Y Pacific Transpuht Une~, et al. vs. Comi<Lissioner of U!Teffila L Revenue

DECISION

This is an appeal contesting the decision of respondent Conunis sione:~:· of Interna 1 Revenue dated February 8, 1961 and holding petitioner liable for deficiency income .ta'< for the years 1951, 1952 and 1953 in the amounts of P44 , 560.00, 'P4,177.00 and fl42 ,875.00, respectively.

This appeal a l s o involves a claim for the refund of 143,816.00 as allegedly overpaid income tax fnr the year 1955.

Petitioner- is a foreign shipping company orga- -- ' nized under t he laws of the State of California , u.s.A. Petitioner's first agent is the Everett Steamsh:i.p Lines, Inc., until 1955, when the agency was trans- ferred to t he Dcdwell & Co . in fllanila. ( P.ll, DIR rec.) ror the taxab le )rear s 1951 , 1952, 1953 and 1955e petitioner had filed its income tax returns with the office of respondent in the? month of h pril of the taxable year covered by each of the said returns.(Par. 2, Petition for f eview; Pdmittedt Par. 2 , Answer.) On ·~he dates stated below, petitioner received the assessr.~nt notices for alleged deficiency, income

DECISION

CIA CASE NO. 1039 (2) t x for the years i nvolved as fol l ows : Date of receipt f _§ .. s s_es sment iv1arch 8 , 1957 Apr i l l , 19 57 i\pri l 24 , 1957 f'.pri l 24 , 1957 (Paragraphs 3 , 5 & 7, Answer ;

Year

6~~es~m~nt N£.

~QV~red

ACR- 1303-56/51

1951 P673 ,425. 00

ACR-1287-56/55

1955 538 , 015. 00

ACR-1053- 56/52

1952 889 , 297 . 00

ACR- 1103-56/53

1953 906 , 509.50 5 , 7, Petition; Admitted , paragraphs 3, pp. 24 , 93, 70, 53 res pectively , BIR r ec .) The above assessments were arrived at on t he theory that her ein petitioner was not duly licensed to do busi- ness i n the Philippines but it s vessels touc hed ports in the Philippines and , therefore , it should be consi- dered a non-resident foreign corporation not engaged i n trade or business in the Philippines , hence , not en- tit l ed to deduct expenses a llocable to income derived from sources within the Philippines. On IVtarch 15 , 1957 , petitioner contested the assess - ment for 1951 (Paragraph 4, Petition : Admitted , Par agr aph 4 , Answer ) ; the assessment for 1955 was likewise con- tested by petitioner in its letter dated April 3 , 1957 (Paragraph 6 , Petition , Admitted, Pa r agraph 6, Answer); while the assessments for ihe years 1952 and 19:13 were contested in its l etter dated April 25 , 1957 (Paragraph 8 , Petition; Admitted , Paragraph 6 , Answer . ) On January 15 , 1958 , respondent ordered the re - investigation of the above - stated income tax liabili- t i es of petitioner ( p. 105 , BIR rec . ) and , as a con- sequence thereof, in a Memoran dum to the Chief , Mar ila Examiners, dated Decefllber 16, 1958 , respondent ' s Exa - miner Bernardino Enerio submitted his report finding that petitioner is a foreign corporation doing business

DECISION

. ' CIA CASE NO. 1039 ( 3) in the Philippines t hereby reversing the original theory that pet itioner is not entitled to deduct ex- penses al locab l e to income derived from sources with- in the Philippines .

I t was determined however , that pet itioner has stil l incurred def i cienc y taxes in the total amount of ¥>135 ,428.00 . (Exh . 7, Hespondent , p. 160- 162, BIR r e c. )

On this basis , respondent, on August 13 , 1959 , assessed and demanded from petitioner payment of de - ficienc y income tax for the years 1951, 1952 , 1953 and 1955 as follows :

Philippine Gross Inc ome Less : Phi lip pine Expenses Net I ncome per investigation Amount subject to tax Tax due t hereon Less : Amount already assessed

DEFICIENCY TAX DUE & COLLECTIBLE

Philippine Gross Income

Less : Phi lip pine Expenses Net Income per investigation Amount s ubj ect to tax ·

DEFICIENCY TAX D~E & COLLECTIBLE

Net income per return Add : Undeclared income Net inco0e per investigation Amount subject to t ax Tax due t here on Less : Amount already as sesse d

DEFICIENCY TAX DUE & COLLECTIBLE

18() P2 , 145,231.62 --~.t....l24.:..~42._~2.1 r 20 885.38 ---·----~------- ____ ?:£)..:..52.fl~-"-38 p 4 177 . 00 =--=:=:!::.= ==--== (4) ACR-1287-59/95 .

