Facts:

Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985
the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid
protested the assessments particularly the 25% surtax for undue accumulation of earnings. It
claimed that said profits were retained to increase petitioners working capital and it would be used
for reasonable business needs of the company. The CIR refused to allow the cancellation of the
assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the
assessment because 1) it accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned
subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and
traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits
corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of
the Corporation Code but that petitioners purpose did not fall within such purposes. It found that
there was no need to set aside such retained earnings as working capital as it had considerable
liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec.
25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTAs
decision.

Issue: Whether or not the accumulation of income was

justified.
Held:
In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon the shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere
afterthoughts. The accumulated profits must be used within reasonable time after the close of the
taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that
such accumulated was for the immediate needs of the business.
To determine the reasonable needs of the business, the United States Courts have invented the
Immediacy Test which construed the words reasonable needs of the business to mean the
immediate needs of the business, and it is held that if the corporation did not prove an immediate

need for the accumulation of earnings and profits such was not for reasonable needs of the business
and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs
of a business depend on the nature of the business, its credit policies, the amount of inventories, the
rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and
other similar factors. The Tax Court opted to determine the working capital sufficiency by using the
ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the
assessment is correct. With the petitioners failure to prove the CIR incorrect, clearly and
conclusively, the Tax Courts ruling is upheld.

G.R. No. 108067. January 20, 2000]

CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS,

THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondents.
DECISION
QUISUMBING, J.:
Petitioner disputes the decision of the Court of Appeals which affirmed the decision of the
Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue
the amount of three million, seven hundred seventy-four thousand, eight hundred sixty seven
pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper accumulation of profits for
1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987,
under Sec. 25 of the National Internal Revenue Code.
[1]

[2]

The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a
wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods,
and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment
of deficiency income tax of one hundred nineteen thousand eight hundred seventeen
(P119,817.00) pesos for taxable year 1981, as follows:

"Net income disclosed by

the return as audited

14,575,210.00

Add: Discrepancies:

Professional
fees/yr.
per
investigatio

17018

262,877.00
110,399.37

Total Adjustment

152,477.00

Net income per Investigation

14,727,687.00

Less: Personal and additional exemptions

___________

Amount subject to tax

14,727,687.00

Income tax due thereon .25% Surtax 2,385,231.50

3,237,495.00

Less: Amount already assessed .

5,161,788.00

BALANCE .

75,709.00

_______ monthly interest from ..1,389,636.00

44,108.00

_________

____________

Compromise penalties ...

___________

TOTAL AMOUNT DUE ..3,774,867.50

119,817.00"

[3]

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and
1981 Deficiency Percentage Assessment of P8,846.72. Petitioner, through its external
accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for the undue
accumulation of earnings was not proper because the said profits were retained to increase
petitioners working capital and it would be used for reasonable business needs of the company.
Petitioner contended that it availed of the tax amnesty under Executive Order No. 41, hence
enjoyed amnesty from civil and criminal prosecution granted by the law.
[4]

On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the
cancellation of the assessment notices and rendered its resolution, as follows:
"It appears that your client availed of Executive Order No. 41 under File No.
32A-F-000455-41B as certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the tax
amnesty under Executive Order No. 41, as amended is sufficient basis, in
appropriate cases, for the cancellation of the assessment issued after August 21,
1986. (Revenue Memorandum Order No. 4-87) Said availment does not,
therefore, result in cancellation of assessments issued before August 21, 1986, as
in the instant case. In other words, the assessments in this case issued on January
30, 1985 despite your clients availment of the tax amnesty under Executive Order
No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay this
Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30)
days from receipt hereof, otherwise this office will be constrained to enforce
collection thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter."

[5]

Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both
parties agreed to compromise the 1981 deficiency income tax assessment of P119,817.00.
Petitioner paid a reduced amount --twenty-six thousand, five hundred seventy-seven pesos
(P26,577.00) -- as compromise settlement. However, the surtax on improperly accumulated
profits remained unresolved.

