofar as it is pertinent to the

issue, provides;

5ection 4. The tax provided for in section one of this

Act shall not be i#posed a"ainst the i#portation into

the Philippines of #achiner! andJor raw #aterials to

be used b! new and necessar! industries as

deter#ined in accordance with Republic Act

nu#bered Nine @undred and /ne< ...< #achiner!,

e>uip#ent, accessories and spare parts, for the use

of industries, #iners, #inin" enterprises planters and

far#ers< ...


17/289

n findin" that the Philippine Acet!lene Co., nc. is en"a"ed in

industr! within the #eanin" of the above>uoted provision, the Tax

Court held that the ter# industr) should be understood in its ordinar!

and "eneral definition, which is an! enterprise e#plo!in" relativel!

lar"e a#ounts of capital andJor labor. /n such pre#ise the Tax Courtconcluded that inas#uch as the Philippine Acet!lene Co., nc.

e#plo!s considerable labor and capital in pac)a"in" li>uefied

petroleu# "as purchased b! it and sellin" the sa#e for profit, it is

en"a"ed in industr! and hence is exe#pt fro# the pa!#ent of the

special i#port tax in connection with the tan) used as container.

The followin" observations in the brief for the petitioner are apropos;

... in the exe#ptin" provisions of Republic Act No.

$%+2, the exe#pted ite#s are divided into separate

and specific enu#erations. The ter# industries is

used in two distinct "roups. The first "roup of

exe#pted industries refers exclusivel! to those fallin"

under the new and necessar! industries as defined inRepublic Act No. +($. n the second, the ter#

=industries= is classed to"ether with the ter#s #iners,

#inin" enterprises, planters and far#ers. ... f

Con"ress reall! intended to "ive the ter# =industries=

its ordinar! and "eneral #eanin" and thus "rant tax

exe#ption to all ventures and trades fallin" under the

said ordinar! and "eneral definition, it should haveeli#inated the words =new and necessar! industries

and #inin" enterprises= since these two ventures are

alread! covered b! the ter# =industries= in its ordinar!

and "eneral #eanin". /n the other hand, the fact that

the lan"ua"e of the law specificall! se"re"ates new

and necessar! industries under Republic Act No. +($

a#on" those entitled to the tax exe#ption, in effect,

restricts the #eanin" and scope of the word

=industries.=

The ar"u#ent appears lo"ical and reasonable. 5ince the ter#

=industries= as used in the law for the second ti#e is classified


18/289

to"ether with the ter#s =#iners, #inin" enterprises, planters and

far#ers=, the obvious le"islative intent is to confine the #eanin" of

the ter# to activities that tend to produce or create or #anufacture,

such as those of #iners, #inin" enterprises, Lplanters and far#ers.

The Tax Courts interpretation would lead to a Patent inconsistenc!, inthat while the first part of the law confines the exe#ption to new and

necessar! industries, another part would extend the exe#ption to all

other industries, re"ardless of their nature, as lon" as the! e#plo!

labor and capital for profit6#a)in" purposes. n "rantin" the

exe#ption, it would have been illo"ical for Con"ress to specif!

i#portations needed b! new and necessar! industries 66 as the ter#

is defined b! law and in the sa#e breath allow a si#ilar exe#ption toall other industries in "eneral.

The respondents #a)e #uch of the interpretation of the ter#

=industries= b! the 5ecretar! of :inance in his :irst ndorse#ent

dated Nove#ber $+, $+4, to wit;

An! Productive enterprise which e#plo!s relativel!lar"e a#ounts of capital andJor labor falls under the

ter# industries as used in 5ection 4 of Republic Act

No. $%+2.

Assu#in" n" the correctness of such interpretation, what should be

noted is that it stresses the producti&e aspect of the enterprise. The

operation for which the respondent co#pan! e#plo!s the "as tan) in>uestion does not involve #anufacturin" or production. t is nothin"

but pac)a"in"< the li>uefied "as, when obtained fro# the refiner!, has

to be placed in so#e )ind of container for transportation to Manila.

Ghen sold to consu#ers, it under"oes no chan"e or transfor#ation,

but is #erel! placed in s#aller c!linders for convenience. The

process is certainl! not production in an! sense.

The phrasin" of 5ection 4 of Republic Act No. $%+2, to be sure, is

rather va"ue and infelicitious, particularl! in the repetition of the word

=industries.= t is such lac) of precision in the law that "ives rise to

liti"ious controversies concernin" its proper application. /ne of the

established rules of statutor! construction, however, is that tax


19/289

exe#ptions are held strictl! a"ainst the taxpa!er, and if not expressl!

#entioned in the law #ust be within its purview b! clear le"islative

intent. n the present case the construction adhered to b! the

respondents in reference to the scope of the ter# =industries= as

e#plo!ed for the second ti#e in 5ection 4 of Republic Act No. $%+2is contrar! to such rule. :or if the ter# were all inclusive, and #eant

industries in "eneral, that is, those which involve relativel! lar"e

a#ounts of capital andJor labor re"ardless of their productive or non6

productive nature, there would be no point in #a)in" a separate

classification with respect to =new and necessar! industries= for

purposes of the tax exe#ption. Ge hold, therefore, that to be entitled

to exe#ption under the second classification in the statute theindustr! concerned, in connection with the activit! for which the

i#portation is #ade, #ust be en"a"ed in so#e productive enterprise,

not in #erel! pac)a"in" an alread! finished product to facilitate its

transportation. n a co#parable case this Court has held that the tax

exe#ption in connection with the processin" of "asoline and the

#anufacture of lubricatin" oil does not extend to pu#p parts i#ported

b! the processor and leased to "asoline stations for their use inservicin" custo#ers vehicles, overrulin" the ar"u#ent of the

petitioner therein that the #ar)etin" of its "asoline product =is

corollar! to or incidental to its industrial operations.= 8ESS+

Standard Eastern 0nc. &s. Acting Commissioner of Customs, $'

5CRA 2''9.

G@ERE:/RE, the decision of the Court of Tax Appeals is reversedand that of the Collector of Custo#s of Manila and the Co##issioner

of Custo#s upheld. Costs a"ainst respondent Philippine Acet!lene

Co., nc.


20/289


SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 71122 March 25, 1988

COMMISSIONER OF INTERNAL REVENUE, Petitioner ,

vs. ARNOLDUS CARPENTR S!OP, INC. a"# COURT OF TA$

APPEALS, Respondents.

CORTES, J.:

Assailed in this petition is the decision of the ou!t of Ta" Appeals in

TA case No. ##$% entitled & ARNOLDUS CARPENTRY SHOP, INC. v.

COMMISSIONER OF INTERNAL REVENUE .& chan!obles vi!tual la'lib!a!(

The facts a!e si)ple.chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(

A!noldus a!pent!( Shop, Inc. *p!ivate !espondent he!ein+ is a

do)estic co!po!ation 'hich has been in e"istence since -/. It has

fo! its seconda!( pu!pose the &p!epa!in0, p!ocessin0, bu(in0, sellin0,

e"po!tin0, i)po!tin0, )anufactu!in0, t!adin0 and dealin0 in cabinet


21/289

shop p!oducts, 'ood and )etal ho)e and office fu!nitu!e, cabinets,

doo!s, 'indo's, etc., includin0 thei! co)ponent pa!ts and )ate!ials, of

an( and all natu!e and desc!iption& *Rollo, pp. /1+. These

fu!nitu!e, cabinets and othe! 'ood'o!2 'e!e sold locall( and e"po!ted

ab!oad.chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(

3o! this business ventu!e, p!ivate !espondent 2ept sa)ples o! )odels

of its 'ood'o!2 on displa( f!o) 'he!e its custo)e!s )a( !efe! to

'hen placin0 thei! o!de!s.chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(

So)eti)e in Ma!ch -%-, the e"a)ine!s of the petitione!

o))issione! of Inte!nal Revenue conducted an investi0ation of the

business ta" liabilities of p!ivate !espondent pu!suant to 4ette! ofAutho!it( No. /5#/% NA dated Nove)be! 6#, -%5. As pe! the

e"a)ination, the total 0!oss sales of p!ivate !espondent fo! the (ea!

