Commissioner of Internal Revenue v. Mar Fishing Co., Inc.

[CA-G.R. SP No. 29838. January 31, 1994.] (C.T.A. Case No. 4287) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . MAR FISHING CO., INC. and THE COURT OF TAX APPEALS , respondents . D E C I S I O N TORRES , JR. , J p : Challenged in this petition for review instituted by the Commissioner of Internal Revenue is the decision dated October 4, 1991 of the Court of Tax Appeals in C.T.A. Case No. 4287 entitled "Mar Fishing Co., Inc. vs. Commissioner of Internal Revenue", the dispositive portion of which reads: 1 "WHEREFORE, this instant assessment is hereby dismissed, without prejudice to the determination by the respondent of the gift tax liability of the petitioner and British Columbia Packers Ltd. (BCPL) in accordance with the provisions of Sections 101 and 102 (now Sections 91 and 92) of the National Internal Revenue Code. No pronouncement as to cost. SO ORDERED." The fact of the case are as follows: It appears that on July 27, 1987, petitioner sent a letter of assessment to the private respondent for the amount of P311,729.99, inclusive of surcharge and interest for deficiency withholding tax at source for the year 1982. 2 On August 6, 1987, private respondent protested the assessment on the ground that the technical services fees supposedly paid to British Columbia Packers, Ltd. (BCPL, for brevity) of Canada were merely accrued in the books of petitioner but were not actually paid. On March 28, 1988, a warrant of levy of real property to enforce the tax deficiency was served upon the private respondent. 3 On May 25, 1988 , petitioner denied private respondent's request for the cancellation of the warrant of levy. 4 Consequently, private respondent MAR Fishing filed on July 8, 1988 a petition for review docketed as CTA Case No. 4287 before the Court of Tax Appeals. 5 On September 15, 1988, petitioner filed his answer thereto. 6 After examining the records and the evidence presented, the respondent court concluded that the said technical services fees were never paid to BCPL, hence, not liable for deficiency withholding tax at source on the technical service fees payable to a non-resident foreign corporation, the pertinent portion thereof in the assailed decision is hereby reproduced, to wit. 7 ". . . Unlike the Bayer case and the other cases cited, the income due the non-resident foreign corporation in the instant case was never remitted for it was condoned or waived by the recipient BCPL due to substantial financial losses by MFCI. Basics as it is, if there is no income involved, there is no tax to be paid. Withholding tax is a system introduced by the government to ensure collection of taxes due, especially considering the difficulties it may encounter in collecting the same as in the case of a non-resident foreign corporation without a branch or office in the Philippines. If the income from which tax shall be imposed not actually realized, no tax may be collected therefrom. Inasmuch as the amount of P413,196.00, the technical service fee due the BCPL, was condoned by it, the same may be considered as a gift or donation to MFCI subject to gift tax as of taxable year 1988, the year said income was waived by BCPL in favor of MFCI. This manner of treating condonation as gift is provided for under Section 50 of Revenue Regulations No. 2, issued by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue, quoted hereunder: 'The cancellation of forgiveness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual perform services for a creditor who, in consideration thereof, cancels the debt, income to that amount is realized by the debtor as compensation for his service. If, however, a creditor merely desires to benefit a debtor and without any consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter ' s gross income . If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of the dividend.'" (Emphasis supplied) On December 4, 1991, petitioner filed a motion for reconsideration 8 which was denied by the respondent court on December 9, 1992. 9 Hence, the instant petition for review. Petitioner maintains that the respondent court erred in dismissing the assessment against the private respondent on the grounds that (1) the alleged condonation, on which the dismissal was based, was only an afterthought and was not averred in the letter-protest; (2) that no evidence was presented whatsoever regarding the condonation; and (3) that the assailed decision is contrary to law and jurisprudence. On the other hand, private respondent contended that they had always maintained that it never paid any technical service fees in favor of BCPL as evidenced by (1) declaration under oath of BCPL's Vice-President for Finance that they have waived the fees due to the substantial losses suffered by company (Exhibit "3"); (2) letter from the Director of the Foreign Exchange Department of the Central Bank stating that no applications for authority to remit foreign exchange to BCPL during 1982 were filed (Exhibit "C"); (3) certification of the external auditors, Joaquin Cunanan & Company (Exhibit "D"). The said technical service fees due to BCPL were merely accrued in its books but were never remitted to BCPL, who in turn waived or condoned the technical service fees, hence, private respondent cannot be held liable for any withholding tax deficiency. After an assiduous scrutiny of the assailed decision of the respondent court, We find that the assailed decision is supported by law and jurisprudence. Contrary to petitioner's contention, private respondent has manifested that the technical services fee due to BDPL were merely accrued in its books but were never remitted to BCPL as shown in the letter dated August 6, 1987 addressed to the petitioner. This fact was further bolstered by evidence presented during the hearing before the respondent court negating that technical service fee due to the BCPL was never remitted and in fact, condoned/waived in favor of the private respondent, to wit: (1) sworn declaration of the Vice-President for Finance of BCPL; (2) letter dated November 15, 1988 of the Director of Foreign Exchange Regulation Department of the Central Bank; (3) certification of External Auditor Joaquin, Cunanan & Company. We agree with the finding of facts of the Court of Tax Appeals. The factual findings of the tax court are entitled to the highest respects and can only be disturbed on appeal if not supported by substantial evidence or if there has been showing of gross error or abuse on the part of the tax court. 