Petitioner claimed that CIRs assessment representing the 25% surtax on its accumulated earnings
for the year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its
earnings and profits for reasonable business requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid
Company, a corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange. This being
the case, no individual shareholder of petitioner could have evaded or prevented the imposition
of individual income taxes by petitioners accumulation of earnings and profits, instead of
distribution of the same.
In denying the petition, the Court of Tax Appeals made the following pronouncements:
"Petitioner contends that it did not declare dividends for the year 1981 in order to
use the accumulated earnings as working capital reserve to meet its "reasonable
business needs". The law permits a stock corporation to set aside a portion of its
retained earnings for specified purposes (citing Section 43, paragraph 2 of the
Corporation Code of the Philippines). In the case at bar, however, petitioners
purpose for accumulating its earnings does not fall within the ambit of any of
these specified purposes.
More compelling is the finding that there was no need for petitioner to set aside a
portion of its retained earnings as working capital reserve as it claims since it had
considerable liquid funds. A thorough review of petitioners financial statement
(particularly the Balance Sheet, p. 127, BIR Records) reveals that the corporation
had considerable liquid funds consisting of cash accounts receivable, inventory
and even its sales for the period is adequate to meet the normal needs of the
business. This can be determined by computing the current asset to liability ratio
of the company:

curren
t ratio

= current assets / current liabilities

= P 47,052,535.00 / P21,275,544.00

= 2.21: 1

The significance of this ratio is to serve as a primary test of a companys solvency

to meet current obligations from current assets as a going concern or a measure of
adequacy of working capital.
xxx
We further reject petitioners argument that "the accumulated earnings tax does not
apply to a publicly-held corporation" citing American jurisprudence to support its
position. The reference finds no application in the case at bar because under
Section 25 of the NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated
September 17, 1980), the exceptions to the accumulated earnings tax are
expressly enumerated, to wit: Bank, non-bank financial intermediaries,
corporations organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance companies, or personal
holding companies, whether domestic or foreign. The law on the matter is clear
and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the
provision of Section 25 of the NIRC should apply to petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect
to its effectivity and coverage...
... Said availment does not result in cancellation of assessments issued before
August 21, 1986 as petitioner seeks to do in the case at bar. Therefore, the
assessments in this case, issued on January 30, 1985 despite petitioners availment
of the tax amnesty under E.O. 41 as amended, still subsist."
xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay
respondent Commissioner of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987."
[6]

Petitioner appealed the Court of Tax Appeals decision to the Court of Appeals. Affirming the
CTA decision, the appellate court said:
"In reviewing the instant petition and the arguments raised herein, We find no
compelling reason to reverse the findings of the respondent Court. The respondent
Courts decision is supported by evidence, such as petitioner corporations financial
statement and balance sheets (p. 127, BIR Records). On the other hand the
petitioner corporation could only come up with an alternative formula lifted from
a decision rendered by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24
T.C.M. [CCH] 1030). Applying said formula to its particular financial position,
the petitioner corporation attempts to justify its accumulated surplus earnings. To
Our mind, the petitioner corporations alternative formula cannot overturn the

persuasive findings and conclusion of the respondent Court based, as it is, on the
applicable laws and jurisprudence, as well as standards in the computation of
taxes and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED and the decision of the Court of Tax Appeals dated August 6, 1992
in C.T.A. Case No. 4250 is AFFIRMED in toto."
[7]

Hence, petitioner now comes before us and assigns as sole issue:

WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE
PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR
THE YEAR 1981.
[8]

Section 25 of the old National Internal Revenue Code of 1977 states:

[9]

"Sec. 25. Additional tax on corporation improperly accumulating profits or

surplus "(a) Imposition of tax. -- If any corporation is formed or availed of for the purpose
of preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of
permitting its gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such corporation, for each taxable
year, a tax equal to twenty-five per-centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same
manner and subject to the same provisions of law, including penalties, as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or indirectly,
by one person.
"(c) Evidence determinative of purpose. -- The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.
"(d) Exception -- The provisions of this sections shall not apply to banks, nonbank financial intermediaries, corporation organized primarily, and authorized by
the Central Bank of the Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.