-%% f!o) both its local and fo!ei0n dealin0s a)ounted to

P$,6,%5%.$- *Rollo. p. /+. 3!o) this a)ount, p!ivate !espondent

!epo!ted in its 7ua!te!l( pe!centa0e ta" !etu!ns P6,8%,-5.6 fo! its

0!oss local sales. The balance of P6,-/,5/$.-%, 'hich is $69 of the

total 0!oss sales, 'as conside!ed as its 0!oss e"po!t sales *TA

Decision, p. 6+.chan!oblesvi!tuala'lib!a!(

chan!oblesvi!tual la'lib!a!(

:ased on such an e"a)ination, :IR e"a)ine!s Honesto A. Ve!0el de

Dios and Voltai!e T!inidad )ade a !epo!t to the o))issione!

classif(in0 p!ivate !espondent as an &othe! independent cont!acto!&

unde! Sec. 6/$ *+ ;no' Sec. - *7+< of the Ta" ode. The !elevant

po!tion of the !epo!t !eads=

>"a)ination of the !eco!ds sho' that pe! pu!chase o!de!s, 'hich a!e

he!eb( attached, of the ta"pa(e!?s custo)e!s du!in0 the pe!iod unde!

!evie', s!"e#t #orpor$tion s%o&d !e #onsidered $ #ontr$#tor $nd not

$ '$n($#trer. The co!po!ation !ende!s se!vice in the cou!se of an

independent occupation !ep!esentin0 the 'ill of his e)plo(e! onl( as

to the !esult of his 'o!2, and not as to the )eans b( 'hich it is

acco)plished, *4u@on Stevedo!in0 o. v. T!inidad, 8# Phil. 5/#+.

Hence, in the co)putation of the pe!centa0e ta", the #9 cont!acto!?s

ta" should be i)posed instead of the %9 )anufactu!e!?s ta". ;Rollo, p.

$- *>)phasis supplied.+ chan!obles vi!tual la'lib!a!(

""" """ """


22/289

As a !esult the!eof, the e"a)ine!s assessed p!ivate !espondent fo!

deficienc( ta" in the a)ount of >IHTB >IHT THOCSAND NIN>

HCNDR>D S>V>NTB TO P>SOS AND T>NTB THR>> >NTAVOS

* P55,-%6.6# +. 4ate!, on Eanua!( #, -5, p!ivate !espondent

!eceived a lette!Fnotice of ta" deficienc( assess)ent inclusive of

cha!0es and inte!est fo! the (ea! -%% in the a)ount of ON>

HCNDR>D >IHT THOCSAND S>V>N HCNDR>D T>NTB P>SOS AND

NIN>TB TO >NTAVOS * P /5,%6/.-6 +. This ta" deficienc( 'as a

conse7uence of the #9 ta" i)posed on p!ivate !espondent?s 0!oss

e"po!t sales 'hich, in tu!n, !esulted f!o) the e"a)ine!s? findin0 that

cate0o!i@ed p!ivate !espondent as a cont!acto! *TA decision,

p.6+.chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

A0ainst this assess)ent, p!ivate !espondent filed on 3eb!ua!( -,

-5 a p!otest 'ith the petitione! o))issione! of Inte!nal Revenue.

In the p!otest lette!, p!ivate !espondent?s )ana0e! )aintained that the

ca!pent!( shop is a )anufactu!e! and the!efo! entitled to ta"

e"e)ption on its 0!oss e"po!t sales unde! Section 6/6 *e+ of the

National Inte!nal Revenue ode. He e"plained that it 'as the %9 ta"

e"e)ption on e"po!t sales 'hich p!o)pted p!ivate !espondent to

e"ploit the fo!ei0n )a!2et 'hich !esulted in the inc!ease of its fo!ei0nsales to at least $69 of its total 0!oss sales in -%% *TA decision, pp.

6#+.chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

On Eune 6#, -5, p!ivate !espondent !eceived the final decision of the

petitione! statin0=

It is the stand of this Office that (ou a!e #onsidered $ #ontr$#tor $n

not $ '$n($#trer.Reco!ds sho' that (ou )anufactu!e 'ood'o!2s

onl( upon p!evious o!de! f!o) supposed )anufactu!e!s and onl( in

acco!dance 'ith the latte!?s o'n desi0n, )odel nu)be!, colo!, etc.

;Rollo p. 8< *>)phasis supplied.+

On Eul( 66, -5, p!ivate !espondent appealed to the ou!t of Ta"

Appeals alle0in0 that the decision of the o))issione! 'as cont!a!( to

la' and the facts of the case.chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

On Ap!il 66, -5$, !espondent ou!t of Ta" Appeals !ende!ed the

7uestioned decision holdin0 that p!ivate !espondent 'as a

)anufactu!e! the!eb( !eve!sin0 the decision of the petitione!.chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(


23/289

Hence, this petition fo! !evie' 'he!ein petitione! !aises the sole issue

of. )%et%er or not t%e Cort o( T$* Appe$&s erred in %o&din+ t%$t

priv$te respondent is $ '$n($#trer $nd not $ #ontr$#tor $nd

t%ere(ore not &i$!&e (or t%e $'ont o( P-,/0-.10, $s de(i#ien#2

#ontr$#tor3s t$*, in#&sive o( sr#%$r+e $nd interest, (or t%e 2e$r 1//.

The petition is 'ithout )e!it. chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

. P!ivate !espondent is a &)anufactu!e!& as defined in the Ta" ode

and not a &cont!acto!& unde! Section 6/$*e+ of the Ta" ode as

petitione! 'ould have this ou!t decide.

*a+ Section 6/$ *+ ;no' Sec. %/ *7+< of the Ta" ode defines&independent cont!acto!s& as= chan!oblesvi!tual la'lib!a!(

... pe!sons *Gu!idical and natu!al+ not enu)e!ated above *but not

includin0 individuals subGect to the occupation ta" unde! Section 6 of

the 4ocal Ta" ode+ 'hose $#tivit2 #onsists essenti$&&2 o( t%e s$&e o( $&&

4inds o( servi#es fo! a fee !e0a!dless of 'hethe! o! not the

pe!fo!)ance of the se!vice calls fo! the e"e!cise o! use of the ph(sical

o! )ental faculties of such cont!acto!s o! thei! e)plo(ees. *>)phasissupplied.+

P!ivate !espondent?s business does not fall unde! this definition. chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

Petitione! contends that the fact that p!ivate !espondent &desi0ns and

)a2es sa)ples o! )odels that a!e ?displa(ed? o! p!esented o!

?sub)itted? to p!ospective bu(e!s 'ho ?)i0ht choose? the!ef!o)&

si0nifies that 'hat p!ivate !espondent is sellin0 is a 2ind of se!vice its

shop is capable of !ende!in0 in te!)s of 'ood'o!2 s2ills and

c!afts)anship *:!ief fo! Petitione!, p. +. He fu!the! st!esses the point

that if the!e a!e no o!de!s placed fo! 0oods as !ep!esented b( the

sa)ple o! )odel, the shop does not p!oduce an(thin0 on the othe!

hand, if the!e a!e o!de!s placed, the shop 0oes into fall p!oduction to

fill up the 7uantit( o!de!ed *Petitione!?s :!ief, p. %+. chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

The facts of the case do not suppo!t petitione!?s clai). Petitione! is

i0no!in0 the fact that p!ivate !espondent sells 0oods 'hich it 2eeps in

stoc2 and not se!vices. As the !espondent Ta" ou!t had found=

""" """ """ chan!obles vi!tual la'lib!a!(


24/289

Petitione! ;p!ivate !espondent he!ein< clai)s, and the !eco!ds bea!

petitione! out, that it %$d $ re$d2 sto#4 o( its s%op prod#ts (or s$&e to

its fo!ei0n and local bu(e!s. As a )atte! of fact, the pu!chase o!de!s

f!o) its fo!ei0n bu(e!s sho'ed that the( o!de!ed b( !efe!!in0 to the

)odels desi0nated b( petitione!. >ven pu!chases b( local bu(e!s fo!

television cabinets *>"hs. ?6 to#?, pp. 1#, :IR !eco!ds+ 'e!e

b( orders (or e*istin+ 'ode&s e"cept onl( fo! so)e adGust)ents in

si@es and accesso!ies utili@ed. chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

ith !e0a!d to the television cabinets, petitione! p!esented th!ee

'itnesses its boo22eepe!, p!oduction )ana0e! and )ana0e! 'ho

testified that sa)ples of television cabinets 'e!e desi0ned and )ade

b( petitione!, f!o) 'hich )odels the television co)panies such asHitachi National and othe!s )i0ht choose, then specified 'hateve!

innovations the( desi!ed. I( (ond to !e s$&e$!&e, so'e te&evision

#$!inets 5ere '$n($#tred (or disp&$2 $nd so&d to t%e +ener$& p!&i# .

