National Development Company vs CIR

7/24/2019 National Development Company vs CIR

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15 States undertaking to guarantee promissory notes does not diminish its taxing

power. (G.R. No. L-53961 June 30, 1987, NATIONAL DEVELOPMENT

COMPAN vs. COMMI!!IONER O" INTERNAL REVEN#E$

137. Residence of !"igor who pays the interest determined the source of interest

income.

"ACT!%#he $ationa" %eve"opment &ompany ($%&' entered into contracts in #okyo

with severa" apanese ship!ui"ding companies for the construction of 1) ocean*

going vesse"s. #he purchase price was to come from the proceeds of !onds issued

!y &enta" +ank. ,nitia" payments were made in cash and through irrevoca!"e "etters

of credit. 1- promissory notes were signed for the !a"ance !y $%& and as re/uired

!y the ship!ui"ders guaranteed !y the Repu!"ic of #he 0hi"s. hen the vesse"s were

comp"eted and de"ivered to the $%& in #okyo the "atter remitted to the ship!ui"ders

the amount of #!& ',066,580.70 () *n+ee)+ on +e (/(ne o +e 2u()e

2*e. $o tax was withhe"d. #he &ommissioner then he"d the $%& "ia!"e on such tax

in the tota" sum of 05115)3-.7-. $egotiations fo""owed !ut fai"ed. $%& went to. +,R was sustained !y . +,R was sustained !y . ence this petition for

certiorari.

I!##E% ,s $%& "ia!"e for tax4

R#LING%es.

#he apanese ship!ui"ders were "ia!"e to tax on the interest remitted to them under

Section 37 of the #ax &ode. thus6

S&. 37. Income from sources within the Philippines. (a' 8ross income from sources within the

0hi"ippines. 9 #he fo""owing items of gross income sha"" !e treated as gross income from sources

within the 0hi"ippines6

(1' Interest. ,nterest derived from sources within the 0hi"ippines and interest on !onds notes

orother interest-bearing obligations of residents, corporate or otherwise;

$%& is not the one taxed !ut the apanese ship!ui"ders who were "ia!"e on the

interest remitted to them under Section 37 of the #ax &ode. #he imposition of the

de:ciency taxes on $%& is a pena"ty for its fai"ure to withho"d the same from the

apanese ship!ui"ders. Such "ia!i"ity is imposed !y Section 53c of the #ax &ode.

$%& was remiss in the discharge of its o!"igation as the withho"ding agent of the

government and so shou"d !e "ia!"e for the omission.

,t is a"so incorrect to suggest that the Repu!"ic of the 0hi"ippines cou"d not co""ect

taxes on the interest remitted !ecause of the undertaking signed !y the Secretary

of ;inance in each of the promissory notes that. #here is nothing in the 0$

guaranteed !y the state exempting the interests from taxes. 0etitioner has not

esta!"ished a c"ear waiver therein of the right to tax interests. #ax exemptions


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cannot !e mere"y imp"ied !ut must !e categorica""y and unmistaka!"y expressed.

2ny dou!t concerning this /uestion must !e reso"ved in favor of the taxing power.

"#LL TET%

$ +2$&

G.R. No. L-53961 June 30, 1987

NATIONAL DEVELOPMENT COMPAN, petitioner

vs.

COMMI!!IONER O" INTERNAL REVEN#E, respondent.

CR#4, J.:

e are asked to reverse the decision of the &ourt of #ax 2ppea"s on the ground that

it is erroneous. e have carefu""y studied it and :nd it is not< on the contrary it is

supported !y "aw and doctrine. So :nding we a=rm.

Reduced to simp"est terms the !ackground facts are as fo""ows.