The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated
earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a publicly owned
company. Specifically, petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals had taken the position that the accumulated
earnings tax could only apply to a closely held corporation.
[10]

A review of American taxation history on accumulated earnings tax will show that the
application of the accumulated earnings tax to publicly held corporations has been problematic.
Initially, the Tax Court and the Court of Claims held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that the
accumulated earnings tax could only apply to closely held corporations. Despite Golconda, the
Internal Revenue Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of shareholders. The Service
indicated it would not follow the Ninth Circuit regarding publicly held corporations. In 1984,
American legislation nullified the Ninth Circuits Golconda ruling and made it clear that the
accumulated earnings tax is not limited to closely held corporations. Clearly, Golconda is no
longer a reliable precedent.
[11]

[12]

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner
does not fall among those exempt classes. Besides, the rule on enumeration is that the express
mention of one person, thing, act, or consequence is construed to exclude all others. Laws
granting exemption from tax are construedstrictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of
proof rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed, a burden which petitioner here has failed to discharge.
[13]

[14]

[15]

[16]

Another point raised by the petitioner in objecting to the assessment, is that increase of working
capital by a corporation justifies accumulating income. Petitioner asserts that respondent court
erred in concluding that Cyanamid need not infuse additional working capital reserve because it
had considerable liquid funds based on the 2.21:1 ratio of current assets to current liabilities.
Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as working capital
reserve, sufficient amounts of liquid assets to carry the company through one operating cycle.
The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities
and any extraordinary expenses reasonably anticipated, plus enough to operate the business
during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw
[17]

materials, raw materials into inventory, and inventory into sales, including the time it takes to
collect payment for the sales.
[18]

Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as
working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts
that Cyanamid had a working capital deficit of P7,986,633.00. Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly accumulated to increase the petitioners working
capital for the succeeding year.
[19]

We note, however, that the companies where the "Bardahl" formula was applied, had operating
cycles much shorter than that of petitioner. In Atlas Tool Co., Inc. vs. CIR, the companys
operating cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi
vs. United States, the corporations operating cycle was only 56.87 days, or 15.58% of the year.
In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reflecting
that petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover the
operating costs of the business. There are variations in the application of the "Bardahl" formula,
such as average operating cycle or peak operating cycle. In times when there is no recurrence of
a business cycle, the working capital needs cannot be predicted with accuracy. As stressed by
American authorities, although the "Bardahl" formula is well-established and routinely applied
by the courts, it is not a precise rule. It is used only for administrative convenience. Petitioners
application of the "Bardahl" formula merely creates a false illusion of exactitude.
[20]

[21]

[22]

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption
of the industry standard. The ratio of current assets to current liabilities is used to determine the
sufficiency of working capital. Ideally, the working capital should equal the current liabilities and
there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to
1" rule.
[23]

[24]

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said
working capital was expected to increase further when more funds were generated from the
succeeding years sales. Available income covered expenses or indebtedness for that year, and
there appeared no reason to expect an impending working capital deficit which could have
necessitated an increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue, we held that:
[25]

"...[T]here is no need to have such a large amount at the beginning of the

following year because during the year, current assets are converted into cash and
with the income realized from the business as the year goes, these expenses may
well be taken care of. [citation omitted]. Thus, it is erroneous to say that the
taxpayer is entitled to retain enough liquid net assets in amounts approximately
equal to current operating needs for the year to cover cost of goods sold and
operating expenses: for it excludes proper consideration of funds generated by the
collection of notes receivable as trade accounts during the course of the year."
[26]

If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of
proving the determination wrong, together with the corresponding burden of first going forward
with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable accumulation of earnings or profits.
[27]

In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which
are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable
time after the close of the taxable year. In the instant case, petitioner did not establish, by clear
and convincing evidence, that such accumulation of profit was for the immediate needs of the
business.
[28]

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, we ruled:

[29]

"To determine the reasonable needs of the business in order to justify an

accumulation of earnings, the Courts of the United States have invented the socalled Immediacy Test which construed the words reasonable needs of the
business to mean the immediate needs of the business, and it was generally held
that if the corporation did not prove an immediate need for the accumulation of
the earnings and profits, the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. (Mertens, Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 103).
[30]

In the present case, the Tax Court opted to determine the working capital sufficiency by using the
ratio between current assets to current liabilities. The working capital needs of a business depend
upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover,
the amount of accounts receivable, the collection rate, the availability of credit to the business,
and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax
court with the required definiteness envisioned by the statute. We agree with the tax court that
the burden of proof to establish that the profits accumulated were not beyond the reasonable
needs of the company, remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very nature of its function, 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.
Unless rebutted, all presumptions generally are indulged in favor of the correctness of the
CIRs assessment against the taxpayer. With petitioners failure to prove the CIR incorrect, clearly
and conclusively, this Court is constrained to uphold the correctness of tax courts ruling as
affirmed by the Court of Appeals.
[31]

WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals,
sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.2/22/00 9:50 AM

Rollo, pp. 25-34.