These cabinets 'e!e not e"po!ted but onl( sold locall(. *t.s.n., pp.

66#$, 3eb!ua!( 5,-56 t.s.n., pp. %1/, Ma!ch 6$, -56 t.s.n., pp.

#1, Au0ust /, -5#.+ chan!obles vi!tual la'lib!a!(


In the case of petitione!?s othe! 'ood'o!2 p!oducts such as ba!o)ete!

cases, 2nife !ac2s, chu!ch fu!nitu!e, school fu!nitu!e, 2noc2 do'n

chai!s, etc., petitione!?s above1)entioned 'itnesses testified that

these 'e!e )anufactu!ed 'ithout p!evious o!de!s. S$'p&es 5ere

disp&$2ed, $nd i( in sto#4, 5ere $v$i&$!&e (or i''edi$te s$&e to &o#$&

$nd (orei+n #sto'ers. Such testi)on( 'as not cont!adicted b(

!espondent *petitione! he!ein+. And in all the pu!chase o!de!s

p!esented as e"hibits, 'hethe! f!o) fo!ei0n o! local bu(e!s, !efe!ence

'as )ade to the )odel nu)be! of the p!oduct bein0 o!de!ed o! to the

sa)ple sub)itted b( petitione!.chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

Respondent?s e"a)ine!s, in thei! )e)o!andu) to the o))issione! of

Inte!nal Revenue, stated that petitione! )anufactu!ed onl( upon

p!evious o!de!s f!o) custo)e!s and &onl( in acco!dance 'ith the

latte!?s o'n desi0n, )odel nu)be!, colo!, etc.& *>"h. ??, p. 6%, :IR

!eco!ds.+ T%eir !$re st$te'ent t%$t t%e 'ode& n'!ers $nd desi+ns

5ere t%e #sto'ers3 o5n, n$##o'p$nied !2 $de6$te eviden#e, is

di((i#&t to !e&ieve. It i+nores #o''on&2 $##epted $nd re#o+ni7ed

!siness pr$#ti#es t%$t it is not t%e #sto'er !t t%e '$n($#trer

5%o (rnis%es t%e s$'p&es or 'ode&s (ro' 5%i#% t%e #sto'ers se&e#t


25/289

5%en p&$#in+ t%eir orders, T%e eviden#e $dd#ed !2 petitioner to

prove t%$t t%e 'ode& n'!ers $nd desi+ns 5ere its o5n is 'ore

#onvin#in+ ;TA decision, pp. 15.< *>)phasis supplied+ chan!oblesvi!tual la'lib!a!(

""" """ """

This ou!t finds no !eason to disa0!ee 'ith the Ta" ou!t?s findin0 of

fact. It has been consistentl( held that 'hile the decisions of the ou!t

of Ta" Appeals a!e appealable to the Sup!e)e ou!t, the fo!)e!?s

findin0 of fact a!e entitled to the hi0hest !espect. The factual findin0s

can onl( be distu!bed on the pa!t of the ta" cou!t ;ollecto! of Inte!n.

al Revenue v. Hende!son, 416-$8, 3eb!ua!( 65, -, SRA 8-

A@na! v. ou!t of Ta" Appeals, 416/$-, Au0. 6#, -%8, $5 SRA $-Ra()undo v. de Eo(a, 416%%##, Dec. #, -5/, / SRA 8-$

Indust!ial Te"tiles Manufactu!in0 o. of the Phils. , Inc. v.

o))issione! of Inte!nal Revenue, 416%%5 and 416%%5, Ma(

6%,-5$,# SRA $8-.< chan!oblesvi!tual la'lib!a!(

*b+ Neithe! can A!ticle 8% of the Ne' ivil ode help petitione!?s

cause. A!ticle 8% states= chan!obles vi!tual la'lib!a!(

A cont!act fo! the delive!( at a ce!tain p!ice of an a!ticle hich the

vendo! in the o!dina!( cou!se of his business )anufactu!es o! p!ocu!es

fo! the 1 0ene!al )a!2et, 'hethe! the sa)e is on hand at the ti)e o!

not, is a cont!act of sale, but if the 0oods a!e to be )anufactu!ed

speciall( fo! the custo)e! and upon his special o!de!, and not fo! the

0ene!al )a!2et, it is a cont!act fo! a piece of 'o!2.chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

Petitione! alle0ed that 'hat e"ists p!io! to an( o!de! is but the sa)ple

)odel onl(, nothin0 )o!e, nothin0 less and the o!de!ed 7uantit( 'ould

neve! have co)e into e"istence but fo! the pa!ticula! o!de! as

!ep!esented b( the sa)ple o! )odel ;:!ief fo! Petitione!, pp. -1/.< chan!obles vi!tual la'lib!a!(

Petitione! 'ants to i)p!ess upon this ou!t that unde! A!ticle 8%,

the t!ue test of 'hethe! o! not the cont!act is a piece of 'o!2 *and

thus classif(in0 p!ivate !espondent as a cont!acto!+ o! a cont!act ofsale *'hich 'ould classif( p!ivate !espondent as a )anufactu!e!+ is

the 'ere e*isten#e o( t%e prod#t $t t%e ti'e o( t%e per(e#tion o( t%e

#ontr$#t s#% t%$t i( t%e t%in+ $&re$d2 e*ists, t%e #ontr$#t is of sale, if

not, it is 'o!2.chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(


26/289

This is not the test follo'ed in this Gu!isdiction. As can be clea!l( seen

f!o) the 'o!din0s of A!t. 8%, 'hat dete!)ines 'hethe! the cont!act

is one of 'o!2 o! of s$&e is 5%et%er t%e t%in+ %$s !een '$n($#tred

spe#i$&&2 (or t%e #sto'er $nd pon %is spe#i$& order.8 Thus, if the

thin0 is speciall( done at the o!de! of anothe!, this is a cont!act fo! a

piece of 'o!2. If, on the othe! hand, the thin0 is )anufactu!ed o!

p!ocu!ed fo! the 0ene!al )a!2et in the o!dina!( cou!se of one?s

business, it is a b cont!act of sale. chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

Eu!isp!udence has follo'ed this c!ite!ion. As held in Co''issioner o(

Intern$& Revene v. En+ineerin+ E6ip'ent $nd Spp&2 Co. *416%/88

and 416%8$6, Eune #/, -%$, 8 SRA $-/, $-%+, &the distinction

bet'een a cont!act of sale and one fo! 'o!2, labo! and )ate!ials istested b( the in7ui!( 'hethe! the thin0 t!ansfe!!ed is one not in

e"istence and5%i#% never 5o&d %$ve e*isted !t (or t%e order o( t%e

p$rt2 desirin+ to $#6ire it , o! a thin0 'hich 'ould have e"isted and

has been the subGect of sale to so)e othe! pe!sons even if the o!de!

had not been 0iven.& *>)phasis supplied.+ And in a :IR !ulin0, 'hich

as pe! Sec. #6 *no' Sec. 6%%+ of the Ta" ou!t the o))issione! has

the po'e! to )a2e and 'hich, as pe! settled Gu!isp!udence is entitled

to the 0!eatest 'ei0ht as an ad)inist!ative vie' ;National 3ede!ationof Su0a! o!2e!s *N3S+ v. OveGe!a, .R. No. $-%8#, Ma( #, -56,

8 SRA #$8, #- Sie!!a Mad!e T!ust v. Hon. Sec. of A0!icultu!e and

Natu!al Resou!ces, Nos. #6#%/ and #6%%, Ap!il 6/, -5#,6 SRA

#58 >spanol v. hai!)an and Me)be!s of the :oa!d of

Ad)inist!ato!s, Phil. Vete!ans Ad)inist!ation, 4188, Eune 6-, -5$,

#% SRA #8, &one 'ho has !ead( fo! the sale to the 0ene!al public

finished fu!nitu!e is a )anufactu!e!, $nd t%e 'ere ($#t t%$t %e did not

%$ve on %$nd $ p$rti#&$r pie#e or pie#es o( (rnitre ordered does not '$4e %i' $ #ontr$#tor on&2 & *:IR Rulin0 No. ##1, se!ies of -/+.

