taxation cases set 5

VINCENT Q. PIGA Taxation I Atty. Rowena Mari, CPA

1. CIR vs. Atlas Consolidated MiningGR No. 104151, March 10, 1995

"Assessments are prima facie presumed correct and made in good faith. So that, in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed."

FACTS: The Commissioner of Internal Revenue served two notices and demand for payment of the respective deficiency ad valorem and buiness taxes for taxable years 1975 and 1976 against the respondent Atlas Consolidated Mining and Development Corporation (ACMDC). The latter protested both assessments but the same were denied, hence it filed two separate petitions for review in the Court of Tax Appeals. The CTA rendered a consolidated decision holding, inter alia, that ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975 and 1976 thereby effectively sustaining the theory of ACMDC that in computing the ad valorem tax on copper mineral, the refining and smelting charges should be deducted, in addition to freight and insurance charges. However, the tax court held ACMDC liable for the amount consisting of 25% surcharge for late payment of the ad valorem tax and late filing of notice of removal of silver, gold and pyrite extracted during certain periods, and for alleged deficiency manufacturer's sales tax and such contractor's tax for leasing out of its personal properties. ACDMC elevated the matter to the Supreme Court claiming that the leasing out was a mere isolated transaction, hence should not be subjected to contractor's tax.

ISSUE: Is the claim of the private respondent, with respect to the contractor's tax, impressed with merit?

HELD: No. It is being held that ACMDC was not a manufacturer subject to the percentage tax imposed by Section 186 of the tax code. However such conclusion cannot be made with respect to the contractor's tax being imposed on ACMDC. It cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts shows that several distinct payments were made for the use of its personal properties such as its plane, motor boat and dump truck. The series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that during the period there were profits earned and reported therefor. The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal properties, since its income therefrom covered only the costs of operation such as salaries and fuel, is not supported by any documentary or substantial evidence. Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the taxpayer and not the BIR who has the duty of proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments. Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment.

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2. CIR vs. Arnoldus Woodworks Int., Inc. and CTACA GR-SP No. 340019, August 31, 1995

It was held that under Sec. 8, Rule 13 of the RC, service by registered mail is deemed completed upon actual receipt by the addressee. If he fails to clam his mail from the post office within five (5) days from the date of first notice of the postmaster, service shall take effect at the expiration of such time. And under Sec. 10 of the same rule, proof of such service shall consist of an affidavit of the person mailing of facts showing compliance with Sec. 5 of Rule 10. The receipt issued by the mailing office, and the registry return card evidencing receipt of the mail by the addressee, or in lieu thereof the letter unclaimed together with the certified or sworn copy of the notice given by the postmaster to the addressee.

3. CIR vs. Arnoldus Carpentry Shop, Inc. and CTAGR No. 71122, March 25, 1988

FACTS:

Arnoldus Carpentry Shop, Inc. is a domestic corporation which has been in existence since 1960. It has for its secondary purpose the "preparing, processing, buying, selling, exporting, importing, manufacturing, trading and dealing in cabinet shop products, wood and metal home and office furniture, cabinets, doors, windows, etc., including their component parts and materials, of any and all nature and description". These furniture, cabinets and other woodwork were sold locally and exported abroad. For this business venture, private respondent kept samples or models of its woodwork on display from where its customers may refer to when placing their orders.

Sometime in March 1979, the examiners of the petitioner Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of private respondent.

Based on such an examination, BIR examiners Honesto A. Vergel de Dios and Voltaire Trinidad made a report to the Commissioner classifying private respondent as an "other independent contractor".The examiners assessed private respondent for deficiency tax in the amount of EIGHTY EIGHT THOUSAND NINE HUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS ( P88,972.23 ). Later, private respondent received a letter/notice of tax deficiency assessment inclusive of charges and interest for the year 1977 in the amount of ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS AND NINETY TWO CENTAVOS ( P 108,720.92 ). This tax deficiency was a consequence of the 3% tax imposed on private respondent's gross export sales which, in turn, resulted from the examiners' finding that categorized private respondent as a contractor.

