G.R. No. L-11305; May 21, 1958
DOMINADOR P. CANLAS and THE MANILA PENCIL CO., as successor of the PHILIPPINE CONSOLIDATED FREIGHT LINES, INC., petitioners, vs. THE REPUBLIC OF THE PHILIPPINES and the HONS. AUGUSTO P. LUCIANO and ROMAN UMALI, Associate Judges of the Court of Tax Appeals, respondents.

FACTS

The Manila Pencil Company, with Dominador P. Canlas as its president, is the successor-in-interest of the Philippine Consolidated Freight Lines, Inc. From 1947 to 1951, the Philippine Consolidated Freight Lines, Inc. operated a bus and trucking service within the Clark Field Air Base under a license from the Philippine Ryukyus Command (PHILRYCOM). It filed income tax returns and was assessed income taxes for several fiscal years, making a partial payment of P4,000.00 for 1947. The Solicitor General filed a complaint to collect deficiency income taxes for the fiscal years ending August 31, 1947, 1948, 1949, and 1951. The case was elevated to the Court of Tax Appeals. The defendants moved to dismiss, claiming the income was derived exclusively from operations within the Clark Field Air Base and was thus exempt under Article XVIII of the Military Bases Agreement between the Philippines and the United States. They also sought a refund of P2,350.74 allegedly collected illegally and the cancellation of a surety bond. The Court of Tax Appeals held defendants liable for the deficiency income tax for 1947 and income taxes for 1949 and 1951, absolving them for 1947 and 1948 on the ground of prescription, and modified its decision to deduct the amount covered by the surety bond. Defendants’ claim of total exemption was denied, prompting this petition for review.

ISSUE

Whether the petitioners (Manila Pencil Company as successor and Dominador P. Canlas) are exempt from paying Philippine income tax on earnings derived from their licensed operation within the Clark Field Air Base under the Military Bases Agreement.

RULING

No. The Supreme Court affirmed the decision of the Court of Tax Appeals. The exemption from “all licenses; fees; sales, excise or OTHER TAXES, or imposts” under Article XVIII of the Bases Agreement applies to the establishment of the agency or concession itself and the merchandise or services sold, not to income taxes on earnings derived from the operation. The phrase “other taxes” refers to imposts other than sales or excise taxes on the undertaking itself. Furthermore, exemption from income tax is specifically addressed in Article XII of the same treaty, which grants such exemption only to members of the U.S. armed forces (except Filipino citizens), U.S. nationals employed in connection with the bases, and their dependents, to the exclusion of Filipino citizens. Therefore, the petitioners, a Philippine corporation, are not exempt from paying income tax on income derived from their concession within the base.