10 As a matter of principle, it is not advisable for the appellate court to set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of the tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvement exercise of its authority. 11 In the case at bar, it having been substantially proven that no remittance of the technical services fee has been made to BCPL, private respondent is not liable for the tax deficiency assessed by the petitioner. Contrary to the allegation of the petitioner, private respondent has submitted sufficient evidence to show that no remittance has been made to the foreign corporation. Noteworthy is the fact that it is the petitioner who did not present evidence to negate the claim of the private respondent as shown in the assailed decision, to wit: 12 "Respondent for his part, never presented any evidence to controvert said facts. In fact, he did not even present the BIR examiner who alleged that payment of the technical services was actually made. On the contrary, respondent submitted his case based on the pleadings and records of the case and did not even bother to submit any memorandum." All persons, corporations, partnerships and association having the control, receipt, custody, disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits and income received or obtained from sources within the Philippines by a non-resident alien firm, co-partnership, corporation, association, trust company, trustee and insurance company, not engaged in business or trade within the Philippines and not having an office or place of business therein, are required to withhold a tax of 35 percent thereon, file the requisite withholding return on the prescribed form and pay the tax withheld. The taxability of a foreign corporation's income depends upon the locus of the activity, property or service giving rise thereto. Stated otherwise, the flow of wealth proceeded from the activity within the Philippine territory, enjoying therein the protection accorded by our Government. Such flow of wealth should, in consideration for the protection, share in the burden of supporting the government. Our legislators adopted the administrative advise in Secs. 53 and 54 (now Secs. 50 and 51) withholding the corresponding income tax at the source of the income to ensure collection of whatever tax that may be due on income earned in the Philippines from those who have no office or agent here. The fact that a foreign corporation does not engage in business here and had no local office or agent is the very reason why its income is subject to withholding tax. 13 In accordance with Section 50 of the National Internal Revenue Code, the non-resident foreign corporation (BCPL) is liable to 35% rate of withholding tax on income earned from sources within the Philippines. However, in the instant case, the technical service fee in the amount of P413,196.00 for 1982 was never remitted to the foreign corporation (BCPL), hence, there is no income realized by the foreign corporation from sources within the Philippines from which the withholding tax could have been based. Considering that the technical service fee was condoned/waived by the foreign corporation, private respondent cannot be held liable for the payment of the withholding tax deficiency assessed by the petitioner. This, however, does not mean that private respondent is not liable for any tax at all for the condonation or waiver of foreign corporation is equivalent or tantamount to a gift or donation which is also taxable. Section 50 of the Revenue Regulations No. 2 provides that the cancellation or condonation of the indebtedness without any consideration may amount to a gift from the creditor and need not be included in the debtor's gross income. Consequently, as stated in the assailed decision is without prejudice to the determination by the respondent (Commissioner of Internal Revenue) of the gift tax liability of the petitioner (Mar Fishing Co., Inc.) and the British Columbia Packers Ltd. (BCPL) in accordance with the provisions of Sections 101 and 102 (now Sections 91 and 92) of the National Internal Revenue Code, page 13, Decision). technical service fee due to the foreign corporation which was condoned can now be subjected to Donors of Gift Tax pursuant to Sections 91 and 92 of the National Internal Revenue Code. We agree with the decision of the Tax Court to the effect that "The decision of this Court lies not only on the provisions of law involved but also on equity and fair play. If the withholding agent and the non-resident foreign taxpayer have in fact recognized in the books income due the latter by reason of their contract or agreement and in fact have accrued the same, the government to which the corresponding tax is due should not be prejudiced by the laxity, delay or negligence of the withholding agent in remitting the income abroad. Withholding taxes should immediately be paid to respondent within the period provided under Section 54 aforequoted. Along the same principle, if the withholding agent who wishes to remit the income abroad is prevented by the government to do so, it is but equitable that should not be held liable immediately but should wait until such time the withholding agent comply with his remittance obligation. This is so because the government itself is the one who prevented the taxpayer form receiving the 'gains, profit or income', equitably it should not ask for the tax due." We find the assailed decision to be in accord with the law and the evidence. ACCORDINGLY, the instant petition for review is hereby DENIED for lack of merit. No pronouncement as to costs. SO ORDERED. This Decision was reached in consultation among the undersigned members of this Division, in accordance with Section 13, Article VIII of the Constitution. Purisima, Jr . and Montenegro, JJ ., concur. Footnotes 1. Decision, Rollo, pages 28-40. 2. Letter, Rollo, page 57. 3. Warrant, Rollo, page 59. 4. Letter, Rollo, page 61. 5. Petition, Rollo, pages 51-56. 6. Answer, Rollo, pages 63-66. 7. Decision, Rollo, pages 38-39. 8. Motion, Rollo, pages 42-45. 9. Resolution, Rollo, page 46. 10. Commissioner of Internal Revenue vs. Arnoldrs Carpentry Shop, Inc., 159 SCRA 199. 11. Commissioner of Internal Revenue vs. Court of Tax Appeals, G.R. No. 61509, April 19, 1988; Sy Po vs. Court of Tax Appeals, L-81446, August 18, 1988. 12. Decision, Rollo, page 4. 13. British Traders Insurance Company, Ltd. vs. Commissioner, G.R. No. L-20501, April 30, 1965.