FIRST DIVISION

[G.R. No. L-52306. October 12, 1981.]

ABS-CBN BROADCASTING CORPORATION , petitioner, vs.

COURT OF TAX APPEALS and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.

Quiason, De Guzman, Makalintal, Veneracion and Barot for petitioner.

Solicitor General Estelito P. Mendoza, Assistant Solicitor General
Santiago M. Kapunan and Solicitor Erlinda B. Masakayan for respondent.

SYNOPSIS

Petitioner cornoration was engaged in the business of telecasting local

as well as foreign films acquired from foreign corporations not engaged
intrade or business within the Philippines, for which petitioner paid rentals
after withholding and turning over to the Bureau of Internal Revenue income
tax of 30% of one-half of the film rentals pursuant to Section 24(b) of the
National Internal Revenue Code, as amended by Rep. Act No. 2343 and the
Implementing General Circular No. V-334 issued by the Commissioner of
Internal Revenue on April 12, 1961. For the years 1963 through 1968,
petitioner dutifully observed the practice. With the amendment of Section
24(b) of the Tax Code by Rep. Act No. 5431 on June 27, 1968, increasing the
tax rate from 30% to 35%, the Commissioner of Internal Revenue revoked,
for being "erroneous for lack of legal basis" Gen. Circular No. V-334, by
issuing Revised Memo-Circular No. 471, basing the tax therein prescribed on
gross income. Pursuant thereto, respondent Commissioner issued against
petitioner a letter of assessment and demand requiring the latter to pay
deficiency with holding income tax on the remitted film rentals for the years
1965 to 1968 in the total amount of P525,897.06. Without acting on
petitioner's request for a reconsideration and withdrawal of the assessment,
respondent Commissioner issued a warrant of distraint and levy over the
former's personal and real property. On petition for review filed with
respondent Court of Tax Appeals, the latter dismissed it and affirmed the
questioned assessment. Petitioner appealed contesting the retroactivity of
Revised Memo-Circular 471 and averring prescription of the right of
respondent Commissioner to assess the deficiency with holding income tax.
In reversing the judgment appealed from and setting aside the
assessment, the Court ruled that in the interest of justice and fairplay,
rulings or circulars promulgated by the Commissioner of Internal Revenue
have no retroactive application where to so apply them would be prejudicial
to taxpayers, who in the case at bar, relied in good faith and religiously
complied with no less than a circular issued "to all internal revenue officials"
by the highest official of the Bureau of Internal Revenue and approved by the
then Secretary of Finance.
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 SYLLABUS

1. TAXATION; ASSESSMENT AND COLLECTION OF TAXES;

CIRCULARS OR RULINGS OF THE COMMISSIONER OF INTERNAL REVENUE
HAVE NO RETROACTIVE APPLICATION; CASE AT BAR. — It is clear from Sec.
338-A (now Sec. 327) of the Tax Code as insisted by Rep. Act No. 6110 on
August 9, 1969 that rulings or circulars promulgated by the Commissioner of
Internal Revenue have no retroactive application where to so apply them
would be prejudicial to taxpayers. The prejudice to petitioner of the
retroactive application of Memorandum Circular No. 4-71 is beyond question.
It was issued only in 1971, or three years after 1968, the last year that
petitioner had with held taxes under General Circular No. V-334. The
assessment and demand on petitioner to pay deficiency `withholding income
tax was also made three years after 1968 for a period of time commencing
in 1963. Petitioner was no longer in a position to withhold taxes due from
foreign corporations because it had already remitted all film rentals and no
longer had any control over them when the new circular was issued. Neither
does petitioner fall under any of the enumerated exceptions stated in the
Section. cdasia

