ESSO STANDARD EASTERN, INC., (FORMERLY, STANDARD-VACUUM OIL COMPANY), PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

On appeal before us is the decision of the Court of Tax Appeals^[1]
denying petitioner’s claims for refund of overpaid income taxes of P102,246.00
for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.

I

In CTA Case No. 1251, petitioner ESSO deducted from its gross
income for 1959, as part of its
ordinary and necessary business expenses, the amount it had spent for drilling
and exploration of its petroleum concessions. 
This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be capitalized and
might be written off as a loss only when a “dry hole” should
result.  ESSO then filed an amended
return where it asked for the refund of P323,279.00 by reason of its
abandonment as dry holes of several of its oil wells.  Also claimed as ordinary and necessary
expenses in the same return was the amount of P340,822.04, representing margin
fees it had paid to the Central Bank on its profit remittances to its New
York head office.

On August 5,
1964, the CIR
granted a tax credit of P221,033.00
only, disallowing the claimed deduction for the margin fees paid.

In CTA Case No. 1558, the
CIR assessed ESSO a deficiency income tax for the year 1960, in the amount of
P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April
18, 1961 to April
18, 1964, for a
total of P434,232.92.  The deficiency
arose from the disallowance of the margin fees of P1,226,647.72 paid by ESSO to
the Central Bank on its profit remittances to its New
York head office.

ESSO settled this
deficiency assessment on August
10, 1964, by applying the tax credit of P221,033.00 representing its overpayment on its income tax for 1959 and
paying under protest the additional amount of P213,201.92.  On August 13, 1964, it claimed the refund of P39,787.94 as overpayment
on the interest on its deficiency income tax. 
It argued that the 18% interest should have been imposed not on
the total deficiency of P367,944.00 but only in the amount of P146,961.00, the difference between the total deficiency and its
tax credit of P221,033.00.

This claim was denied by
the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency
tax.  On May 4, 1965, the CIR also denied the claims of ESSO for
refund of the overpayment of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be considered taxes or allowed
as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for
1959, contending that the margin fees were deductible from gross income either
as a tax or as an ordinary and necessary business expense.  It also claimed an overpayment of its tax by
P434,232.92 in 1960, for the same reason. 
Additionally, ESSO argued that even if the amount paid as margin fees
were not legally deductible, there was still an overpayment by P39,787.94 for
1960, representing excess interest.

After trial, the CTA denied petitioner’s claim for refund of
P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for
P39,787.94 as excess interest.  This
portion of the decision was appealed by the CIR but was affirmed by this Court
in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502-03, promulgated
on April 18, 1989.  ESSO for its part appealed the CTA decision
denying its claims for the refund of the margin fees P102,246.00 for 1959 and
P434,234.92 for 1960.  That is the issue now before us.

II

 The first question we must
settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of
the Philippines
to Establish a Margin Over Banks’ Selling Rates of Foreign Exchange, is a
police measure or a revenue measure.  If it is a revenue measure, the margin fees
paid by the petitioner to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO’s
gross income under Sec. 30(c) of the National Internal Revenue
Code.  This provides that all taxes paid
or accrued during or within the taxable year and which are related to the
taxpayer’s trade, business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the
background and legislative history of the
Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on
foreign exchange imposed by R.A. 601. 
This was a revenue measure formally proposed by President Carlos P.
Garcia to Congress as part of,
and in order to balance, the budget for 1959-1960.  It was enacted by Congress as such and,
significantly, properly originated in the House of Representatives.  During its two and a half years of existence,
the measure was one of the major sources of revenue used to finance the
ordinary operating expenditures of the government.  It was, moreover, payable out of the General
Fund.

On the claimed
legislative intent, the Court of Tax Appeals, quoting established principles,
pointed out that –

We are not unmindful
of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the
passage of the law through the legislature, may be resorted to as an aid in the
interpretation of a statute which
is ambiguous or of doubtful meaning.  The courts may take into consideration the
facts leading up to, coincident with, and in any way connected with, the passage
of the act, in order that they may properly interpret the legislative
intent.  But it is also well-settled
jurisprudence that only in extremely doubtful matters of interpretation does
the legislative history of an act of Congress become important.  As a matter of fact, there
may be no resort to the legislative history of the enactment of a statute, the
language of which is plain and unambiguous, since such legislative history may
only be resorted to for the purpose of solving doubt, not for the purpose of
creating it. [50 Am. Jur. 328.]

Apart from the above consideration, there are at least two cases
where we have held that a margin fee is not a tax but an exaction designed to
curb the excessive demands upon our international reserve.

In Caltex
(Phil.) Inc. v. Acting Commissioner of Customs,^[2] the Court stated through Justice Jose P. Bengzon:

A margin levy on foreign exchange is a form of exchange control or
restriction designed to discourage imports and encourage exports, and
ultimately ‘curtail any excessive demand upon the international reserve’ in
order to stabilize the currency. 
Originally adopted to cope with balance of payment pressures, exchange
restrictions have come to serve various
purposes, such as limiting
non-essential imports, protecting domestic industry – and when combined with
the use of multiple currency rates – providing a source of revenue to the
government, and area in many developing countries regarded as a more or less
inevitable concomitant of their economic development programs.  The different measures of exchange control or restriction cover different phases of foreign exchange transactions
i.e., in quantitative restriction, the control is on the amount of foreign
exchange allowable.  In the case of the
margin levy, the immediate impact is on the rate of foreign exchange; in fact,
its main function is to control the exchange rate without changing the par
value of the peso as fixed in the Bretton Woods
Agreement Act.  For a member
nation is not supposed to alter its exchange rate (at par value) to correct a
merely temporary disequilibrium in its balance of payments.  By its nature, the margin levy is part of the
rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase
of foreign exchange and hence should not form part of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax is levied to provide
revenue for government operations, while the proceeds of the margin fee are
applied to strengthen our country’s international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines
v. Central Bank,^[3]
the same idea was expressed, though in
connection with a different levy, through Justice J.B.L. Reyes:

Neither do we find
merit in the argument that the 20% retention of exporter’s foreign exchange
constitutes an export tax.  A tax is a
levy for the purpose of
providing revenue for government operations,
while the proceeds of 20% retention, as we have seen, are applied to strengthen the Central Bank’s
international reserve.