Against this assessment, private respondent filed a protest with the petitioner Commissioner of Internal Revenue. In the protest letter, private respondent's manager maintained that the carpentry shop is a manufacturer and therefore entitled to tax exemption on its gross export sales under Section 202 (e) of the National Internal Revenue Code. He explained that it was the 7% tax exemption on export sales which prompted private respondent to exploit the foreign market which resulted in the increase of its foreign sales to at least 52% of its total gross sales in 1977.

On June 23, 1981, private respondent received the final decision of the petitioner that they are considered a contractor and not a manufacturer. They only manufacture woodworks only upon previous order from supposed manufacturers.

On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that the decision of the Commissioner was contrary to law and the facts of the case.

On April 22, 1985, respondent Court of Tax Appeals rendered the questioned decision holding that private respondent was a manufacturer thereby reversing the decision of the petitioner.

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ISSUE: Whether or not the Court of Tax Appeals erred in holding that private respondent is a

manufacturer and not a contractor and therefore not liable for the amount of P108,720.92, as deficiency contractor's tax, inclusive of surcharge and interest, for the year 1977.

RULING:

1. Private respondent is a "manufacturer" as defined in the Tax Code and not a "contractor" under Section 205(e) of the Tax Code as petitioner would have this Court decide.(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines "independent contractors" as:

... persons (juridical and natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. (Emphasis supplied.)

Private respondent's business does not fall under this definition.The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact that private respondent sells goods which it keeps in stock and not services.This Court finds no reason to disagree with the Tax Court's finding of fact. It has been consistently held that while the decisions of the Court of Tax Appeals are appealable to the Supreme Court, the former's finding of fact are entitled to the highest respect. The factual findings can only be disturbed on the part of the tax court.

(b) Neither can Article 1467 of the New Civil Code help petitioner's cause. Article 1467 states: A contract for the delivery at a certain price of an article Which the vendor in the ordinary course of his business manufactures or procures for the - general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. Petitioner alleged that what exists prior to any order is but the sample model only, nothing more, nothing less and the ordered quantity would never have come into existence but for the particular order as represented by the sample or model [Brief for Petitioner, pp. 9-101.]Petitioner wants to impress upon this Court that under Article 1467, the true test of whether or not the contract is a piece of work (and thus classifying private respondent as a contractor) or a contract of sale (which would classify private respondent as a manufacturer) is the mere existence of the product at the time of the perfection of the contract such that if the thing already exists, the contract is of sale, if not, it is work.

This is not the test followed in this jurisdiction. As can be clearly seen from the wordings of Art. 1467, what determines whether the contract is one of work or of sale is whether the thing has been manufactured specially for the customer and upon his special order." Thus, if the thing is specially done at the order of another, this is a contract for a piece of work. If, on the other hand, the thing is manufactured or procured for the general market in the ordinary course of one's business, it is a b contract of sale.

As held in Commissioner of Internal Revenue v. Engineering Equipment and Supply Co. (L-27044 and L-27452, June 30, 1975, 64 SCRA 590, 597), "the distinction between a contract of sale and one for work, labor and materials is tested by the inquiry whether the thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed and has been the subject of sale to some other persons even if the order had not been given."

2. As the Court of Tax Appeals did not err in holding that private respondent is a "manufacturer," then private respondent is entitled to the tax exemption under See. 202 (d) and (e) mow Sec. 167 (d) and (e)] of the Tax Code which states:

Sec. 202. Articles not subject to percentage tax on sales. The following shall be exempt from the percentage taxes imposed in Sections 194, 195, 196, 197, 198, 199, and 201: xxx xxx xxx(d) Articles shipped or exported by the manufacturer or producer, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the articles so exported. (e) Articles sold by "registered export producers" to (1) other" registered export producers" (2) "registered export traders' or (3) foreign tourists or travelers, which are considered as "export sales."

