G.R. No. L-53961. June 30, 1987
NATIONAL DEVELOPMENT COMPANY, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals
on the ground that it is erroneous. We
have carefully studied it and find it is not; on the contrary, it is supported
by law and doctrine. So finding, we
affirm.
Reduced to simplest terms, the background facts are as follows.
The National Development Company entered into contracts in Tokyo
with several Japanese shipbuilding companies for the construction of twelve
ocean-going vessels.[1]
The purchase price was to come from the proceeds of bonds issued by the Central
Bank.[2]
Initial payments were made in cash and through irrevocable letters of credit.[3]
Fourteen promissory notes were signed for the balance by the NDC and, as
required by the shipbuilders, guaranteed by the Republic of the Philippines.[4]
Pursuant thereto, the remaining payments and the interests thereon were remitted
in due time by the NDC to Tokyo. The vessels were eventually completed and
delivered to the NDC in Tokyo.[5]
The NDC remitted to the shipbuilders in Tokyo
the total amount of US$4,066,580.70 as interest on the balance of the purchase
price. No tax was withheld. The Commissioner then held the NDC liable on
such tax in the total sum of P5,115,234.74.
Negotiations followed but failed.
The BIR thereupon served on the NDC a warrant of distraint
and levy to enforce collection of the claimed amount.[6]
The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of
the tax deficiency in the sum of P900.00 representing the compromise penalty.[7]
The NDC then came to this Court in a petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest
remitted to them under Section 37 of the Tax Code, thus:
“SEC. 37. Income
from sources within the Philippines. – (a) Gross income from sources within
the Philippines.
– The following items of gross income shall be treated as gross income from
sources within the Philippines:
(1) Interest. –
Interest derived from sources within the Philippines,
and interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise;
x x x x
x x x x x.”
The petitioner argues that the Japanese shipbuilders were not
subject to tax under the above provision because all the related activities –
the signing of the contract, the construction of the vessels, the payment of
the stipulated price, and their delivery to the NDC – were done in Tokyo.[8]
The law, however, does not speak of activity but of “source,” which
in this case is the NDC. This is a
domestic and resident corporation with principal offices in Manila.
As the Tax Court put it:
“It is quite apparent, under the terms of the law, that the
Government’s right to levy and collect income tax on interest received by
foreign corporations not engaged in trade or business within the Philippines is
not planted upon the condition that ‘the activity or labor – and the sale from
which the (interest) income flowed had its situs‘ in
the Philippines, The law specifies: ‘Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise.’ Nothing there speaks of the ‘act or activity’
of non-resident corporations in the Philippines,
or place where the contract is signed.
The residence of the obligor who pays the interest rather than
the physical location of the securities, bonds or notes or the place of
payment, is the determining factor of the source of interest income. (Mertens, Law of
Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk &. Co. Inc. 10
T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon,
6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4
BTA 867.) Accordingly, if the obligor is a resident of the Philippines
the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or
other interest-bearing obligations, but by the obligor. (See Mertens, Id.,
Vol. 8, p. 124.)
“Here in the case at bar, petitioner National Development
Company, a corporation duly organized and existing under the laws of the
Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila,
Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor
in fourteen (14) promissory notes for each vessel, the balance of the contract
price of the twelve (12) ocean-going vessels purchased and acquired by it from
the Japanese corporations, including the interest on the principal sum at the
rate of five per cent (5%) per annum.
(See Exhs. “D”, D-1″ to
“D-13”, pp. 100-113, CTA Records; par. 11, Partial Stipulation of
Facts.) And pursuant to the terms and conditions of these promissory notes,
which are duly signed by its Vice Chairman and General Manager, petitioner
remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and
1962 the sum of $830,613.17, $1,654,936.52 and $1,541,031.00, respectively, as
interest on the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation
of Facts.)
“The law is clear. Our
plain duty is to apply it as written.
The residence of the obligor which paid the interest under
consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines;
and as a corporation duly organized and existing under the laws of the Philippines,
it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code,)
The interest paid by petitioner, which is admittedly a resident of the Philippines,
is on the promissory notes issued by it.
Clearly, therefore, the interest remitted to the Japanese shipbuilders
in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of
the vessels acquired by petitioner is interest derived from sources within the
Philippines subject to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code.”[9]
There is no basis for saying that the interest payments were
obligations of the Republic of the Philippines
and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)/47/ of the Tax Code, reading as follows:
“SEC. 29. Gross Income. – x x
x x x x x x x x x x x
(b) Exclusions from
gross income. -The following items shall
not be included in gross income and shall be exempt from taxation under this
Title:
x x x x
x x x x x
(4) Interest on Government Securities. – Interest upon the obligations of
the Government of the Republic of the Philippines
or any political subdivision thereof, but in the case of such obligations
issued after approval of this Code, only to the extent provided in the act
authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; underscoring
supplied)
The law invoked by the petitioner as authorizing the issuance of
securities is R. A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does
carry such authorization but, like R.A. No. 1407, does not exempt from taxes
the interests on such securities.