2. ID.; ID.; GOVERNMENT GENERALLY NOT ESTOPPED FROM

COLLECTING TAXES DUE BECAUSE OF MISTAKES OR ERRORS OF ITS
AGENTS; EXCEPTIONS. — The Court is not unaware of the well-entrenched
principle that the Government is never estopped from collecting taxes
because of mistakes or errors on the part of its agents. In fact, utmost
caution should be taken in this regard. But, like other principles of law, this
also admits of exceptions in the interest of justice and fairplay. The insertion
of Sec. 338-A into the National Internal Revenue Code, as held in the case of
Tuason, Jr., v. Lingad, 58 SCRA 170(1974) is indicative of legislative intention
to support the principle of good faith. In fact, in the United States, from
where Sec. 24 (b) was patterned, it has been held that the Commissioner or
Collector is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom, or where there has
been a misrepresentation to the taxpayer.
3. ID.; ID.; IMPOSITION OF SURCHARGE UNCALLED FOR IN INSTANT
CASE; REASON. — The decision of the Court of Tax Appeals further requiring
the petitioner to pay interest and surcharge as provided for in Sec. 51(e) of
the Tax Code in addition to the deficiency withholding tax of P525,897.06 is
much less called for because the petitioner relied in good faith and
religiously complied with no less than a Circular issued "to all internal
revenue officials" by the highest official of the Bureau of Internal Revenue
and approved by the then Secretary of Finance.
4. STATUTORY CONSTRUCTION; RE-ENACTMENT OF STATUTE
SUBSTANTIALLY UNCHANGED, A CASE OF LEGISLATIVE APPROVAL OF
ADMINISTRATIVE INTERPRETATION.— Republic Act No. 2343, dated June 20,
1939, which was the basis of General Circular No. V-334, was just one in a
series of enactments regarding Sec. 24(b) of the Tax Code. Republic Act No.
3825 came next on June 22, 1963 without changing the basis but merely
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 adding a proviso. Republic Act No. 3841, — dated likewise on June 22, 1963,
followed later, omitting the proviso and inserting some words. It was only on
June 27, 1968 under Republic Act No. 5431, which became the basis of
Revenue Memorandum Circular No. 471, that Sec. 24(b) was amended to
refer specifically to 35% of the "grass income." The principle of legislative
approval of administrative interpretation by reenactment clearly obtains in
this case. It provides that "the reenactment of a statute substantially
unchanged is persuasive indication of the adoption by Congress of a prior
executive construction." Note should be taken of the fact that this case
involves not a mere opinion of the Commissioner or ruling rendered on a
mere query, but a Circular formally issued to "all internal revenue officials"
by the then Commissioner of Internal Revenue.

DECISION

MELENCIO-HERRERA, J : p

This is a Petition for Review on Certiorari of the Decision of the Court of

Tax Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which
affirmed the assessment by the Commissioner of Internal Revenue, dated
April 16, 1971, of a deficiency withholding income tax against petitioner,
ABS-CBN Broadcasting Corporation, for the years 1965, 1966, 1967 and
1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00 and
P222,260.64, or a total of P525,897.06. cdasia

During the period pertinent to this case, petitioner corporation was

engaged in the business of telecasting local as well as foreign films acquired
from foreign corporations not engaged in trade or business within the
Philippines, for which petitioner paid rentals after withholding income tax of
30% of one-half of the film rentals.
In so far as the income tax on non-resident corporations is concerned,
Section 24(b) of the National Internal Revenue Code, as amended by
Republic Act No. 2343 dated June 20, 1959, used to provide:
"(b) Tax on foreign corporations . — (1) Non-resident
corporations. — There shall be levied, collected, and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph,
upon the amount received by every foreign corporation not engaged in
trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed
or determinable annual or periodical gains, profits and income, a tax
equal to thirty per centum of such amount." (Emphasis supplied)

On April 12, 1961, in implementation of the aforequoted provision, the

Commissioner of Internal Revenue issued General Circular No. V-334 reading
thus:
"In connection with Section 24(b) of Tax Code, the amendment
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 introduced by Republic Act No. 2343, under which an income tax equal
to 30% is levied upon the amount received by every foreign
corporation not engaged in trade or business within the Philippines
from all sources within this country as interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains,
profits and income, it has been determined that the tax is still imposed
on income derived from capital, or labor, or both combined, in
accordance with the basic principle of income taxation (Sec. 39,
Income Tax Regulations), and that a mere return of capital or
investment is not income (Par. 5.06, 1 Mertens Law of Federal
Taxation). Since according to the findings of the Special Team who
inquired into business of the non-resident foreign film distributors, the
distribution or exhibition right on a film is invariably acquired for a
consideration, either for a lump sum or a percentage of the film
rentals, whether from a parent company or an independent outside
producer, a part of the receipts of a non-resident foreign film
distributor derived from said film represents, therefore , a return of
investment.
xxx xxx xxx

"4. The local distributor should withhold 30% of one-half of

the film rentals paid to the non-resident foreign film distributor, and
pay the same to this office in accordance with law unless the non-
resident foreign film distributor makes a prior settlement of its income
tax liability." (Emphasis ours).

