ALEXANDER HOWDEN & CO., LTD., H.G. CHESTER & OTHERS ET AL., PETITIONERS, VS. THE COLLECTOR (NOW COMMISSIONER) OF INTERNAL REVENUE, RESPONDENT.

In 1950 the Commonwealth
Insurance Co., a domestic corporation, entered into reinsurance contracts with
32 British insurance companies not engaged in trade or business in the
Philippines, whereby the former agreed to cede to them a portion of the premiums
on insurances on fire, marine and other risks it has underwritten in the
Philippines. Alexander Howden & Co., Ltd., also a
British corporation not engaged in business in this country, represented the
aforesaid British insurance companies. The reinsurance contracts were prepared
and signed by the foreign reinsurers in
England and sent to
Manila where Commonwealth Insurance Co.
signed them.

Pursuant to the aforesaid
contracts, Commonwealth insurance Co., in 1951, remitted P798,297.47 to Alexander Howden &
Co., Ltd., as reinsurance premiums. In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed in
April 1952 an income tax return declaring the sum of P798,297.47, with accrued interest thereon in the amount of
P4,985.77, as Alexander Howden & Co., Ltd.’s gross income for calendar year 1951. It paid the
Bureau of Internal Revenue P66,l12.00 as tax thereon.

On May 12, 1954, within the
two-year period provided law, Alexander Howden &
Co., Ltd., filed with the of Internal Revenue a claim for refund of the
P66,112.00, later reduced to P65,115.00, because Alexander Howden & Co., Ltd., agreed to the payment of P997.00 as
income tax on the P4,985.77 accrued interest. A ruling of the Commissioner of
Internal Revenue, dated December 8,
1953 was
invoked, stating that it exempted from withholding tax reinsurance premiums
received from domestic insurance companies by foreign insurance companies, not
authorized to do business in the Philippines. Subsequently, Alexander Howden & Co., Ltd. Instituted an action in the Court of
First Instance of Manila for the recovery of the aforesaid amount claimed.
Pursuant to Section 22 of Republic Act 1125 the case was certified to the Court
of Tax Appeals. On November 24,
1961, the
Tax Court denied the claim.

Plaintiffs have appealed, thereby
squarely raising the following issues: (1) Are portions of premiums earned from
insurances locally underwritten by a domestic corporation, ceded to and received
by non-resident foreign reinsurance companies, thru a non-resident foreign
insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in
the Philippines, subject to income tax or not? (2) If subject thereto, may or
may not the income tax on reinsurance premiums be withheld pursuant to Sections
53 and 54 of the National Internal Revenue Code?

Section 24 of
the National Internal Revenue Code subjects to tax a non-resident foreign
corporation’s income from sources within the
Philippines. The first issue therefore hinges
on whether or not the reinsurance premium in question came from sources within
the Philippines.

Appellant would impress’ upon
this Court that the reinsurance premiums came from sources outside the
Philippines, for these reasons: (1) The contracts of reinsurance, out of which
the reinsurance premiums were earned; were prepared and signed abroad, so that
their situs lies outside the Philippines; (2) The
reinsurers, not engaged in business in the
Philippines, received the insurance premiums as income from their business
conducted in England and, as such, taxable in England; and, (3) Section 37 of
the Tax Code, enumerating what are income from sources within the Philippines,
does not include reinsurance premiums.

The source of an income is the
property, activity or service that produced the income.^[1] The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had for their
source the under- taking to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the
Philippines. In the first place, the
reinsured, the liabilities insured and the risks originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity
were based, were all situated in the Philippines. Secondly, contrary to
appellants’ view, the reinsurance contracts were perfected in the
Philippines, for Commonwealth Insurance Co.
signed them last in Manila. The American cases cited are
inapplicable to this case because in all of them the reinsurance contracts were
signed outside the jurisdiction of the taxing State. And, thirdly, the parties
to the reinsurance contracts in question evidently intended Philippine law to
govern. Article 11 thereof provided for arbitration in
Manila, according to the laws of the
Philippines, of any dispute arising between
the parties in regard to the integration of said contracts or rights in respect
of any transaction involved. Furthermore, the contracts provided for the use of
Philippine currency as the medium of exchange and for the payment of Philippine
taxes.