Philippoine Gress Income P1,997 Less: Fhiliprine Expenses eta eae Net income per investigation - Pol Amount suoject to tax ee Tax due thereon yi Less: Amount already assessed .

DEFICIENCY TAX DUE & COLLECTISGLE F | 43,816.00 (Exh. 9 hears Exh. G, resp. pr. 18C+1E1,. BI. AEC.) The deficiency assessment this tine arose from the alleced understatement of petitioner's world income in its income tax returns for the years in question.

O

oy cr yt

D

On Cectober 5, 1959, petitioner dispute aforementioned es.essment cna assailed tne richt of respondent to aS S@SS deficiency iacome tax for the years 1951, 1952 ana 1953 on tne cround of erescrip- tion. Thus, in tne case of its incor.e tax return for 1953, petitioner Cléined that the return, was filed in April, 1954 so tnat the prescri;tive period ex- pired in April, 195¢. (Exn. 10, iiespondent, pp. 164-— 186, BIA rec.)

Fetitioner also argued that it maic the defi- ciency income tex assessment for 1655 on Octover 15, 1059, in the amount of i 42,616.00 uiwer Ova. No. Ae €63371, (Faracraph 11, kets Admitted, F aracraph 6, answer.)

On January 1E, 1°6C, the Deputy Cormissioner of Internal Revenue, wisacl i. Vera, wrote the tax edvi- #3) sers of petiticner, i:essers. sycit,.orres,Velayo « Co.

that a reconsideration of tne bases oz petitioner's

DECISIOO-

. '

(5) t ax l.iab i l itiGs as ca lle d f or i n its lett er to res Jondent dat ed Uctober 5 0 1959 can on l y be ma de upon e xecution b y pet i t i oner of t he waiver of t he def en&e of pres cr i ption . (P.

~D5 , DlR rec. ) Thus , on Sept embe r 7 , 1() 60 , petit i oner e xe cuted a wa i - ver of the statut e of limi ta ·i: :l.on wit h a provision t hat pet itioner res er ve s the right to mainta in and purs ue at al l times the defense of pre s cript ion which it has set up aga i nst the foregoi ng as ses s - ~ ( ~- \- men ~.. s .

~x. 1 . 11, Respon dent , pp. 212-213 , BIR rec.) :,A s upplement a 1 protest dated O ctob ,~ r 4 , 1960 was fi led b y pet i tioner on Octcber 5 , 1960 , reque s - ting f or the cancellation of the assessment i n quest i on on t he ground that r e s pondent ' s r ight to as s es s ancJ co l le ct the a l lecje d de'iiciency i ncOi;1C t a xes for the years 1951, 19 ::>2 and 1953 ha d already pres- cr i bt:·d . ( Pp . 215- 219 , Ir1\ r e co ) fina l ly, r es .ondent on February 8 , 1961, den l~d petit ioner ' s re quest f or cance l lati on a nd wit hdra- w· l of t he assessment. ( Ex h . l L0 pp. 221-223 , BIH rec.)

On Apri l 11 , 1961. pet itioner file d a claim f or r e f 1nd with respondent ( Pp. 226- 227 , BI R r e c . ) and fi l ed its petit ion for r eview with t his Court on the s a me date .

S hortl y~ afte r the f3.ling of t his appe 3 l , res- pondent i s s ue d a warrant of distr a int <m el levy io enforce collect ion of thG deficiency t a'< assessment • . On J uly 13 , 1961 , petitioner filed a "Motion To -~

Q

Ji \.

<.)

DECISION-

CIA CASE. NO. 1039 (6) Quash Warrant of Distr aint and l£vy and to Enjoin Collect ion of Ta>·es" and on 1\il.arch 31, 1962, thts Court r·Emdered a resolution grantiny petitioner's motion to quash Warrant of D i~tz.·aint and levy sub- ject to the condition that petitioner files with this Court a surety bond .

