3 N.v. Reederij Amsterdam v. Commissioner Of

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    FIRST DIVISION [G.R. No. L-46029. June 23, 1988.] N.V. REEDERIJ AMSTERDAM and ROYAL INTEROCEANLINES ,  petitioners ,   vs.  COMMISSIONER OF INTERNALREVENUE ,  respondent  . D E C I S I O NGANCAYCO ,  J p : The issue posed in this petition is the income tax liability of a foreign shippingcorporation which called on Philippine ports to load cargoes for foreigndestination on two occasions in 1963 and 1964, respectively, and which collectedfreight fees on these transactions.From March 27 to April 30, 1963, MV Amstelmeer, and from September 24 toOctober 28, 1964, MV Amstelkroon, both of which are vessels of petitioner N.B.Reederij AMSTERDAM, called on Philippine ports to load cargoes for foreigndestination. The freight fees for these transactions were paid abroad in theamount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these twoinstances, petitioner Royal Interocean Lines acted as husbanding agent for a feeor commission on said vessels. No income tax appears to have been paid bypetitioner N.V. Reederij AMSTERDAM on the freight receipts.Respondent Commissioner of Internal Revenue, through his examiners, filed thecorresponding income tax returns for and in behalf of the former under Section15 of the National Internal Revenue Code. Applying the then prevailing marketconversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V.Reederij Amsterdam for 1963 and 1964 amounted to P382,882.50 andP535.052.00, respectively. On June 30, 1967, respondent Commissioner assessedsaid petitioner in the amounts of P193,973.20 and P262,904.94 as deficiencyincome tax for 1963 and 1964, respectively, as a non-resident foreign corporationnot engaged in trade or business in the Philippines under Section 24 (b) (1) of the Tax Code.  LibLex On the assumption that the said petitioner is a foreign corporation engaged intrade or business in the Philippines, on August 28, 1967, petitioner RoyalInterocean Lines filed an income tax return of the aforementioned vesselscomputed at the exchange rate of P2.00 to US$1.00 1  and paid the tax thereon inthe amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b)(2) in relation to Section 37 (B) (e) of the National Internal Revenue Code andSection 163 of Revenue Regulations No. 2. On the same two dates, petitionerRoyal Interocean Lines as the husbanding agent of petitioner N.V. Reederij AMSTERDAM filed a written protest against the abovementioned assessmentmade by the respondent Commissioner which protest was denied by said CD Technologies Asia, Inc. © 2016cdasiaonline.com  respondent in a letter dated March 3, 1969: On March 31, 1969, petitioners fileda petition for review with the respondent Court of Tax Appeals praying for thecancellation of the subject assessment. After due hearing, the respondent court,on December 1, 1976, rendered a decision modifying said assessments byeliminating the 50% fraud compromise penalties imposed upon petitioners.Petitioners filed a motion for reconsideration of said decision but this was deniedby the respondent court. Hence, this petition for review where petitioners raisedthe following issues: A. WHETHER N.V. REEDERIJ 'AMSTERDAM,' NOT HAVING ANY OFFICE ORPLACE OF BUSINESS IN THE PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS FOR THE PURPOSE OF LOADING CARGOES ONLY TWICE — ONE IN 1963 AND ANOTHER IN 1964 — SHOULD BE TAXED ASA FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (1) OF THE TAX CODE ORSHOULD BE TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADEOR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) INRELATION TO SECTION 37 (e) OF THE SAME CODE; ANDB. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ AMSTERDAM SHOULD BE CONVERTED INTO PHILIPPINE PESOS AT THEOFFICIAL RATE OF P2.00 TO US$1.00, OR AT P3.90 TO US$1.00. Petitioners contend that respondent court erred in holding that petitioner N.V.Reederij AMSTERDAM is a non-resident foreign corporation because it allegedlydisregarded Section 163 of Revenue Regulations No. 2 (providing for thedetermination of the net income of foreign corporations doing business in thePhilippines) and in holding that the foreign exchange receipts of said petitionerfor purposes of computing its income tax should be converted into Philippinepesos at the rate of P3.90 to US$1.00 instead of P2.00 to US$1.00. The petition is devoid of merit.Petitioner N.V. Reederij AMSTERDAM is a foreign corporation not authorized orlicensed to do business in the Philippines. It does not have a branch office in thePhilippines and it made only two calls in Philippine ports, one in 1963 and theother in 1964. In order that a foreign corporation may be considered engaged intrade or business, its business transactions must be continuous. A casual businessactivity in the Philippines by a foreign corporation, as in the present case, doesnot amount to engaging in trade or business in the Philippines for income taxpurposes. The Court reproduces with approval the following disquisition of the respondentcourt — A corporation is itself a taxpaying entity and speaking generally, forpurposes of income tax, corporations are classified into (a) domesticcorporations and (b) foreign corporations. (Sec. 24(a) and (b), Tax Code.)Foreign corporations are further classified into (1) resident foreigncorporations and (2) non-resident foreign corporations. (Sec. 24(b) (1)and (2). Tax Code.) A resident foreign corporation is a foreign corporationengaged in trade or business within the Philippines or having an office orplace of business therein (Sec. 84(g), Tax Code) while a non-residentforeign corporation is a foreign corporation not engaged in trade or CD Technologies Asia, Inc. © 2016cdasiaonline.com  business within the Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.)A domestic corporation is taxed on its income from sources within andwithout the Philippines, but a foreign corporation is taxed only on itsincome from sources within the Philippines. (Sec. 24(a), Tax Code; Sec.16, Rev. Regs. No. 2.) However, while a foreign corporation doingbusiness in the Philippines is taxable on income solely from sources withinthe Philippines, it is permitted to claim deductions from gross income butonly to the extent connected with income earned in the Philippines (Secs.24(b) (2) and 