ABS-CBN BROADCASTING CORPORATION, PETITIONER, VS. COURT OF TAX APPEALS AND THE COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.

This is a Petition for
Review on Certiorari of the Decision of the Court of Tax Appeals in C.T.A.
Case No. 2809, dated November 29, 1979, which affirmed the assessment by the
Commissioner of Internal Revenue,
dated April 16, 1971, of a
deficiency withholding income tax against petitioner, ABS-CBN
Broadcasting Corporation, for the years 1965, 1966, 1967 and 1968 in the
respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222,260.64, or a
total of P525,897.06.

During the period
pertinent to this case, petitioner corporation was engaged in the business of telecasting local as well as foreign films acquired
from foreign corporations not engaged in trade or business within the Philippines, for which petitioner paid rentals after
withholding income tax of 30% of one-half of the film rentals.

In so far as the income
tax on non-resident corporations is concerned, section 24 (b) of the National Internal
Revenue Code, as amended by Republic Act No. 2343 dated June 20, 1959, used to
provide:

“(b)  Tax on
foreign corporations. — (1) Non-resident
corporations. — There shall
be levied, collected, and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every
foreign corporation not engaged in
trade or business within the Philippines, from all sources within
the Philippines, as
interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax equal to thirty
per centum of such
amount.” (Italics supplied)

On April 12, 1961, in
implementation of the aforequoted provision, the
Commissioner of Internal Revenue
issued General Circular
No. V-334 reading thus:

“In connection with Section 24(b) of Tax Code, the amendment
introduced by Republic Act No.
2343, under which an income tax equal to 30% is
levied upon the amount received by every
foreign corporation not engaged in trade or business within the Philippines from all sources within this country
as interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments,
or other fixed or determinable annual or periodical gains, profits, and income, it has been determined
that the tax is still imposed on income derived from capital, or labor, or both
combined, in accordance with the basic principle of income
taxation (Sec. 39, Income Tax Regulations), and that a mere return of capital or investment is not
income (Par. 5.06, 1 Mertens Law of Federal
Taxation).  Since according to the
findings of the Special Team who inquired into business of
the non-resident foreign film distributors, the distribution or
exhibition right on a film is invariably
acquired for a consideration,
either for a lump sum or a percentage of the film rentals, whether from a
parent company or an independent outside producer, a part of the receipts of a non-resident foreign film distributor
derived from said film represents, therefore, a return of investment.

x x x              x x x                 x x x

“4.     The local distributor should withhold 30% of one-half of the film rentals
paid to the non-resident foreign film
distributor, and pay the same to this office in accordance with law unless the
non-resident foreign film distributor makes a prior settle­ment of its income
tax liability.” (Italics ours).

Pursuant to the
foregoing, petitioner dutifully withheld and turned over to the Bureau of Internal Revenue the amount
of 30% of
one-half of the film rentals
paid by it to foreign corporations not engaged in trade or business within the Philippines.  The
last year
that petitioner withheld taxes
pursuant to the foregoing Circular was in
1968.

On June 27, 1968, Republic Act No. 5431 amended Section 24(b) of the Tax Code increasing the tax rate from 30% to 35% and revising the tax basis from
“such amount” referring to
rents, etc. to “gross income,” as follows:

“(b)  Tax on foreign corporations. — (1) Non-resident corporations. — A foreign corporation not engaged in trade or business in the Philippines
Including a foreign life insurance company not engaged in the life insurance
business in the Philippines shall pay a tax equal to
thirty-five per cent of the gross
income received during each taxable year from all
sources within the Philippines, as
interests, dividends, rents,
royalties, salaries, wages, premiums, annuities, compensations, remunerations
for technical services or otherwise, emoluments or other fixed or determinable
annual, periodical or casual gains, profits, and income, and capital gains, Provided, however, That premiums shall not include reinsurance
premiums.” (Italics supplied)

On February 8,
1971, the
Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 4-71,
revoking General Circular No. V-334, and holding that
the latter was “erroneous for lack of legal basis,” because “the tax therein prescribed
should be based on gross income
without deduction whatever,” thus:

“After a restudy and analysis of Section 24(b) of the National
Internal Revenue Code, as amended by Republic Act No. 5431, and guided by the
inter­pretation given by tax authorities to
a similar provision in the Internal
Revenue Code of the United States, on which
the aforementioned provision of our Tax Code was patterned, this Office has
come to the conclusion that the
tax therein prescribed should be based on gross income without
deduction whatever.  Consequently, the ruling in General Circular No. V-334, dated April 12,
1961, allowing the deduction of the proportionate cost of production
or exhibition of motion picture
films from the rental income of
non-resident foreign corporations, is erroneous for lack of legal
basis.