On March 26 , 1962 , pe- titioner file d a surety bond to guarantee payment of the deficiency taxes, posted by the Corm11onwea lth lnsurance Company.

The issuES therefore to be decided by this Court are as follows:

l. Whether or not the right cf respondent to assess and collect the deficiency income tax for the years 19~:>1, 1952 and 1953 has already prescribed;

2. Whether or not· the deficiency assessments for said years are correct and in accordance with law, and

3. Wh(ether ti" e deficiency income tax for 1955 in the amount oi ~~4.:3 ~ 816.00 ond paid by petit io- ner on Octob ,~ r 15, 1959 under O.R. No. A-883371 was assessed and collected in accordance with law and , therefore , pet i-r. i oner is not entitled to a refund of the amount paid by it.

We wil l now coma to the first issue. The law on prescr i ption involved i n this case is f ound in Sect ions 331, 332 dnd 333 of t he Tax Code at the time, stating as f ollows:

LLCLS LUN ‘

CTA CAot fu, 1039 it) ment_ang collection. = Lxcept as proviced in the Succeeding section, internal revenue taxes shall be assessed within five years after the return wos filed, und no proceeding in court without assessment for the collection of Such taxes shall be becun after the expirsution of such period, For the purposes of tnis section a return filed before the last cay prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this Limitation Shall not apply to cases already investigated prior to he approval of this Code.

SLU, 332. Exceptions as to period of limi- tution of assessuent oni collection of taxes. -

(a) In the case of 4 false or fraudulent return with intent to evude tax or of a failure to file a return, the tax way be assessed, or & proceeding in court for the collection of such tax may be beaun without assessment, at any tie within ten years after the discovery of the fal- Sity, trdud, or omission.

(b) where before the expir:tion of the ti.e prescribed in the preceding section for the assessuent of the tax, both the Commissioner of internal Revenue onethe taxpayer have con- sented in writiny to its assessment after such tine, the tax may be assessed at any tise, prior tothe expiration of the period agreed upon. The period so ayréed upon nay be extenued by subsequent agreements in writiny mace before the expiretion of the period previously acreed upon,

(c) where the assessment of any internal revenue tax has becn mace within the pesiod of lisiitation above-preseribed, Such tax may be collected by distrzint or levy or by a proceed- ing in court, but only if begun (1) within five yeors after the assessment of the tax, or (2) prior to the expiration of any perio. for collec- tion acrecd upon in writing by the Comrissioner of Internal Internal Kevenue anc the taxpayer wefore the expiration of such fiveeyear verio’. VYhe perio? so acrecd upon may bo extended By Subsequent agrecients in: riting move betore the expirocion of the period previously agrecd upon, 190 DECIS..Oi Cla CASE No, 1039 (8) SEC, 333.- Suspension of running of statute,- ore ey wees The running of the statute of limitations provided in section 331 or 332 on the waking of assessment and the beginning of cistraint or levy or 4 pro- ceeding court for collection, in reSpect of any deficiency, shall be suspended for the period cu- ring which the Commissioner of Internal Revenue is prohibited from making the assessment or begin- ning distruint or levy or a proceeding in court and for sixty days thereafter.

Fetitioner contends that the right of the govern- ment to assess and collect the deficiency income tax for the years 1951, 1952 and 1953 has already pres- cribed, wkespondent, on the other hand, maintains that the petitioner is estopped from raising the de- fense of prescription because it voluntarily filed a written "Waiver of the Lefense of Prescription" on september 7, 1960. Respondent cites the case of San- tiago Sembrano vs, Court of Tax Appeals and Collector of Internal Revenue, ©.R. No, L-8052, march 30, 1957, 1Ol Phil, 1-15, He further intimates that an assessient could have been issued within the statutory period~ had the local agent of petitioner not inisled the res- pendent into holdin; or delaying the assessiucent of the tax by virtue of petitioner's representation to con~ sult with its principal, citing the case of the Col- lector of internal Kevenue vs, Suyoc Consolidated | i- ming Co,, €t 41,, GR. Ne,. L-11527, Wov, 25, 1956.

