G.R. No. L-19392 April 14, 1965
ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET AL., petitioners, vs. THE COLLECTOR (NOW COMMISSIONER) OF INTERNAL REVENUE, respondent.

FACTS

In 1950, Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines. Alexander Howden & Co., Ltd., also a British corporation not engaged in business in the country, acted as their representative. The contracts were prepared and signed by the reinsurers in England and then sent to Manila where Commonwealth Insurance Co. signed them. In 1951, Commonwealth remitted P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums. In April 1952, Commonwealth, on behalf of Alexander Howden, filed an income tax return declaring this amount as gross income for 1951 and paid P66,112.00 in income tax. On May 12, 1954, within the two-year prescriptive period, Alexander Howden filed a claim for refund of P66,112.00 (later reduced to P65,115.00 after agreeing to pay tax on accrued interest). The claim invoked a ruling of the Commissioner of Internal Revenue dated December 8, 1953, which purportedly exempted such reinsurance premiums from withholding tax. After the claim was denied, Alexander Howden instituted an action for recovery, which was certified to the Court of Tax Appeals. The Tax Court denied the claim on November 24, 1961.

ISSUE

1. Are portions of premiums earned from insurances locally underwritten by a domestic corporation, ceded to and received by non-resident foreign reinsurance companies, through a non-resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines, subject to income tax?
2. If subject to tax, may the income tax on such reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal Revenue Code?

RULING

1. Yes, the reinsurance premiums are subject to income tax. The Supreme Court held that the reinsurance premiums constituted income from sources within the Philippines under Section 24 of the National Internal Revenue Code. The source of income is the property, activity, or service that produced it. Here, the source was the undertaking to indemnify Commonwealth Insurance Co. against liability, which took place in the Philippines. This conclusion was based on three factors: (a) the reinsured, the liabilities insured, and the risks originally underwritten were all situated in the Philippines; (b) the reinsurance contracts were perfected in the Philippines because Commonwealth signed them last in Manila; and (c) the contracts indicated an intent to be governed by Philippine law, as they provided for arbitration in Manila under Philippine laws, used Philippine currency, and provided for payment of Philippine taxes. The Court rejected the argument that Section 37’s enumeration of income from Philippine sources was exclusive, stating it was not all-inclusive. It also clarified that “gross receipts” from reinsurance premiums, which do not constitute a return of capital, form part of gross income.
2. Yes, the income tax on such reinsurance premiums may be withheld. The Court held that the reinsurance premiums fall under “premiums” or, alternatively, under “other fixed or determinable annual or periodical gains, profits, and income” as specified in Section 53(b) of the Tax Code, which, by reference in Section 54, applies to foreign corporations not engaged in trade or business in the Philippines. The premiums were determinable because they could be calculated based on the contracts, and periodical because they were earned and remitted from time to time. The Court also noted that the subsequent enactment of Republic Act 3825 in 1963, which exempted such premiums from tax, affirmed their taxability prior to the amendment. Finally, the Court rejected the appellants’ belated objection to the participation of Judge Augusto M. Luciano, as they failed to raise it in the Court of Tax Appeals. The judgment of the Court of Tax Appeals was affirmed.