ABS-CBN Broadcasting Corporation vs. Court of Tax Appeals

A revocation or modification of a BIR ruling or circular may not be given retroactive application if prejudicial to the taxpayer, where the taxpayer acted in good faith on the prior circular and none of the statutory exceptions — deliberate misstatement, materially different facts, or bad faith — apply.

ABS-CBN Broadcasting Corporation was engaged in the business of telecasting local and foreign films acquired from foreign corporations not engaged in trade or business within the Philippines, for which it paid rentals subject to withholding income tax. Section 24(b) of the National Internal Revenue Code, as amended by Republic Act No. 2343, levied a 30% tax on the amount received by non-resident foreign corporations from Philippine sources as rents and other income. On April 12, 1961, the Commissioner of Internal Revenue issued General Circular No. V-334, which determined that a portion of film rental receipts represented a return of capital or investment and was therefore not income, fixing that portion at 50% and directing local distributors to withhold 30% of only one-half of film rentals paid to non-resident foreign film distributors.

During the period pertinent to this case, ABS-CBN Broadcasting Corporation was engaged in the business of telecasting local as well as foreign films acquired from foreign corporations not engaged in trade or business within the Philippines, for which it paid rentals after withholding income tax. Section 24(b) of the National Internal Revenue Code, as amended by Republic Act No. 2343 on June 20, 1959, levied a tax equal to thirty percent of the amount received by every foreign corporation not engaged in trade or business within the Philippines from all sources within the country, including rents and other fixed or determinable gains, profits, and income.

On April 12, 1961, the Commissioner of Internal Revenue issued General Circular No. V-334 to implement Section 24(b). The Circular determined that the tax was imposed on income derived from capital or labor in accordance with the basic principle of income taxation, and that a mere return of capital or investment is not income. Based on findings that the distribution or exhibition right on a film is invariably acquired for a consideration, the Circular concluded that part of the receipts of a non-resident foreign film distributor represented a return of investment. It directed local distributors to withhold 30% of one-half of the film rentals paid to non-resident foreign film distributors, unless the latter made a prior settlement of their income tax liability. Pursuant to this Circular, ABS-CBN dutifully withheld and turned over to the Bureau of Internal Revenue 30% of one-half of the film rentals paid to foreign corporations not engaged in trade or business within the Philippines. The last year ABS-CBN withheld taxes under General Circular No. V-334 was 1968.

On June 27, 1968, Republic Act No. 5431 amended Section 24(b) of the Tax Code, increasing the tax rate from 30% to 35% and revising the tax basis from "such amount" to "gross income." On February 8, 1971, the Commissioner issued Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-334 as "erroneous for lack of legal basis" and directing that the tax should be based on gross income without any deduction. The new Circular required local distributors and exhibitors to withhold 35% of the entire amount payable to non-resident foreign corporations as film rental or royalty, without any deduction.

On the basis of Revenue Memorandum Circular No. 4-71, the Commissioner issued a letter of assessment and demand dated April 15, 1971, but allegedly released and received by ABS-CBN on April 12, 1971, requiring payment of deficiency withholding income tax on remitted film rentals for the years 1965 through 1968 in the total amount of P525,897.06. ABS-CBN requested reconsideration and withdrawal of the assessment on May 5, 1971. Without acting on that request, the Commissioner issued a warrant of distraint and levy over ABS-CBN's personal and real properties on April 6, 1976. ABS-CBN then filed a Petition for Review with the Court of Tax Appeals, which dismissed the petition on November 29, 1979 and ordered ABS-CBN to pay P525,897.06 plus surcharge and interest under Section 51(e) of the NIRC. The Tax Court held that General Circular No. V-334 was a nullity because it effectively changed the law, and that ABS-CBN acquired no vested rights thereunder.

• Retroactive Application of RMC No. 4-71: Petitioner argued that respondent could not retroactively apply Revenue Memorandum Circular No. 4-71 to issue a deficiency assessment for taxable years 1965 to 1968, because Section 338-A of the Tax Code prohibits retroactive application of a revocation or modification of a ruling when prejudicial to the taxpayer, and petitioner had relied in good faith on General Circular No. V-334.
• Prescription for 1965: Petitioner maintained that the Commissioner's right to assess deficiency withholding income tax for the year 1965 had already prescribed.

