Metro Alliance Holdings and Equities Corporation v. Commissioner of Internal Revenue

SIXTH DIVISION [CA-G.R. SP No. 73744. December 1, 2003.] METRO ALLIANCE HOLDINGS AND EQUITIES CORPORATION (formerly known as MARSMAN & COMPANY, INC.), petitioner, vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N SABIO , J.L., Jr. , J p : At bar is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure questioning then July 5, 2000 decision as well as the October 23, 2002 Resolution of the Court of Tax Appeals (CTA) in CTA Case No. 5940. To provide perspective, it is helpful to restate the facts. Petitioner Metro Alliance Holdings and Equities Corporation (hereinafter Metro Alliance) is a domestic corporation organized and existing under the laws of the Philippines engaged in the promotion, sale, and distribution of medical products and other medicinal and food products. Its corporate name was formerly Marsman and Company, Incorporated ( hereinafter Marsman ) until October 11, 1989 when the Securities and Exchange Commission approved its petition to change its corporate name, resulting in the amendment of its Articles of Incorporation. On May 30, 1984, a General Agency Agreement was executed by and between Medpro Pacific Limited, a corporation duly organized and existing under and by virtue of the laws of Hong Kong, on the one hand, and herein petitioner Marsman & Company, Inc., as local agent whereby the latter, among others, undertook to perform the following services in favor of the former: "1. The AGENT shall be primarily responsible for the promotion in the Philippines, of products designated by the PRINCIPAL. The promotional activities to be performed by the AGENT shall include but shall not be limited to the following: (a) To conduct market research to determine the market potential in the Philippines of products designated by the PRINCIPAL and to transmit information thus gathered to PRINCIPAL; HDITCS (b) To distribute brochures, pamphlets and other informative materials which the principal may make available to the AGENT for distribution to interested parties in the Philippines; (c) To transmit to the PRINCIPAL any document or written communication received by it from clients of the PRINCIPAL in the Philippines; (d) To inform the PRINCIPAL of any significant and important developments in the Philippines which may affect the promotion and marketability of the products of the PRINCIPAL; (e) To convey to the PRINCIPAL other information with respect to competitors, competitive products and promotional activities engaged in by other firms in the same business as the PRINCIPAL. 2. The AGENT shall handle the collection, for the account of the PRINCIPAL, of payments made directly to it by Philippine clients of the PRINCIPAL. The Agent, subject to the Philippine foreign exchange regulations and Philippine withholding tax statute and regulations, shall remit to the PRINCIPAL collections made while in its possession, the AGENT shall hold the funds in trust for the PRINCIPAL . . . " Subsequently, on July 19, 1991, the original parties to the General Agency Agreement forged a Novation Agreement whereby Medpro Pacific transferred all its rights, title and interest in and to certain assets including those arising under the Agency Agreement to Medimedia Pacific Limited, a company likewise incorporated under the laws of Hong Kong. Meanwhile, on February 4, 1992, Confidential Information No. 8-92 was filed before the Intelligence and Investigation Office of the Bureau of Internal Revenue (BIR) informing the said office of the transactions entered into by Medical Progress Pacific Limited and/or Medimedia Pacific Limited and its alleged tie-up with the petitioner. On the basis of the Memorandum-Report of the assigned revenue officers dated October 23, 1992, Letter Authority No. 002548 was issued on January 12, 1993 authorizing the examination of petitioner's books of accounts and other accounting records for income tax, withholding tax, and percentage/value-added taxes for the years 1989, 1990, and 1991. As a result of the investigation conducted by respondent BIR, unnumbered Assessment Notices with attached Demand Letters all dated December 1, 1993 were issued against petitioner for alleged deficiency withholding taxes for the years 1989, 1990, and 1991 in the aggregate amount of P68,656,016.12 inclusive of interest and surcharge, detailed as follows: WITHHOLDING TAX 1989, 1990 AND 1991 1989 1990 1991 Gross receipts from Advertisements P15,093,120.00 P15,093,120.00 P15,093,120.00 Gross receipts from Subscriptions 9,450,000.00 9,450,000.00 9,450,000.00 Total Gross Receipts 24,543,120.00 24,543,120.00 24,543,120.00 Tax Rate 35% 35% 35% Tax Due P8,590,092.20 P8,590,092.20 P8,590,092.20 Less: Tax already paid - - - Deficiency Withholding Tax P8,590,092.20 P8,590,092.20 P8,590,092.20 Add: 50% Surcharge 4,295,046.00 