G.R. No. L-16850. May 30, 1962. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. UNITED STATES LINES COMPANY, respondent.
FACTS

The respondent, United States Lines Company, a foreign corporation operating under the name “American Pioneer Lines,” is a common carrier by water and also acts as the agent in the Philippines for other shipping lines. The Commissioner of Internal Revenue assessed deficiency common carrier’s percentage taxes against the respondent for the period 1950-1955. The assessment included a tax on the respondent’s own gross receipts, its receipts as agent for the Pacific Far East Line, and, crucially, a tax on the freight revenue earned by a non-resident principal, West Coast Trans-Oceanic Steamship Lines Co., from two shipments of chrome ore from the Philippines. The respondent contested the assessment before the Court of Tax Appeals (CTA).
The CTA modified the assessment. On the first issue, it ruled that “collect” revenues (freight earned in the Philippines but collected in U.S. dollars abroad and not remitted to the Philippines) should be converted to Philippine pesos at the legal rate of P2.00 to $1.00, not the higher free market rate used by the Commissioner, as no foreign exchange transaction occurred locally. On the second issue, the CTA held that the respondent, as a mere agent, was not personally liable for the 2% common carrier’s tax on the gross receipts of its non-resident principal, West Coast Trans-Oceanic, as no law made the agent a withholding agent for such tax. The Commissioner appealed.

ISSUE

The primary issues are: (1) whether the conversion rate for “collect” revenues should be the legal or free market rate; and (2) whether a local shipping agent is personally liable for the common carrier’s percentage tax on the gross receipts of its non-resident principal.

RULING

The Supreme Court affirmed the CTA on the first issue but reversed it on the second. Regarding the conversion rate, the Court upheld the use of the legal rate of P2.00 to $1.00. The evidence confirmed that the dollar freight fees collected abroad for the respondent’s own operations were not remitted to or converted into pesos in the Philippines. Therefore, no taxable peso receipt arose from a foreign exchange transaction, making the free market rate inapplicable. The legal rate properly reflected the actual tax base.
On the agent’s liability, the Court ruled that the respondent, as the duly appointed local agent for the non-resident carrier West Coast Trans-Oceanic, is personally liable for the 2% tax on the principal’s gross receipts derived from Philippine operations. The Court anchored this liability on Article 586 of the Code of Commerce, which makes the ship agent liable for “all the damages and indemnities” arising from the contracts and acts of the captain. This civil law liability extends to tax obligations incurred by the principal in the course of the agency business. The agent’s responsibility is primary and direct to the government, without prejudice to its right to seek reimbursement from the principal. The Court rejected the argument that the agent-principal agreement alone governs liability, as the law is deemed written into such contracts. The case was remanded to the CTA for a recomputation of the tax due consistent with this ruling.