• Nullity of General Circular No. V-334: Respondent countered that the provision on non-retroactivity was inapplicable because General Circular No. V-334 was a nullity, as it effectively changed the law by allowing deductions from the tax base when the statute imposed a tax on a specified percentage of the gross amount received.
• No Vested Rights Under a Nullity: Respondent argued that petitioner did not acquire any vested right under General Circular No. V-334 because the Circular was void for lack of legal basis, and deductions are wholly within the power of Congress to grant, condition, or deny.

• Retroactive Application: Whether or not respondent can apply Revenue Memorandum Circular No. 4-71 retroactively and issue a deficiency assessment against petitioner in the amount of P525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967, and 1968.
• Prescription: Whether or not the right of the Commissioner of Internal Revenue to assess the deficiency withholding income tax for the year 1965 has prescribed.

• Retroactive Application: No. The retroactive application of Revenue Memorandum Circular No. 4-71 was prejudicial to the taxpayer under Section 338-A of the Tax Code, and none of the statutory exceptions applied.
• Prescription: Resolution rendered unnecessary. Having concluded that the assessment was invalid for being retroactively applied, the issue of prescription for the year 1965 became moot.

• Retroactive Application: Section 338-A (now Section 327) of the Tax Code, inserted by Republic Act No. 6110 on August 9, 1969, expressly provides that any revocation, modification, or reversal of rules, regulations, rulings, or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if prejudicial to the taxpayer, except where the taxpayer deliberately misstates or omits material facts, where the facts subsequently gathered are materially different from those on which the ruling was based, or where the taxpayer acted in bad faith. The prejudice to ABS-CBN was beyond question: Revenue Memorandum Circular No. 4-71 was issued in 1971, three years after 1968, the last year ABS-CBN had withheld taxes under General Circular No. V-334. ABS-CBN was no longer in a position to withhold taxes from the foreign corporations because it had already remitted all film rentals and no longer had control over them. None of the three statutory exceptions applied, as petitioner did not misstate facts, the facts were not materially different, and petitioner did not act in bad faith. The respondent's position that General Circular No. V-334 was a nullity was rejected because the rationale behind the Circular — that a return of capital or investment is not income — was grounded on the basic principle of income taxation. The original statutory language of Section 24(b) was not plain and simple; the very necessity of issuing the Circular indicated that the provision was susceptible to different interpretations. Moreover, the principle of legislative approval of administrative interpretation by re-enactment obtained: Congress re-enacted Section 24(b) substantially unchanged through Republic Act No. 3825 and Republic Act No. 3841 after the issuance of General Circular No. V-334, indicating adoption of the Commissioner's prior construction. It was only under Republic Act No. 5431, effective June 27, 1968, that Section 24(b) was amended to specifically refer to "gross income." While the Government is generally not estopped from collecting taxes due to mistakes of its agents, this principle admits of exceptions in the interest of justice and fairplay, and Section 338-A reflects legislative intent to support the principle of good faith reliance. The Court of Tax Appeals' additional imposition of surcharge and interest under Section 51(e) was likewise unwarranted, as ABS-CBN had relied in good faith and religiously complied with a Circular formally issued by the highest official of the Bureau of Internal Revenue and approved by the Secretary of Finance.
• Prescription: Having concluded that the assessment must be set aside for improper retroactive application of Revenue Memorandum Circular No. 4-71, resolution of the prescription issue became unnecessary.

• Non-retroactivity of BIR Rulings and Circulars — Under Section 338-A (now Section 327) of the National Internal Revenue Code, any revocation, modification, or reversal of rules, regulations, rulings, or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if prejudicial to the taxpayer, except in three cases: (a) where the taxpayer deliberately misstates or omits material facts from the return or any document required by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. The Court applied this provision to bar the retroactive application of Revenue Memorandum Circular No. 4-71, which revoked General Circular No. V-334, because ABS-CBN had already remitted all film rentals, could no longer withhold taxes from foreign corporations, did not fall under any exception, and had relied in good faith on a formally issued circular approved by the Secretary of Finance.

• Legislative Approval of Administrative Interpretation by Re-enactment — The re-enactment of a statute substantially unchanged is a persuasive indication of the adoption by Congress of a prior executive or administrative construction. The Court applied this principle where Congress re-enacted Section 24(b) of the Tax Code substantially unchanged through Republic Act No. 3825 and Republic Act No. 3841 after the Commissioner had issued General Circular No. V-334 interpreting "such amount" as excluding a return of capital, thereby indicating legislative approval of that administrative interpretation.

