Case Summary (A.C. No. 10145)
Factual Background
The two vessels called at Philippine ports solely to load cargoes for foreign destinations on two discrete occasions (one call in 1963 and one call in 1964). N.V. Reederij "Amsterdam" did not maintain an office or place of business in the Philippines and did not file income tax returns or pay income tax on the freight receipts. The Commissioner, through examiners, filed returns and assessed deficiency income taxes against N.V. Reederij "Amsterdam" by converting the foreign exchange receipts at the then prevailing market rate of P3.90 = US$1.00, producing gross peso receipts of P382,882.50 (1963) and P535,052.00 (1964). Assessments of deficiency tax in the amounts of P193,973.20 (1963) and P262,904.94 (1964) were issued on June 30, 1967, treating the shipowner as a non‑resident foreign corporation not engaged in trade or business in the Philippines under Section 24(b)(1) of the Tax Code.
Procedural History
Royal Interocean Lines, assuming the shipowner was engaged in trade or business in the Philippines, filed on August 28, 1967 income tax returns for the vessels and paid smaller tax amounts using an exchange rate of P2.00 = US$1.00 pursuant to Sections 24(b)(2) and 37(e) and Section 163 of Revenue Regulations No. 2. Royal Interocean Lines protested the Commissioner’s assessments on behalf of N.V. Reederij "Amsterdam"; the protest was denied (letter dated March 3, 1969). Petitioners then filed a petition for review with the Court of Tax Appeals (CTA). On December 1, 1976, the CTA rendered a decision modifying the assessments by eliminating 50% fraud compromise penalties; petitioners’ motion for reconsideration was denied. Petitioners sought further review in the Supreme Court.
Issues Presented
Petitioners raised two principal issues: (A) whether N.V. Reederij "Amsterdam," having no office or place of business in the Philippines and whose vessels called Philippine ports only twice, should be classified and taxed as (i) a non‑resident foreign corporation not engaged in trade or business in the Philippines under Section 24(b)(1), or (ii) a foreign corporation engaged in trade or business in the Philippines under Section 24(b)(2) in relation to Section 37(e); and (B) whether the foreign exchange receipts should be converted into Philippine pesos for tax computation at the official parity rate of P2.00 = US$1.00 or at the prevailing free market rate of P3.90 = US$1.00.
Legal Framework Identified by the Court
The Court and the CTA applied the Tax Code classifications: domestic corporations; foreign corporations (resident foreign corporations—those engaged in trade or business in the Philippines or having an office or place of business therein—and non‑resident foreign corporations—those not engaged in trade or business and not having an office or place of business therein). A foreign corporation engaged in trade or business in the Philippines is taxed on net income from Philippine sources and may claim deductions connected to Philippine income (Section 24(b)(2) and Section 37(e)); a foreign corporation not doing business in the Philippines is taxed on gross income from Philippine sources at the fixed percentage rate specified in Section 24(b)(1). The particular rule set out in Section 37(e) and implemented by Section 163 of Revenue Regulations No. 2 governs computation of net income for foreign steamship companies doing business in or from the Philippines and thus presupposes a foreign carrier actually engaged in trade or business in the Philippines.
Analysis: Engaged in Trade or Business
The Court accepted the CTA’s conclusion that N.V. Reederij "Amsterdam" was a non‑resident foreign corporation not engaged in trade or business in the Philippines. The Court emphasized that to be considered engaged in trade or business within the Philippines a foreign corporation must have continuous business activity in the country; isolated, casual, or occasional calls to load cargo do not constitute doing business in the Philippines for income tax purposes. Given that the shipowner had no office or place of business in the Philippines and made only two port calls for loading cargo (one in 1963 and one in 1964), its activity was held to be casual and insufficient to establish engagement in trade or business. Consequently, the shipowner’s taxable base was gross income from Philippine sources and not net income computed under the formula applicable to foreign carriers doing business in the Philippines.
Analysis: Applicability of Section 37(e) and Section 163
The Court agreed with the CTA that Section 37(e) and Revenue Regulations Section 163 apply only where a foreign steamship company is doing business in or from the Philippines, because those rules are designed to apportion and compute net income when a carrier’s receipts are derived partly within and partly outside the Philippines. Because N.V. Reederij "Amsterdam" was not engaged in trade or business in the Philippines, those provisions did not provide an alternate computation that could displace the statutory treatment of non‑resident foreign corporations under Section 24(b)(1).
Analysis: Conve
...continue readingCase Syllabus (A.C. No. 10145)
Citation and Court
- Reported at 245 Phil. 435, First Division.
- G.R. No. L-46029.
- Decision date: June 23, 1988.
- Opinion by Justice Gancayco.
