BRITISH TRADER’S INSURANCE CO., LTD., PETITIONER VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

British Traders’ Insurance Co.,
Ltd., a Hongkong corporation engaged in business in
the Philippines, Union Insurance Society of Canton, Ltd. and North Pacific
Insurance Company, Ltd., calling themselves the Union Companies, entered into
worldwide reinsurance treaties with various foreign insurance companies whereby
they agreed to cede a portion of the premiums on insurance they had originally
underwritten in consideration for assumption by the reinsurers of liability on an equivalent portion of the
risks originally insured. Said treaties were negotiated and signed by the
parties concerned outside the Philippines. Payment of claims and premiums
were stipulated to be made in London but the Union Companies were required to keep registers wherein they entered all
risks ceded to the reinsurers. Entry in such registers
constituted a cession and was binding on the reinsurers.

The aforesaid treaties considered
the liability of the reinsurers coterminous with the
liability of the Union Companies under the original insurances. Adjustments,
settlements or compromises which may be made by the Union Companies for loss
were binding on the reinsurers. By virtue of such
reinsurance treaties, the Philippine office of British Traders’ Insurance Co.,
Ltd. ceded to foreign reinsurers not doing business in
the Philippines the following reinsurance
premiums corresponding to insurances originally underwritten in the
Philippines:

British Traders’ Insurance Co.,
Ltd. did not include in its gross income the above amounts when it filed its
income tax returns for 1954 and 1955 and withheld no income tax thereon. So, the
Commissioner of Internal Revenue issued against it the following assessment for
withholding tax under Sections 53 and 54 of the Tax Code:

British Traders’ Insurance Co.,
Ltd. protested the assessments, reasoning that the cessions of reinsurance
premiums were not subject to withholding tax. After its protest was denied by
the Commissioner of Internal Revenue, it appealed to the Court of Tax Appeals.
On January 30,
1962, the
Tax Court rendered judgment sustaining the assessments, thus:

“Wherefore, in view of the
foregoing considerations, petitioner British Traders’ Insurance Co., Ltd., is
hereby ordered to pay the Commissioner of Internal Revenue the total amount of
P117,148.00 as withholding income tax for the years
1954 and 1055, within thirty (30) days from the date this decision becomes
final.

“If any amount of the tax is not
paid within the time prescribed above, there shall be collected a surcharge of
5% of the tax unpaid, plus interest at the rate of 1% a month from the date of
delinquency to the date of payment, provided that the maximum amount that may be
collected as interest shall not exceed the amount corresponding to a period of
three (3) years. With costs against the petitioner.”

Subsequently, on March 1, 19G2,
British Traders’ Insurance Co., Ltd., for and in behalf of its non-resident
foreign reinsurers, filed income tax returns for the
years 1954 and 1955, declaring therein the aforesaid reinsurance premiums, and
thereupon paid the corresponding income tax for 1954 in the amount of P6,212.50. No tax was due for 1955 per the corresponding
return.

On March 6, 1962, before the
decision of the Court of Tax Appeals would become final, British Traders’
Insurance Co., Ltd. attempted to file a supplemental petition for review,
alleging therein the filing of the income tax returns for 1954 and 1955 and
praying for relief from payment of withholding taxes as provided for in Section
53 (c) of the Tax Code. The Tax Court did not give due course to it on the
ground that the supplemental petition for review would entirely change the
theory of the original petition, eventually re-open the case and delay or
protract the proceedings.

British Traders’ Insurance Co.,
Ltd., has appealed, raising two issues:

{1) Does the Tax; Code subject to
income and/or withholding tax reinsurance premiums ceded to non-resident foreign
insurance companies pursuant to treaties negotiated and executed abroad?

(2) Did the Court of Tax Appeals
commit reversible error in denying leave to file a supplemental petition for
review?

Petitioner would wish to stress
that the reinsurance premiums in question are not taxable because they do not
constitute income from sources within the
Philippines. To support its view, petitioner
points out that the reinsurance treaties were executed outside the Philippines;
that performance under the reinsurance treaties was to take place outside the
Philippines; that the foreign reinsurers were not
engaged in business in the Philippines and had no offices or representatives
here; and that reinsurance premiums are not included in Section 37 of the Tax
Code enumerating gross income from sources within the Philippines.