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The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any claim for tax exemption from tax statutes is strictly construed against the taxpayer and it is contingent upon private respondent as taxpayer to establish a clear right to tax exemption.Conversely therefore, if there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, then the rule on strict construction will not apply. In the present case the respondent Tax Court did not err in classifying private respondent as a "manufacturer". Clearly, the 'latter falls with the term 'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As the only question raised by petitioner in relation to this tax exemption claim by private respondent is the classification of the latter as a manufacturer, this Court affirms the holding of respondent Tax Court that private respondent is entitled to the percentage tax exemption on its export sales.

There is nothing illegal in taking advantage of tax exemptions. When the private respondent was still exporting less and producing locally more, the petitioner did not question its classification as a manufacturer. But when in 1977 the private respondent produced locally less and exported more, petitioner did a turnabout and imposed the contractor's tax. By classifying the private respondent as a contractor, petitioner would likewise take away the tax exemptions granted under Sec. 202 for manufacturers. Petitioner's action finds no support in the applicable law.

WHEREFORE, the Court hereby DENIES the Petition for lack of merit and AFFIRMS the Court of Tax Appeals decision in CTA Case No. 3357.

4. G.R. No. L-67649 June 28, 1988ENGRACIO FRANCIA, petitioner, vs.INTERMEDIATE APPELLATE COURT

and HO FERNANDEZ, respondents.

FACTS:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

ISSUE: Whether or not internal revenue taxes can be the subject of compensation.

RULING: No.

SC ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for taxes levied for general or local governmental

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purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..."

5. CIR v. Marubeni CorporationG.R. No. 137377 (December 18, 2001)

FACTS:

Marubeni is a Japanese corporation engaged in financing and construction and has a branch office in Manila.

Commissioner issued a letter of authority to examine the books of account of the Manila branch office for Fiscal Year '85, and found undeclared income from 2 contracts in the Phils, completed in '84, one by the NDC for the construction of a wharf/port complex and the other by Philphos for the construction of an ammonia storage complex. Both NDC and Philphos are government corporations.

Revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor's and commercial broker's taxes. Marubeni questioned the assessment.

CIR found: the contracts were on turn-key basis and the gross income was over Php900M. Each contract was for a piece of work and since the projects were for construction of facilities in the Phils, the entire income constituted income from Phil sources, hence, subject to internal revenue taxes.

Aug. '86: EO41 declared amnesty covering unpaid income taxes for '81-'85. Sept. '86: Marubeni filed 2 petitions for review with CTA, one for deficiency

income, branch profit remittance, and contractor's taxes, and the other for deficiency commercial broker's tax.

Oct. '86 Marubeni filed tax amnesty return and availed under EO41. Nov. '86: EO64 amended EO41, including in its coverage estate and donor's taxes.

Taxpayers who availed under EO41 could avail under EO64. Marubeni did. 10 years after filing of the case, CTA: Marubeni properly availed of tax amnesty

under EO41 and EO64 and the deficiency taxes were deemed canceled and withdrawn. CA: affirmed.

ISSUE: W/N Marubeni falls under the exception to the amnesty coverage of EO41 and EO64.

HELD/RATIO:

Sec. 4(b) of EO41: taxpayers with income tax cases already filed in Court as of effectivity thereof may not avail themselves of the amnesty. EO41 took effect on Aug '86. CTA Case was filed Sept '86. Hence, Marubeni not disqualified from availing of amnesty for income and branch profit remittance taxes. Difficulty lies re: contractor's tax (a business tax) and and Marubeni's availment of the amnesty under EO64, which now covered business tax.

Re: availment of EO64.

EO64 took effect Nov '86, and didn't provide for exceptions to the coverage of the amnesty. Sec. 8 of EO41, not being inconsistent with the amendatory act, was reenacted in EO64. Thus Sec. 4(b) excepts from availment a taxpayer with income tax cases already filed in Court as of effectivity hereof, referring to EO64's effectivity.