#he nationa" %eve"opment &ompany entered into contracts in #okyo with severa"

apanese ship!ui"ding companies for the construction of twe"ve ocean*going

vesse"s. 1#he purchase price was to come from the proceeds of !onds issued !ythe &entra" +ank. ,nitia" payments were made in cash and through irrevoca!"e

"etters of credit. 3;ourteen promissory notes were signed for the !a"ance !y the

$%& and as re/uired !y the ship!ui"ders guaranteed !y the Repu!"ic of the

0hi"ippines. '0ursuant thereto the remaining payments and the interests thereon

were remitted in due time !y the $%& to #okyo. #he vesse"s were eventua""y

comp"eted and de"ivered to the $%& in #okyo. 5

#he $%& remitted to the ship!ui"ders in #okyo the tota" amount of >S?-@[email protected]@

as interest on the !a"ance of the purchase price. $o tax was withhe"d. #he

&ommissioner then he"d the $%& "ia!"e on such tax in the tota" sum of

05115)3-.7-. $egotiations fo""owed !ut fai"ed. #he +,R thereupon served on the$%& a warrant of distraint and "evy to enforce co""ection of the c"aimed

amount. 6#he $%& went to the &ourt of #ax 2ppea"s.

#he +,R was sustained !y the except for a s"ight reduction of the tax de:ciency

in the sum of 0C@@.@@ representing the compromise pena"ty. 7#he $%& then came

to this &ourt in a petition for certiorari.


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#he petition must fai" for the fo""owing reasons.

#he apanese ship!ui"ders were "ia!"e to tax on the interest remitted to them under

Section 37 of the #ax &ode thus6

S&. 37. Income from sources within the Philippines. (a' 8ross income from

sources within the 0hi"ippines. 9 #he fo""owing items of gross income sha"" !e

treated as gross income from sources within the 0hi"ippines6

(1' Interest. ,nterest derived from sources within the 0hi"ippines and interest on

!onds notes orother interest-bearing obligations of residents, corporate or

otherwise;

xxx xxx xxx

#he petitioner argues that the apanese ship!ui"ders were not su!Dect to tax under

the a!ove provision !ecause a"" the re"ated activities 9 the signing of the contract

the construction of the vesse"s the payment of the stipu"ated price and theirde"ivery to the $%& 9 were done in #okyo. 8#he "aw however does not speak of

activity !ut of EsourceE which in this case is the $%&. #his is a domestic and

resident corporation with principa" o=ces in Fani"a.

2s the #ax &ourt put it6

,t is /uite apparent under the terms of the "aw that the 8overnmentGs right to "evy

and co""ect income tax on interest received !y foreign corporations not engaged in

trade or !usiness within the 0hi"ippines is not p"anted upon the condition that Gthe

activity or "a!or 9 and the sa"e from which the (interest' income Howed had its

situsG in the 0hi"ippines. #he "aw speci:es6 G,nterest derived from sources within the0hi"ippines and interest on !onds notes or other interest*!earing o!"igations of

residents corporate or otherwise.G $othing there speaks of the Gact or activityG of

non*resident corporations in the 0hi"ippines or p"ace where the contract is signed.

#he residence of the obligorwho pays the interest rather than the physica" "ocation

of the securities !onds or notes or the p"ace of payment is the determining factor

of the source of interest income. (Fertens Iaw of ;edera" ,ncome #axation Jo". B p.

1)B citing 2.&. Fonk K &o. ,nc. 1@ #.&. 77< Sumitomo +ank Itd. 1C +#2 -B@< state

of I.. Fckinnon A +#2 -1)< Standard Farine ,ns. &o. Itd. - +#2 B53< Farine ,ns.

&o. Itd. - +#2 BA7.' 2ccording"y if the o!"igor is a resident of the 0hi"ippines the

interest payment paid !y him can have no other source than within the 0hi"ippines.

#he interest is paid not !y the !ond note or other interest*!earing o!"igations !ut

!y the o!"igor. (See mertens ,d., Jo". B p. 1)-.'

ere in the case at !ar petitioner $ationa" %eve"opment &ompany a corporation

du"y organiLed and existing under the "aws of the Repu!"ic of the 0hi"ippines with

address and principa" o=ce at &a""e 0ureLa Sta. Fesa Fani"a 0hi"ippines

unconditiona""y promised to pay the apanese ship!ui"ders as o!"igor in fourteen


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(1-' promissory notes for each vesse" the !a"ance of the contract price of the

twe"ve (1)' ocean*going vesse"s purchased and ac/uired !y it from the apanese

corporations inc"uding the interest on the principa" sum at the rate of :ve per cent

(5M' per annum. (See xhs. E%E %*1E to E%*13E pp. 1@@*113 Records< par. 11

0artia" Stipu"ation of ;acts.' 2nd pursuant to the terms and conditions of these

promisory notes which are du"y signed !y its Jice &hairman and 8enera" Fanagerpetitioner remitted to the apanese ship!ui"ders in apan during the years 1CA@

1CA1 and 1CA) the sum of [email protected] ?1A5-C3A.5) and ?15-1.@31.@@

respective"y as interest on the unpaid !a"ance of the purchase price of the

aforesaid vesse"s. (pars. 13 1- K 15 0artia" Stipu"ation of ;acts.'