4i2e'ise,


hen the vendo! ente!s into a cont!act fo! the delive!( of an a!ticle

'hich in the o!dina!( cou!se of his business he )anufactu!es o!

p!ocu!es fo! the 0ene!al )a!2et at a p!ice ce!tain *A!t. 8$5+ such

cont!act is one of sale even i( $t t%e ti'e o( #ontr$#tin+ %e '$2 not

%$ve s#% $rti#&e on %$nd . Such a!ticles fall 'ithin the )eanin0 of

&futu!e 0oods& )entioned in A!t. 86, pa!. . ;$ Padilla, ivil 4a'=

ivil ode Annotated #- *-%8+ chan!obles vi!tual la'lib!a!(


27/289

""" """ """

These conside!ations 'e!e 'hat p!ecisel( )oved the !espondent ou!t

of Ta" Appeals to !ule that ?the fact that ;p!ivate !espondent< 2ept

)odels of its p!oducts... indicate that these p!oducts 'e!e fo! sale to

the 0ene!al public and not fo! special o!de!s,? citin0 Ce&estino Co $nd

Co. v. Co&&e#tor o( Intern$& Revene ;-- Phil, 58 *-$+NTRB SHOP in this case

*:!ief fo! Petitione!, pp. 815+. Petitione! see)s to have )issed the

'hole point in the fo!)e! case.chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

T!ue, the fo!)e! case did )ention the fact of the business conce!n

bein0 a 3ATORB, Thus=


... I cannot believe that petitione! co)pan( 'ould ta2e, as in fact it

has ta2en, all the t!ouble and e"pense of !e0iste!in0 a special t!ade

na)e fo! its sash business and then o!de!s co)pan( statione!(

ca!!(in0 the bold p!int &O!iental Sash 3acto!( *elestino o and

o)pan(, P!op.+ -6 Raon St., uiapo, Manila, Tel. No. ##/%,

Manufactu!e!s of all 2inds of doo!s, 'indo's, sashes fu!nitu!e, etc.

used season d!ied and 2iln1d!ied lu)be!, of the best 7ualit(

'o!2)anship& solel( fo! the pu!pose of suppl(in0 the need fo! doo!s,

'indo's and sash of its special and li)ited custo)e!s. One 'ill note

that petitione! has chosen fo! its t!ade na)e and has offe!ed itself to

the public as a 3ATORB, 'hich )eans it is out to do business in its

chosen lines on a bi0 scale. As a 0ene!al !ule, sash facto!ies !eceive

o!de!s fo! doo!s and 'indo's of special desi0n onl( in pa!ticula! cases

but the bul2 of thei! sales is de!ived f!o) !ead(1)ade doo!s and

'indo's of standa!d si@es fo! the ave!a0e ho)e. ;>)phasis

supplied.< chan!obles vi!tual la'lib!a!(

""" """ """


28/289

Ho'eve!, these findin0s 'e!e )e!el( attendant facts to sho' 'hat the

ou!t 'as !eall( d!ivin0 at 1 the %$!it$&it2 of the p!oduction of the

0oods involved fo! the +ener$& p!&i#.

In the instant case, it )a( be that 'hat is involved is a ARP>NTRB

SHOP. :ut, in the sa)e vein, the!e a!e also attendant facts he!ein to

sho' habitualit( of the p!oduction fo! the 0ene!al public. chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(

In this 'ise, it is note'o!th( to a0ain cite the findin0s of fact of the

!espondent Ta" ou!t=


Petitione! ;p!ivate !espondent he!ein< clai)s, and the !eco!ds bea!

petitione! out, that it %$d $ re$d2 sto#4 o( its s%op prod#ts (or s$&e to

its fo!ei0n and local bu(e!s. As a )atte! of fact, the pu!chase o!de!s

f!o) its fo!ei0n bu(e!s sho'ed that the( o!de!ed b( !efe!!in0 to the

)odels desi0ned b( petitione!. >ven pu!chases b( local bu(e!s fo!

television cabinets... 'e!e b( orders (or e*istin+ 'ode&s. ...chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

ith !e0a!d to the television cabinets, petitione! p!esented th!ee

'itnesses... 'ho testified that sa)ples of television cabinets 'e!e

desi0ned and )ade b( petitione!, f!o) 'hich )odels the television

co)panies ... )i0ht choose, then specified 'hateve! innovations the(

desi!ed. I( (ond to !e s$&e$!&e, so'e te&evision #$!inets 5ere

'$n($#tred (or disp&$2 $nd so&d to t%e +ener$& p!&i#.


In the case of petitione!?s othe! 'ood'o!2 p!oducts... these 'e!e

)anufactu!ed 'ithout p!evious o!de!s. S$'p&es 5ere disp&$2ed, $nd i(

in sto#4, 5ere $v$i&$!&e (or i''edi$te s$&e to &o#$& $nd (orei+n

#sto'ers. *TA decision, pp. 15. ;>)phasis supplied.<

*c+ The p!ivate !espondent not bein0 a &cont!acto!& as defined b( the

Ta" ode o! of the Ne' ivil ode, is it a ?)anufactu!e!? as counte!edb( the ca!pent!( shopJ chan!oblesvi!tual la'lib!a!(

Sec. 5% *"+ ;no' Sec. $% *"+< of the Ta" ode defines a

)anufactu!e!? as follo's=


29/289

&Manufactu!e!& includes eve!( pe!son 'ho b( ph(sical o! che)ical

p!ocess alte!s the e"te!io! te"tu!e o! fo!) o! inne! substance of an(

!a' )ate!ial o! )anufactu!ed o! pa!tiall( )anufactu!ed p!oduct in

such )anne! as to p!epa!e it fo! a special use o! uses to 'hich it could

not have been in its o!i0inal condition, o! 'ho b( an( such p!ocess

alte!s the 7ualit( o! an( such !a' )ate!ial o! )anufactu!ed o! pa!tiall(

)anufactu!ed p!oduct so as to !educe it to )a!2etable shape o!

p!epa!e it fo! an( of the uses of indust!(, o! 'ho b( an( such p!ocess

co)bines an( such !a' )ate!ial o! )anufactu!ed o! pa!tiall(

)anufactu!ed p!oducts 'ith othe! )ate!ials o! p!oducts of the sa)e o!

diffe!ent 2inds and in such )anne! that the finished p!oduct of such

p!ocess o! )anufactu!e can be put to a special use o! uses to 'hich

such !a' )ate!ial o! )anufactu!ed o! pa!tiall( )anufactu!ed p!oducts

in thei! o!i0inal condition 'ould not have been put, and 'ho in

addition alte!s such !a' )ate!ial o! )anufactu!ed o! pa!tiall(

)anufactu!ed p!oducts, o! co)bines the sa)e to p!oduce such

finished p!oducts fo! the pu!pose of thei! sale o! dist!ibution to othe!s

and not fo! his o'n use o! consu)ption.

It is a basic !ule in statuto!( const!uction that 'hen the lan0ua0e of

the la' is clea! and une7uivocal, the la' )ust be ta2en to )eane"actl( 'hat it sa(s ;:ana'a et al. v. Mi!ano et al., 4168%$/, Ma( ,

-5/, -% SRA $%, $##


30/289


*d+ A!ticles shipped o! e"po!ted b( the )anufactu!e! o! p!oduce!,

i!!espective of an( shippin0 a!!an0e)ent that )a( be a0!eed upon

'hich )a( influence o! dete!)ine the t!ansfe! of o'ne!ship of the

a!ticles so e"po!ted. chan!oblesvi!tuala'lib!a!( chan!oblesvi!tual la'lib!a!(

*e+ A!ticles sold b( &!e0iste!ed e"po!t p!oduce!s& to *+ othe!&

!e0iste!ed e"po!t p!oduce!s& *6+ &!e0iste!ed e"po!t t!ade!s? o! *#+

fo!ei0n tou!ists o! t!avele!s, 'hich a!e conside!ed as &e"po!t sales.&

The la' is clea! on this point. It is conceded that as a !ule, as a!0ued

b( petitione!, an( clai) fo! ta" e"e)ption f!o) ta" statutes is st!ictl(const!ued a0ainst the ta"pa(e! and it is contin0ent upon p!ivate

!espondent as ta"pa(e! to establish a clea! !i0ht to ta" e"e)ption

;:!ief fo! Petitione!s, p. 5. Ta" e"e)ptions a!e st!ictl( const!ued

a0ainst the 0!antee and 0ene!all( in favo! of the ta"in0 autho!it( ;it(

of :a0uio v. :usue0o, 416-%%6, Sept. 5, -5/, // SRA the(

a!e loo2ed upon 'ith disfavo! ;este!n Minolco o!p. v. o))issione!