4,295,046.00 4,295,046.00 25% Surcharge 2,147,523.00 2,147,523.00 2,147,523.00 Total P15,032,661.00 P15,032,661.00 P15,032,661.00 Add: 20% Interest per annum from 4/15/903/15/94 P9,019,596.60 4/15/913/15/94 P8,772,484.36 4/15/913/15/94 P5,765,952.16 Total Amount Due and Collectible P24,052,257.60 P23,805,145.36 P20,798,613.16 The assessment notices arose form petitioner's alleged failure to withhold the income tax on subscription and advertising fees collected from Philippine advertisers and subscribers and remitted to Medpro Pacific Limited. EASCDH On August 23, 1994, petitioner filed a letter-protest objecting to the deficiency withholding tax assessments for the years 1989, 1990 and 1991. Petitioner countered that Medpro Pacific, Ltd., a non-resident foreign corporation, the alleged income recipient, did not derive any income whatsoever from sources within the Philippines. Neither did Marsman make any income payment to Medpro Pacific that would be subject to withholding tax. It further claimed that the BIR Ruling dated May 28, 1999 reversing its previous rulings that subscription payments for magazines printed and published abroad are not subject to tax in the Philippines should be applied only prospectively and not retroactively. Likewise, it claimed that the said ruling could not be applied to advertising fees considering that the same refer particularly to subscription payments and that previous rulings on advertising fees paid to non-resident foreign corporation have not been revoke up to this date. Through a letter dated May 19, 1999, respondent BIR denied the protest for lack of merit. However, the respondent found merit in petitioner's contention that the imposition of the 50% surcharge is baseless and unfounded for the latter relied in good faith on the rulings of the BIR that the subject advertising and subscription fees are not subject to Philippine income tax. But in view of adjustments made on the interest due, the deficiency tax assessment was increased to P83,753,397.00 exclusive of increments that may still accrue thereon. The letter indicated that it was the respondent BIR's final decision on the matter. On September 30, 1999, the controversy was elevated to the CTA via a petition for review. The same was however denied in a decision dated July 5, 2002. The dispositive portion of the decision reads: "WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED for lack of merit. Accordingly, petitioner is ORDERED to PAY the respondent the amount of P83,753,397.00, inclusive of 25% surcharge and 20% deficiency interest, as deficiency withholding taxes for the years 1989, 1990 and 1991. SO ORDERED." In denying to petition, the CTA ruled, firstly , that Medi Media Pacific Ltd, and Medpro Pacific, Ltd., by virtue of the Novation Agreement dated July 17, 1991, were both duly organized under the laws of Hong Kong with principal place of business also in Hong Kong. Since the Philippines has no tax treaty with Hong Kong, the use of the term "permanent establishment" as used in tax treaties for the purpose of determining whether the profits of an enterprise of a contracting state are taxable or not finds no application. Secondly , as to whether or not petitioner is considered an agent of independent status acting in the ordinary course of business in the Philippines, applying Article 1868 of the Civil Code vis a vis the General Agency Agreement executed by and between Medpro Pacific, Ltd. and the petitioner, the CTA ruled in the affirmative. Thirdly , resolving the issue of whether or not petitioner is required to pay withholding tax on subscription and advertising payments paid to its principal, the CTA applied the decision of the Supreme Court in Commissioner of Internal Revenue vs. British Overseas Airways Corporation and Court of Tax Appeals, 149 SCRA 395 ACETID . The CTA explained: "Verily, Medimedia, being a non-resident foreign corporation, is subject to tax equal to 35% of its gross income received from all sources within the Philippines. In the case of BOAC, the Supreme Court ruled that the fact that Section 37(a) of the Tax Code do not mention income from sale of tickets for international transportation does not render it less an income and that Section 37, by its language, does not intend the enumeration to be exclusive but merely directs that the types of income listed therein be treated as income from sources within the Philippines. The same holds true in the case of the subject subscription and advertising fees." The CTA adopted BIR Ruling No. 094-90 dated May 28, 1990 which in turn applied the BOAC case. The said ruling being substantially similar to the issue in the case at bar, pertaining as it does to subscription payments. We quote: ". . . Thus, the filling up of the subscription form by the Philippine subscriber to the Newsweek Magazine is the activity that produced the income consisting of the subscription payments. Since the subscription payments were made here and therefore came from the Philippines, the source of income is this country. