[ G. R. No. 42780. January 17, 1936 ] 62 Phil. 895
[ G. R. No. 42780. January 17, 1936 ]
MANILA GAS CORPORATION, PLAINTIFF AND APPELLANT, VS. THE COLLECTOR OF INTERNAL REVENUE, DEFENDANT AND APPELLEE. D E C I S I O N
MALCOLM, J.:
This is an action brought by the Manila Gas Corporation against the Collector of Internal Revenue for the recovery of P56,757.37, which the plaintiff was required by the defendant to deduct and withhold from the various sums paid by it to foreign corporations as dividends and interest on bonds and other indebtedness and which the plaintiff paid under protest. On the trial court dismissing the complaint, with costs, the plaintiff appealed assigning as the principal errors alleged to have been committed the following:
“1. The trial court erred in holding that the dividends paid by the plaintiff corporation were subject to income tax in the hands of its stockholders, because to impose the tax thereon would be to impose a tax on the plaintiff, in violation of the terms of its franchise, and would, more- over, be oppressive and inequitable. “2. The trial court erred in not holding that the interest on bonds and other indebtedness of the plaintiff corporation, paid by it outside of the Philippine Islands to corporations not residing therein, were not, on the part of the recipients thereof, income from Philippine sources, and hence not subject to Philippine income tax.”
The facts, as stated by the appellant and as accepted by the appellee, may be summarized as follows: The plaintiff is a corporation organized under the laws of the Philippine Islands. It operates a gas plant in the City of Manila and furnishes gas service to the people of the metropolis and surrounding municipalities by virtue of a franchise granted to it by the Philippine Government. Associated with the plaintiff are the islands Gas and Electric Company domiciled in New York, United States, and the General Finance Company domiciled in Zurich, Switzerland. Neither of these last mentioned corporations is resident in the Philippines. For the years 1930,1931, and 1932, dividends in the sum of P1,348,847.50 were paid by the plaintiff to the Islands Gas and Electric Company in the capacity of stockholders upon which withholding income taxes were paid to the defendant totalling P40,460.03 For the same years interest on bonds in the sum of P411,600 was paid by the plaintiff to the Islands Gas and Electric Company upon which withholding income taxes were paid to the defendant totalling P12,348. Finally for the stated time period, interest on other indebtedness in the sum of P131,644:90 was paid by the plaintiff to the Islands Gas and Electric Company and the General Finance Company respectively upon which withholding income taxes were paid to the defendant totalling P3,949.34. Some uncertainty existing regarding the place of payment, we will not go into this factor of the case at this point, except to remark that the bonds and other tokens of indebtedness are not to be found in the record. However, Exhibits E, F, and G, certified correct by the treasurer of the Manila Gas Corporation, purport to prove that the place of payment was the United States and Switzerland. The appeal naturaly divides into two subjects, one covered by the first assigned error, and the other by the second assigned error. We will discuss these subjects and errors in order. 1. Appellant first contends that the dividends paid by it to its stockholders, the Islands Gas and Electric Company, were not subject to tax because to impose a tax thereon would be to do so on the plaintiff corporation, in violation of the terms of its franchise and would, moreover, be oppressive and inequitable. This argument is predicated on the constitutional provision that no law impairing: the obligation of contracts shall be enacted. The particular portion of the franchise which is invoked provides:
“The grantee shall annually on the fifth day of January of each year pay to the City of Manila and the municipalities in the Province of Rizal in which gas is sold, two and one-half per centum of the gross receipts within said city and municipalities, respectively, during the preceding year. Said payment shall be in lieu of all taxes, Insular, provincial and municipal, except taxes on the real estate, buildings, plant, machinery, and other personal property belonging to the grantee.”