“In view thereof, General Circular No.
V-334, dated April 12, 1961, is hereby revoked and henceforth, local films
distributors and exhibitors shall deduct and withhold 35% of the entire amount payable
by them to non-resident
foreign corporations, as film rental or
royalty, or whatever such payment may be
denominated, without any deduction whatever, pursuant to Section 24(b), and pay the withheld taxes in accordance with Section
54 of the Tax Code, as amended.

“All rulings inconsistent with this Circular is likewise revoked.”
(Italics ours)

On
the basis of this new Circular,
respondent Commissioner of Internal
Revenue issued against petitioner a letter of
assessment and demand dated April 15, 1971, but allegedly released by it and
received by petitioner on April 12, 1971, requiring them to pay deficiency
withholding income tax on the remitted film rentals for the years 1965 through
1968 and film royalty as of the end of 1968 in
the total amount of P525,897.06 computed as follows:

“1965

Total amount remitted. . . . . . . . .
. . . . . . . . . . P 511,059.43

Withholding tax due thereon. . . . . . . . . . . . .
.    153,318.00

Less:  Amount already assessed.
. . . . . . . . .      89,000.00

Balance. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . P 
64,318.00

Add: 
½% mo. int. fr.

4-16-66
to 4-16-69. . . . . . . . .
. . . . . . . .      11,577.24

Total amount due & collectible. . .
. . . . . . . . . P   75,895.24

1966

Total amount remitted. . . . . . . . .
. . . . . . . . .  P373,492.24

Withholding
tax due thereon. . . . . . . . .
. . . .     112,048.00

Less: 
Amount already assessed. . . . . . . . .       27,947.00

Balance.
. . . . . . . . . . . . . . . . . . . . . . . . . . . .       84,101.00

Add:  ½ mo. int. fr.

4-16-67 to 4-16-70. . . . . . . . . . . . . . . .      15,138.18

Total amount due & collectible. . . . . .
. . . . .   P 99,239.18

1967

Total amount remitted. . . . . . . . .
. . . . . . . . .  P601,160.65

Withholding tax due thereon . . . . . . . . . . . . .    180,348.00

Less:
Amount already assessed. . . . .
. . . .        71,448.00

Balance.
. . . . . . . . . . . . . . . . . . . . . . . . . . . .     108,900.00

Add:
½% mo. int. fr.

4-16-68 to 4-16-71. . . . . . . . . . . . . . .        19,602.00

Total amount due & collectible. . .
. . . . . . . .   P128,502.00

1968

Total amount
remitted. . . . . . . . . . . . . . . . . . 
P881,816.92

Withholding tax due thereon.
. . . . . . . . . . . . .   291,283.00

Less: 
Amount already assessed. . . . . . . . . .     92,886.00

Balance.
. . . . . . . . . . . . . . . . . . . . . . . . . . . .  P 198,447.00

Add:  ½% mo. int. fr.

4-16-69 to 4-29-71. . . . . . . . . . . . . . . .      23,813.64

Total amount due & collectible . .
. . . . . . . . .  P222,260.64“^[1]

On May 5, 1971, petitioner requested for a recon­sideration and withdrawal of the assessment.  However, without acting thereon, respondent,
on April 6, 1976,
issued a warrant of distraint and levy over petitioner’s personal as well as
real properties.  The petitioner then
filed its Petition for Review with the Court of Tax Appeals whose Decision,
dated November 29, 1979, is, in turn, the subject of this
review.  The Tax Court held:

“For the reasons given, the Court finds the assessment issued
by respondent on April 16, 1971
against petitioner in the amounts of P75,895.24, P99,239.18, P128,502.00 and
P222,260.64 or a total of P525,897.06
as deficiency withholding income tax for the years 1965, 1966, 1967 and 1968,
respectively, in accordance with law.  As
prayed for, the petition for review filed in this case is dismissed, and
petitioner ABS-CBN Broadcasting Corporation is hereby
ordered to pay the sum of P525,897.06 to respondent
Commissioner of Internal Revenue as
deficiency withholding income tax for the taxable years 1965 thru 1968, plus the surcharge and interest which have accrued
thereon incident to delinquency, pursuant to Section 51(e) of the National
Internal Revenue Code, as amended.