CA Rollo, pp. 19-28.
[3]
Records, CA Rollo, p. 24.
[4]
Id. at 25.
[5]
Id. at 27.
[6]
Id. at 24-28.
[7]
Rollo, p. 33.
[8]
Id. at 9.
[9]
The tax on improperly accumulated income tax underwent changes since the time of assessment of herein
petitioner, in 1985, until the enactment of the present tax code, the 1997 NIRC. This provision was subsequently
repealed by Executive Order No. 37 which took effect on January 1, 1986. The reason for the repeal was explained
by the Commissioner of Internal Revenue through Revenue Memorandum Circular No. 26-86 as follows: "The tax
on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute
corporate earnings so that the said earnings will be taxed to the shareholders. The exemption of dividends from
income tax renders the improperly accumulated surplus tax meaningless. Accordingly, the provisions of the tax on
improper accumulation or surplus are repealed and replaced with provisions to govern the taxation of foreign
corporation which are lifted from Section 24 (b)." (Annotation, Improper Accumulation of Corporate Surplus or
Profit by Severiano S. Tabios, 173 SCRA, pp. 403-408.) However, Section 29 of the New 1997 NIRC provides for
the revival of the imposition of improperly accumulated earnings tax. The exemption from this rule now includes
publicly held corporation (par. B, 2, Section 29, 1997 NIRC)
[10]
A publicly owned corporation was one where the outstanding stock was owned by more than 1,500 persons and
not more than 10% of either the total combined voting power, or, the total value of all classes of its outstanding
stock was owned at the close of the taxable year, by any one individual, either directly or indirectly, under the
provision for attribution of ownership.
[11]
10 Mertens Law of Federal Income Taxation, Chapter 39, Accumulated Earnings Tax, Sec. 39.05.
[12]
Ibid.
[13]
Commissioner of Customs vs. Court of Tax Appeals, 224 SCRA 665, 669-670 (1993); Centeno vs. VillalonPornillos, 236 SCRA 197 (1994)
[14]
Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, 181 SCRA 214, 223-224 (1990)
[15]
Ibid.
[16]
Ibid.
[17]
Bardahl Manufacturing Corp. vs. Commissioner, 24 TCM 1030.
[18]
10 Mertens Law of Federal Income Taxation, Chapter 39, Accumulated Earnings Tax, Sec. 39.133.
[19]
Rollo, p. 118.
[20]
614 F2d 860.
[21]
535 F 2d 1225.
[22]
10 Mertens Law of Federal Income Taxation, Chapter 39, Accumulated Earnings Tax, Sec. 39.132.
[23]
Id. at Sec. 39.128.
[24]
19 Fletcher Cyclopedia Corporations, Chapter 68, Corporation Practice, Section 9248 (1975)
[25]
21 SCRA 17 (1967)
[26]
Id. at 27.
[27]
Nolledo and Nolledo, The National Internal Revenue Code of the Philippines, Annotated (1982)
[28]
Basilan Estates, Inc. vs. Commissioner of Internal Revenue, 21 SCRA 17, 26 (1967), citing Jacob Mertens, Jr.,
The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213.
[29]
127 SCRA 483 (1984)
[30]
Id. at 494.
[31]
Commissioner of Internal Revenue vs. Court of Appeals, 271 SCRA 605, 608 (1997)
[1]
[2]

SOUTH AFRICAN AIRWAYS

Facts: Petitioner South African Airways is a foreign

corporation organized and existing under and by virtue of
the laws of the Republic of South Africa. Its principal
office is located at Airways Park, Jones Road,
Johannesburg International Airport, South Africa. In the
Philippines, it is an internal air carrier having no landing
rights in the country. Petitioner has a general sales agent
in the Philippines, Aerotel Limited Corporation (Aerotel).
Aerotel sells passage documents for compensation or
commission for petitioners off-line flights for the
carriage of passengers and cargo between ports or points
outside the territorial jurisdiction of the Philippines.
Petitioner is not registered with the Securities and
Exchange Commission as a corporation, branch office, or
partnership. It is not licensed to do business in the
Philippines. It paid a corporate tax in the rate of 32% of
its gross billings. However, it subsequently claim for
refund contending that its income should be taxed at the
rate of 2 1/2% of its gross billings.
Issues: whether or not petitioners income is sourced
within the Philippines and is to be taxed at 32% of the
gross
billings?
Held: Yes! In the instant case, the general rule is that resident foreign
corporations shall be liable for a 32% income tax on their income from
within the Philippines, except for resident foreign corporations that are
international carriers that derive income from carriage of persons,
excess baggage, cargo and mail originating from the Philippines which
shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner,