Inte!nal Revenue, .R. No. #6, Au0. ,-5#,68 6. The( a!e

held st!ictl( a0ainst the ta"pa(e! and if e"p!essl( )entioned in thela', )ust at least be 'ithin its pu!vie' b( clea! le0islative intent

;o))issione! of usto)s v. Phil., Acet(lene o., 416688#, Ma( 6-,

-%, #- SRA %/, 4i0ht and Po'e! o. v. o))issione! of usto)s,

.R. 4165%#- and 4165-/6, Ma!ch 6-, -%6, 88 SRA 66


31/289

locall( less and e"po!ted )o!e, petitione! did a tu!nabout and i)posed

the cont!acto!?s ta". :( classif(in0 the p!ivate !espondent as a

cont!acto!, petitione! 'ould li2e'ise ta2e a'a( the ta" e"e)ptions

0!anted unde! Sec. 6/6 fo! )anufactu!e!s. Petitione!?s action finds no

suppo!t in the applicable la'.chan!oblesvi!tuala'lib!a!(chan!oblesvi!tual la'lib!a!(

H>R>3OR>, the ou!t he!eb( D>NI>S the Petition fo! lac2 of )e!it

and A33IRMS the ou!t of Ta" Appeals decision in TA ase No.

##$%.chan!oblesvi!tuala'lib!a!( chan!obles vi!tual la'lib!a!(

SO ORD>R>D.

Fern$n 9C%$ir'$n:, ;tierre7,


32/289

FERNANO, J.:

This Court, in this petition for the review of a decision of the Court

of Tax Appeals is not faced with a proble# of undue co#plexit!.

The law "overnin" the #atter has been authoritativel! expoundedin an opinion b! the then *ustice, now Chief *ustice, Concepcion

in Alham#ra Cigar &. Collector of 0nternal Re&enue,$ a case

involvin" the sa#e parties over a si#ilar >uestion but coverin" an

earlier period of ti#e. The li#its of a power of respondent

Co##issioner of nternal Revenue to allow deductions fro# the

"ross inco#e =the ordinar! and necessar! expenses paid or

increased durin" the taxable !ear in carr!in" on an! trade or

business, includin" a reasonable allowance for salaries and other

co#pensation for personal services actuall! rendered . . .=0 had

thus been authoritativel! expounded. Ghat re#ains to be decided

in this liti"ation is whether the decision of the Court of Tax Appeals

sou"ht to be reviewed reflected with fidelit! the doctrine thus

announced or deviated therefro#.

Accordin" to the petition for review, Alha#bra Ci"ar Ci"arette

Manufacturin" Co#pan!, petitioner6appellant, =is a corporation

dul! or"aniKed and existin" under the laws of the Philippines, with

principal office at %$ Ta!u#an street, Tondo, Manila< and the

respondent6appellee is the dul! appointed and >ualified

Co##issioner of nternal Revenue, vested with authorit! to act assuch for the overn#ent of the Republic of the Philippines, . . . .%

n the petition for review it was contended that the Court of Tax

Appeals, in affir#in" the action ta)en b! respondent6appellee

Co##issioner of nternal Revenue, erred =8a9 n holdin" that A. P.

-uenKle and @.A. 5treiff who were the President and Fice6

President, respectivel!, of the petitioner6appellant, were entitled toa salar! of onl! P4,(((.(( each !ear, for $+2, $+, $+4 and

$+&, and a bonus e>ual to the reduced bonus of G. E""#ann for

each of said !ears< and disallowin" as deductions the portions of

their salar! and bonus in excess of said a#ounts< 8b9 n

disallowin", as deductions, all the directors fees and co##issions


33/289

paid b! the petitioner6appellant to A.P. -uenKle and @.A. 5treiff< 8c9

n holdin" that the petitioner6appellant is liable for the alle"ed

deficienc! inco#e taxes in >uestion.=2

t is indisputable as noted in the brief for petitioner6appellant thatthe deductions disallowed b! respondent6appellee, Co##issioner

of nternal Revenue, for the !ear $+2 to $+& desi"nated

as salaries officers= #onus officers= commissions to

managers and directors> fees =relate exclusivel! to the

co#pensations paid b! the petitioner6appellant in $+2, $+,

$+4 and $+&, to A. P. -uenKle and @.A. 5treiff who were, durin"

the said !ears, as the! had been in prior !ears and still are,

directors and the president and vice6president, respectivel!, of the

petitioner6appellant. . . .=

nder the cate"or! of salaries officers of the fixed annual

co#pensation of A. P. -uenKle and @. A. 5treiff in the a#ount of

P$,(((.(( each =the respondent6appellee allowed for each of

the# a salar! of onl! P4,(((.(( and disallow the balance of

P+,(((.((, or a total disallowance of P$',((.(,( for both of the#,

for each of the !ears in >uestion.=4 nder that of the #onus

officers of the a#ount under such cate"or! paid to the above

"entle#en for the !ear $+2 of P$2,&(.(( each, =the respondent6

appellee allowed each of the# a bonus of onl! P,'(.((, and

disallowed the balance of P',+((.(( or a total disallowance ofP$&,'((.(( for both of the#.=& :or the !ear $+, the bonus bein"

paid, once a"ain, a#ountin" to P$2,&(.(( to each of the#, =the

respondent6appellee allowed for each of the#, a bonus of onl!

P&,(((.((, and disallowed the balance of P&,&(.(( each, or a

total disallowance of P$,((.(( for both of the#.=' :or the !ear

$+4, a"ain the a#ount, not sufferin" an! chan"e for each, =the

respondent6appellee allowed for each of the# a bonus of onl!P,((.(( and disallowed the balance of P+,0(.(( each, or a

total disallowance of P$',((.(( for both of the#.=+ astl!, for the

!ear $+&, of a si#ilar a#ount pa!able to each in the concept of

bonus, =the respondent6appellee allowed for each of the# a bonus


34/289

of onl! P4,((.((, and disallowed the balance of P',0(.(( each,

or a total disallowance of P$4,((.(( for both of the#.=$(

As to the deduction in the concept of commissions to managers,

the brief for the petitioner appellant states; =The co##issions paidb! the petitioner6appellant to A. P. -uenKle and @. A. 5treiff in the

a#ount of P$%,4(&.4$ each in $+2, or a total of P0&,0$.00 for

both of the#< P$2,(+&.40 each in $+, or a total of P0',$+.02

for both of the#< P$%,$'(.'& each in $+4, or a total of

P04,%4$.&2 for both of the#< and P$%,$22.0+ each in $+&, or a

total of P04,0''.2' for both of the#, were entirel! disallowed b!

the respondent6appellee.=$$

Concernin" the directors> fees paid to both officials b! petitioner6

appellant, it is noted in the brief that =in the a#ount of P$$,(2.&$

each in $+2, or a total of P0%,((+.20 for both of the#<

P$(,4+%.(0 each in $+, or a total of P0$,%'4.(2 for both of

the#< P$(,%4(.0% each in $+4, or a total of P0(,&0(.24 for both

of the#< and P+,&$4.4% each in $+&, or a total of P$+,2%%.04 for

both of the# were also entirel! disallowed b! the respondent6

appellee.=$0

n the decision of the respondent Court of Tax Appeals sou"ht to

be reviewed, there was an appraisal of the evidence on which

respondent6appellee Co##issioner of nternal Revenue based

the above deduction on salaries and bonuses; =The evidence

shows that prior to $+2, Messrs. A. P. -uenKle and @. A. 5treiff

President and Fice6President, respectivel!, of petitioner

corporation, were each paid an annual salar! P4,(((.(( and a

bonus of about four ti#es as #uch as the annual salar!. n

Alha#bra Ci"ar and Ci"arette Manufacturin" Co#pan! v. Coll. of

nt. Rev. C.T.A. No. $20 *anuar! %$, $+& 8affd. in .R. Nos. 6$0(04 6$0$%$, Ma! 0+, $++9, this Court held that considerin"

the nature of the services perfor#ed b! Messrs. -uenKle and

5treiff the salar! of P4,(((.(( paid to each of the# was

reasonable and, therefore, deductions is ordinar! and necessar!

business expense. The bonus paid to each of said officers was


35/289

however reduced to the a#ount e>uivalent to that paid to Mr. G.