The Court agrees with petitioner that the right of respondent to assess and colleet the deficiency income taxes in question has prescribed. Vt is to be iSt

DECISION | - §

CTA CASE NO, 1039 (9 noted. that petitioner had filed its income. tax return in the month of April corresponding to each of the taxable years 1951, 1952 and 1953 and, accordindly, the five-year period prescribed by law to assess the tax for said years shall prescribe in the month of mpril, 1957, 1958 and 1959, respectively. ‘Since the assessment for the years 1951, 1952 and 1953 were issued only on ‘.ugust 13, 1959, the riuht of respon- dent to assess the taxes is already barred by the Statute of limitation. Hence, even assuming that the amounts demanded uncer assessment notices Nos, hCi-1303-59/51, ACR-1053-59/52, ACR-1103-59/53, all dated August 13, 1959, are legélly cue from petitioner, the Same may no longer be collected.

In the instant case, it is our finding firstly, that no provision of law-or effective agreement was cited by respondent to show that he was prohibited from making the assessment in 1957, or sometime thereafter, secondly, respondent issued in 1957 merely a proposed (tentative) deficiency tax assess- ment against petitioner, on the errcuneous belief that petitioner was not licensed to do business in the Fhilippines instead of a final deficiency tax assessment, The voluntary and uniloteral act of respondent in inviting petitioner to air its objec- tions to the proposed assessiient cannot be cons- trued to suSpend the period within which to assess 1$2

DECI ON- a

CT, CASE NO. 1039 (10) the tax. (Dupro Philippines, Inc. vs. Comm. of Int. Rev., CTA Case No. 1341, Dec. 16, 1968.).

horeover, M assessment thet hes been set aside or cancelled is not assessment at all. where an ass- essnent is made within the five-year period but was set aside or iodified by another, the five -year period within which to assess in section 331 of the Internal nevenue Code is to be counted fron te date ot the filing the return to the date the new essess- nent wes made. (Fineda vs. Coll. of Int. Rev., Ge. No. Lel4b22, May 31, 1961; 2 sCKA 401.)

Respondent, however, insists that he recuest ot the agent of petitioner, Vodwell % Co., to con-= sult with its principal with respect to the proposed assessment had the effect of persuading the respon- dent to c:ostpone the assessnient of the deficiency tex. Wowhere does the law recognizes the fact that a simple recuest, such as in the instant case, un- ~ accompanied by any positive act inuiceting that the }etitioner waives Hig Fight to assert the defense of prescription, has the effect of postponing the richt of the respondent to assess. (Coll. of Int. hiev. vs. wuyoc Consolidated :iining Co., et al., GR. Ho. L-11507, lov. 25, 1958.)

The case vhich respondent cited as authority to sustain his contention that the petitioner has waived the defense of prescription is not in point. In the case 1350

DECISTON~

CTA CASE INO, 1039 (11) of Santiago Senbrano vs, Court of Tex Appeals & Col- lector of Internal Revenue (now Cormaissioner of In- ternal Revenuc), G.R. No, L-8652, iiarch 30, 1957, pe- titioner therein, Santiago Semrano, wus assessed 1 184,241.08 on April 28, 1951, fox Gnoones percentage and residence taxes for 1945 to 1943, and percentage tax from 1939 to 1941, inclusive of Surcharge and pe= nalties, insteud of contesting the assessment, peti- tioner Sembrano paid F17,929.40, and executed a chat- tel mortgage on 67 of his TPU buses to secure payment of his obligation, and tried to execute another inort gage covering 20 buses, althougi this was not approved by the Public Service Commission, Upon failure to comply with the conditions of the mortgage, the Collector of Internal Revenue issued a warrant ot distraint and levy on Septem er 27, 1052 and seized 63 auto-buses of said petitioner to be sold for the ssuisZactien of its tax obligations, The sale was however, sus— pended when petitioner proposed to make Substantial payment but whe leter on failed to comply therewith. The Collector then set the sale of petitioner's pro- pertiles, and petitioner promptly filed a petition before the Court of Tax mppeals to enjoin the sale. In the instant case, which is dificrent from the. _case first cited, the assessments were duly. and Seasonably protested, and the defense of prescription

DECISION-

..

eTA CA ~:i E NO. 1039 ( 12) was fully asserted.

While petitioner had executed a waiver of the statute of limitation , it was with the conditi on that it reserved its right to ma in- t ain and pursue at all times the defer'lSe of pres crip- tion which it has already set up a ga in~t the assess- ments .

