Alexander Howden & Co., Ltd. vs. The Collector of Internal Revenue

Reinsurance premiums remitted to non-resident foreign corporations not engaged in trade or business in the Philippines constitute income from sources within the Philippines, making them subject to Philippine income tax under Section 24 of the National Internal Revenue Code and to withholding tax under Sections 53 and 54 thereof, based on the location of the insured risks and the perfection of the reinsurance contracts in the Philippines rather than the place where the foreign corporations conduct their primary business operations or where the contracts were initially signed.

The case arises from international reinsurance transactions where a domestic insurance company ceded portions of premiums to foreign reinsurance companies represented by a foreign broker, raising fundamental questions regarding the extraterritorial application of Philippine tax jurisdiction, the proper statutory interpretation of "income from sources within the Philippines," and the distinction between gross receipts and gross income under the National Internal Revenue Code.

• In 1950, 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 Commonwealth agreed to cede to them portions of premiums on fire, marine, and other risks underwritten in the Philippines.
• Alexander Howden & Co., Ltd., a British corporation not engaged in business in the Philippines, acted as the representative for the aforesaid British insurance companies in the reinsurance transactions.
• The reinsurance contracts were prepared and signed by the foreign reinsurers in England and subsequently sent to Manila where Commonwealth Insurance Co. signed them, thereby perfecting the contracts in the Philippines.
• In 1951, Commonwealth Insurance Co. remitted P798,297.47 to Alexander Howden & Co., Ltd. as reinsurance premiums pursuant to the contracts.
• In April 1952, Commonwealth Insurance Co. filed an income tax return in behalf of Alexander Howden & Co., Ltd. declaring the sum of P798,297.47 plus accrued interest of P4,985.77 as gross income for calendar year 1951, and paid P66,112.00 as income tax to the Bureau of Internal Revenue.
• On May 12, 1954, within the statutory two-year period, Alexander Howden & Co., Ltd. filed a claim for refund of the P66,112.00, later reduced to P65,115.00 after agreeing to the payment of P977.00 as income tax on the accrued interest.
• The claim for refund invoked a ruling of the Commissioner of Internal Revenue dated December 8, 1953, which allegedly exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines.
• The reinsurance contracts provided for arbitration in Manila according to the laws of the Philippines for any dispute arising between the parties, and stipulated the use of Philippine currency as the medium of exchange and the payment of Philippine taxes.

• The reinsurance premiums came from sources outside the Philippines because the contracts of reinsurance were prepared and signed abroad by the foreign reinsurers, giving the contracts a situs outside Philippine jurisdiction.
• The reinsurers received the premiums as income from their business conducted in England, and as such, the income was taxable only in England and not in the Philippines since they were not engaged in business therein.
• Section 37 of the Tax Code, which enumerates specific items of gross income from sources within the Philippines, does not include reinsurance premiums, thereby excluding them from the scope of Philippine income taxation.
• Reinsurance premiums constitute "gross receipts" rather than "gross income" and are therefore not subject to income tax under the statutory scheme.
• The term "premiums" as used in Section 53(b) of the Tax Code should be interpreted in the context of surrounding terms such as "rents, salaries, wages" and "annuities, compensations" to mean periodical income payable for investments or personal services rendered, and not insurance or reinsurance premiums.
• Reinsurance premiums do not qualify as "other fixed or determinable annual or periodical gains, profits, and income" under Section 53(b) because they are not periodical in the sense contemplated by the statute.
• Administrative rulings of the Commissioner of Internal Revenue dated October 13, 1953, February 7, 1955, and February 8, 1955, as well as the decision in Franklin Baker Co., had established an administrative practice exempting reinsurance premiums from withholding tax, and these rulings acquired the force of law under the principle of legislative approval by re-enactment when Sections 53 and 54 were amended by Republic Acts 1065, 1291, 1505, and 2343.
• Judge Augusto M. Luciano was disqualified from hearing the case at the Court of Tax Appeals because he had previously appeared as counsel for the Commissioner of Internal Revenue and answered the plaintiff's complaint before the Court of First Instance of Manila, without obtaining the written consent of all parties as required by the Rules of Court.