E""#ann, the resident Treasurer and Mana"er of petitioner.

:ollowin" the decision of the 5upre#e Court in . R. Nos. 6

$0(04 6 $0$%$, . . ., respondent allowed as deduction

P4,(((.(( as salar! to Messrs. -uenKle and 5treiff and a bonuse>uivalent to that paid annuall! to Mr. E""#ann fro# $+2 to

$+&, as indicated above.=$%

Then the decision of respondent Court of Tax Appeals in affir#in"

what respondent6appellee did explained wh!; =pon the evidence

of record, we find no ?ustification to reverse or #odif! the decision

of respondent with respect to the disallowance of a portion of the

salaries and bonuses paid to Messrs. -uenKle and 5treiff.

Petitioner see)s to ?ustif! the increase in the salaries of Messrs.

-uenKle and 5treiff on the "round of increased costs of livin". The

said officers of petitioner are, however, non6residents of the

Philippines.=$2

t #a! be stated in this connection that the brief for petitioner6

appellant did not actuall! dispute the fact of non6residence of the

aforesaid officials. Thus; =A. P. -uenKle or @. A. 5treiff usuall!

ca#e to the Philippines ever! two !ears, and "enerall! sta!ed

fro# five to ei"ht wee)s 8t.s.n., pp. 0(%60(29. 3urin" the !ears in

>uestion, @. A. 5treiff was in the Philippines fro# *anuar! 0& to

March 0(, $+2. @e was personall! present at the special #eetin"of the board of directors of the petitioner6appellant on :ebruar!

$+, $+2 and at the re"ular #eetin" on :ebruar! 0&, $+2, the

#inutes of all of which he si"ned as Fice6President 8Exhibits 1, 16

$ and 1609. @e was also personall! present at the se#i6annual

#eetin" of stoc)holders of the petitioner6appellant on :ebruar!

$+, $+2, the #inutes of which he also si"ned as vice6president

8Exh. R9. A. P. -uenKle was in the Philippines fro# :ebruar! % toMarch ', $+4 8t.s.n., pp. 0(260(9. @e was personall! present at

the special #eetin" of the board of directors on :ebruar! 00, and

on :ebruar! 0%, $+4, and at the se#i6annual "eneral #eetin" of

stoc)holders on :ebruar! 0%, $+4, the #inutes of all of which he

si"ned as President 8Exhs. 16', 16+. and R629. @. A. 5treiff ca#e


36/289

a"ain to the Philippines in $+', and he personall! attended the

special #eetin" of the board of directors on March &, $+4', the

#inutes of which he also, si"ned as Fice6President 8Exh. 16$49.=$

There was in the brief of petitioner6appellant stress laid on thosewor) perfor#ed b! the#, both in and outside the Philippines.

=3urin" their sta! in the Philippines, A. P. -uenKle or @. A. 5treiff

inspected the install petitions of the petitioner6appellant, and

discussed with the local #ana"e#ent, personnel and

#ana"e#ent #atters, lon"6ran"e plannin" and policies of the

co#pan! 8t.s.n., pp. 0(60(49. Aside fro# these visits of A. P.

-uenKle and @. A. 5treiff to the Philippines, there were other

personal consultations between the# and the local #ana"e#ent.

There were about seven staff #e#bers in the local #ana"e#ent,

and each of the# went on ho#e leave ever! four !ears and for

consultations in 5witKerland with the "eneral #ana"ers, AP

-uenKle and @. A. 5treiff. These ho#e leaves each lasted for six

#onths. n this wa!, at least one staff #e#ber went on ho#e

leave ever! !ear and for consultations with the "eneral

#ana"er. . . .=$4

As to commissions and directors> fees, it is the findin" of the Court

of Tax Appeals; =n connection with the co##issions paid to

Messrs. -uenKle and 5treiff there is no evidence of an! particular

service rendered b! the# to petitioner to warrant pa!#ent ofco##issions. Counsel for petitioner sou"ht to prove the various

t!pes of services perfor#ed b! said officers, but the services

#entioned are those for which the! have been #ore than

ade>uatel! co#pensated in the for# of salaries and bonuses. As

re"ards the directors fees, it is ad#itted that Messrs. -uenKle and

5treiff =usuall! ca#e to the Philippines ever! two !ears, and

"enerall! sta!ed fro# five to ei"ht wee)s.= 8Pa"e $&,Me#orandu# for Petitioner.9 Ge cannot see an! ?ustification for

the pa!#ent of directors fees of about P$(,(((.(( to each of said

officers for co#in" to the Philippines to visit their corporation once

in two !ears. Bein" non6resident President and Fice6President of

Petitioner corporation of which the! are the controllin"


37/289

stoc)holders, we are #ore inclined to believe that said

co##issions and directors fees, pa!#ent of which was based on

a certain percenta"e of the annual profits of petitioner, are in the

nature of dividend distributions,=$&

Considerin" how carefull! the Court of Tax Appeals considered the

#atter of the disallowances in the li"ht of 5ection %( of the

National nternal Revenue Code, the tas) for petitioner6appellant

in provin" that it erred in holdin" that A. P. -uenKle and @. A.

5treiff were entitled onl! to the salar! of P4,(((.(( each a !ear,

for $+2, $+, $+4 and $+&, and a bonus e>ual to the reduced

bonus of one of its officials a certain G. E""#ann, for each of said

!ears, and in disallowin" as deductions the directors fees and

co##issions paid b! it to the#, was far fro# eas!. Nor could it be

said that petitioner6appellant did succeed in such effort As

#entioned earlier, the previous case of Alham#ra Cigar <

Cigarette *anufacturing Compan) &. The Collector of 0nternal

Re&enue,$'has laid down the applicable principle of law.

n the lan"ua"e of then *ustice, now Chief *ustice, Concepcion;

=n the li"ht of the tenor of the fore"oin" provision, whenever a

controvers! arises on the deductibilit!, for purposes of inco#e tax,

of certain ite#s for alle"ed co#pensation of officers of the

taxpa!er, two 809 >uestions beco#e #aterial, na#el!; 8a9 @ave

=personal services= been =actuall! rendered= b! said officers 8b9n the affir#ative case, what is the =reasonable allowance=

therefore Ghen the Collector of nternal Revenue disallowed the

fees, bonuses and co##issions afore#entioned, and the

co#pan! appealed therefro#, it beca#e necessar! for the OCourt

of Tax AppealsL to deter#ine whether said officer had correctl!

applied section %( of the Tax Code, and this, in turn, re>uired the

consideration of the two 809 >uestions alread! adverted to. n thecircu#stances surroundin" the case, we are of the opinion that

the OCourt of Tax AppealsL has correctl! construed and applied

said provision.= 5o it is now. This appeal too cannot prosper.


38/289

Even if there were no such previous decision, it would still follow,

in the li"ht of the controllin" doctrines, that the Court of Tax

Appeals #ust be sustained. The well written brief for petitioner6

appellant citin" Botan! Gorsted Bills v. nited 5tates,$+ states;

=Ghether the a#ounts disallowed b! the respondent6appellee inthe respective !ears were reasonable co#pensation for personal

services, is a >uestion of fact to be deter#ined fro# all the

evidence.=0( That the >uestion thus involved is inherentl! factual,

appears to be undeniable. This Court is bound b! the findin" of

facts of the Court of Tax Appeals, especiall! so, where as here,

the evidence in support thereof is #ore than substantial, onl!