being an international carrier with no flights originating from the

Philippines, does not fall under the exception. As such, petitioner must
fall under the general rule. This principle is embodied in the Latin
maxim, exception firmat regulam in casibus non exceptis, which means,
a thing not being excepted must be regarded as coming within the
purview
of
the
general
rule.
To reiterate, the correct interpretation of the above provisions is
that, if an international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from
other activities in the country will be taxed at the rate of 32% of
such income.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION
SOUTH AFRICAN AIRWAYS,
Petitioner,

G.R. No. 180356

Present:

- versus -

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

CORONA, J., Chairperson,

VELASCO, JR.,
LEONARDO-DE CASTRO,*
PERALTA, and
MENDOZA, JJ.
Promulgated:
February 16, 2010

x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks the reversal of
the July 19, 2007 Decision[1] and October 30, 2007 Resolution[2] of the Court of
Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African
Airways v. Commissioner of Internal Revenue. The assailed decision affirmed the
Decision dated May 10, 2006[3] and Resolution dated August 11, 2006[4] rendered
by the CTA First Division.

The Facts
Petitioner South African Airways is a foreign corporation organized and existing
under and by virtue of the laws of the Republic of South Africa. Its principal office
is located atAirways Park, Jones Road, Johannesburg International Airport, South
Africa. In the Philippines, it is an internal air carrier having no landing rights in the
country. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Corporation (Aerotel). Aerotel sells passage documents for compensation or
commission for petitioners off-line flights for the carriage of passengers and cargo
between ports or points outside the territorial jurisdiction of the Philippines.
Petitioner is not registered with the Securities and Exchange Commission as a
corporation, branch office, or partnership. It is not licensed to do business in
the Philippines.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax
returns for its off-line flights, summarized as follows:
Period

Date Filed

2.5% Gross
Phil. Billings

For Passenger

Sub-total
For Cargo

1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
st

1 Quarter
2nd Quarter
3rd Quarter
4th Quarter

May 30, 2000

August 29, 2000
November 29, 2000
April 16, 2000
May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000

Sub-total
TOTAL

PhP

PhP
PhP

PhP

222,531.25
424,046.95
422,466.00
453,182.91
1,522,227.11
81,531.00
50,169.65
36,383.74
37,454.88
205,539.27
1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal

Revenue, Revenue District Office No. 47, a claim for the refund of the amount of
PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for
the taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003,
petitioner filed a Petition for Review with the CTA for the refund of the
abovementioned amount. The case was docketed as CTA Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition
for lack of merit. The CTA ruled that petitioner is a resident foreign corporation
engaged in trade or business in the Philippines. It further ruled that petitioner was
not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National Internal
Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable
to pay a tax of 32% on its income derived from the sales of passage documents in
the Philippines. On this ground, the CTA denied petitioners claim for a refund.
Petitioners Motion for Reconsideration of the above decision was denied by the
CTA First Division in a Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its
claim for a refund of its tax payment on its GPB. This was denied by the CTA in its
assailed decision. A subsequent Motion for Reconsideration by petitioner was also
denied in the assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues

Whether or not petitioner, as an off-line international carrier

selling passage documents through an independent sales agent in the
Philippines, is engaged in trade or business in the Philippines subject to
the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of
passage documents covering petitioners off-line flights is Philippinesource income subject to Philippine income tax.
Whether or not petitioner is entitled to a refund or a tax credit of
erroneously paid tax on Gross Philippine Billings for the taxable year
2000 in the amount of P1,727,766.38.[5]

The Courts Ruling

This petition must be denied.
Petitioner Is Subject to Income Tax
at the Rate of 32% of Its Taxable Income
Preliminarily, we emphasize that petitioner is claiming that it is exempted
from being taxed for its sale of passage documents in the Philippines. Petitioner,
however, failed to sufficiently prove such contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation,[6] we held, Since an action for a tax refund partakes of the nature of
an exemption, which cannot be allowed unless granted in the most explicit and
categorical language, it is strictly construed against the claimant who must
discharge such burden convincingly.
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal implication
of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is
petitioners contention that, with the new definition of GPB, it is no longer liable
under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on