“WHEREFORE, the decision appealed from is hereby affirmed at
petitioner’s costs.

“SO ORDERED.”^[2]

The issues raised are twofold:

“I.  Whether or not respondent can apply General Circular No. 4-71 retroactively and
issue a
deficiency assessment against
petitioner in the amount of P525,897.06 as deficiency withholding
income tax for the years 1965, 1966, 1967 and 1968.

II.   Whether or not the right of the Commissioner
of Internal Revenue to assess the deficiency withholding income tax for the year 1965 has prescribed.”^[3]

Upon the facts and
circumstances of the case, review is
warranted.

In point is Sec. 338-A
(now Sec. 327) of the Tax Code.  As
inserted by Republic Act No. 6110 on August
9, 1969, it provides:

“Sec.
338-A.  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 of Internal Revenue 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 mis-states or
omits material facts from his return or 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; or (c) where the taxpayer acted in bad faith.” (Italics for emphasis)

It is clear from the
foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive
application where to so apply them
would be prejudicial to taxpayers.  The
prejudice to petitioner of the retroactive application of Memorandum Circular
No. 4-71 is beyond question.  It was
issued only in 1971, or three years after 1968, the last year that petitioner
had withheld taxes under General Circular No.
V-334. 
The assessment and demand on petitioner to pay deficiency withholding
income tax was also made three
years after 1968 for a period of time commencing in 1965.  Petitioner was no longer in a position to
withhold taxes due from foreign corporations
because it had already remitted all film rentals and no longer had any control over them when the new
Circular was issued.  And in so far as
the enumerated exceptions are concerned, admittedly, petitioner does not fall
under any of them.

 Respondent claims, however, that the provision on non-retroactivity is
inapplicable in the present case in that General Circular No. V-334 is a
nullity because, in effect, it changed the law on the matter.  The Court of Tax Appeals sustained this position holding that:  “Deductions are wholly and exclusively
within the power of Congress or the law-making body to grant, condition or deny;
and where the statute imposes a tax equal to a specified rate or percentage of
the gross or entire amount received
by the taxpayer, the authority of some administrative officials to modify or change, much less reduce,
the basis or measure of the tax should not be read into law:”^[4]  Therefore, the Tax Court concluded,
petitioner did not acquire any vested
right thereunder as the same was a
nullity.

The
rationale behind General Circular No. V-334 was clearly
stated therein, however:  “It ha(d)
been determined that the tax is still imposed on income derived from capital,
or labor, or both combined, in accordance with the basic principle of income
taxation x x
x and that a
mere return of capital or
investment is not income x x x .” “A part of the receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment.”  The Circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the portion of the
rentals covering the return of capital.^[5]

Were the “gross
income” base clear from Sec. 24(b), perhaps, the ratiocination of the Tax
Court could be upheld. 
It should be noted, however, that said Section was not too plain and
simple to understand. 
The fact that the
issuance of the General Circular
in question was rendered necessary
leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different interpretations.

In fact, Republic Act No.
2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was just
one in a series of enactments regarding Sec. 24(b) of the Tax Code. 
Republic Act No. 3825 came next on June 22, 1963 without changing the basis but merely adding a proviso (in bold letters).

“(b)  Tax on
foreign corporation. — (1) Non-resident corporations.
— There shall be levied, collected, and paid for each taxable year, in lieu of
the tax imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as
interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits, and income,
a tax equal to thirty per centum of such amount: 
PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS.”
(double emphasis ours)

Republic Act No. 3841,
dated likewise on June 22, 1963, followed after, omitting the proviso and inserting
some words (also in bold letters).