>uestions of law thus bein" left open to it for

deter#ination.0$ Githout i"norin" this various factors which

petitioner6appellant would have this Court consider in passin"

upon the deter#ination #ade b! the Court of Tax Appeals but with

full reco"nition of the fact that the two officials were non6residents,

it cannot be said that it co##itted the alle"ed errors, callin" for

the interposition of the corrective authorit! of this Court. Nor as a

#atter of principle is it advisable for this Court to set aside the

conclusion reached b! an a"enc! such as the Court of Tax

Appeals which is, b! the ver! nature of its function, dedicated

exclusivel! to the stud! and consideration of tax proble#s and has

necessaril! developed an expertise on the sub?ect unless, as did

not happen here, there has been an abuse or i#provident

exercise of its authorit!.

G@ERE:/RE, the decision of the Court of Tax Appeals is

affir#ed, with costs a"ainst petitioner6appellant.


39/289


SUPREME COURT

Manila

EN BANC

G.R. No. L-188'4 M!( 29, 1969

UEN%LE 5 STREIFF, INC., petitioner,

vs.T*E COMMISSIONER OF INTERNAL REENUE, respondent.

Angel S. Gam#oa for petitioner.

+ffice of the Solicitor General Arturo A. Alafri8 Assistant Solicitor

General ose %. Ale?andro and Special Attorne) :irgilio C.

Salda?eno for respondent.

I%ON, J.:

Petition filed b! -uenKle 5treiff nc. for the review of the

decision of the Court of Tax Appeals in C.T.A. Case No. $

sustainin" the assess#ents of the respondent issued a"ainst it,


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for deficienc! inco#e taxes for the !ears $+%, $+2 and $+ in

the a#ounts of P2(,2.((, P$$,02'.(( and P$4,00'.((,

respectivel!, arisin" fro# the disallowance, as deductible

expenses, of the bonuses paid b! petitioner to its officers, upon

the "round that the! were not ordinar!, nor necessar!, norreasonable expenses within the purview of 5ection %(8a9 8$9 of the

National nternal Revenue Code.

Petitioner, a do#estic corporation, filed its inco#e tax

returns for the taxable !ears $+%, $+2 and $+, declarin" net

losses of P0,('.'2, P2,+%.+$ and P+,024.(& respectivel!. pon

a verification thereof, the respondent, on 5epte#ber +, $+&,

assessed a"ainst it the deficienc! inco#e taxes in >uestion,

arrived at as follows;

:or the !ear $+%, b! disallowin" as deductions all a#ounts

paid that !ear b! the petitioner as bonus to its officers and staff6

#e#bers in the a""re"ate su# of P$&,$2(.((, this resultin" in a

net taxable inco#e of petitioner a#ountin" to P$&%,(2.$4< for the

taxable !ears $+2 and $+, the si#ilar disallowance as

deductions of a portion of the bonuses paid b! petitioner in said

!ears to its officers and staff6#e#bers in the a""re"ate su#s of

P'',$+%.%% for $+2 and P+(,%'.(( for $+, resulted li)ewise in

a net taxable inco#e for petitioner in the su# of P'%,0%+.20 for

$+2 and P'$,$%'.+% for $+.

/n *ul! +, $+' petitioner filed with the Court of Tax

Appeals a petition for review contestin" the afore#entioned

assess#ents 8C.T.A. Case No. $9, and on April 0', $+4$, said

Court rendered ?ud"#ent as follows;

=:/R T@E :/RE/N C/N53ERAT/N5, the decisionappealed fro# is hereb! affir#ed with respect to deficienc!

assess#ent for the !ears $+% and $+. As re"ards the

deficienc! assess#ent for the !ear $+2, the sa#e is hereb!

#odified in the sense that the a#ount due fro# petitioner is

P$$,02'.((, instead of P$4,42'.((. Accordin"l!, petitioner is


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ordered to pa! within thirt! da!s fro# the date this decision

beco#es final the su#s of P2(,2.(( and P$4,00'.((, plus 7

surchar"e and $7 #onthl! interest fro# /ctober $, $+& until

paid. t is li)ewise ordered to pa! the su# of P$$,02'.(( within the

sa#e period, and, if not so paid, there shall be added thereto 7surchar"e and $7 #onthl! interest fro# the date of delin>uenc!

to the date of pa!#ent. Gith costs a"ainst petitioner.=

Petitioner #oved for a reconsideration of the above>uoted

decision, and on Au"ust 0$, $+4$, the court a#ended the sa#e to

include the followin" at the end thereof;

... n both cases, the #axi#u# a#ount of interest shall

not exceed the a#ount correspondin" to a period of three

!ears, pursuant to 5ection $8e9 809 of the National nternal

Revenue Code, as a#ended b! 5ection ' of Republic Act No.

0%2%. Gith costs a"ainst petitioner.

@avin" found that the bonuses in >uestion were paid forservices actuall! rendered b! the recipients thereof, the tax court

proceeded to consider the >uestion of =whether or not the! are

reasonable=. n this connection it construed 5ection %(8a9 8$9 of

the Revenue Code as allowin" the deduction fro# "ross inco#e

of all the ordinar! and necessar! expenses incurred durin" the

taxable !ear in carr!in" on the trade or business of the taxpa!er,

includin" a reasonable allowance for salaries or other

co#pensation for personal services actuall! rendered. Ge a"ree

with the view thus expressed, as well as with courts conclusion

that the bonuses in >uestion were not reasonable considerin" all

#aterial and relevant factors.

Petitioner contends that the tax court, in arrivin" at its

conclusion, acted =in a purel! arbitrar! #anner=, and erred in not

considerin" individuall! the total co#pensation paid to each of

petitioners officers and staff #e#bers in deter#inin" the

reasonableness of the bonuses in >uestion, and that it erred


42/289

li)ewise in holdin" that there was nothin" in the record indicatin"

that the actuation of the respondent was unreasonable or un?ust.

t is not true, as petitioner clai#s to support its view, that the

respondent and the tax court based their rulin" exclusivel! uponthe fact that petitioner had suffered net losses in its business

operations durin" the !ears when the bonuses in >uestion were

paid. The truth appears to be that, in arrivin" at such conclusion,

the respondent and the tax court "ave due consideration to all the

#aterial factors that led this Court to decide an earlier case of

petitioner itself involvin" the sa#e issue and where the test for

deter#inin" the reasonableness of bonuses and additional

co#pensation for services actuall! rendered were laid down b! s

as follows;

t is a "eneral rule that Bonuses to e#plo!ees #ade in

"ood faith and as additional co#pensation for the services

actuall! rendered b! the e#plo!ees are deductible, provided

such pa!#ents, when added to the stipulated salaries, do not

exceed a reasonable co#pensation for the services rendered

82 Mertens aw of :ederal nco#e Taxation, 5ec. 0.(, p.

2$(9. The condition precedents to the deduction of bonuses

to e#plo!ees are; 8$9 the pa!#ent of the bonuses is in fact

co#pensation< 809 it #ust be for personal services actuall!

rendered< and 8%9 bonuses, when added to the salaries, are

reasonable ... when #easured b! the a#ount and >ualit! ofthe services perfor#ed with relation to the business of the

particular taxpa!er 80dem., 5ec. 0.22, p. %+9. @ere it is

ad#itted that the bonuses are in fact co#pensation and were

paid for services actuall! rendered. The onl! >uestion is

whether the pa!#ent of said bonuses is reasonable.