• Government Not Estopped from Collecting Taxes (Exception) — While the Government is never estopped from collecting taxes because of mistakes or errors on the part of its agents, this principle admits of exceptions in the interest of justice and fairplay. The insertion of Section 338-A into the Tax Code is indicative of legislative intention to support the principle of good faith reliance on BIR rulings. Where a taxpayer has religiously complied with a circular formally issued by the Commissioner and approved by the Secretary of Finance, retroactive revocation of that circular to the taxpayer's prejudice is impermissible.

• "It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply them would be prejudicial to taxpayers." — This passage states the ratio decidendi: the Court's application of Section 338-A to bar retroactive application of a revoking circular where the taxpayer would be prejudiced.

• "The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It provides that 'the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction.'" — This passage articulates the doctrine of legislative approval of administrative interpretation, which the Court used to validate General Circular No. V-334 and reject the claim that it was a nullity.

• "But, like other principles of law, this also admits of exceptions in the interest of justice and fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code, as held in the case of Tuason, Jr. vs. Lingad, is indicative of legislative intention to support the principle of good faith." — This passage establishes the exception to the rule that the government is not estopped from collecting taxes, grounded on statutory non-retroactivity and good faith reliance.

• Tuason, Jr. vs. Lingad, 58 SCRA 170 (1974) — Followed. The Court relied on this case to hold that the insertion of Section 338-A into the Tax Code reflects legislative intent to support the principle of good faith reliance on BIR rulings, and that surcharges and interest should not be imposed on a taxpayer who acted in good faith on a formally issued circular.
• Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 (1965) — Cited in support of the principle of legislative approval of administrative interpretation by re-enactment.
• Biddle vs. Commissioner, 302 U.S. 573 (1938) — Cited as U.S. authority for the principle of legislative approval of administrative interpretation by re-enactment.
• Filipinas Life Assurance Co. vs. Court of Tax Appeals, 21 SCRA 622 (1967) — Cited in a footnote noting that the omission of a proviso in Republic Act No. 3841 appeared due to oversight, the purpose of the amendment being to include capital gains in gross income.
• Connell Bros. Co. Phil. vs. Collector of Internal Revenue, 10 SCRA 470 (1964) — Cited alongside Tuason, Jr. vs. Lingad in support of good faith reliance on BIR circulars.
• Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357 (1965) — Cited for the well-entrenched principle that the Government is never estopped from collecting taxes because of mistakes of its agents.

• Section 24(b), National Internal Revenue Code (as amended by RA No. 2343, RA No. 3825, RA No. 3841, and RA No. 5431) — Governed the income tax on non-resident foreign corporations. Originally levied 30% of "such amount" received from Philippine sources; amended by RA No. 5431 to levy 35% of "gross income." The evolution of this provision was central to determining whether General Circular No. V-334 had legal basis and whether the shift to "gross income" was prospective only.
• Section 338-A (now Section 327), National Internal Revenue Code (inserted by RA No. 6110) — Provided the controlling rule on non-retroactivity of BIR rulings and circulars. The Court applied it to bar retroactive application of Revenue Memorandum Circular No. 4-71, as its revocation of General Circular No. V-334 was prejudicial to ABS-CBN and none of the three statutory exceptions applied.
• Section 51(e), National Internal Revenue Code — Governed surcharges and interest incident to delinquency. The Court held that imposing surcharges and interest was unwarranted because ABS-CBN had relied in good faith on a formally issued and approved circular.
• General Circular No. V-334 (April 12, 1961) — Issued by the Commissioner of Internal Revenue to implement Section 24(b), determining that part of film rental receipts represented return of capital and directing local distributors to withhold 30% of only one-half of film rentals. The Court upheld its validity as a reasonable administrative interpretation of an ambiguous statutory provision.
• Revenue Memorandum Circular No. 4-71 (February 8, 1971) — Revoked General Circular No. V-334 as "erroneous for lack of legal basis" and required withholding of 35% of the entire amount payable to non-resident foreign corporations without deduction. The Court held that its retroactive application was barred by Section 338-A.

Makasiar (Acting Chairman), Fernandez, Guerrero, and De Castro, JJ., concur. Justice Pacifico P. de Castro was designated to sit in the First Division, Justice Claudio Teehankee being on official leave.