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines ( Commissioner vs. British Overseas Airways, Corp. (BOAC) and CTA , supra, citing Manila Gas Corp. vs. Collector , 62 Phil 895) "The fact that the foreign publisher, Newsweek , Inc. (Hong Kong branch) printed and published the magazine in Hong Kong, does not determine the source of income and the situs of Philippine taxation. Said BOAC case citing Howden & Co., Ltd., vs . Collector, 13 SCRA 601, said that the test of taxability is the "source" and the source of an income is the activity that produced the income. As heretofore stated, the activity that produced the income is the filling up of the subscription form by the Philippine subscriber, as well as the payments for subscription also in the Philippines. ". . . The subscription payments for the Newsweek magazines by Philippine subscribers are considered Philippine source income; hence, subject to Philippine income tax and consequently to the 35% withholding tax prescribed Section 25(b)(1) of the Tax Code in relation to Section 50(a) and 51 of the same Code." Thus, the CTA concluded that the activities which produced the income earned by petitioner's principal were the filling up of subscription forms by Philippine subscribers and the ad placements made in the Philippines by Philippine advertisers to the two medical journals, the Journal of Pediatrics, Obstetrics and Gynecology (JPOG) and Medical Progress (MP) . Consequently, the subscription fees paid by Philippine subscribers ad advertising payments made by Philippine advertisers to petitioner are subject to withholding tax, as these income are considered earned in the Philippines. Finally , as to the employment by the respondent BIR of the Best Evidence Obtainable method in determining petitioner's alleged withholding deficiency, the CTA dismissed the petitioner's claim that there was no factual basis for the computation of the amounts imputed as deficiency withholding tax. The CTA upheld the authority of the BIR to utilize the Best Evidence Obtainable method as sanctioned by Section 16 of the Tax Code . It ruled that the authority springs from the failure or refusal of the taxpayer to submit the required documents to aid the BIR in its examination. On July 31, 2002, petitioner filed an urgent motion for reconsideration of the July 5, 2002 decision, arguing in the main that the right of the respondent BIR to issue tax assessments covering the years 1989 and 1990 has already prescribed, as the notices, including the demand letters were issued only on December 1, 1993 and received by petitioner on August 16, 1994. The CTA dismissed the motion in its resolution promulgated on October 23, 2002 applying Section 223(a) of the NIRC giving the government a period of ten (10) years to make the necessary tax assessment in case of false or fraudulent return with intent to evade tax or in case of failure to file a return, the ten year period to be counted from the discovery of the falsity, fraud or omission. As the petitioner clearly failed to file the required withholding tax returns, respondent BIR had the right to assess the subject withholding taxes at any time within ten years after discovery of such omission. Hence, this petition for review, raising the following assignment of errors: I THE COURT OF TAX APPEALS ERRED IN FINDING THAT RESPONDENT HAD LEGAL AND FACTUAL BASIS TO JUSTIFY THE EMPLOYMENT OF THE BEST EVIDENCE OBTAINABLE METHOD IN DETERMINING THE ALLEGED DEFICIENCY WITHHOLDING TAX LIABILITY OF PETITIONER II THE COURT OF TAX APPEALS ERRED IN APPLYING THE DOCTRINE IN COMMISSIONER OF INTERNAL REVENUE VS. BRITISH OVERSEAS AIRWAYS CORPORATION AS A LEGAL BASIS FOR THE PROTESTED ASSESSMENT III THE COURT OF TAX APPEALS ERRED IN UPHOLDING THE COMMISSIONER'S DECISION HOLDING PETITIONER MARSMAN LIABLE FOR WITHHOLDING TAXES ON ADVERTISING AND SUBSCRIPTION FEES PAID TO MEDIMEDIA/MEDPRO TEaADS In support of its first assignment of error, petitioner claims that the Best Evidence Obtainable Method applies only when a report required by law as basis for the assessment of any internal revenue tax shall not be forthcoming, or when there is reason to believe that such report is erroneous, incomplete or false, and that there is no other reasonable method in determining petitioner's tax deficiency. This situation, according to the petitioner, does not occur in the case at bar, as there are other more reliable sources of information which could have formed the basis of the assessments, sources which the BIR agents failed and refused to make use of. Petitioner contests the uniform assessment made by the BIR for the years 1989, 1990 and 1991. It claims that it is the respondent