There plaintiff is no fixed test for deter#inin" thereasonableness of a "iven bonus as co#pensation. This depends

upon #an! factors, one of the# bein" the a#ount and >ualit! of

the services perfor#ed with relation to the business. /ther tests

su""ested are; pa!#ent #ust be #ade in "ood faith< the

character of the taxpa!ers business, the volu#e and a#ount of its


43/289

net earnin"s, its localit!, the t!pe and extent of the services

rendered, the salar! polic! of the corporation< the siKe of the

particular business< the e#plo!ees >ualifications and

contributions to the business venture< and "eneral econo#ic

conditions 82 Mertens aw of :ederal nco#e Taxation, 5ecs.0.22, 0.2+, 0.(, 0.$, pp. 2(&62$09. @owever, in deter#inin"

whether the particular salar! or co#pensation pa!#ent is

reasonable, the situation #ust be considered as a

whole. la'phi1.@et /rdinaril!, no sin"le factor is decisive. ... it is i#portant to

)eep in #ind that it seldo# happens that the application of one

test can "ive a satisfactor! answer, and that ordinaril! it is the

interpla! of several factors, properl! wei"hted for the particular

case, which #ust furnish the final answer 8de#9.= -uenKle

5treiff v. Coll. of nt. Rev., . R. Nos. 6$0($( 6$0$$%, /ct. 0(,

$++.9

Ma)in" a distinction between petitioners previous case and

the present, the tax court said that while it is true that in the for#er

8C.T.A. No. $4+, 3ece#ber 0+, $+4, .R. Nos. 6$0($( and 6

$0$$%, /ctober 0(, $++, involvin" taxable !ears $+( to $+0

8Ge allowed I and considered deductible I bonuses in a#ounts

bi""er than the ones allowed b! respondent in the case at bar,

that was due to the fact that petitioner had earned hu"e profits

durin" the !ears $+(60. 5o #uch so that, the pa!#ent of such

bonuses notwithstandin", petitioner still had substantial net profitsdistributable as dividends a#on" its stoc)holders. n the present

case, on the other hand, it is clear that the ulti#ate and inevitable

result of the pa!#ent of the >uestioned bonuses would be net

losses for petitioner durin" the taxable !ears in which the! were

paid.

t see#s clear fro# the record that, in arrivin" at its #ainconclusion, the tax court considered, inter alia, the followin"

factors;

n the first place, for the !ears $+%, $+2 and $+ the

petitioner paid to its followin" top officers; A. P. -uenKle, @. A.


44/289

5treiff, A. *un", . attaneo, A. 5chatK#ann, :. E. Rein, M.

-lin"er, A. @uber, 5. Meili, M. Triaca, *. /rtiK, @. Fo"t, G. Ra#p,

G. 5trehler, @. R. *un", -. 5chedler, P. C. Curtis, R. /efeli,

substantial a#ounts as salaries and bonuses ran"in" fro#

P+,(((.(( !earl! as a #ini#u# 8except in the case9 andP(,(((.(( as #axi#u#. All these officials headed various

depart#ents of petitioners business. Ghile it #ust be assu#ed,

on the one hand, in the absence of evidence to the contrar!, that

the! were co#petent, on the other the record discloses no

evidence nor has petitioner ever #ade the clai# that all or so#e

of the# were "ifted with so#e special talent, or had under"one

so#e extraordinar! trainin", or had acco#plished an! particular

tas), that contributed #ateriall! to the success of petitioners

business durin" the taxable !ears in >uestion.

n the second place, wor)in" under the above6na#ed

officials and constitutin" what we #i"ht call the staff of petitioners

wor)in" personnel, were a "ood nu#ber of other e#plo!ees I

#ostl! :ilipinos 8T.s.n., pp. 000600%9 I all of who#, accordin" to

the record 8de#. 00%9, received no pa! increase at all durin" the

sa#e !ears.

n the third place, the above salaries and bonuses were

paid to petitioners top officials #entioned heretofore, in spite of

the fact that accordin" to its inco#e tax returns for the relevant!ears, it had suffered net losses as follows; P0,('.'2, P2,+%.+$,

P+,024.(& for the !ears $+%, $+2 and $+, respectivel!. n fact,

petitioners financial state#ents further show that its "ross assets

suffered a "radual decrease for the sa#e !ears 8Exh. B6$, p. ',

B..R., records, Exh. 36$, p. %4 id ., Exh. :6$, p. $2 id .9, and that a

si#ilar downward trend too) place in its surplus and capital

position durin" the sa#e period of ti#e.

That the char"e of arbitrariness a"ainst respondent is

without #erit is further shown b! the followin" considerations;


45/289

Petitioner ad#its that the a#ounts it paid to its top officers

in $+% as bonus or =additional re#uneration= were ta)en either

fro# operatin" funds, that is, funds fro# the !ears business

operations, or fro# its "eneral reserve. Nor#all!, the a#ounts

ta)en fro# the first source should have constituted profits of thecorporation distributable as dividends a#on"st its shareholders.

nstead it would appear that the! were diverted fro# this purpose

and used to pa! the bonuses for the !ear $+%. n the case of the

a#ounts ta)en fro# the "eneral reserve it see#s clear that the

co#pan! had to resort to the use of such reserve funds because

the ite# of expense to be #et could not be considered as ordinar!

or necessar! I and was therefore be!ond the purview of the

provisions of 5ection %(8a9 8$9 of the National nternal Revenue

Code. This bein" so, Ge cannot see our wa! clear to holdin" that

the respondent acted arbitraril! in disallowin" as deductible

expenses the a#ounts thus paid as bonus or =additional

re#uneration=.

Neither does the total disallowance of the bonuses paid to

so#e officers and the partial disallowance of those paid to others

show that respondent acted un?ustl! and unreasonabl!. The

record sufficientl! shows that the total disallowance was #ore or

less due to the fact that the affected officers had previousl!

received substantial increases in their basic salaries.

Petitioner ?ustifies pa!#ent of these bonuses to its top

officials b! sa!in" that its "eneral salar! polic! was to "ive a low

salar! but to "rant substantial bonuses at the end of each !ear, so

that its officers #a! receive considerable lu#p su#s with which to

purchase whatever expensive ob?ects or ite#s the! #i"ht need.

Ghile Ge are not prepared to hold that such polic! is

unreasonable, still Ge believe that its application should not resultin producin" a net loss for the e#plo!er at the end of the !ear, for

if that were to be the case, the sche#e #a! be utiliKed to freel!

achieve so#e other purpose I evade pa!#ent of taxes.


46/289

The authorit! relied upon b! petitioner 8Mertens aw of

:ederal nco#e Taxation, Fol. F, p. 2$'9 does not appl! to the

present case, because it refers to the salar! paid to an e#plo!ee,

which #a! be clai#ed as a deductible a#ount. n the case before

s the respondent does not >uestion the basic salaries paid b!petitioner to the officers and e#plo!ees, but disallowed onl! the

bonuses paid to petitioners top officers at the end of the taxable

!ears in >uestion.

n further support of its appeal petitioner clai#s that the

a#ounts disallowed b! the respondent should be considered as

le"iti#ate business expenses as their pa!#ent was #ade in "ood

faith. n brin"in" up this point, petitioner treads on dan"erous

"round. n the first place, "ood faith cannot decide whether a

business is reasonable or unreasonable for purposes of inco#e

tax deduction. n the second place, petitioners "ood faith in the

#atter at issue is not overl! #anifest, considerin" that the

>uestioned bonuses were fixed and paid at the end the !ears in

>uestion I at a ti#e, therefore, when petitioner full! )new that it

was "oin" to suffer a net loss in its business operations.

As far as petitioners contention that as e#plo!er it has the

ri"ht to fix the co#pensation of its officers and e#plo!ees and that

it was in the exercise of such ri"ht that it dee#ed proper to pa!

the bonus in >uestion, all that Ge need sa! is this; that ri"ht#a!be conceded, but for inco#e tax purposes the e#plo!er

cannot le"all! clai# such bonuses as deductible expenses unless

the! are shown to be reasonable. To hold otherwise would open

the "ate to ra#pant tax evasion. astl!, Ge #ust not lose si"ht of

the fact that the >uestion of allowin" or disallowin" as deductible

expenses the a#ounts paid to corporate officers b! wa! of bonus

is deter#ined b! respondent exclusivel! for inco#e tax purposes.Concededl!, he has no authorit! to fix the a#ounts to be paid to

corporate officers b! wa! of basic salar!, bonus or additional

re#uneration I a #atter that lies #ore or less exclusivel! within

the sound discretion of the corporation itself. But this ri"ht of the


47/289

corporation is, of course, not absolute. t cannot exercise it for the

purpose of evadin" pa!#ent of taxes le"iti#atel! due to the 5tate.

G@ERE:/RE, the appealed decision bein" in accordance

with law, the sa#e is hereb! affir#ed, with costs.

Re)es .;.(. *aalintal Baldi&ar Sanche8 9ernando

Capistrano Teehanee and ;arredo . concu

kamote chips

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