GPB is inapplicable to it, it is thereby excluded from the imposition of any income
tax.
Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. A corporation organized, authorized, or
existing under the laws of a foreign country, engaged in trade or business
within the Philippines, shall be taxable as provided in subsection (a) of
this section upon the total net income received in the preceding taxable
year from all sources within the Philippines: Provided, however, that
international carriers shall pay a tax of two and one-half percent on their
gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which
defined GPB as follows:
Gross Philippine billings include gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger,
excess baggage or mail, provided the cargo or mail originates from the
Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to
read:
Gross Philippine Billings means gross revenue realized from uplifts of
passengers anywhere in the world and excess baggage, cargo and mail
originating from the Philippines, covered by passage documents sold in
the Philippines.

Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts
anywhere in the world, provided that the passage documents were sold in
the Philippines. Legislature departed from such concept in the 1997 NIRC where
GPB is now defined under Sec. 28(A)(3)(a):
Gross Philippine Billings refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the
ticket or passage document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of

passengers and cargo occur to or from the Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain
flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the
1997 NIRC. This much was also found by the CTA. But petitioner further posits
the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded
from paying any other income tax for its sale of passage documents in
the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (British Overseas Airways),[7] which was decided under similar
factual circumstances, this Court ruled that off-line air carriers having general sales
agents in the Philippines are engaged in or doing business in the Philippines and
that their income from sales of passage documents here is income from within the
Philippines. Thus, in that case, we held the off-line air carrier liable for the 32% tax
on its taxable income.
Petitioner argues, however, that because British Overseas Airways was
decided under the 1939 NIRC, it does not apply to the instant case, which must be
decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident
foreign corporations, such as itself, on all income from sources within
the Philippines. Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is
that, since it is an international carrier that does not maintain flights to or from the
Philippines, thereby having no GPB as defined, it is exempt from paying any
income tax at all. In other words, the existence of Sec. 28(A)(3)(a) according to
petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs
with regard to the taxation of off-line air carriers is more apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any
categorical term, exempt all international air carriers from the coverage of Sec.
28(A)(1) of the 1997 NIRC. Certainly, had legislatures intentions been to
completely exclude all international air carriers from the application of the general
rule under Sec. 28(A)(1), it would have used the appropriate language to do so; but
the legislature did not. Thus, the logical interpretation of such provisions is that, if
Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)
(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident
foreign corporation, whether an international air carrier or not, would be liable for
the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the
instant case, wherein petitioner claims that the former case does not apply.
Thus, British Overseas Airways applies to the instant case. The findings therein
that an off-line air carrier is doing business in the Philippines and that income from
the sale of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in
amending the definition of GPB is to exempt off-line air carriers from income tax
by citing the pronouncements made by Senator Juan Ponce Enrile during the
deliberations on the provisions of the 1997 NIRC. Such pronouncements, however,
are not controlling on this Court. We said in Espino v. Cleofe:[8]
A cardinal rule in the interpretation of statutes is that the meaning
and intention of the law-making body must be sought, first of all, in the
words of the statute itself, read and considered in their natural, ordinary,
commonly-accepted and most obvious significations, according to good
and approved usage and without resorting to forced or subtle
construction. Courts, therefore, as a rule, cannot presume that the lawmaking body does not know the meaning of words and rules of grammar.
Consequently, the grammatical reading of a statute must be presumed to
yield its correct sense. x x x It is also a well-settled doctrine in this
jurisdiction that statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the
sense of that body and are, consequently, not controlling in the
interpretation of law. (Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show

that petitioners interpretation of those provisions is erroneous.
Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%)
of the taxable income derived in the preceding taxable year from all
sources within the Philippines: provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%), and
effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%).
xxxx
(3) International Carrier. - An international carrier doing business
in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on
its Gross Philippine Billings as defined hereunder:
(a) International Air Carrier. Gross Philippine Billings
refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the ticket
or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That
for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the cost
of the ticket corresponding to the leg flown from the Philippines
to the point of transshipment shall form part of Gross Philippine
Billings.