It is also incorrect to suggest that the Republic of the
Philippines could not collect taxes on the interest remitted because of the
undertaking signed by the Secretary of Finance
in each of the promissory notes that:
“Upon authority of the President of the Republic of the Philippines,
the undersigned, for value received, hereby absolutely and unconditionally
guarantee (sic), on behalf of the Republic of the Philippines,
the due and punctual payment of both principal and interest of the above
note.”[10]
There is nothing in the above undertaking exempting the interests
from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but
must be categorically and unmistakably expressed.[11]
Any doubt concerning this question must be resolved in favor of the taxing
power.[12]
Nowhere in the said undertaking do we find any inhibition
against the collection of the disputed taxes.
In fact, such undertaking was made by the government in consonance with
and certainly not against the following provisions of the Tax Code:
“Sec. 53(b). Nonresident
aliens. – All persons, corporations general co-partnerships (companies colectivas), in whatever capacity acting, including lessees
or mortgagors of real or personal capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having control, receipt, custody, disposal or
payment of interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual
or categorical gains, profits and income of any nonresident alien individual,
not engaged in trade or business within the Philippines and not having any
office or place of business therein, shall (except in the cases provided for in
subsection (a) of this Section) deduct and withhold from such annual or
periodical gains, profits and income a tax equal to twenty (now 30%) per
centum thereof: x x.”
“Sec. 54. Payment of
corporation income tax at source. – In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted
and withheld at the source in the same manner and upon the same items as is
provided in section fifty-three a tax equal to thirty (now 35%) per centum
thereof, and such tax shall be returned and paid in the same manner and subject
to the same conditions as provided in that section: x x
x.”
Manifestly, the said undertaking of the Republic of the Philippines
merely guaranteed the obligations of the NDC but without diminution of its
taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the
funds of the Republic of the Philippines,
the petitioner closes its eyes to the nature of this entity as a
corporation. As such, it is governed in
its proprietary activities not only by its charter but also by the Corporation
Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being
taxed. The tax was due on the interests
earned by the Japanese shipbuilders. It
was the income of these companies and not the Republic of the Philippines
that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on
the NDC is a penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is
imposed by Section 53(c) of the Tax Code, thus:
“Section 53(c). Return and Payment. – Every person
required to deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of each year,
and, on or before the time fixed by law for the payment of the tax, shall pay
the amount withheld to the officer of the Government of the Philippines
authorized to receive it. Every such
person is made personally liable for such tax, and is indemnified against the
claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No.
2343.)”
In Philippine Guaranty Co. v. The Commissioner of Internal
Revenue and the Court of Tax Appeals,[13]
the Court quoted with approval the following regulation of the BIR on the responsibilities
of withholding agents:
“In case of doubt, a withholding agent may always protect
himself by withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the determination whether
or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue
decides that the income paid to an individual is not subject to withholding,
the withholding agent may thereupon remit the amount of tax withheld.”
(2nd par., Sec. 200, Income Tax Regulations).”
“Strict observance of said steps is required of a
withholding agent before he could be released from liability,” so said
Justice Jose P. Bengson, who wrote the decision. “Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be construed strictissimi juris.”[14]
The petitioner was remiss in the discharge of its obligation as
the withholding agent of the government and so should be held liable for its
omission.
WHEREFORE, the appealed decision is AFFIRMED, without any
pronouncement as to costs. It is so
ordered.
Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras,
Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, and
Cortes, JJ., concur.
[1]
Partial Stipulation of Facts, pars. 3-4.
[2]
Ibid., par. 8.
[3]
Id., par. 10.
[4]
id., par. 11; Exhs. “D”, “D-1”
to “D-13”
[5]
Partial Stipulation of Facts, pars. 7, 13-15.
[6]
Decision, pp. 1, 4-5.
[7]
Ibid., pp, 19-21.
[8]
Rollo, pp. 12-13.
[9]
Decision, pp. 7-9.
[10]
Exhs. “D”, “D-1” to
“D-13”.
[11]
Asiatic Petroleum Co. v. LLanes, 49 Phil. 466,
471; Union Garment Co., Inc. v. CTA, 4 SCRA 304; Phil. Acetylene Co.,
Inc. v. Comm. of Internal Revenue, 20 SCRA 1056; Republic Flour Mills,
Inc. v. Comm. of Internal Revenue, 31 SCRA 520; Comm. of Customs v.
Phil. Acetylene Co., Inc., 39 SCRA 71; Davao Light
and Power Co., Inc. v. Comm. of Customs, 44 SCRA 122.
[12]
Asiatic Petroleum Co. v. Llanes, supra;
Meralco v. Comm. of Internal Revenue, 67 SCRA 351.
[13]
15 SCRA 1.
[14]
Ibid.; La Carlota Sugar Central v. Jimenez, 2 SCRA 295.