VISAYAN CEBU TERMINAL CO., INC., petitioner-appellant, vs. COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
FACTS
Pursuant to a Management Agreement dated June 24, 1957, entered into after public bidding, the Visayan Cebu Terminal Co., Inc. (the Contractor) was appointed the sole manager of the Arrastre Service at the Port of Cebu by the Bureau of Customs. Under the agreement, the Bureau was to receive 28% of the total monthly gross income from the arrastre operation. The Bureau of Internal Revenue demanded payment of percentage taxes and penalties from the company for the period August 24, 1956, to October 31, 1958. The company contested its liability. After an examination, Internal Revenue examiners initially issued a memorandum stating the petitioner was not subject to the 3% percentage tax because it was paying 28% of its gross receipts to the Bureau of Customs. However, the Deputy Commissioner of Internal Revenue later assessed the company for percentage taxes and surcharges. The company appealed to the Court of Tax Appeals (CTA), which modified the assessment, holding the company liable for the percentage tax but excluding from the taxable gross receipts the 28% share delivered to the Bureau of Customs. Both parties appealed the CTA decision.
ISSUE
The primary issue is whether the Visayan Cebu Terminal Co., Inc., as an arrastre contractor, is liable for the 3% percentage tax under Section 191 of the National Internal Revenue Code, and if so, whether the 28% of gross receipts paid to the Bureau of Customs under the Management Agreement should be included in the computation of its taxable gross receipts.
RULING
The Supreme Court affirmed the decision of the Court of Tax Appeals. The Court held that the petitioner is an arrastre contractor under Section 191 of the Tax Code and is therefore liable for the 3% percentage tax on its gross receipts. The Court rejected the petitioner’s arguments that it was merely a manager of the Bureau of Customs and thus exempt, and that the initial memorandum from revenue examiners estopped the government from collecting the tax. However, the Court also ruled that the 28% of the gross receipts paid to the Bureau of Customs pursuant to the Management Agreement was not part of the petitioner’s taxable gross receipts. Citing the principle from Commissioner v. Manila Jockey Club, Inc., gross receipts should not include money specially earmarked for another person. The Management Agreement, which lawfully allocated 28% to the Bureau, constituted a “regulation” that earmarked those funds. Therefore, it would be unjust to tax the petitioner on income it did not retain. The CTA’s computation, which excluded the 28% share, was upheld.