that has the burden of proving that there is no other obtainable and available means to prove the taxpayer's true liability, The basis of the respondent in imposing tax deficiency solely the confidential information of witness Rogelio Carbonel. On the second issue, petitioner insists that the BOAC case finds no application as it involves income taxes assessed upon a resident foreign corporation while the case at bar involves alleged withholding tax liabilities arising out of advertising and subscription fees remitted by petitioner to two nonresident foreign corporations. Likewise, said case falls under Section 24(b)(2) of the NIRC pertaining to tax sources of resident foreign corporation. On the other hand, the instant case falls under Section 22,(b) of the NIRC. Petitioner claims there is no mention at all of the liability of agents of non-resident foreign corporations in the BOAC case. Petitioner maintains that the rulings of the BIR in the cases of Newsweek and Dow Jones should not be applied retroactively, invoking the decisions in Commissioner vs. Court of Appeals, 267 SCRA 557 and Commissioner vs. Telefunken, 249 SCRA 401 . On the third issue, petitioner insists that it did not undertake any collection activity in favor of Medimedia or Medpro. It claims that it absolutely did not have any control of the funds because the fees were not payable at all to Marsman and were never entered in the books nor were they deposited in the accounts of Marsman. On the contrary, evidence discloses that the checks given as payment by subscribers and advertisers were all payable directly to Medimedia or to Medpro. The very nature of its business purposes and its relation with Medimedia and Medpro precluded it from withholding any payments made by advertisers and subscribers from the Philippines. Finally, as fourth assignment of error, petitioner claims that the assessment notices and demand letters dated December 1, 2000 were issued contrary to Section 235 of the NIRC which allows the examination of the taxpayer's books of accounts only once a year. As its books were already examined and consequently assessed deficiency tax liabilities for the taxable years 1989, 1990 and 1991, which it duly paid, the subsequent assessment notices and demand letters are therefore void. We dismiss the petition. First . We cannot adhere to petitioner's claim of irregularity on the part of the respondent Commissioner in using the Best Evidence Obtainable method in arriving at the disputed assessment in the light of the express authority granted by the National Internal Revenue Code, Section 6(B) thereof: "(B) Failure to Submit Required Returns, Statements, Reports and Other Documents. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by the laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. (Emphasis Ours) In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes." In simple terms, the Commissioner is given the power, under Section 6(B) of the National Internal Revenue Code (NIRC) to assess the proper tax on the best evidence obtainable when a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations, or when there is a reason to believe that any such report is false, incomplete or erroneous. In any such case, the Commissioner may make a return or amend any return so made or amended is prima facie good and sufficient for all legal purposes, unless the taxpayer can prove the contrary. TAaEIc In the case at bar, the basis for the resort to the best evidence obtainable method is the failure of the taxpayer to report certain transactions between Medical Progress Pacific Limited and/or Medimedia Pacific Limited which is in turn based on the Confidential Information gathered by the BIR investigators. On the strength of this Memorandum Report of the assigned revenue officers, Letter Authority No. 002548 was issued by the Commissioner authorizing the examination of petitioner's books of accounts and other accounting records for income tax, withholding tax and percentage/value added taxes for the years 1989, 1990 and 1991. The failure therefore of the petitioner to submit the required return or other documents necessary to make the necessary assessment of its tax liability makes it incumbent upon the respondent Commissioner to resort to the application of the Best Evidence Obtainable Method to recover unpaid taxes due the government. Any assessment made, as a result thereof is presumed prima facie correct and sufficient for all legal purposes. A tax assessment issued by the Commissioner of Internal Revenue or a subordinate official is presumed correct and made in good faith, and is to be given full weight and credit. It is the taxpayer that has the burden of showing that the assessment is illegal or improper. This has been the consistent and uniform holding of the Supreme Court in a long line of cases. Second . The income