Moreover, t his Court bas alr ea dy ruled that the period of prescription can only be ru_<j:§n.Qed_ before the expiration of said par iod.

Thus, in Rattan t~rt & Decorations, Inc . vs . Col le ctor of Internal Revenue , CfA Case No. 567 , promulgated August 1, 1960 \) this Court s a id:

"But it is a lleged that pet5.tioner express- ly waived the tatutc of limit ation prescribed in Sections 331 and 332 on ~cpt embe r 19 , 1955 . Section 332(b ) provides :

'(B) Where bef:gre th~ exgi:c:ati_q_n_Qf :t.llit t;l.me ..,m:-~ribed ).£L the pre s~ din g section for the assessment of the tax both the Col- lector of Internal Revenue and t he taxpayer have consented in writing to its assessment after such t:tme, the ta)t may be assessed any time prior to the e:xpirat ion of t he period agreed upon.

The per·i.od a greed upon may be extende d oy subsequent agreements in w1·iting made !1§_fore the .ru<.J?l...rQtion of t he Qeriod previous 1 y agreed upon. ' "I t will be observed that the period of li- mitation upon assessment ma y be suspended under Section 332(b ) if the a<Jrcem:nt is made before t ht.tJl~i_,,?'l t\QD. of t he period fixed in Secti on 331 .

I n this case , the ag:ceement was entered i nto between petitioner and the Commissione:r;

of Interna

Hevenue on September 19 , 1955 , after the peri0d for assessment of the deficiency sa les tax for the year 1949 and first quarter of 1950 had a lready lapsed.

The agr 0err.ent is, therefore , ineffective as t o such period. lt x x 11 /I j\ ' l .,J 0

DECISiuN-

CT A C/\S E NO~ 1039

( 13) And , in the case of Suyoc Consolidated Mining Co., s.YP,'l:".£1.., the taxpayer ther e j~n has been found to have , by positive acts, i.nQ!LC!@d .£.!1.§..29JH.i~nt to SIJ~penq th~ ~..9l:Jection Qf _}:.he t<!A cH>se ssed agai 1st it. On the ' other handj in the present case , at no time did petitioner induced' by pos itive acts , the respondent to de l ay the assessment.

The local agent of petitio·- ner had merely :cequest ed respondent that it be fur- nished with the computation of the deficiency :tn- come t a ~ for 1951 , 1952 , 1953 and 195:) for t he pur- pose of transmitting .it to its principal and t o have a basis for conference upon rece ipt of its prin- cipa l ' s reply.

It wi l l be noted alno that in the ab ove cited case of Suyoc 0 it 1., the right of the responde nt to colle ct (not the right to assess) which has been he J.d ba r~·ed by pres cription . Certainly, the alleg.::Jtion then of respondent Jhat the assessrn;;mt cou ld have been iss ue d by him we 11 within t he statutory period hc:1d the loca 1 agent of peti.t i oner not misled him into holding and delaying the assess ment of the tax by virtue o petitioner's agent ~epresentation to consult with its pri ncipa 1, is without n12rit . It .:s suffJ.- ciont t o state ,Lat pet :..t ioner had ,;.) 1:.:.erfect 1 y legitimate right t o consult. with it& pr incipal and this act wil l not suffi:e to stop it from invoking - ~ , G .i..:.J

DECISION-

eTA CASE NO. 1039 ( lL). )

the statute of limitation. (Coll. of Int. Rev. vs. Pineda, 2 SCRA 402.)

Fin 11 y • it is always in cum- bent upon respondent to t ake the necessary moa- sures and steps to prevent t he setting of pres- cription of his right to assess and collect taxes. Having disposed of the f irst issue on pres- cription adverse to respondent, we f ind it unne- cessary to determine the related question of whe- ther or not the assessments for 1951, 1952 and 1953 arc correct and in accordance with l aw. With res pect to the last issue, i. e., vhe- ther the 1955 assessment for deficiency income t ax in the amount of P43p816 .00 and paid by peti- t i oner on October 1:,, 1959 under o.n. No. A883371 was in accordance with law and , therefore, peti- tioner iG not entit led t o a r efund of the amount paid by it, the Court be l ieves that the assess- ment was wron1J and the amount paid therefor :l.s refundable to petit i oner.