Pursuant to the foregoing, petitioner dutifully withheld and turned over

to the Bureau of Internal Revenue the amount of 30% of one-half of the film
rentals paid by it to foreign corporations not engaged in trade or business
within the Philippines. The last year that petitioner withheld taxes pursuant
to the foregoing Circular was in 1968. cdphil

On June 27, 1968, Republic Act No. 5431 amended Section 24(b) of the
Tax Code increasing the tax rate from 30% to 35% and revising the tax basis
from "such amount" referring to rents. etc. to "gross income," as follows:
"(b) Tax on foreign corporations . — (1) Non-resident
corporations. — A foreign corporation not engaged in trade or business
in the Philippines including a foreign life insurance company not
engaged in the life insurance business in the Philippines shall pay a tax
equal to thirty-five per cent of the gross income received during each
taxable year from all sources within the Philippines, as interests,
dividends, rents, royalties, salaries, wages, premiums, annuities,
compensations, remunerations for technical servicesor otherwise,
emoluments or other fixed or determinable annual, periodical or casual
gains, profits and income, and capital gains, Provided, however, That
premiums shall not include reinsurance premiums." (Emphasis
supplied)

On February 8, 1971, the Commissioner of Internal Revenue issued

Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-
334, and holding that the latter was "erroneous for lack of legal basis,"
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 because "the tax therein prescribed should be based on gross income
without deduction whatever," thus:
"After a restudy and analysis of Section 24(b) of the National
Internal Revenue Code, as amended by Republic Act No. 5431, and
guided by the interpretation given by tax authorities to a similar
provision in the Internal Revenue Code of the United States, on which
the aforementioned provision of our Tax Code was patterned, this
Office has come to the conclusion that the tax therein prescribed
should be based on gross income without deduction whatever.
Consequently, the ruling in General Circular No. V-334, dated April 12,
1961, allowing the deduction of the proportionate cost of production or
exhibition of motion picture films from the rental income of non-
resident foreign corporations, is erroneous for lack of legal basis.
cdrep

"In view thereof, General Circular No. V-334, dated April 12,
1961, is hereby revoked and henceforth, local films distributors and
exhibitors shall deduct and withhold 35% of the entire amount payable
by them to non-resident foreign corporations, as film rental or royalty,
or whatever such payment may be denominated, without any
deduction whatever, pursuant to Section 24(b), and pay the withheld
taxes in accordance with Section 54 of the Tax Code, as amended.

"All rulings inconsistent with his Circular is likewise revoked."

(Emphasis supplied)

On the basis of this new Circular, respondent Commissioner of Internal

Revenue issued against petitioner a letter of assessment and demand dated
April 16, 1971, but allegedly released by it and received by petitioner on
April 12, 1971, requiring them to pay deficiency withholding income tax on
the remitted film rentals for the years 1965 through 1968 and film royalty as
of the end of 1968 in the total amount of P525,897.06 computed as follows:
"1965

Total amount remitted P511,059.48

—————
Withholding tax due thereon 153,318.00
Less: Amount already assessed 89,000.00
—————
Balance P 64,318.00
Add: 1/2% mo. int. fr.
4-16-66 to 4-16-69 11,577.24
—————
Total amount due & collectible P 75,895.24
1966

Total amount remitted P373,492.24

—————
Withholding tax due thereon 112,048.00
Less: Amount already assessed 27,947.00
—————
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 Balance 84,101.00
Add: 1/2% mo. int. fr.
4-16-67 to 4-16-70 15,138.18
—————
Total amount due and collectible P 99,239.18
=========
1967
Total amount remitted P601,160.65
—————
Withholding tax due thereon 180,348.00
Less: Amount already assessed 71,448.00
—————
Balance 108,900.00
Add: 1/2% mo. int. fr.
4-16-68 to 4-16-71 19,602.00
—————
Total amount due and collectible P128,502.00
=========
1968

Total amount remitted P881,816.92

—————
Withholding tax due thereon 291,283.00
Less: Amount already assessed 92,886.00
—————
Balance P198,447.00
Add: 1/2% mo. int. fr.
4-16-69 to 4-29-71 23,813.64
—————
Total amount due and collectible P222,260.64" 1
=========
On May 5, 1971, petitioner requested for a reconsideration and
withdrawal of the assessment. However, without acting thereon, respondent,
on April 6, 1976, issued a warrant of distraint and levy over petitioner's
personal as well as real properties. The petitioner then filed its Petition for
Review with the Court of Tax Appeals whose Decision, dated November 29,
1979, is, in turn, the subject of this review. The Tax Court held:
"For the reasons given, the Court finds the assessment issued by
respondent on April 16, 1971 against petitioner in the amounts of
P75,895.24, P99,239.18, P128,502.00 and P222,260.64 or a total of
P525,897.06 as deficiency withholding income tax for the years 1965,
1966, 1967 and 1968, respectively, in accordance with law. As prayed
for, the petition for review filed in this case is dismissed, land petitioner
ABS-CBN Broadcasting Corporation is hereby ordered to pay the sum of
P525,897.06 to respondent Commissioner of Internal Revenue as
deficiency withholding income tax for the taxable years 1965 thru
1968, plus the surcharge and interest which have accrued thereon
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 incident to delinquency, pursuant to Section 51(e) of the National
Internal Revenue Code, as amended.
"WHEREFORE, the decision appealed from is hereby affirmed at
petitioner's costs.
"SO ORDERED." 2

