COMMISSIONER OF G.R. No. 153793
INTERNAL REVENUE,
Petitioner, Present:
Panganiban, C.J.
(Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman Promulgated:
(Attorney-in-fact)
Respondent. August
29, 2006
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YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR)
appeals from the January 18, 2002 Decision[1] of
the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of
respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision[2] of
the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the
The facts show that respondent Juliane
Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc.,
a domestic corporation engaged in “[m]anufacturing, marketing on wholesale
only, buying or otherwise acquiring, holding, importing and exporting, selling
and disposing embroidered textile products.”[4] Through JUBANITEX’s General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent as
commission agent. It was agreed that
respondent will receive 10% sales commission on all sales actually concluded
and collected through her efforts.[5]
In 1995, respondent received the
amount of P1,707,772.64, representing her sales commission income from which
JUBANITEX withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On
On
The next day,
On petition with the Court of Appeals,
the latter reversed the Decision of the CTA, holding that respondent received
the commissions as sales agent of JUBANITEX and not as President thereof. And since the “source” of income means the
activity or service that produce the income, the sales commission received by
respondent is not taxable in the
WHEREFORE, premises considered, the
assailed decision of the Court of Tax Appeals dated
SO ORDERED.[8]
Petitioner filed a motion for reconsideration but was denied.[9] Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in
the
Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She
contended that income of nonresident aliens like her is subject to tax only if
the source of the income is within the
The issue here is whether respondent’s sales commission income is taxable
in the
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident
Alien Engaged in Trade or Business Within the
(1) In General. –
A nonresident alien individual engaged in trade or business in the
x x x x
(B) Nonresident
Alien Individual Not Engaged in Trade or Business Within the
Pursuant to the foregoing provisions of the NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to Philippine income
taxation on their income received from all sources within the
The first Philippine income tax law
enacted by the Philippine Legislature was Act No. 2833,[10]
which took effect on
SECTION 1. (a) There shall be levied, assessed, collected,
and paid annually upon the entire net income received in the preceding calendar
year from all sources by every individual, a citizen or resident of the
Philippine Islands, a tax of two per centum upon such income; and a like tax
shall be levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources within the Philippine
Islands by every individual, a nonresident alien, including interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or
otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue
Law of 1916 as amended by U.S. Revenue Law of 1917.[12] Being
a law of American origin, the authoritative decisions of the official charged
with enforcing it in the
The Internal Revenue Code of the U.S. enumerates specific types of income
to be treated as from sources within the U.S. and specifies when similar types
of income are to be treated as from sources outside the U.S.[14] Under the said Code, compensation for labor
and personal services performed in the U.S., is generally treated as income
from U.S. sources; while compensation for said services performed outside the
U.S., is treated as income from sources outside the U.S.[15] A
similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income
From Sources Within the
x x x x
(3) Services. –
Compensation for labor or personal services performed in the
x x x x
(C) Gross Income
From Sources Without the
x x x x
(3) Compensation
for labor or personal services performed without the
The following discussions on sourcing of income under the Internal
Revenue Code of the
The Supreme Court has said, in a definition much quoted but
often debated, that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. While the
three elements of this attempt at definition need not be accepted as
all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from “sources within the
If the income is from labor the place where the labor is done
should be decisive; if it is done in this country, the income should be from “sources
within the
Much confusion will be avoided by regarding the term “source”
in this fundamental light. It is not a
place, it is an activity or property. As such, it has a situs or location, and
if that situs or location is within the
The intention of Congress in the 1916 and subsequent statutes
was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the “source,” or situs of the
activities or property which produce the income. The result is that, on the one hand,
nonresident aliens and nonresident foreign corporations are prevented from
deriving income from the
The underlying theory is that the consideration for taxation
is protection of life and property and that the income rightly to be levied
upon to defray the burdens of the United States Government is that income which
is created by activities and property protected by this Government or obtained
by persons enjoying that protection. [16]
The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered.[17]
In Alexander Howden & Co., Ltd. v. Collector of
Internal Revenue,[18] the
Court addressed the issue on the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign insurance company in respect
of risks located in the
The source of an income is the property, activity or service
that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance
contracts, accordingly, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums,
and the same took place in the
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),[20]
the issue was whether BOAC, a foreign airline company which does not maintain
any flight to and from the Philippines is liable for Philippine income taxation
in respect of sales of air tickets in the Philippines, through a general sales
agent relating to the carriage of passengers and cargo between two points both
outside the Philippines. Ruling in the
affirmative, the Court applied the case of Alexander
Howden & Co., Ltd. v. Collector of
Internal Revenue, and
reiterated the rule that the source of income is that “activity” which produced
the income. It was held that the “sale
of tickets” in the
Both the petitioner and respondent cited the case of Commissioner of
Internal Revenue v. British Overseas Airways Corporation in support of
their arguments, but the correct interpretation of the said case favors the
theory of respondent that it is the situs of the activity that
determines whether such income is taxable in the
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the
x x x x
The source of an income is the property, activity or service
that produced the income. For the source
of income to be considered as coming from the
A transportation ticket is not a mere piece of paper. When
issued by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the purchaser
of the ticket to pay the fare and the corresponding obligation of the carrier
to transport the passenger upon the terms and conditions set forth thereon. The
ordinary ticket issued to members of the traveling public in general embraces
within its terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship.[22]
The Court reiterates the rule that “source of income” relates to the
property, activity or service that produced the income. With respect to rendition of labor or
personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is therefore no merit in petitioner’s
interpretation which equates source of income in labor or personal service with
the residence of the payor or the place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual circumstances
showing that her income is exempt from Philippine income taxation.
