COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. JOHN GOTAMCO & SONS, INC. AND THE COURT OF TAX APPEALS, RESPONDENTS.

YAP, J.:

The question involved in this petition is whether respondent
John Gotamco & Sons, Inc. should pay the 3% contractor’s tax under Section
191 of the National Internal Revenue Code on the gross receipts it realized from
the construction of the World Health Organization office building in
Manila.

The World Health Organization (WHO for short) is an international
organization which has a regional office in Manila.  As an international
organization, it enjoys privileges and immunities which are defined more
specifically in the Host Agreement entered into between the Republic of the
Philippines and the said Organization on July 22, 1951.  Section 11 of that
Agreement provides, inter alia, that “the Organization, its assets,
income and other properties shall be:  (a) exempt from all direct and indirect
taxes.  It is understood, however, that the Organization will not claim
exemption from taxes which are, in fact, no more than charges for public utility
services; . . .”

When the WHO decided to construct a building to house
its own offices, as well as the other United Nations offices stationed in
Manila, it entered into a further agreement with the Government of the Republic
of the Philippines on November 26, 1957.  This agreement contained the following
provision (Article III, paragraph 2):

“The Organization may import into the country materials and
fixtures required for the construction free from all duties and taxes and agrees
not to utilize any portion of the international reserves of the
Government.”

Article VIII of the above-mentioned agreement referred to the
Host Agreement concluded on July 22, 1951 which granted the Organization
exemption from all direct and indirect taxes.

In inviting bids for the
construction of the building, the WHO informed the bidders that the building to
be constructed belonged to an international organization with diplomatic status
and thus exempt from the payment of all fees, licenses, and taxes, and that
therefore their bids “must take this into account and should not include items
for such taxes, licenses and other payments to Government agencies”.

The
construction contract was awarded to respondent John Gotamco & Sons, Inc.
(Gotamco for short) on February 10, 1958 for the stipulated price of
P370,000.00, but when the building was completed the price reached a total of
P452,544.00.

Sometime in May 1958, the WHO received an opinion from the
Commissioner of the Bureau of Internal Revenue stating that “as the 3%
contractor’s tax is an indirect tax on the assets and income of the
Organization, the gross receipts derived by contractors from their contracts
with the WHO for the construction of its new building, are exempt from tax in
accordance with . . . the Host Agreement”.  Subsequently, however, on June 3,
1958, the Commissioner of Internal Revenue reversed his opinion and stated that
“as the 3% contractor’s tax is not a direct nor an indirect tax on the WHO, but
a tax that is primarily due from the contractor, the same is not covered by . .
. the Host Agreement”.

On January 2, 1960, the WHO issued a certification
stating, inter alia,:

“When the request for bids for the construction of the World
Health Organization office building was called for, contractors were informed
that there would be no taxes or fees levied upon them for their work in
connection with the construction of the building as this will be considered an
indirect tax to the Organization caused by the increase of the contractor’s bid
in order to cover these taxes.  This was upheld by the Bureau of Internal
Revenue and it can be stated that the contractors submitted their bids in good
faith with the exemption in mind.

The undersigned, therefore, certifies
that the bid of John Gotamco & Sons, made under the condition stated above,
should be exempted from any taxes in connection with the construction of the
World Health Organization office building.”

On January 17, 1961, the Commissioner of Internal Revenue sent
a letter of demand to Gotamco demanding payment of P16,970.40, representing the
3% contractor’s tax plus surcharges on the gross receipts it received from the
WHO in the construction of the latter’s building.

Respondent Gotamco
appealed the Commissioner’s decision to the Court of Tax Appeals, which after
trial rendered a decision in favor of Gotamco and reversed the Commissioner’s
decision.  The Court of Tax Appeal’s decision is now before us for review on
certiorari.