Appellants should not confuse
activity that creates in come with business in the course of which
an income is realized. An activity may consist of a single act; while business
implies continuity of transactions.^[2] An income may be earned by a corporation in
the Philippines although such corporation
conducts all its business abroad. Precisely, Section 24 of the Tax Code
does not require a foreign corporation to be engaged in business in the
Philippines, in order for its income from
sources within the Philippines to be taxable. It subjects
foreign corporations not doing business in the
Philippines to tax for income from sources
within the Philippines. If by source of income is meant
the business of the taxpayer, foreign corporations not engaged in business in
the Philippines would be exempt from taxation on
their income from sources within the Philippines. Furthermore, as used in our
income tax law, “income” refers to the flow of wealth.^[3] Such flow, in the instant case, proceeded
from the Philippines. Such income enjoyed the
protection of the Philippine government. As wealth flowing from within the
taxing jurisdiction of the Philippines and in consideration for
protection accorded it by the Philippines, said income should properly
share the burden of maintaining the government.

Appellants further contend that
reinsurance premiums not being among those mentioned in Section 37 of the Tax
Code as income from sources within the
Philippines, the same should not be treated
as such. Section 37, however, is not an all-inclusive enumeration. It states
that the following items of gross income shall be treated as income from sources
within the Philippines“. It does state or imply that an
income not listed therein is necessarily from sources outside the
Philippines.

As to appellants, contention that
reinsurance premiums constitute “gross receipts” instead of “gross income”, not
subject to income tax, suffice it to say that, as correctly observed by the
Court of Tax Appeals, “gross receipts” of amounts that do not constitute return
of capital, such as reinsurance premiums; are part of the gross income of a
taxpayer. At any rate, the tax actually collected in this case was computed not
on the basis of gross premium receipts but on the net premium income that is,
after deducting general expenses, payment of policies and taxes.

The reinsurance premiums in
question being taxable, we turn to the issues whether or not they are subject to
withholding tax under Section 54 in relation to Section 53 of the Tax Code.

Subsection (b) of Section 53
subjects to withholding tax the following: interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments,
or other fixed or determinable annual or periodical gains, profits, and
income of any non-resident alien individual not engaged in trade or business
within the Philippines and not having any office or place of business therein.
Section 54, by reference, applies this provision to foreign corporations not
engaged in trade or business in the
Philippines.

Appellants maintain that
reinsurance premiums are not “premiums” at all as contemplated by Subsection (b)
of Section 53 j that they are not within the scope of “other fixed or
determinable annual or periodical gains, profits and income”; that, therefore,
they are not items of income Object to withholding tax.

The argument of appellants is
that “premiums”, as used in Section 53(b), is preceded by “rents, salaries,
wages” and followed by “annuities, compensations, remunerations” which connote
periodical income payable to the recipient on account of some investment or for
personal services rendered. “Premiums” should, therefore, in appellants’ view,
be given a meaning kindred to the other terms in the enumeration and be
understood in its broadest sense as “a reward or recompense for some act done; a
bonus; compensation for the use of money; a price for a loan; a sum in addition
to interest”.

We disagree with the foregoing
proposition. Since Section 63 subjects to withholding tax various specified
income, among them, “premiums”, the generic connotation of each and every word
or phrase composing the enumeration in Subsection (b) thereof is income.
Perforce, the word “premiums”, which is neither qualified nor defined by the law
itself, should mean income and should include all premiums constituting income,
whether they be insurance or reinsurance premiums.

Assuming that reinsurance
premiums are not within the word “premiums” in Section 53, still they may be
classified as determinable and periodical income under the same provision
of law. Section 199 of the Income Tax Regulations defines fixed, determinable,
annual and periodical income:

“Income is fixed when it is to be
paid in amounts definitely predetermined. On the other hand, it is determinable
whenever there is a basis of calculation by which the amount to be paid may be
ascertained.

“The income need not be paid
annually if it is paid periodically; that is to say, from time to time, whether
or not at regular intervals. That the length of time during which the payments
are to be made may be increased or diminished in accordance with someone’s will
or with the happening of an event does not make the payments any the less
determinable or periodical. * * *”

Reinsurance premiums, therefore,
are determinable an periodical income; determinable, because they can be
calculated accurately on the basis of the reinsurance contracts; periodical,
inasmuch as they were earned and remitted from time to time.