From the reinsurance treaties,
however, it is clear that the reinsurance transactions and/or activities in
question were to be performed in the Philippines. Specifically these are: the
entry in the registry of risks ceded; computation of retention, determination of
the amount ceded; remittance of reinsurance premium; adjustment, settlement, or
compromise of indemnity for loss due from reinsurers;
and, payment of applicable taxes-to ceded premiums. A strong indication is
thereby given that the undertaking to indemnify the insured for loss on
insurance located in the Philippines, was to be actually performed in
Philippine soil. Such reinsurance treaties, moreover, provided that entry of
risks ceded to reinsurers in a register to be kept by
British Traders’ Insurance Co., Ltd. constitutes a cession binding on the reinsurers. Petitioner, in compliance with such clause in
the reinsurance treaties, kept a register in Manila and entered therein all the
risks ceded to its reinsurers during 1954 and 1955,
thereby localizing in the Philippines the actual cession and their
acceptance by the reinsurers.

Section 24 of the Tax Code taxes
foreign corporations on their income from sources within the
Philippines. The word “sources” has been
interpreted to mean activity, property or service out of which the income
arose.^[1] Accordingly, taxability of a foreign
corporation’s income depends upon the locus of the activity, property or service
giving rise thereto. The reinsurance premiums in question were income of
petitioner’s foreign reinsurers from the reinsurance
transactions or activities, which, as mentioned above, were performed in the
Philippines. Perforce, the situs of the source of the reinsurance premiums is the
Philippines, within the taxing provision of
Section 24. Stated otherwise, the flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying therein the protection accorded by our
Government. Such flow of wealth should, in consideration for the protection,
share the burden of supporting the Government.

The reinsurance treaties between
petitioner and its foreign reinsurers were indeed
negotiated and signed abroad. The place of contract, however, is not a sole
criterion that conclusively determines the situs of
the reinsurance premiums. For, otherwise, it would be relatively easy for
foreign corporations to celebrate a contract abroad, for instance in
Mexico, where there appears to be no
income tax, and thus evade payment of tax on income flowing to them from the
Philippines.

Neither should the place of
business of the foreign reinsurers be made the norm
for applying Section 24 of the Tax Code. For the income tax law does not require
as a condition sine qua non the conduct of business in the
Philippines in order that foreign
corporations may thereunder be taxed on their income.
It is sufficient that such income is derived from an activity within the
Philippines. Place of activity, not
place of business, is controlling. Since an activity may consist of only
a single transaction whereas business implies a continuity of transactions,^[2] it follows that the source of an income can
be an activity performed outside one’s place of business. Precisely, our
legislators adopted the administrative device in Sections 53 and 54 withholding
of the corresponding income tax at the source of the income;—to insure collection of
whatever tax may be due on income earned in the
Philippines by those who are not doing
business in the Philippines and have no office or agent
here. The fact that a foreign corporation does not engage in business here and
has no local office or agent is the very reason why its income is subject to
withholding tax.^[3]

Although reinsurance premiums are
not expressly mentioned in Section 37 of the Tax Code enumerating types of
income that should be treated as coming from sources within the Philippines,
this does not render it any less such an income. Section 37 is obviously not an
all-inclusive enumeration, for it “only directs that the types of income
mentioned therein be treated as income from sources within the
Philippines, but does not state that no
other kind of income be likewise so considered.

As to the question whether or not
reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are subject to withholding tax under Sections
53 and 54, suffice it to say that we have already decided this in the
affirmative in Howden vs. Commissioner of Internal
Revenue, L-19392, April 14, 1965.

Petitioner further contends that,
since it relied on the rulings of the Commissioner of Internal Revenue in not
withholding the tax on the reinsurance premiums in question, it may not anymore
be compelled to pay the withholding tax thereon, invoking the second paragraph
of Section 200 of the Income Tax Regulations, which states:

“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 of 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 in not subject to withholding, the withholding
agent may thereupon remit the amount of tax
withheld.”