The decisive factual
consideration here is not the capacity in which respondent received the income,
but the sufficiency of evidence to prove that the services she rendered were
performed in
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
taxpayer.[24] To those therefore,
who claim a refund rest the burden of proving that the transaction subjected to
tax is actually exempt from taxation.
In the instant
case, the appointment letter of respondent as agent of JUBANITEX stipulated
that the activity or the service which would entitle her to 10% commission
income, are “sales actually concluded and collected through [her] efforts.”[25] What she presented as evidence to prove that
she performed income producing activities abroad, were copies of documents she
allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or
designs and fabrics to be used in the finished products as well as samples of
sales orders purportedly relayed to her by clients. However, these documents do not show whether
the instructions or orders faxed ripened into concluded or collected sales in
The paucity of
respondent’s evidence was even noted by Atty. Minerva Pacheco, petitioner’s
counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent presented no
contracts or orders signed by the customers in
In sum, we find
that the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as
adequate to support the conclusion[31]
that it was in Germany where she performed the income producing service which
gave rise to the reported monthly sales in the months of March and May to
September of 1995. She thus failed to
discharge the burden of proving that her income was from sources outside the
The Court notes
that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a
previous case for refund of income withheld from respondent’s remunerations for
services rendered abroad, the Court in a Minute Resolution dated February 17, 2003,[33] sustained
the ruling of the Court of Appeals that respondent is entitled to refund the sum
withheld from her sales commission income for the year 1994. This ruling has no bearing in the instant
controversy because the subject matter thereof is the income of respondent for
the year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has no
application here. Its elements are: (1) there must be a final
judgment or order; (2) the court that rendered the judgment must have
jurisdiction over the subject matter and
the parties; (3) it must be a judgment on the merits; (4) there must be between
the two cases identity of parties, of subject matter, and of
causes of action. [34] The instant case, however, did not satisfy the
fourth requisite because there is no identity
as to the subject matter of the previous and present
case of respondent which deals with income earned and activities performed for different
taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8,
2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED
and SET ASIDE. The June 28, 2000 Decision of the Court of Tax
Appeals in C.T.A. Case No. 5633, which denied respondent’s claim for refund of
income tax paid for the year 1995 is REINSTATED.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson
MA. ALICIA
AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.
Associate Justice Associate Justice
MINITA V. CHICO-NAZARIO
Associate Justice
CERTIFICATION
Pursuant
to Section 13, Article VIII of the Constitution, it is hereby certified that
the conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.
ARTEMIO
V. PANGANIBAN
Chief Justice
[1]
Penned by Associate Justice Salvador J. Valdez, Jr. and concurred in by
Associate Justices Mercedes Gozo-Dadole and Juan Q. Enriquez, Jr; rollo, pp. 47-57.
[2]
Penned by Presiding Judge Ernesto D. Acosta, with Associate Judges Ramon O. De
Veyra, concurring and Amancio Q. Saga, dissenting; rollo, pp. 78-91.
[3] Rollo, pp. 59-61.
[4]
General Information Sheet of JUBANITEX, Inc., rollo, p. 211.
[5] Rollo, p. 100.
[6]
Exhibit “A,” Folder of Exhibits, unpaged.
[7]
Petition for Review with the CTA, records, p. 4.
[8] Rollo, p. 57.
[9]
Resolution dated
[10]
An Act establishing the income tax law, making other provisions relating to
said tax, and amending certain sections of Act Numbered Twenty-seven hundred
and eleven.
[11]
F. Dalupan, National Internal Revenue Code Annotated, 1964 ed., vol. 1, p. 25.
[12]
[13]
J. Arañas, Annotations and Jurisprudence on the National Internal Revenue Code,
as Amended, 1963 ed., vol. 1, p. 34.
[14]
34 Am Jur 2d, ¶ 30651, p. 453 (2000).
[15]
34 Am Jur 2d, ¶ 30654, p. 453 (2000).
[16]
12 J. Mertens, The Law of Federal Income Taxation, Section 45C:04, pp. 45C-12
to 45C-13 (1996). The 1957 edition
thereof was cited in the dissenting opinion of Justice Florentino P. Feliciano
in Commissioner of Internal Revenue v. British Overseas Airways Corporation, G.R. Nos. L-65773-74,
[17]
12 J. Mertens, The Law of Federal Income Taxation, Section 45C:11, p. 45C-32
(1996).
[18]
121 Phil. 579 (1965).
[19]
[20] Supra note 16.
[21]
[22]
[23] Velarde
v. Social Justice Society, G.R. No. 159357, April 28, 2004, 428 SCRA 283,
312.
[24] Calamba Steel Center, Inc. v. Commissioner of Internal
Revenue, G.R.
No. 151857, April 28, 2005, 457 SCRA 482, 500.
[25] Rollo, p. 100.
[26]
TSN,
[27] Rollo, pp. 95-99.
[28]
Folder of Exhibits, unpaged.
[29]
Records, pp. 74-75.
[30]
Respondent’s Formal Offer of Evidence, rollo,
p. 202.
[31] Transglobe
International, Inc. v. Court of Appeals, 361 Phil. 727, 738 (1999).
[32]
G.R. No. 156305.
[33] It became final and executory on
[34] Barbacina
v. Court of Appeals, G.R.
No. 135365,