• The reinsurance premiums are subject to income tax as income from sources within the Philippines under Section 24 of the National Internal Revenue Code because the source is the activity that produced the income, specifically the undertaking to indemnify Commonwealth Insurance Co. against liability, which took place in the Philippines where the risks were situated.
• The reinsurance contracts were perfected in the Philippines because Commonwealth Insurance Co., the last party to sign, executed the contracts in Manila, and the parties evidenced their intention to subject the contracts to Philippine law through arbitration clauses in Manila and payment provisions in Philippine currency.
• Section 37 of the Tax Code is not an all-inclusive enumeration of income from sources within the Philippines, and the absence of reinsurance premiums from the list does not exclude them from taxation if they otherwise meet the criteria for Philippine-source income.
• Reinsurance premiums constitute "gross income" rather than mere "gross receipts" because they do not represent return of capital but rather earnings derived from the reinsurance activity.
• The premiums are properly subject to withholding tax under Sections 53 and 54 of the Tax Code as "premiums" in the generic sense, and alternatively, they qualify as "other fixed or determinable annual or periodical gains, profits, and income" under Section 53(b) because they are determinable based on the contracts and periodical in nature.
• The principle of legislative approval by re-enactment is inapplicable because Republic Acts 1065, 1291, 1505, and 2343 merely amended the tax rates imposed in Sections 53 and 54 rather than substantially re-enacting the substantive provisions, and the administrative rulings relied upon were unpublished letters rather than promulgated regulations.
• The enactment of Republic Act 3825 in 1963, which specifically exempted reinsurance premiums from income and withholding taxes, effectively affirmed that such premiums were taxable prior to the enactment of the exemption.
• The objection regarding Judge Luciano's disqualification was not raised in the Court of Tax Appeals as required by the Rules of Court and therefore cannot be raised for the first time on appeal before the Supreme Court.

• Procedural Issues: Whether an objection to the qualification of a judge, based on his prior appearance as counsel for one of the parties in the lower court, may be raised for the first time on appeal before the Supreme Court after an adverse decision has been rendered by the Court of Tax Appeals.
• Substantive Issues: Whether reinsurance premiums received by non-resident foreign corporations not engaged in trade or business in the Philippines constitute income from sources within the Philippines subject to income tax under Section 24 of the National Internal Revenue Code; whether such premiums are subject to withholding tax under Sections 53 and 54 of the same Code as "premiums" or as "other fixed or determinable annual or periodical gains, profits, and income"; and whether administrative rulings of the Commissioner of Internal Revenue exempting such premiums from withholding tax acquired the force of law through legislative approval by re-enactment.

• Procedural: The Supreme Court ruled that the objection regarding Judge Augusto M. Luciano's disqualification could not be entertained because it was raised for the first time on appeal before the Supreme Court rather than in the Court of Tax Appeals as required by Sections 1 and 2 of Rule 137 of the Rules of Court, and a litigant cannot be permitted to speculate upon the action of the court by raising such an objection only after an adverse decision has been rendered.
• Substantive: The Court held that the reinsurance premiums constitute income from sources within the Philippines because the source of income is the property, activity, or service that produced it, and here the activity of undertaking to indemnify Commonwealth Insurance Co. against liability took place in the Philippines where the reinsured, the liabilities insured, and the risks underwritten were all situated; that Section 24 subjects foreign corporations not doing business in the Philippines to tax on income from sources within the Philippines regardless of where they conduct their business operations; that the premiums are subject to withholding tax under Sections 53 and 54 as "premiums" in the generic sense of income, and alternatively as "other fixed or determinable annual or periodical gains, profits, and income" because they are determinable based on the reinsurance contracts and periodical in nature; that Section 37 is not an exclusive enumeration of Philippine-source income; that the legislative approval by re-enactment doctrine does not apply where subsequent laws merely amended tax rates and the administrative rulings were unpublished letters rather than regulations; and that the subsequent enactment of Republic Act 3825 in 1963, which exempted reinsurance premiums from tax, effectively confirmed that such premiums were taxable prior to the exemption.

• Source of Income Rule — The source of an income is defined as the property, activity, or service that produced the income; the Court applied this doctrine to determine that reinsurance premiums were derived from Philippine sources because the indemnification activity occurred in the Philippines where the insured risks were located and the contracts were perfected.
• Activity versus Business Distinction — The Court distinguished between "activity," which may consist of a single act, and "business," which implies continuity of transactions, holding that Section 24 of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines for its Philippine-source income to be taxable.
• Income as Flow of Wealth — Income refers to the flow of wealth; the Court ruled that since the reinsurance premiums represented wealth flowing from the Philippines and enjoying the protection of the Philippine Government, they should properly share the burden of maintaining the government.
• Legislative Approval by Re-enactment — This doctrine holds that where a statute is susceptible of the meaning placed upon it by a ruling of the enforcing government agency and the Legislature thereafter re-enacts the provisions without substantial change, such action is confirmatory that the ruling carries out the legislative purpose; the Court held this inapplicable where subsequent laws merely amended rates and the administrative rulings were unpublished opinions rather than promulgated regulations.
• Non-exclusivity of Statutory Enumeration — The Court ruled that Section 37's enumeration of income from sources within the Philippines is not all-inclusive, and the absence of specific items such as reinsurance premiums from the list does not exclude them from taxation if they otherwise meet the criteria for Philippine-source income.