Petitioner maintains in connect ion with this issue that ln the a pportionment of a pa .. -t of the wor ld expense of the Phi l i ppine operations , it is er roneous to i nclude as par t of "world gross in- carne" the amounts \'Vhich are clearly from sources without the P'1i l ippines und clearly bear no rela- tionship to t he expense being allocated or appor- tioned.

_, {' 1"'7 .1 .j '

DECISIGI-

( 15) Jl,es pendent, on th E. other hand, contends that t he deficie ncy tax pc:dd for 1955 should be computed in accordance v.;ith the formula of general apportion- ment prescribe d under Section 37(e) of the Tal\ Code and i mplenEnted by Section 163 of Revenue Regula- tion No. 2.

And u der the prov1.sion of Sect ion 163 of the Income Tax Re gulation No. 2 and its accom- panying formula, nothing therein implies that the denominat ti>vr: "'Norld gross income " is strictly limi- ted to income partly within andpartly without the Philippines .

Thus, it is orgued that "world gross i ncome" connotes all kinds of income of foreign shipping companies whose vesse b touch Philippine ports irrespect ive as to whether or not such in- come is derived f rom sources outside or inside the Philippines s or part 1 y v:i thin and part 1 y without the Philippines .

Moreover , as suming that the de- nominator "world gross income" r e f ers exclusively to income partly der.ived withi n and partly without t he Philippines, pet.itioner failed to present evi- dence showing that the above-ment i oned items were indeed income obtained exclusive ly outside the Philippines .

Ver ily, t he view of r espondent i s not well taken. !he question involved i e not of first irn- pression.

I n severa l cnses, to wit: States !:>team- ship Company vs. Commissioner of I rrtc rn ~ l Reven~e, . .

DECISION-

CIA CASE NO. 1039 ( 16) C'fl\ Cbse No . 1401 e J·u 1 y 16 • 1975; Da i i cr·:i Cbuo Kisen K~ if;lha vs. Commissioner of Internal Rovenue, CTA Case No . 1277, tv\a y 31 ~ 1969 ; United States Lines Company vs . Commissioner of Internal Heve nue, CTA Case No . 1305, June 28 , 1973; Ginn & Compnny vs. Corru:'lissioner of Interna 1 Hevonue, CTJ\ Case No . 674 , tviay 21 , 1962 and Hol land East Asia Lines vs . Col- l ector of I nterna 1 Revenue , Cf/-\ Case No. 383 , August 5, 1958 , th i s Court has ruled on t he interpretation of Section 37 and the i rnplenEnting income tax r e- gu lation .

Thus, i n States Steamship Company case, sup~, our Court he l d:

11Sect ion 37 of the Nat ion a l lnterna 1 Revenue Co t ~ c la s& ~fied inc on~ of fore ign co:'porations i rt o three categorie;; , t o wit: ( l) lncome which is derive d i n full f.;r;_q.m .§..Q!.J;t:f!.=_~_w i.tbj.n the Phi lippines; ( 2) income \Nhich :l.s derived i n ful l r om sour~.2_.:.wit.h.­ p.J:!l t he Philippine s ; and 3 income which i::; derived Q~.Ji:~-l.ID. •. SP.!Jrces vt!.t.b).:.!1 an_Q u:il.tl..lJ.L.from ~ur ces w:i.. t hout the Phi i!lippines" Non-res i dent fvre ign cor por a t i ons, like petitionex: here in, are t axable only on income from sources within t.he Phi lipr.)ines , whether deri ved exclusively from s o~rc es within the Philippines or part ly f r om source s within and partly f r om sources without the Phi lippines provided the y are allocable to s ources within the Phi l i ppines .

(Da i i chi Chuo Kisen lla isha

v. Comm of Intern .c~ l Hevenue, CTJ\ C'iSe No. 1277, U.ay 31 , 19c9; U$t: . LinesCompany v . Commi ssicr;er of Int ·.rna 1 I-1-evenue, CTA Case No. 1305, J une 28 , 1973; Gi nn and Company v, Comrnissioner of Internal Revenue , CTA Case No. 674, May, 21 1962; Holland East Asia l:i.nes v , Coll. 'of Int. Rev. , CT/\ Case No. 383, August 5 ~ 1958. ) Need- l ess to say, inC . .Q.mg_Q[_$2§.ll. ti one~:_deililt<t 1n iD.....iQ]..j __ i£2l!.L.~Qll!...C..Q.§._Q~.Q!:_t hc_Lh ill£. ;ln es j._?.._llP .. :L ...... tJ:ltlefore a _ _§_ub i~£t .. ~.SL..tJ1e Pl!t' li f.~ in~..Ql!}g . .J;.Ql<_, pursuant t o Sect ion :37rc of t he

