COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.

FACTS: Marubeni is a foreign corporation organized and existing under the laws of Japan. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC). The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos). Petitioners revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractors and commercial brokers taxes. Respondent questioned this assessment. Respondent corporation received a letter from petitioner assessing respondent several deficiency taxes. Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes. The assessment letter further stated that the same was petitioners final decision and that if respondent disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment. Respondent filed two (2) petitions for review with the CTA. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and contractors tax assessments in petitioners assessment letter. The second, CTA Case No. 4110, questioned the deficiency commercial brokers assessment in the same letter. Earlier, Executive Order (E.O.) No. 41, declaring a one-time amnesty covering unpaid income taxes for the years 1981 to 1985 was issued. In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return. The return was received by the BIR and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and 1986. The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986. The scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 included estate and donors taxes under Title III and the tax on business under Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the new E.O. by filing an amended return and paying an additional 5% on the increase in net worth to cover business, estate and donors tax liabilities. The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated December 17, 1986. Respondent filed a supplemental tax amnesty return and paid a further amount equivalent to five percent (5%) of the increase of its net worth between 1981 and 1986. The CTA rendered a decision in CTA Case No. 4109. The tax court found that respondent

had properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed cancelled and withdrawn. ISSUES: (1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals which ruled that herein respondents deficiency tax liabilities were extinguished upon respondents availment of tax amnesty under Executive Orders Nos. 41 and 64. - no (2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractors taxes assessed by petitioner no (The services not rendered in the Philippines are not subject to the tax) HELD: The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income tax, branch profit remittance tax and contractors tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41. Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder, viz: Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein granted: b) Those with income tax cases already filed in Court as of the effectivity hereof; Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case No. 4109 had already been filed and was pending before the Court of Tax Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41. Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty those taxpayers with income tax cases already filed in court as of the effectivity hereof. The point of reference is the date of effectivity of E.O. No. 41 (AUGUST 22, 1986). The filing of income tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline for filing. When E.O. No. 41 became effective, CTA Case No. 4109 had not yet been filed in court. In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively. There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the original issuance. Executive Order No. 64 is a substantive amendment of E.O. No. 41. Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be construed strictly against the taxpayer. The term income tax cases should be read as to refer to estate and donors taxes and taxes on business while the word hereof, to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986. Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the exception. On situs of taxation Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax because the income from the projects came from the Offshore Portion as opposed to Onshore Portion. It claims all materials and equipment in the contract under the Offshore Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes. Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and financed either by OECF or by suppliers credit. The Japanese Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny. CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondents entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractors tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on products). Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside Philippines taxing jurisdiction and are therefore not subject to contractors tax. Petition denied.