Appellants’ claim for refund, as
stated, invoked a ruling: the Commissioner of Internal Revenue dated
December 8,
1953.
Appellants’ brief also cited rulings of the same official, dated October 13,
1953, February 7, 1955 and February 8, 1955, as well as the decision of the
defunct Board of Tax Appeals in the case of Franklin Baker Co.^[4], thereby attempting to show that the
prevailing administrative interpretation of Sections 53 and 54 of the Tax Code
exempted from withholding tax reinsurance premiums ceded to non-resident foreign
insurance companies. It is asserted that since Sections 53 and 54 were
“substantially re-enacted” by Republic Acts 1065 (approved June 12,
1954),
1291 (approved June 15,
1955),
1505 (approved June 16,
1956) and
2343 (approved June 20,
1959)
when the said administrative rulings prevailed, the
rulings should be given the force of law under the principle of legislative
approval by re-enactment.

The principle of legislative
approval by re-enactment may briefly be stated thus: When a statute is
susceptible of the meaning placed upon it by a ruling of the government agency
charged with its enforcement and the Legislature thereafter re-enacts the
provisions with substantial change, such action is to some extent confirmatory
that the ruling carries out the legislative purpose.^[5]

The afore-stated principle,
however, is not applicable to this case. Firstly, Sections 53 and 54 were never
re- enacted. Republic Acts 1065, 1291, 1505 and 2343 were merely amendments
in respect to the rate of tax imposed in Sections 53 and 54. Secondly, the
administrative rulings the Commissioner of Internal Revenue relied upon’ by
taxpayers were only contained in letters to taxpayers and never published, so
that the Legislature is not presumed to know said rulings. Thirdly, in the case
on which appellants rely, Interprovincial Autobus Co.,
Inc. vs. Collector of Internal Revenue, 98 Phil. 290, January 31, 1956, what was
declared to have acquired the force and effect of law was a regulation
promulgated to implement a law; whereas, in this case, what appellant would seek
to have the force of law are opinions on queries submitted.

It may not be amiss to note that
in 1963, after the Tax Court rendered judgment in this case, Congress enacted
Republic Act 3825, as an amendment to Sections 24 and 54 of the Tax Code,
exempting from income taxes and withholding tax, reinsurance premiums received
by foreign corporations not engaged in business in the Philippines. Republic Act
3825 in effect took out from Sections 24 and 54 something which formed a
part of the subject matter therein,^[6] thereby affirming the taxability of
reinsurance premiums prior to the afore-stated amendment.

Finally, appellant would argue
that Judge Augusto M. Luciano, who penned the decision
appealed from, was disqualified to sit in this case since he had appeared as
counsel for the Commissioner of Internal Revenue and, as such, answered
plaintiffs’ complaint before the Court of First Instance of Manila.

The Rules of Court provides that
no judge shall sit in any case in which he has been counsel without the written
consent of all the parties in interest, signed by them and entered upon the
record. The party objecting to the judge’s competency may file, in writing, with
such judge his objection, stating therein the grounds for it. The judge shall
thereupon proceed with the trial or with draw therefrom, but his action shall be made in writing and made
part of the record.^[7]

Appellants, instead of asking for
Judge Luciano’s disqualification by raising their
objection in the Court of Tax Appeals, are content to raise it for the first
time before this Court. Such being the case they may not now be heard to
complain on this point, when Judge Luciano has given
his opinion on the merits of the case. A litigant cannot be permitted to
speculate upon the action of the court and raise an objection of this nature
after decision has been rendered.^[8]

WHEREFORE, the judgment appealed from is
hereby affirmed with costs against appellants.

SO
ORDERED.

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

^[1] Mortens Jr., Jacob, Law on Federal Income Taxation, Vol. 8,
Section 45.27.

^[2] Mentholatum Co. vs. Mangaliman, 40
Off. Gaz.
1838.

^[3] Madrigal and Paterno vs. Rafferty and Concepcion, 38
Phil.414-418.

^[4] Umali,
Roman N., Decisions of the Board of Tax Appeals, Vol. 2 pp. 303-307.

^[5] Laxamana vs. Paltazar, 92 Phil.
32; Mead Corporation vs. Commissioner of Internal Revenue, 116 F(2d) 187.

^[6] Manila Electric Co. vs. Public
Utilities Employees Association, 79, Phil. 409.

^[7] Secs.
I and 2, Rule 137 (formerly Rule 126), Rules of Court.

^[8] Rodriguez vs. Treasurer of the
Philippines, 45 Off. Gaz., 4457 (Resolution); Arnault
vs. Nazareno, L-3820, Resolution of August 9,
1950.