We conclude then that the margin fee was imposed by the State in
the exercise of its police power and not the power of taxation.

Alternatively, ESSO prays
that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from
its gross income.  The fees were paid for the remittance by ESSO as part of the profits to the head office in the
United
States.  Such remittance was an
expenditure necessary and proper for the conduct of its corporate affairs.

The applicable provision
is Section 30 (a) of the National Internal Revenue Code reading as follows:

SEC. 30.  Deductions from
gross income. – In computing net income there shall be allowed as deductions –

(a)   Expenses:

(1)  In general. – All the
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered;
traveling expenses while away from home in the pursuit of a trade or business;
and rentals or other payments required to be made as a condition to the
continued use or possession, for the purpose of the trade or business, of
property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(2)  Expenses allowable to
non-resident alien individuals and foreign corporations. – In the case of a
non-resident alien individual or a
foreign corporation, the expenses deductible are the necessary expenses paid or
incurred in carrying on any business or trade conducted within the Philippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue,^[4] the Court laid down the rules on the
deductibility of business expenses, thus:

The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the statute in which
that deduction is authorized and must be able to prove that he is entitled to
the deduction which the law allows.  As
previously adverted to, the law allowing expenses as deduction from gross
income for purposes of the income tax is Section 30 (a) (1) of the National
Internal Revenue which allows a deduction of ‘all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business.’ An item of expenditure, in order to be deductible under this section
of the statute, must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three conditions are
imposed, namely:  (1) the expense must be
ordinary and necessary, (2) it must be paid or incurred within the taxable
year, and (3) it must be paid or
incurred in carrying on a trade or business. 
In addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. 
The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United
States delving on the interpretation of the terms ‘ordinary and necessary’ as
used in the federal tax laws, no adequate or satisfactory definition of those
terms is possible.  Similarly, this Court
has never attempted to define with
precision the terms ‘ordinary and necessary.’ There are however, certain
guiding principles worthy of serious consideration in the proper
adjudication of conflicting claims. 
Ordinarily, an expense will be considered ‘necessary’ where the expenditure is appropriate and helpful in the
development of the taxpayer’s business. 
It is ‘ordinary’ when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding circumstances.  The term ‘ordinary’ does not require that the
payments be habitual or normal in the sense that the same taxpayer will have to
make them often; the payment may be unique or non-recurring to the particular
taxpayer affected.

There is thus no hard and fast rule on the matter.  The right to a deduction depends in each case on the particular facts
and the relation of the payment to the type of business in which the taxpayer
is engaged.  The intention of the
taxpayer often may be the controlling fact in making the determination.  Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayer’s business, the answer to the question as to whether the expenditure is
an allowable deduction as a business expense must be determined from the nature
of the expenditure itself, which in turn depends on the extent and permanency
of the work accomplished by the expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it
held on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and
necessary deductible expense, it may be asked: 
Were the margin fees paid by petitioner on its profit remittances to its
Head Office in New York appropriate and helpful in the taxpayer’s
business in the Philippines?  Were
the margin fees incurred for purposes proper to the conduct of the affairs of
petitioner’s branch in the Philippines?  Or
were the margin fees incurred for the purpose of realizing a profit or of
minimizing a loss in the Philippines? 
Obviously not.  As stated in the
Lopez case, the margin fees are not expenses in connection with the production
or earning of petitioner’s incomes in the Philippines.  They
were expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioner’s branch
in the Philippines for the disposal of its Head Office in New York which is already another distinct and
separate income taxpayer.

x                      x                      x

Since the margin fees in question were incurred for the remittance
of funds to petitioner’s Head Office in New York, which is a separate and
distinct income taxpayer from the branch in the Philippines, for its disposal
abroad, it can never be said therefore that the margin fees were appropriate
and helpful in the development of petitioner’s business in the Philippines
exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner’s branch in the Philippines exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively.  If at all, the margin fees were incurred for
purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil
Company in New
York,
but certainly not in the Philippines.

ESSO has not shown that the remittance to the head office of part
of its profits was made in furtherance of its own trade or business.  The petitioner merely presumed that all
corporate expenses are necessary and appropriate in the absence of a showing
that they are illegal or ultra vires.  This is error.  The public respondent is correct when it
asserts that “the paramount rule is that claims for deductions are a
matter of legislative grace and do not turn on mere equitable considerations x x x.  The taxpayer in every instance has the burden
of justifying the allowance of any deduction claimed. “^[5]

It is clear that ESSO,
having assumed an expense properly attributable to its head office, cannot now
claim this as an ordinary and necessary expense paid or incurred in carrying on
its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals
denying the petitioner’s claims for refund of P102,246.00 for 1959 and
P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.

SO ORDERED.

Narvasa, (Chairman), Gancayco, Griño-Aquino, and Medialdea, JJ., concur.

^[1]
Penned by Associate Judge E. Alvarez, with Presiding Judge Umali
and Associate Judge Avanceña concurring.

^[2]
22 SCRA 779.

^[3]
14 SCRA 630.

^[4]
102 SCRA 246.

^[5]
Merten’s, Law of Federal Income Taxation, Section 25.03.