“(b)  Tax on foreign corporations. — (i) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every foreign corporation not
engaged in trade or business
within the Philippines, from all
sources within the Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical OR CASUAL gains, profits and
income, AND CAPITAL GAINS, a tax equal to thirty per centum of such amount.”^[6]
(double emphasis supplied)

The principle of
legislative approval of adminis­trative interpretation by re-enactment
clearly obtains in this case.  It provides that “the re-enactment of a statute substantially unchanged is persuasive indication
of the adoption by Congress of a prior executive construction.”^[7]  Note should be taken of the fact that this
case involves not a mere opinion of the Commissioner or ruling rendered on a
mere query, but a Circular formally issued to “all
internal revenue officials” by the then Commissioner of Internal Revenue.

It was only on June 27,
1968 under Republic
Act No. 5431, supra, which became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24(b) was amended to refer specifically to 35% of the “gross income.”

This Court is not unaware
of the well-entrenched principle that the Government is never estopped from collecting taxes because of mistakes or
errors on the part of its agents.^[8]  In
fact, utmost caution should be
taken in this regard.^[9]  But,
like other principles of law, this also admits of exceptions in the
interest of justice, and fairplay.  The
insertion of Sec. 338-A into the National Internal Revenue Code, as held in the
case of Tuason, Jr. vs.
Lingad,^[10] is indicative of legislative intention to
support the principle of good faith.  In fact, in the United States, from where Sec. 24(b) was patterned, it has been held that the Commissioner or Collector is
precluded from adopting a position inconsistent
with one previously taken where injustice would result therefrom,^[11] or where there has been a mis­representation to the taxpayer.^[12]

We have also noted that
in its Decision, the Court of Tax Appeals further required the petitioner to
pay interest and surcharge as provided for in Sec. 51(e) of the
Tax Code in addition to the deficiency withholding tax of P525,897.06.  This
additional requirement is much less called for because the petitioner relied in
good faith and religiously complied
with no less than a Circular issued “to all internal revenue officials” by the highest official of
the Bureau of Internal Revenue and approved by the then Secretary of
Finance.^[13]

With the foregoing
conclusions arrived at, resolution of the issue of prescription becomes
unnecessary.

WHEREFORE, the
judgment of the Court of Tax Appeals is hereby reversed, and the questioned assessment set aside.  No
costs.

SO ORDERED.

Makasiar, (Acting Chairman),
Fernandez, Guerrero, and De Castro*, JJ., concur.

^[1]
Comment of Respondents, Rollo, pp. 73-74.

^[2]
Decision, Annex
“A”, Rollo, pp. 53-54.

^[3]
Memorandum of Petitioner, Rollo, p. 97.

^[4]
Decision, Annex “A”, Rollo, p.
41.

^[5]
Comment of Commissioner of Internal
Revenue, p. 3.

^[6]
The omission of the proviso “Provided, however, That premiums shall not include reinsurance premiums” appears to be
due to oversight as the purpose of the amendment was to include capital gains
in gross income of foreign non-resident corporations.  See footnote 13, Filipinas Life Assurance Co.
vs. Court of Tax Appeals,
21 SCRA 622 (1967).

^[7]
Biddle vs.
Commissioner, 302 U.S., 573 (1938); Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 (1965).

^[8]
Visayan Cebu
Terminal Co., Inc. vs.
Commissioner of Internal Revenue, 13 SCRA 357 (1965); Zamora vs. Court of Tax Appeals,
36 SCRA 77 (1970); Balmaceda vs. Corominas & Co., Inc. 66 SCRA 555 (1975).

^[9]
Senator James Couzens, 11 BTA 1040 (1928), 48
Harvard Law Review 1281, 1300, cited in 10A Metens, Law of Federal Income Taxation, Sec. 60.13, p. 189.

^[10]
58 SCRA 170 (1974).

^[11]
Ford Motor Co. vs. U.S., 9 F.Supp.
590 (1935).

^[12]
J. W. Carter Music Co. vs. Bass, 20 F. 2d 390 (1927).

^[13]
Tuason, Jr. vs. Lingad, 58 SCRA 170 (1974); Connel Bros. Co. (Phil.) vs. Collector of
Internal Revenue, 10 SCRA 470 (1964).

* De Castro, J., was designated to sit in the First Division, Teehankee, J., being on official leave.