G.R. No. L-26806 July 30, 1970
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ROYAL INTEROCEAN LINES and THE COURT OF TAX APPEALS, respondents.

FACTS

The respondent, Royal Interocean Lines, Inc. (taxpayer), is a foreign corporation licensed to do business in the Philippines, with its head office in Amsterdam, Holland. It operates ocean-going vessels and acts as an agent for Holland East Asia Lines, receiving commissions. From February to May 1962, vessels of the taxpayer and/or Holland East Asia Lines loaded cargo at Philippine ports, with freight payable at destination, valued at US $37,501.50. This sum was collected by and paid to the taxpayer’s head office in Holland and was not physically remitted as freight fees to the taxpayer’s Philippine branch. The only remittances received by the Philippine branch from the head office were for operational expenses. Prior to January 1962, the taxpayer converted its dollar earnings from freight revenues into Philippine pesos using the prevailing free market rate for computing the common carrier’s tax under Section 192 of the National Internal Revenue Code. Starting February 1962, it discontinued this practice and began reporting revenues based on the parity rate of P2 to $1, paying P1,500.00 as carrier’s tax. The Commissioner of Internal Revenue (petitioner), upon examination, held that the free market conversion rate should apply, resulting in gross receipts of P133,855.88 and a deficiency tax of P1,177.12, plus a 25% surcharge, totaling P1,471.39, and a P200.00 compromise penalty. The taxpayer protested, arguing the parity rate should apply since the freight fees were not physically remitted to the Philippines. The petitioner overruled the protest, and the taxpayer appealed to the Court of Tax Appeals, which reversed the petitioner’s decision. The petitioner appealed to the Supreme Court.

ISSUE

Whether the gross receipts from freight fees collected abroad by the taxpayer’s head office should be converted to Philippine currency at the free market rate or the parity rate for purposes of computing the deficiency common carrier’s percentage tax.

RULING

The Supreme Court reversed the decision of the Court of Tax Appeals. The gross receipts from freight fees are revenues derived from “foreign exchange” transactions under Central Bank Circular No. 20 and subsequent circulars. These transactions involved services rendered in the Philippines (loading of cargo), and the collections made abroad by the head office on behalf of the resident Philippine branch fall under the regulations requiring surrender of foreign exchange at the official rate. During the relevant period, Republic Act No. 2609 had relaxed controls, allowing the Monetary Board to fix conversion rates other than the parity rate. The free market rate (ranging from P3.47 to P3.65 to a US dollar) was properly applied by the petitioner. The non-physical remittance of the fees to the Philippines does not alter their nature as foreign exchange transactions; the completion of the transaction and the accounting entries between the head office and branch office are tantamount to receipt. The provision imposing the 25% surcharge is mandatory, and the taxpayer’s alleged good faith based on counsel’s advice is insufficient to exempt it, as it had previously used the free market rate until December 1961, indicating a calculated risk in changing its policy. The Court affirmed the petitioner’s assessment of P1,471.39, with interest from the date of demand, but eliminated the P200.00 compromise penalty.