subject to tax here is clearly sourced in the Philippines. We reiterate the rule established in the case of Commissioner vs. British Overseas Airways Corporation, 149 SCRA 395: "The source of the income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in the Philippine currency. The situs or source of payments is in the Philippines. The flow of wealth proceeded from, and occurred within, Philippines territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government." Petitioner, however, would impress upon this Court that the BOAC doctrine should not be applied, as unlike the said case, the entity involved in the present controversy is a non-resident foreign corporation. Section 28(B)(1) of the National Internal Revenue Code , relative to tax on non-resident foreign corporations, provides. . . . a foreign corporation not engaged in the business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except insurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains . . ." When read together with Section 28(A) of the said NIRC, it is clear that a foreign corporation, whether engaged in business or not, is taxed on all income derived from sources within the Philippines. There is thus no point in making a distinction, because as far as taxability is concerned, the same rule applies to both resident and non-resident foreign corporation. The only difference in the tax liability of a resident foreign corporation from a non-resident foreign corporation is that the latter's tax rate is fixed at 35%, while that of the former changes with respect to certain incomes as provided for in the NIRC. It bears stressing that the enumeration of items of gross income subject to tax as contained in Section 28(B) thereof does not remove subscription and advertisement payments within the ambit of the term "gross income". The provision, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. The said NIRC provision does not state, in any way, that it is an all-inclusive enumeration, or that no other kind of income may be considered. Going back to the case of British Overseas Airways vs. Commissioner of Internal Revenue, 149 SCRA 395 , the test of taxability is always the "source" and the source of an income is that activity which produced the income. Unquestionably, while the principal of the petitioner is a Hong Kong based corporation, it cannot be denied that the subscriptions and advertisements in the principal's magazines were secured by the agent in the Philippines and hence, revenue therefrom was derived from a business activity pursued within the Philippines. As held in the BOAC case, the word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. HDIaET Finally , We reiterate the rule that rulings of the Commissioner of Internal Revenue take on the character of substantive rules and are generally binding and effective if not otherwise contrary to law and the Constitution. In the same vein, it is a principle widely accepted that this contemporaneous construction placed upon the statute by the executive officers whose duty is to enforce it is entitled to great respect by the courts. This is especially true if the interpretation has been observed for a long time without objection. In Sea Land Service, Inc. vs. Court of Appeals, 357 SCRA 441 , the Supreme Court had once again the occasion to rule that it will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its functions, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. Anent the contention that the rulings applied by the Commissioner in resolving the present controversy should not be given retroactive effect, We find the same untenable. The BOAC case was decided in 1987, long before the petitioner in the case at bar incurred the tax liability subject of the assessment. The Commissioner, in the case at bar, seeks to recover unpaid taxes dating back to 1989, 1990 and 1991. Notwithstanding the subsequent rulings of the Commissioner in Newsweek (decided in 1999), the rule established by BOAC vs. Commissioner was never abrogated, and hence, remained good law. Besides, the rule on non-retroactivity of BIR rulings admits of certain exceptions. The rule finds no application where: (a) the taxpayer deliberately misstates or omits material facts from his return in any document required of him by the BIR; (b) the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based, or; (c) the taxpayer acted in bad faith (Section 246, National Internal Revenue Code) . As earlier explained, the first exception applies to the petitioner. WHEREFORE finding the instant petition for review to be without merit in fact and in law, the same is DENIED DUE COURSE. The July 5, 2000 Decision and the October 23, 2002 Resolution of the Court of Tax Appeals (CTA) in CTA Case No. 5940 are hereby AFFIRMED in toto . No costs. CaHAcT SO ORDERED. Vidallon-Magtolis and Abdulwahid, JJ . , concur.