#he "aw is c"ear. ur p"ain duty is to app"y it as written. #he residence of the o!"igor

which paid the interest under consideration petitioner herein is &a""e 0ureLa Sta.

Fesa Fani"a 0hi"ippines< and as a corporation du"y organiLed and existing under

the "aws of the 0hi"ippines it is a domestic corporation resident of the 0hi"ippines.

(Sec. B-(c' $ationa" ,nterna" Revenue &ode.' #he interest paid !y petitioner which

is admitted"y a resident of the 0hi"ippines is on the promissory notes issued !y it.

&"ear"y therefore the interest remitted to the apanese ship!ui"ders in apan in

1CA@ 1CA1 and 1CA) on the unpaid !a"ance of the purchase price of the vesse"s

ac/uired !y petitioner is interest derived from sources within the 0hi"ippines su!Dect

to income tax under the then Section )-(!'(1' of the $ationa" ,nterna" Revenue

&ode. 9

#here is no !asis for saying that the interest payments were o!"igations of the

Repu!"ic of the 0hi"ippines and that the promissory notes of the $%& were

government securities exempt from taxation under Section )C(!'N-O of the #ax &ode

reading as fo""ows6

S&. )C. Gross Income. xxxx xxx xxx xxx

(!' Exclusion from gross income. 9 #he fo""owing items sha"" not !e inc"uded in

gross income and sha"" !e exempt from taxation under this #it"e6

xxx xxx xxx

(! Interest on Go"ernment #ecurities. 9 ,nterest upon the o!"igations of the

8overnment of the Repu!"ic of the 0hi"ippines or any po"itica" su!division thereof

!ut in the case of such obligations issued after appro"al of this $ode, onl% to the

extent pro"ided in the act authori&ing the issue thereof.(2s amended !y Section AR.2. $o. B)< emphasis supp"ied'

#he "aw invoked !y the petitioner as authoriLing the issuance of securities is R.2.

$o. 1-@7 which in fact is si"ent on this matter. &.2. $o. 1B) as amended !y &.2. $o.

311 does carry such authoriLation !ut "ike R.2. $o. 1-@7 does not exempt from

taxes the interests on such securities.


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,t is a"so incorrect to suggest that the Repu!"ic of the 0hi"ippines cou"d not co""ect

taxes on the interest remitted !ecause of the undertaking signed !y the Secretary

of ;inance in each of the promissory notes that6

>pon authority of the 0resident of the Repu!"ic of the 0hi"ippines the undersigned

for va"ue received here!y a!so"ute"y and unconditiona""y guarantee (sic' on !eha"fof the Repu!"ic of the 0hi"ippines the due and punctua" payment of !oth principa"

and interest of the a!ove note. 10

#here is nothing in the a!ove undertaking exempting the interests from taxes.

0etitioner has not esta!"ished a c"ear waiver therein of the right to tax interests. #ax

exemptions cannot !e mere"y imp"ied !ut must !e categorica""y and unmistaka!"y

expressed. 112ny dou!t concerning this /uestion must !e reso"ved in favor of the

taxing power. 1

$owhere in the said undertaking do we :nd any inhi!ition against the co""ection of

the disputed taxes. ,n fact such undertaking was made !y the government in

consonance with and certain"y not against the fo""owing provisions of the #ax &ode6

Sec. 53(!'. 'onresident aliens.9 2"" persons corporations and genera" co*

partnership (companies co"ectivas' in whatever capacity acting inc"uding "essees

or mortgagors of rea" or persona" capacity executors administrators receivers

conservators :duciaries emp"oyers and a"" o=cers and emp"oyees of the

8overnment of the 0hi"ippines having contro" receipt custody< disposa" or payment

of interest dividends rents sa"aries wages premiums annuities compensations

remunerations emo"uments or other :xed or determina!"e annua" or categorica"

gains pro:ts and income of any nonresident a"ien individua" not engaged in trade

or !usiness within the 0hi"ippines and not having any o=ce or p"ace of !usinesstherein sha"" (except in the cases provided for in su!section (a' of this section'

deduct and withho"d from such annua" or periodica" gains pro:ts and income a tax

to twenty (now 3@M'per centum thereof ...