◦ The general rule is that an amendatory act operates prospectively. While an amendment is generally construed as becoming a part of the original act as if it had always been contained therein, it may not be given a retroactive effect unless it is so provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.

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◦ Nothing in EO64 that provides that it should retroact to the date of effectivity of EO41, the original issuance.

◦ Where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original act. In an amendatory act, every case of doubt must be resolved against its retroactive effect.

◦ Moreover, EO 41 and 64 are tax amnesty issuances. A tax amnesty is a general

pardon or intentional overlooking by the State of its authority to impose penalties

on persons otherwise guilty of evasion or violation of a revenue or tax law. It

partakes of an absolute forgiveness or waiver by the government of its right to

collect what is due it and to give tax evaders who wish to relent a chance to start

with a clean slate. A tax amnesty, much like a tax exemption, is never favored

nor presumed in law. If granted, the terms of the amnesty, must be construed

strictly against the taxpayer. For the right of taxation is inherent in government.

The State cannot strip itself of the most essential power of taxation by doubtful

words. He who claims an exemption (or an amnesty) from the common burden

must justify his claim by the clearest grant of organic or state law. If a doubt

arises as to the intent of the legislature, that doubt must be resolved in favor of

the state.

◦ Marubeni filed CTA case on Sept '86. By the time it filed its supplementary tax amnesty return, it already fell under the exception and was disqualified.

Re: liability for contractor's tax

◦ Marubeni: assuming it did not validly avail of the amnesty under the two EOs, still not liable for the deficiency contractor's tax because the income from the projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the "Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

◦ SC: for Marubeni.◦ It is with regard to the gross receipts from the Foreign Offshore Portion of the two

contracts that the liabilities involved in the assessments subject of this case arose.

◦ Commissioner: since the two agreements are turn-key type, they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines. Marubeni's entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.

◦ Contractor's tax: imposed upon the privilege of engaging in business, generally in the nature of an excise tax levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority.

◦ The service of “design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . .” of the two projects involved two taxing jurisdictions, Jap and Phils.While the construction and installation work were completed within the Philippines, quipment and supplies were completely designed and engineered in Japan. They were already finished products when shipped to the Philippines, therefore not subject to contractor's tax.

Engineering Equipment case not in point here because there was no foreign element involved in the supply of materials and services

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6. CIR vs. CA, CTA and FORTUNE TOBACCO CORP.G.R. No. 119761; August 29, 1996

Facts: Fortune Tobacco Corporation ("Fortune Tobacco"), engaged in the manufacture of different brands of cigarettes, registered "Champion," "Hope," and "More" cigarettes. BIR classified them as foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortun changed the names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand category.

A 45% Ad Valorem taxes were imposed on these brands. Then Republic Act ("RA") No. 7654 was enacted – 55% for locally manufactured foreign brand while 45% for locally manufactured brands. 2 days before the effectivity of RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR saying since there is no showing who the real owner/s are of Champion, Hope and More, it follows that the same shall be considered locally manufactured foreign brand for purposes of determining the ad valorem tax - 55%. BIR sent via telefax a copy of RMC 37-93 to Fortune Tobacco addressed to no one in particular. Then Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. CIR assessed Fortune Tobacco for ad valorem tax deficiency amounting to P9,598,334.00.

Fortune Tobacco filed a petition for review with the CTA. 8 CTA upheld the position of Fortune. CA affirmed.

Issue: WON it was necessary for BIR to follow the legal requirements when it issued its RMC

Ruling:YES. CIR may not disregard legal requirements in the exercise of its quasi-legislative powers which publication, filing, and prior hearing.When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. BUT when, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, the agency must accord, at least to those directly affected, a chance to be heard, before that new issuance is given the force and effect of law.RMC 37-93 cannot be viewed simply as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654 which subjects mentioned brands to 55% the BIR not simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.

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taxation cases set 5

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