COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. MALAYAN INSURANCE COMPANY, INC., RESPONDENT.

This is a petition for review of the decision of the Court of Tax
Appeals (in CTA Case No. 1018), ordering the refund to Malayan Insurance
Company, Inc., of the sum of P958.00 which was allegedly paid erroneously, and
the dismissal of the counterclaim of the Commissioner of Internal Revenue for
payment of the withholding tax for P15,416.96.

Malayan Insurance Company, Inc. (hereafter referred to as
MALAYAN), a domestic corporation which has reinsurance contract with Orion
Insurance Company, Ltd. of London (hereafter referred to as ORION) a
nonresident foreign corporation, without previous authorization, filed the
latter’s income tax return for 1958 and paid the tax due thereon, in the sum of
P958.00.  Finding later that ORION had
commissioned another domestic entity, Filipinas Compañia
de Seguros (to be referred hereafter as FILIPINAS) to
file the income tax return on its behalf, and that the said agent paid the sum
of P778.00 as corresponding income tax for the same year (1958), MALAYAN
requested the Commissioner of Internal Revenue for the refund of the P958.00 it
had paid.  When no action was taken
thereon, MALAYAN filed a petition in the Court of Tax Appeals for the same
purpose.

In his amended answer to the petition, the Commissioner of
Internal Revenue alleged, inter alia,
that in 1958, petitioner had ceded to ORION reinsurance premiums covering risks
located in the Philippines amounting to P64,327.36; that this amount is subject
to withholding tax in the sum of P15,416.96; that demand for payment of the
withholding tax was made upon petitioner on February 16, 1962; and that even if
petitioner is to be credited with the sum of P958.00, there would still be due
from the latter the sum of P14,458.96. 
Respondent, therefore, asked the Court that the petition be dismissed
and petitioner be ordered to pay P14,458.96, with the
penalties incident to late payment.

The parties submitted the case for decision on the
pleadings.  On July 16, 1963, the Tax Court decided for therein
petitioner and ordered the refund of the sum of P958.00 it had erroneously paid
as income tax of ORION for 1958.  And for
the reason that FILIPINAS is the duly authorized representative of ORION,
respondent’s counter?claim for P15,416.96 was
dismissed without prejudice.  The
Commissioner of Internal Revenue interposed this appeal.

In the present proceeding, petitioner Commissioner of Internal
Revenue reiterates the allegation that in 1958, MALAYAN had ceded to ORION
reinsurance premiums^[1]
amounting to P 64,327.36, on which amount MALAYAN should have paid withholding
tax of P15,416.96. 
Petitioner does not dispute that FILIPINAS was commis­sioned by ORION to
file its income tax return for 1958, in a commu­nication that reads as follows:

“Dear Sirs,

“Income Tax

Return of Annual Net
Income

“With reference to your letter dated 26th December 1958, addressed to Alexr. Howden & Co., Ltd., we
would like to accept your offer to act on our behalf and appoint you our Agents
for the purposes of filing the Return of Annual Net Income as required by
Section 46 of Commonwealth Act 496.

“It is understood and agreed that neither the Appoint­ment nor
the filing of the Return is to be taken as an indication of the Company’s
acceptance of liability to pay Income Tax, and the Company retains the right to
appeal for a refund of Tax whether this be Income Tax or withholding
Tax”., (p. 26, B.I.R. Record)

and that said
agent, accordingly, had paid the sum of P778.00 as tax supposedly on the entire
taxable income of ORION for 1958.

In assailing the correctness of the ruling of the Court of Tax
Appeals, however, the petitioner Commissioner of Internal Revenue contends that
the payment by FILIPINAS of the supposed tax on the incomes derived by ORION
from Philippine sources did not relieve MALAYAN of its obligation to withhold
and pay the withholding tax on the reinsurance premiums it had ceded to
ORION.  The contention is meritorious.

Section 53(b) of the National Internal Revenue Code,^[2]
provides:

 “SEC.
53.  Withholding
of tax at source. —

xxx       xxx       xxx

“(b) Nonresident aliens. — All
persons, corporations, and general copartnerships
(compañias colectivas),
in whatever capacity acting, including lessees or mortgagors of real or
personal property, trustees acting in any trust capacity, executors,
administrators, receivers, conservators, fiduciaries, employers and all
officers and em­ployees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments or other fixed or determinable annual or
periodical gains, profits, and income of any nonresident alien individual
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 sixteen per centum
thereof:  x x x.” 
(Underscoring supplied.)