There is no showing that
petitioner actually withheld tax on the reinsurance premiums in question and
subsequently inquired from the Commissioner of Internal Revenue whether or not
such premiums were subject to withholding. Petitioner therefore may not invoke
the protection accorded by Section 200, for failure to show compliance with the
requirements set forth therein. Furthermore, its reliance on the previous
rulings of the Commissioner of Internal Revenue would not relieve it from its
duty to pay the withholding tax due on the reinsurance premiums, for the State
is not estopped from collecting taxes by the mistakes
and errors of its agents.^[4]

Petitioner maintains finally,
that the Tax Court erred in denying admission of its supplemental petition for
review. The record shows that the burden of petitioner’s supplemental petition
was that petitioner had filed income tax returns’ for 1954 and 1955, and paid
the income tax due, after the Tax Court rendered its decision; and that said
decision, not yet final and executory, should
accordingly recognize the absence of further need of withholding tax.

For the Court of Tax Appeals to
have admitted the aforesaid supplemental petition would have meant re-opening
the case and receiving such evidence as balance sheets, statements of profit and
loss, books of accounts, receipts, invoices, schedules of income and
disbursements, etc., in support of the income tax returns. The Tax Court would
only have been made to perform the proper and initial task of the Commissioner
of Internal Revenue—the examination, verification and
audit of petitioner’s income tax returns after their filing which lawfully
belongs to the Commissioner of Internal Revenue who has the necessary facilities
and personnel to conduct the same. He has at his disposal fieldmen whom he can send to the offices of the tax-payer to
examine all its books, records and papers. Whereas, the Court of Tax Appeals has
to limit itself to whatever papers or documents that may be presented before it
as evidence in accordance with the rules of procedure.

Petitioner, moreover, by the
supplemental petition for review in reality sought nullification of the Tax
Court’s judgment holding it liable for withholding tax, by simply and
conveniently changing its theory and alleging therein payment of the income tax
due on the reinsurance premiums, thus allegedly eliminating the reason and
purpose for the withholding of such tax. Admission of the supplemental petition
at the stage when it was filed would have been opening the door for a party
litigant to wait until the court has rendered its opinion on a case and then, to
best suit his purposes, change his stand on the point
that had been submitted for the resolution of the court. Justice requires that
such speculation by a party should not be sanctioned by our courts. Neither can
the courts countenance a situation where a party, through the use of a
supplemental pleading, puts two agencies of the Government, such as the Court of
Tax Appeals and the Bureau of Internal Revenue, in contradictory positions for
the benefit of the taxpayer and to the prejudice of the Government. Under the
supplemental petition the Court of Tax Appeals would have ‘been called upon to
decide the propriety of the tax paid as reported in the late income tax returns.
Eventually, it would have the effect of tying the hands of the Bureau of
Internal Revenue, preventing it from verifying the returns and ultimately
foiling collection of deficiency tax, if there be any.

We see no reason, therefore, to
alter the course taken by the Tax Court in this regard.^[5] The admission or non-admission of a
supplemental pleading lies in the sound discretion of the court before which its
admission is sought. The Rules of Court states that on motion of a party “the
court may, upon reasonable notice and upon such terms as just, permit him
to serve a supplemental pleading”.^[6] The admission of a supplemental pleading,
therefore, is not a matter of right.

Finally, supplemental pleadings,
as the name implies, are meant (a supply deficiencies in aid of an original
pleading, not to entirely substitute the latter.

WHEREFORE, the decision appealed from is
hereby affirmed with costs against petitioner.

SO ORDERED.

Bengzon, C. J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal and Zaldivar, JJ., concur.

^[1]Mertons, Jr., Jacob, Law oil Federal
Taxation, Vol. 8, Section

^[2]Imperial vs. Collector of
Internal Revenue, L-7924, September 30, 1965.

^[3]Sec. 54, Nat. Int. Rev. Code.

^[4]Hilado vs.
Collector of Internal Revenue, 100 Phil., 288; Off. Gaz., 2481; Koppel
(Philippines), Inc.
vs. Collector of Internal Revenue, L-10550, Sept. 19,
1961; Compania General de Tabacos de
Filipinas vs. City of Manila, L-16619,
June 29,
1963.

^[5]Petitioner has cited cases that
have no application here. The supplemental petition was not in tendril to cure a
defect as in Cuyugan vs. Dizon, 79 Phil., 80; 46 Off. Gaz.,
673; neither was it interposed pending; trial of the caw, that is, before a
derision has been rendered, as in Villaruel,
vs. Manila Motor Co., Inc., 104 Phil. 926; nor did circumstances exist in
this case similar to those obtaining in Legarda
vs. Carrascoso, 81 Phil. 450.

^[6]Sec. 5, Rule 17, now Sec. 6, Rule
10, Rules of Court.