In his first assignment of error, petitioner
questions the entitlement of the WHO to tax exemption, contending that the Host
Agreement is null and void, not having been ratified by the Philippine Senate as
required by the Constitution.  We find no merit in this contention.  While
treaties are required to be ratified by the Senate under the Constitution, less
formal types of international agreements may be entered into by the Chief
Executive and become binding without the concurrence of the legislative
body.^[1] The Host Agreement comes within
the latter category; it is a valid and binding international agreement even
without the concurrence of the Philippine Senate.  The privileges and immunities
granted to the WHO under the Host Agreement have been recognized by this Court
as legally binding on Philippine authorities.^[2]

Petitioner maintains that even
assuming that the Host Agreement granting tax exemption to the WHO is valid and
enforceable, the 3% contractor’s tax assessed on Gotamco is not an “indirect
tax” within its purview.  Petitioner’s position is that the contractor’s tax “is
in the nature of an excise tax which is a charge imposed upon the performance of
an act, the enjoyment of a privilege or the engaging in an occupation . . . It
is a tax due primarily and directly on the contractor, not on the owner of the
building.  Since this tax has no bearing upon the WHO, it cannot be deemed an
indirect taxation upon it.”

We agree with the Court of Tax Appeals in
rejecting this contention of the petitioner.  Said the respondent court:

“In context, direct taxes are those that are demanded from the
very person who, it is intended or desired, should pay them; while indirect
taxes are those that are demanded in the first instance from one person in the
expectation and intention that he can shift the burden to someone else. 
(Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39
Law. Ed. 759.) The contractor’s tax is of course payable by the contractor but
in the last analysis it is the owner of the building that shoulders the burden
of the tax because the same is shifted by the contractor to the owner as a
matter of self-preservation.  Thus, it is an indirect tax.  And it is an
indirect tax on the WHO because, although it is payable by the petitioner, the
latter can shift its burden on the WHO.  In the last analysis it is the WHO that
will pay the tax indirectly through the contractor and it certainly cannot be
said that ‘this tax has no bearing upon the World Health Organization’.”

Petitioner claims that under the authority of the
Philippine Acetylene Company versus Commissioner of Internal Revenue, et
al.,^[3] the 3% contractor’s tax
falls directly on Gotamco and cannot be shifted to the WHO.  The Court of Tax
Appeals, however, held that the said case is not controlling in this case, since
the Host Agreement specifically exempts the WHO from “indirect taxes”.  We
agree.  The Philippine Acetylene case involved a tax on sales of goods
which under the law had to be paid by the manufacturer or producer; the fact
that the manufacturer or producer might have added the amount of the tax to the
price of the goods did not make the sales tax “a tax on the purchaser”.  The
Court held that the sales tax must be paid by the manufacturer or producer even
if the sale is made to tax-exempt entities like the National Power Corporation,
an agency of the Philippine Government, and to the Voice of America, an agency
of the United States Government.

The Host Agreement, in specifically
exempting the WHO from “indirect taxes”, contemplates taxes which, although not
imposed upon or paid by the Organization directly, form part of the price paid
or to be paid by it.  This is made clear in Section 12 of the Host Agreement
which provides:

“While the Organization will not, as a general rule, in the
case of minor purchases, claim exemption from excise duties, and from taxes on
the sale of movable and immovable property which form part of the price to be
paid, nevertheless, when the Organization is making important purchases
for official use of property on which such duties and taxes have been charged or
are chargeable the Government of the Republic of the Philippines shall make
appropriate administrative arrangements for the remission or return of the
amount of duty or tax.” (Emphasis supplied).

The above-quoted provision, although referring only to
purchases made by the WHO, elucidates the clear intention of the Agreement to
exempt the WHO from “indirect” taxation.

The certification issued by the
WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from
any taxes in connection with the construction of the WHO office building.  The
3% contractor’s tax would be within this category and should be viewed as a form
of an “indirect tax” on the Organization, as the payment thereof or its
inclusion in the bid price would have meant an increase in the construction cost
of the building.

Accordingly, finding no reversible error committed by
the respondent Court of Tax Appeals, the appealed decision is hereby
affirmed.

SO ORDERED.

Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco,
and Sarmiento, JJ., concur.

^[2] World Health Organization and Dr.
Leonce Verstuyft v. Hon. Benjamin Aquino, etc., et al., 48 SCRA
242.

^[3] 127 Phil. 461.