- Concurring Justices: Narvasa (Chairman), Cruz, Grino-Aquino, and Medialdea.
Parties
- Petitioners: N.V. Reederij "AMSTERDAM" (a foreign shipping corporation organized under the laws of The Netherlands) and Royal Interocean Lines (acted as husbanding/agent).
- Respondent: Commissioner of Internal Revenue.
Central Issue Presented
- The income tax liability of a foreign shipping corporation (N.V. Reederij "AMSTERDAM") that called on Philippine ports to load cargoes for foreign destinations on two occasions (once in 1963 and once in 1964), collected freight fees on those voyages, and did not pay income tax on those freight receipts.
Relevant Facts — Voyage, Receipts, and Agency
- Two vessel calls and time periods:
- MV "Amstelmeer" (vessel of petitioner N.V. Reederij "AMSTERDAM"): called Philippine ports from March 27 to April 30, 1963.
- MV "Amstelkroon" (vessel of petitioner N.V. Reederij "AMSTERDAM"): called Philippine ports from September 24 to October 28, 1964.
- Freight fees collected and payment location:
- Freight fees were paid abroad in U.S. dollars.
- 1963 receipts: US$98,175.00.
- 1964 receipts: US$137,193.00.
- Royal Interocean Lines acted as husbanding agent for the vessels and received a fee or commission for such agency services.
- No income tax was paid by N.V. Reederij "AMSTERDAM" on the freight receipts in question.
Procedural History and Administrative Actions
- Respondent (Commissioner of Internal Revenue), through examiners, filed corresponding income tax returns for and in behalf of N.V. Reederij "AMSTERDAM" under Section 15 of the National Internal Revenue Code.
- Conversion applied by respondent at the prevailing market rate of P3.90 to US$1.00 produced gross receipts in pesos:
- 1963: P382,882.50 (from US$98,175.00).
- 1964: P535,052.00 (from US$137,193.00).
- June 30, 1967: Commissioner assessed N.V. Reederij "AMSTERDAM" deficiency income tax amounts of:
- P193,973.20 for 1963.
- P262,904.94 for 1964.
- Assessment characterized N.V. Reederij "AMSTERDAM" as a non-resident foreign corporation not engaged in trade or business in the Philippines (Section 24(b)(1) of the Tax Code).
- August 28, 1967: On the alternative assumption that the ship-owner was engaged in trade or business in the Philippines, Royal Interocean Lines filed income tax returns for the vessels computed at an exchange rate of P2.00 to US$1.00 and paid tax amounts of:
- P1,835.52 (for one vessel/year).
- P9,448.94 (for the other vessel/year).
- Payments were made pursuant to Section 24(b)(2) in relation to Section 37(B)(e) of the National Internal Revenue Code and Section 163 of Revenue Regulations No. 2.
- Royal Interocean Lines, as husbanding agent, filed written protests against the Commissioner’s assessments on the same dates; protests were denied by the Commissioner on March 3, 1969.
- March 31, 1969: Petition for review filed with the Court of Tax Appeals (CTA) seeking cancellation of the assessments.
- December 1, 1976: CTA rendered a decision modifying the assessments by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioners’ motion for reconsideration before the CTA was denied.
- Petitioners filed for review with the Supreme Court (this petition).
Issues Raised by Petitioners (verbatim as presented)
- A. WHETHER N.V. REEDERIJ 'AMSTERDAM,' NOT HAVING ANY OFFICE OR PLACE 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 AS A FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) OF THE TAX CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) IN RELATION TO SECTION 37 (e) OF THE SAME CODE; AND
- B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ 'AMSTERDAM' SHOULD BE CONVERTED INTO PHILIPPINE PESOS AT THE OFFICIAL RATE OF P2.00 TO US$1.00, OR AT P3.90 TO US$1.00.
Relevant Statutory and Regulatory Provisions Cited
- National Internal Revenue Code:
- Section 15 (filing returns).
- Section 24(a), 24(b)(1), 24(b)(2) (classification and taxation of corporations).
- Section 37 (including Section 37(B)(e) / Section 37(e) referenced).
- Section 84(g) (definition: resident foreign corporation).
- Section 84(h) (definition: non-resident foreign corporation).
- Revenue Regulations No. 2:
- Section 163 (implementing computation rule for foreign steamship companies doing business in or from this country).
- Republic Act No. 2609 (authorized Monetary Board to fix legal conversion rate for foreign exchange).
- Historical reference: Section 48 of Republic Act 265 (parity rate P2.00 to US$1.00, relevant to pre-RA 2609 period).
Court’s Legal Analysis — Classification and Taxable Status
- Corporate classification and taxation explained by the CTA and reproduced with a