It may be noted that the abovequoted
provision is not only broad and all-embracing — covering the receipt, control,
custody, etc. by any person, natural or juridical, for a foreign corporation
not doing business in the Philippines, of practically all forms of income as
long as they are fixed or determinable and are received with regularity;^[3]
but also, the Obligation imposed thereunder upon the
withholding agent is compulsory.  This is
evident from paragraph (c) of the same Section 53 of the Tax Code, which makes
the withholding agent personally liable for payment of the tax treated
there­in.  And this has to be so, for it
must be realized that the withhold­ing provision of Section 53 (b) is a device
without which the Phil­ippine Government may not be able to collect the proper
and correct tax on incomes, derived from sources in the Philippines,
by aliens who are outside of the taxing jurisdiction of this country.  It is for this reason that the withholding
provision is not being applied if the income is to be remitted to Filipino
citizens, or resident aliens, or to nonresident aliens but conducting business and
maintaining office or place of business in the Philippines.^[4]
In this connection, this Court has already held^[5]
that reinsurance premiums ceded by domestic entities to nonresident foreign
corporations are determinable, periodical income of those foreign corporations
from sources within the Philippines
and, therefore, are subject to withholding tax.^[6]

The Court of Tax Appeals, nevertheless, dismissed the
Government’s claim for withholding tax against the withholding agent, on the
ground that the authorized representative of the taxpayer is FILIPINAS – an
indirect way of saying that the demand, if at all, should be made on the
latter.

This is error.  The cause
of action of the Commissioner against MALAYAN is not for collection of income
tax, but for the enforcement of the withholding provision of Section 53 of the Tax
Code – the compliance with which obligation is imposed on the withholding
agent, not upon the taxpayer.^[7]
Whether or not the taxpayer, ORION, has a duly authorized representative in
this country is, consequently, beside the point.  There is no showing that any of the
reinsurance premiums ceded by MALAYAN to ORION ever passed to the hands of
FILIPINAS, the representative of ORION.

There is no evidence here that MALAYAN withheld a certain percentage
of the reinsurance premiums transmitted to ORION and that it (MALAYAN) had
filed a return thereon, as required by Section 53 (c) of the Tax Code.  What is actually material is whether that
obligation of the withholding agent is affected by the payment by FILIPINAS of
the income tax of ORION for 1958.

We have to rule that the payment by FILIPINAS of the alleged tax
on the incomes of ORION did not relieve the withholding agent of its legal
duty.  Firstly, the filing of the tax
return and payment of the amount of P778.00 as income tax cannot be considered
in this case as final.  Not only is there
no proof that the return made by FILIPINAS for ORION included the reinsurance
premiums ceded by MALAYAN, but the great difference between the amount paid and
that which should have been withheld and transmitted to the Philippine
Government, to take care of the taxes that may be due on that income (P15,416.96), is sufficient to put one in expectancy of further
proceedings on that return.  In fact, an
investigation of the tax return filed by FILIPINAS was already conducted, and
in April, 1962, the examiners recommended the assessment against the taxpayer
of deficiency income tax in the sum of P6,442.00 (p. 67, B.I.R. Record).

In the second place, this is as appropriate an instance as any
for the operation of the provision of Section 53 (b).  Because, in the event the taxpayer is finally
found liable for deficiency tax on its incomes from the Philippines in 1958,
the Government would have no way of collecting what is still due from said
taxpayer, which is a foreign corporation not engaged in trade or business and
without office or place of business in the Philippines.  FILIPINAS cannot be considered the authorized
agent through which any deficiency tax against ORION may be collectible.  As specified from the letter of appointment
of FILIPINAS, herein before quoted, the filing of the tax return by the agent,
which was therein authorized, would not even bind the principal to pay the tax
based thereon.  The right to appeal or
claim for refund is also withheld from the agent.  In the circumstances, the importance of the
withholding under Section 53 is clearly underscored.

For the foregoing considerations, the decision appealed
from is modified; the ruling of the Court of Tax Appeals is reversed, insofar
as it dismissed the counterclaim of the Commissioner of Internal Revenue.  In the collection of the withholding tax (and
penalties incident to late payment) upon the reinsurance premiums ceded by res­pondent
MALAYAN to ORION in 1958, said respondent should be credited with the sum of
P958.00 it had erroneously paid as income tax of that foreign corporation.  No costs.

SO ORDERED.

Dizon, Makalintal,
Bengzon, Zaldivar, Sanchez,
Castro, Angeles, and Fernando, JJ., concur.

^[1]
With the approval of Republic Act 3825 on June 22, 1963, reinsurance premiums were excluded
from the term “premiums” used in Section 53 (b) of the Tax Code.

^[2]
As amended by Republic Act 590.

^[3]
Under Republic Act 3841, approved on June
22, 1963, even casual gains, profits and income of
nonresident aliens are subject to income tax.

^[4]
Section 200, B.I.R. Revised Regulations No. 2.

^[5]
Alexander Howden & Co., Ltd. vs. Collector
of In­ternal Revenue, L-19392, April
14, 1965.

^[6]
British Traders Insurance Co., Ltd. vs. Commissioner of Internal
Revenue, L-20501, April 30, 1965; Alexander Howden
& Co. vs. Collector, supra.

^[7] Jai Alai Corp. vs. Republic, L-17462, May 29, 1967; 1967B PHILD 460.