The trial judge was of the opinion that the instant case was governed by our previous decision in the case of Philippine Telephone and Telegraph Co. vs. Collector of Internal Revenue ([1933], 58 Phil., 639). In this view we concur. It is true that the tax exemption provision relating to the Manila Gas Corporation herein before quoted differs in phraseology from the tax exemption provision to be found in the franchise of the Telephone and Telegraph Company, but the ratio decideridi of the two cases is substantially the same. As there held and as now confirmed, a corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation, which are paid and delivered in cash to foreign corporations as stockholders, are subject to the payment of the income tax, the exemption clause in the charter of the corporation notwithstanding. For the foregoing reasons, we are led to sustain the decision of the trial court and to overrule appellant’s first assigned error. 2. In support of its second assignment of error, appellant contends that, as the Islands Gas and Electric Company and the General Finance Company are domiciled in the United States and Switzerland respectively, and as the interest on the bonds and other indebtedness earned by said corporations has been paid in their respective domiciles, this is not income from Philippine sources within the meaning of the Philippine Income Tax Law. Citing sections 10 (a) and 13 (e) of Act No. 2833, the Income Tax Law, appellant asserts that their applicability has been squarely determined by decisions of this court in the cases of Manila Railroad Co. vs. Collector of Internal Revenue (No. 31196, promulgated December 2, 1929, not reported), and Philippine Railway Co. vs. Posadas (No. 3S766, promulgated October 30,1933 [58 Phil., 968]), wherein it was held that interest paid to non-resident individuals or corporations is not income from Philippine sources, and hence not subject to the Philippine income tax. The Solicitor-General answers with the observation that the cited decisions interpreted the Income Tax Law before it was amended by Act No. 3761 to cover the interest on bonds and other obligations or securities paid “within or without the Philippine Islands.” Appellant rebuts this argument by “assuming, for the sake of the argument, that by the amendment introduced to section 13 of Act No. 2833 by Act No. 3761 the Legislature intended that interest received by non-residents is to be considered income from Philip- pine sources and so is subject to tax,” but with the necessary sequel that the amendatory statute is invalid and unconstitutional as being beyond the power of the Legislature to enact. Taking first under observation the last point, it is to be observed that neither in the pleadings, the decision of the trial court, nor the assignment of errors, was the question of the validity of Act No. 3761 raised. Under such circumstances, and no jurisdictional issue being involved, we do not feel that it is the duty of the court to pass on the constitutional question, and accordingly will refrain from doing so. (Cadwallader-Gibson Lumber Co. vs. Del Rosario [1913], 26 Phil,, 192; Macondray & Co. vs. Benito and Ocampo, p. 137, ante; State vs. Burke [1912], 175 Ala., 561.) As to the applicability of the local cases cited and of the Porto Rican case of Domenech vs. United Porto Rican Sugar Co. ([1932], 62 F. [2d], 552), we need only observe that these cases announced good law, but that each case must be decided on its particular facts. In other words, in the opinion of the majority of the court, the facts at bar and the facts in those cases can be clearly differentiated. Also, in the case at bar there is some uncertainty concerning the place, of payment, which under one view could be considered the Philippines and under another view the United States and Switzerland, but which cannot be definitely determined without the necessary documentary evidence before us. The approved doctrine is that no state may tax anything not within its jurisdiction without violating the due process clause of the constitution. The taxing power of a state does not extend beyond its territorial limits, but within such limits it may tax persons, property, income, or business. If an interest in property is taxed, the situs of either the property or interest must be found within the state. If an income is taxed, the recipient thereof must have a domicile within the state or the property or business out of which the income issues must be situated within the state so that the income may be said to have a situs therein. Personal property may be separated from its owner, and he may be taxed on its account at the place where the property is although it is not the place of his own domicile and even though he is not a citizen or resident of the state which imposes the tax. But debts owing by corporations are obligations of the debtors, and only possess value in the hands of the creditors. (Farmers Loan Co. vs. Minnesota [1930], 280 U. S., 204; Union Refrigerator Transit Co. vs. Kentucky [1905], 199 U.. S., 194; State Tax on Foreign- held Bonds [1873], 15 Wall, 300; Buck vs. Beach [1907], 206 U. S., 392; State ex rel. Manitowoc Gas Go. vs. Wis. Tax Comm. [1915], 161 Wis., Ill; United States Revenue Act of 1932, sec. 143.) These views concerning situs for taxation purposes apply as well to an organized, unincorporated territory or to & Commonwealth having the status of the Philippines. Pushing to one side that portion of Act No. 8761 which permits taxation of interest on bonds and* other indebtedness paid without the Philippine Islands, the question is if the income was derived from sources within the Philippine Islands. In the judgment of the majority of the court, the question should be answered in the affirmative. The Manila Gas Corporation operates its business entirely within the Philippines. Its earnings, therefore, come from local sources. The place of material delivery of the interest to the foreign corporations paid out of the revenue of the domestic corporation is of no particular moment. The place of payment even if conceded to be outside of the country cannot alter the fact that the income was derived from the Philippines. The word “source” conveys only one idea, that of origin, and the origin of the income was the Philippines. In synthesis, therefore, we hold that conditions have not been provided which justify the court in passing on the constitutional question suggested; that the facts while somewhat obscure differ from the facts to be found in the cases relied upon, and that the Collector of Internal Revenue was justified in withholding income taxes on interest on bonds and other indebtedness paid to non-resident corporations because this income was received from sources within the Philippine Islands as authorized by the Income Tax Law. For the foregoing reasons, the second assigned error will be overruled. Before concluding, it is but fair to state that the writer’s opinion on the first subject and the first assigned error herein discussed is accurately set forth, but that his opinion on the second subject and the second assigned error is not accurately reflected, because on this last division his views coincide with those of the appellant. However, in the interest of the prompt disposition of this case, the decision has been written up in accordance with instructions received from the court. Judgment affirmed, with the costs of this instance assessed against the appellant. Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.