Sec. 5-. Pa%ment of corporation income tax at source. 9 ,n the case of foreign

corporations su!Dect to taxation under this #it"e not engaged in trade or !usiness

within the 0hi"ippines and not having any o=ce or p"ace of !usiness therein there

sha"" !e deducted and withhe"d at the source in the same manner and upon the

same items as is provided in section :fty*three a tax e/ua" to thirty (now 35M'per

centumthereof and such tax sha"" !e returned and paid in the same manner and

su!Dect to the same conditions as provided in that section6....

Fanifest"y the said undertaking of the Repu!"ic of the 0hi"ippines mere"y

guaranteed the o!"igations of the $%& !ut without diminution of its taxing power

under existing "aws.

,n suggesting that the $%& is mere"y an administrator of the funds of the Repu!"ic

of the 0hi"ippines the petitioner c"oses its eyes to the nature of this entity as a


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corporation. 2s such it is governed in its proprietary activities not on"y !y its

charter !ut a"so !y the &orporation &ode and other pertinent "aws.

#he petitioner a"so forgets that it is not the $%& that is !eing taxed. #he tax was

due on the interests earned !y the apanese ship!ui"ders. ,t was the income of

these companies and not the Repu!"ic of the 0hi"ippines that was su!Dect to the taxthe $%& did not withho"d.

,n ePect therefore the imposition of the de:ciency taxes on the $%& is

apenalt%for its fai"ure to withho"d the same from the apanese ship!ui"ders. Such

"ia!i"ity is imposed !y Section 53(c' of the #ax &ode thus6

Section 53(c'. )eturn and Pa%ment. 9 very person re/uired to deduct and

withho"d any tax under this section sha"" make return thereof in dup"icate on or

!efore the :fteenth day of 2pri" of each year and on or !efore the time :xed !y "aw

for the payment of the tax sha"" pay the amount withhe"d to the o=cer of the

8overnment of the 0hi"ippines authoriLed to receive it. very such person is made

persona""y "ia!"e for such tax and is indemni:ed against the c"aims and demands of

any person for the amount of any payments made in accordance with the provisions

of this section. (2s amended !y Section C R.2. $o. )3-3.'

,nPhilippine Guarant% $o. ". *he $ommissioner of Internal )e"enue and the $ourt

of *ax +ppeals,13 the &ourt /uoted with approva" the fo""owing regu"ation of the

+,R on the responsi!i"ities of withho"ding agents6

,n case of dou!t a withho"ding agent may a"ways protect himse"f !y withho"ding the

tax due and prompt"y causing a /uery to !e addressed to the &ommissioner of

,nterna" Revenue for the determination whether or not the income paid to an

individua" is not su!Dect to withho"ding. ,n case the &ommissioner of ,nterna"

Revenue decides that the income paid to an individua" is not su!Dect to withho"ding

the withho"ding agent may thereupon remit the amount of a tax withhe"d. ()nd par.

Sec. )@@ ,ncome #ax Regu"ations'.

EStrict o!servance of said steps is re/uired of a withho"ding agent !efore he cou"d

!e re"eased from "ia!i"ityE so said ustice ose 0. +engson who wrote the decision.

E8enera""y the "aw frowns upon exemption from taxation< hence an exempting

provision shou"d !e construed strictissimi uris.E 1'

#he petitioner was remiss in the discharge of its o!"igation as the withho"ding agent

of the government an so shou"d !e he"d "ia!"e for its omission.

R;R the appea"ed decision is 2;;,RF% without any pronouncement as to

costs. ,t is so ordered.

*eehanee, $.., /ap, 0ernan, 'ar"asa, 1elencio-2errera, Gutierre&, r., Paras,

0eliciano, Ganca%no, Padilla, 3idin, #armiento and $orte&, ., concur


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Documents

National Development Company vs CIR