37, Tax Code.) On the other hand, foreign corporations notdoing business in the Philippines are taxable on income 'from all sourceswithin the Philippines, as interest, dividends, rents, salaries, wages,premiums, annuities, compensations, remunerations, emoluments, orother fixed or determinable annual or periodical or casual gains, profitsand income and capital gains.' The tax is 30% (now 35%) of such grossincome. (Sec. 24 (b) (1), Tax Code.)At the time material to this case, certain corporations were given specialtreatment, namely, building and loan associations operating as such inaccordance with Section 171 of the Corporation Law, educationalinstitutions, domestic life insurance companies and foreign life insurancecompanies doing business in the Philippines. (Sec. 24(a) & (c), Tax Code.)It bears emphasis, however, that foreign life insurance companies whichwere not doing business in the Philippines were taxable as other foreigncorporations not authorized to do business in the Philippines. (Sec. 24(c) Tax Code.)Now to the case at bar. Here, petitioner N.V. Reederij 'Amsterdam' is anon-resident foreign corporation, organized and existing under the lawsof The Netherlands with principal office in Amsterdam and not licensed todo business in the Philippines. (pp. 8-81, CTA records.) As a non-residentforeign corporation, it is thus a foreign corporation, not engaged in tradeor business within the Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.) As stated above, it is thereforetaxable on income from all sources within the Philippines, as interest,dividends, rents, salaries, wages, premiums, annuities, compensations,remunerations, emoluments, or other fixed or determinable annual orperiodical or casual gains, profits and income and capital gains, and thetax is equal to thirty  per centum  of such amount, under Section 24(b) (1)of the Tax Code. The accent is on the words — 'of such amount.'Accordingly, petitioner N. V. Reederij 'Amsterdam' being a non-residentforeign corporation, its taxable income for purposes of our income taxlaw consists of its gross income from all sources within the Philippines.  prLL  The law seems clear and specific. It thus calls for its application asworded as it leaves no leeway for interpretation. The applicable provisionimposes a tax on foreign corporations falling under the classification of non-resident corporations without any exceptions or conditions, unlike inthe case of foreign corporations engaged in trade or business within thePhilippines which contained (at the time material to this case) anexception with respect to foreign life insurance companies. Adherence tothe provision of the law, which specifies and determines the taxableincome of, and the rate of income tax applicable to, non-resident foreigncorporations, without mentioning any exceptions, would therefore lead to CD Technologies Asia, Inc. © 2016cdasiaonline.com  the conclusion that petitioner N.V. Reederij 'Amsterdam' is subject toincome tax on gross income from all sources within the Philippines. A foreign corporation engaged in trade or business within the Philippines, orwhich has an office or place of business therein, is taxed on its total net incomereceived from all sources within the Philippines at the rate of 25% upon theamount but which taxable net income does not exceed P100,000.00, and 35%upon the amount but which taxable net income exceeds P100,000.00. 2  On theother hand, a foreign corporation not engaged in trade or business within thePhilippines and which does not have any office or place of business therein istaxed on income received from all sources within the Philippines at the rate of 35% of the gross income. 3  Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code andimplementing Section 163 of the Income Tax Regulations but these provisionsrefer to a foreign corporation engaged in trade or business in the Philippines andnot to a foreign corporation not engaged in trade or business in the Philippineslike petitioner-ship-owner herein. Thus, the respondent court aptly ruled: It must be stressed, however, that Section 37 (e) of the Code, asimplemented by Section 163 of the Regulations, provides the rule of thedetermination of the net income taxable in the Philippines of a foreignsteamship company doing business in the Philippines. To assure that non-resident foreign steamship companies not engaged in business in thePhilippines and not having any office or place of business herein are notcovered therein, the regulations explicitly and clearly provide that 'the netincome of a foreign steamship company doing business in or from thiscountry is ascertained,' under the formula contained therein, 'for thepurpose of the income tax.' The reason is easily discernible. As statedabove, the taxable income of non-resident foreign corporations consistsof its gross income from all sources within the Philippines. Accordingly, aforeign steamship corporation derives income partly from sources withinand partly from sources without the Philippines if it is carrying on abusiness of transportation service  between points in the Philippines andpoints outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.)Only then does Section 37 (e) of the Tax Code, as implemented bySection 163 of the Regulations, apply in computing net income subject totax. There is no basis therefore for an assertion 'that Section 37 (e) doesnot distinguish between a foreign corporation engaged in business in thePhilippines and a foreign corporation not engaged in business in thePhilippines.' (p. 84, C.T.A. records.) (Decision, pp. 11-12.)  The conversion rate of P2.00 to US$1.00 which petitioners claim should beapplicable to the income of petitioners for income tax purposes instead of P3.90to $1.00 is likewise untenable. The transactions involved in this case are for thetaxable years 1963 and 1964. Under Rep. Act No. 2609, the monetary board wasauthorized to fix the legal conversion rate for foreign exchange. The free marketconversion rate during those years was P3.90 to US$1.00.  LLpr 'This conversion rate issue was definitely settled by this Court in the caseof Commissioner of Internal Revenue vs. Royal Interocean Lines and theCourt of Tax Appeals, 4   to wit: CD Technologies Asia, Inc. © 2016cdasiaonline.com
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