DECISION~-

CTA CASE NO, 1039 (17) Tax Code which provides as follows:

SEC, 37, Income From Sources With- an the Philippines. - xa XX xX K X xX KX

(c) Gross Income From Sources With- ovt the Philippines. - The following items of gross income shall be treated as in- coin from sources without the Philippines:

(1) Interest other than that derived from sources within the Philippines as rovided in paragraph (2) of subsection fa) of this section;

(2) Dividends other than those de- rived from scurces within the Philippines as provided in paragraph (2) of subsection

(a) of this section;

(3) Compensation for labor or perso- nél services performed without the Pii- lippines;

(4) Rentals or royelties from pro- perty located without the Philippines or from any interest in such property, in- cluding rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, Secret processes and formulas, goodwill, trademarks, trade brands, franchiseg, and~ other like properties; and

(5) Gains, profits, and income from

LNCOi

the sale of real property located without the Philippines," (See also Section 158 of Income Tax or Revenue Reaulations No, 2).

Petitioner received the agency fees, com- misSions and other shipping income from agency Services for other steamship lines in its seve- ral offices in the United States (Exh, P at:p. 95, CTA rec.): the interest income was earned from Government securities and time depesits in the United Stetes; and the other net income was realized from the gains on sales of fixed assets in the United States (Ibid, p. 94.) CTA rec.; see also exh. I, pp. 384-385, CTA rec. );

200 ..

DECISION-

CIA CASE NO. 1039 ( 18) the proceeds of insurance taken on the life of Eric Wroldsen and re fund of Federal Income tax were derived in full from s ources outside the Fhilippines. (IQ).._d , p. 95 , CTA rec., i hi.Q., pp. 384-385, CTI\ rec. J Under the provis ions of Section 37 of the Tax Code , as i11plemented by Section 158 of the Income Tax Regu l at ions , the incowe menttoned above shou ld not be included in t he gross in- come of petitioner for j;he. po .... pose of deter- mining its Philippine income under Sect ion 16~' of the Income Tax Regulations because, if an item of income e manated actually from sour- ce s within or without the Philippin@ under the provisions of Se ction 37(a ) and (c) of the Tax Code • then Sect i on 37( e) and Section 163 of the Income Tax Re oulations above-ment ioned will no longer apply- (United !::itates Lines v. Gominis s ioner of Interna l Rev""nue , SUQ!:'!·) as the said income are not subject to allocation or a pportionrrent to sources within or wi thout t he Phi lippines .

As to the allegation of respondent that peti- tioner f aile d to pre.sent evidence showing that the a)OVe-mentioned items we e in 'eed income obtained exclusively outside the Philippines , suffice it to state that G orge G. Lit t l c: , .1\sst . Se cretary-Trea·- surer of States Steamship Company at the time he testified, explained tho nature of the items in question when he appeared before the Phili ppine Cons ul at the Consular Di strict of San Francisco, California, U. S. A. (Pleasr;: see , pp. 162-165 , CTA r e co) No cross-interrogat ions wer e submitted by respondent .

Also , at the hearing of this case bb- fore the Co\..\r t, no evide nce was present ed rebut - ttng the testimony of George C o Little . t~ee dless to say, the testimony of th(:? witness for petitioner

DECISION—

CTA CASE NO, 1039 (19) identified the items in question as earned outside of the Philippines and had nothing to do with Phi- lippine operations, Therefore, since these items were clearly iden- tified as earned outside the Philippines, they should not be included in the “world gross income",

WHEREFORE, the decision of respondent Commis - Sioner of Internal Revenue appealed from is hereby reversed, and the respondent is hereby ordered to refund or grant a tax credit to petitioner the amount of 743,316.00 representing erroneously peid income tax for the year 1955, No Costs, SO URDERID, Quezon City, April 29, 1981.

ff BORBESate Judge

WE CONQURs

) ; f..¥

AMANTE AI LLER

PresidiAg Jucge

——

Associate Judge