GR 4588; (September, 1908) (Digest)
G.R. No. 4588
THE EASTERN EXTENTION AUSTRALASIA AND CHINA TELEGRAPH COMPANY, LTD., plaintiff-appellee, vs. JOHN S. HORD, Collector of Internal Revenue, defendant-appellant.
September 17, 1908
FACTS:
The Eastern Extension Australasia and China Telegraph Company, Ltd. (Company) was granted two concessions by the Spanish Government:
1. Visayan Cables (Domestic Traffic): A royal decree dated April 10, 1897, for the construction and operation of cables connecting islands within the Philippines. Article 16 of this concession stipulated a 10% payment of receipts to the State after deducting expenses, but did not grant exemption from other taxes.
2. Hong Kong-Manila Cable (Foreign Traffic): A concession in 1879, superseded by a new royal decree dated March 28, 1898, for a cable from Hong Kong to Manila. Article 3, paragraph 3 of this concession granted “exemption of the company’s property from taxes and local imposts.”
From January 1, 1905, to June 30, 1906, the Company’s gross receipts in the Philippine Islands totaled P608,162.16. Of this, P510,250.10 was from foreign traffic (Hong Kong line) and P97,912.06 from domestic traffic (Visayan cables). Within the domestic traffic receipts, P6,539.70 was collected as surtaxes, which the Company claimed it collected as an agent for the government and never belonged to it.
The Collector of Internal Revenue sought to compel the Company to pay the internal-revenue tax under Section 139 of Act No. 1189.
Original Section 139: Imposed a tax on goods sold “for domestic consumption in the Philippine Islands.”
Section 141: Declared persons or corporations conducting telegraph lines as “manufacturers” for the purpose of this law.
Section 142(b): Exempted “exporters, on the raw material and manufactured or partially manufactured products actually exported by them.”
Attorney-General’s Opinion (March 31, 1905): Stated that foreign cable messages were not subject to tax because they were either not sold in the Philippines (received messages) or, if sold here (sent messages), were not for “domestic consumption” and were considered “exports.”
Act No. 1370 (July 7, 1905): Amended Section 139 by striking the words “for domestic consumption.”
The Company contended that:
1. Its foreign business was exempt from taxation based on the original Section 139 and the “exports” exemption in Section 142(b).
2. Its domestic business was also exempt due to the tax exemption clause in the Hong Kong concession, arguing that it should apply to the Visayan concession given they were granted to the same company.
3. The surtax collected for the government should not be considered part of its taxable gross receipts.
The lower court ordered the repayment of the entire amount paid by the Company as taxes.
ISSUE:
1. Whether the Company is liable for internal-revenue tax on its receipts from foreign traffic.
2. Whether the Company is liable for internal-revenue tax on its receipts from domestic traffic, specifically if the tax exemption from the Hong Kong concession applies to the Visayan concession.
3. Whether the surtax collected by the Company as an agent for the government should be included in its taxable gross receipts.
RULING:
1. NO, the Company is NOT liable for internal-revenue tax on its receipts from foreign traffic.
For the period before July 7, 1905 (when Act No. 1370 amended Section 139), the original Section 139 applied, which taxed goods sold “for domestic consumption.” Foreign messages were not for domestic consumption.
For the period after July 7, 1905, even with the amendment removing “for domestic consumption,” the Company’s foreign business remained exempt. By legislatively declaring a cable company a “manufacturer” (Section 141), the “articles” (messages) it deals in, when sent abroad, are considered “exported articles” within the meaning of Section 142(b) and are therefore exempt from taxation. Messages received from abroad are not “sales” in the Philippines.
Thus, the P510,250.10 from foreign traffic is not taxable.
2. YES, the Company IS liable for internal-revenue tax on its receipts from domestic traffic.
The Visayan concession itself (for domestic cables) did not contain a blanket exemption from all taxes. The 10% payment to the State under Article 16 was not in lieu of all other taxes.
The tax exemption in the Hong Kong concession (Article 3, paragraph 3) explicitly applied to the “company’s property” used in connection with that specific concession. The Court held that the two concessions were separate and distinct contracts, and the terms of one, including an exemption, cannot be automatically applied to the other, even if granted to the same company. There was no evidence that property used for the Visayan cables was connected to the Hong Kong concession for the purpose of this exemption.
3. NO, the surtax collected by the Company as an agent for the government should NOT be included in its taxable gross receipts.
* The evidence showed that the 5 centimes surtax for every word sent over the Visayan cables never belonged to the Company, which merely acted as an agent for the Government in its collection. Therefore, this amount should be deducted from the gross domestic receipts. The P97,912.06 domestic receipts should be reduced by the P6,539.70 surtax, leaving P91,372.36 as taxable domestic receipts.
The judgment of the lower court was modified. The Company was entitled to recover only the taxes paid on its foreign business and on the surtax amount within its domestic business. The recovery was reduced from P2,027.18 to P1,722.60 plus interest. As modified, the judgment was affirmed.