• "The source of an income is the property, activity or service that produced the income."
• "Appellants should not confuse activity that creates income 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."
• "As used in our income tax law, 'income' refers to the flow of wealth."
• "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."
• "Section 37, however, is not an all-inclusive enumeration. It states that 'the following items of gross income shall be treated as gross income from sources within the Philippines.' It does not state or imply that an income not listed therein is necessarily from sources outside the Philippines."
• "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."
• "The principle of legislative approval by re-enactment may briefly be stated thus: Where 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 without substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose."
• "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."

• Mentholatum Co. vs. Mangaliman, 40 O.G. 1838 — Cited for the distinction between "activity" and "business" in the context of income taxation and corporate transactions.
• Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414 — Cited for the principle that income refers to the flow of wealth and the theoretical basis for income taxation.
• Franklin Baker Co. — Cited by appellants as a decision of the defunct Board of Tax Appeals supporting their position on administrative interpretation of withholding tax provisions.
• Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, L-6741, January 31, 1956 — Cited to contrast the application of legislative approval by re-enactment where a regulation was promulgated versus the unpublished letters in the instant case.
• Laxamana v. Baltazar, 92 Phil. 32 — Cited for the principle of legislative approval by re-enactment and the conditions under which administrative rulings acquire legal force.
• Mead Corporation v. Commissioner of Internal Revenue, 116 F. (2d) 187 — Cited for the principle of legislative approval by re-enactment based on American jurisprudence.
• Manila Electric Co. v. Public Utilities Employees Association, 79 Phil. 409 — Cited for the principle that subsequent amendment taking out a specific subject matter from a statute effectively affirms its prior inclusion and taxability.
• Rodriguez v. Treasurer of the Philippines, 45 O.G. 4457 — Cited for the rule that objections to a judge's qualification based on prior representation must be raised in the court below and not for the first time on appeal.
• Arnault v. Nazereno, L-3820 — Cited for the procedural rule regarding timely objection to judicial disqualification.
• Lee Ng Len vs. Republic, G.R. No. L-20151, March 31, 1965 — Cited for the court's authority to scan the whole record despite the absence of opposition to prevent the conferment of benefits to persons not fully qualified therefor.

• Section 24 of the National Internal Revenue Code — Imposes tax on non-resident foreign corporations' income from sources within the Philippines, regardless of whether they are engaged in trade or business in the country.
• Section 37 of the National Internal Revenue Code — Enumerates items of gross income from sources within the Philippines; the Court held this is not an all-inclusive enumeration and does not exclude reinsurance premiums.
• Section 53(b) of the National Internal Revenue Code — Subjects to withholding tax various items including "premiums" and "other fixed or determinable annual or periodical gains, profits, and income" of non-resident aliens not engaged in trade or business.
• Section 54 of the National Internal Revenue Code — Applies the withholding tax provision of Section 53 to foreign corporations not engaged in trade or business in the Philippines.
• Section 199 of the Income Tax Regulations — Defines fixed, determinable, annual, and periodical income as interpreted by the Court to include reinsurance premiums.
• Section 22 of Republic Act 1125 — Provided for the certification of cases from the Court of First Instance to the Court of Tax Appeals for proper jurisdiction.
• Republic Act 1065, Republic Act 1291, Republic Act 1505, and Republic Act 2343 — Cited as amendments to Sections 53 and 54 regarding tax rates, distinguished from substantial re-enactment of statutory provisions.
• Republic Act 3825 — Enacted in 1963, amending Sections 24 and 54 to exempt reinsurance premiums received by foreign corporations not engaged in business in the Philippines; the Court noted this effectively affirmed the taxability of such premiums prior to the amendment.
• Rule 137 (formerly Rule 126), Rules of Court — Governs the disqualification of judges who have previously acted as counsel in the case, requiring objection to be raised in the court below.
• Article 11 of the Reinsurance Contracts — Provided for arbitration in Manila according to Philippine laws, cited as evidence of the parties' intention to subject the contracts to Philippine jurisdiction and law.