The issues raised are twofold:

"I. Whether or not respondent can apply General Circular No.
4-71 retroactively and issue a deficiency assessment against petitioner
in the amount of P525,897.06 as deficiency withholding income tax for
the years 1965, 1966, 1967 and 1968. cdphil

"II. Whether or not the right of the Commissioner of Internal

Revenue to assess the deficiency withholding income tax for the year
1965 has prescribed." 3
Upon the facts and circumstances of the case, review is warranted.
In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by
Republic Act No. 6110 on August 9, 1969, it provides:
"Sec. 338-A. Non-retroactivity of rulings. — Any revocation,
modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding Section or any of the
rulings or circulars promulgated by the Commissioner of Internal
Revenue shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayers, except in
the following cases: (a) where the taxpayer deliberately mis-states or
omits material facts from his return or any document required of him
by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or (c) where the taxpayer
acted in bad faith." (Italics for emphasis)

It is clear from the foregoing that rulings or circulars promulgated by

the Commissioner of Internal Revenue have no retroactive application where
to so apply them would be prejudicial to taxpayers. The prejudice to
petitioner of the retroactive application of Memorandum Circular No. 4-71 is
beyond question. It was issued only in 1971, or three years after 1968, the
last year that petitioner had withheld taxes under General Circular No. V-
334. The assessment and demand on petitioner to pay deficiency
withholding income tax was also made three years after 1968 for a period of
time commencing in 1965. Petitioner was no longer in a position to withhold
taxes due from foreign corporations because it had already remitted all film
rentals and no longer had any control over them when the new Circular was
issued. And in so far as the enumerated exceptions are concerned,
admittedly, petitioner does not fall under any of them. llcd

Respondent claims, however, that the provision on non-retroactivity is

inapplicable in the present case in that General Circular No. V-334 is a nullity
because, in effect, it changed the law on the matter. The Court of Tax
Appeals sustained this position holding that: "Deductions are wholly and
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 exclusively within the power of Congress or the law-making body to grant,
condition or deny; and where the statute imposes a tax equal to a specified
rate or percentage of the gross or entire amount received by the taxpayer,
the authority of some administrative officials to modify or change, much less
reduce, the basis or measure of the tax should not be read into law." 4
Therefore, the Tax Court concluded, petitioner did not acquire any vested
right thereunder as the same was a nullity.
The rationale behind General Circular No. V-334 was clearly stated
therein, however: "It ha(d) been determined that the tax is still imposed on
income derived from capital, or labor, or both combined, in accordance with
the basic principle of income taxation . . . and that a mere return of capital
or investment is not income. . . ." "A part of the receipts of a non-resident
foreign film distributor derived from said film represents, therefore, a return
of investment." The circular thus fixed the return of capital at 50% to simplify
the administrative chore of determining the portion of the rentals covering
the return of capital. 5
Were the "gross income" base clear from Sec. 24(b), perhaps, the
ratiocination of the Tax Court could be upheld. It should be noted, however,
that said Section was not too plain and simple to understand. The fact that
the issuance of the General Circular in question was rendered necessary
leads to no other conclusion than that it was not easy of comprehension and
could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was
the basis of General Circular No. V-334, was just one in a series of
enactments regarding Sec. 24(b) of the Tax Code. Republic Act No. 3825
came next on June 22, 1963 without changing the basis but merely adding a
proviso (in bold letters).
"(b) Tax on foreign corporation . — (1) Non-resident
corporations. — There shall be levied, collected, and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph,
upon the amount received by every foreign corporation not engaged in
trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed
or determinable annual or periodical gains, profits and income, a tax
equal to thirty per centum of such amount: PROVIDED, HOWEVER,
THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS."
(double emphasis ours)

Republic Act No. 3841, dated likewise on June 22, 1963, followed after,
omitting the proviso and inserting some words (also in bold letters). prcd

"(b) Tax on foreign corporations . — (1) Non-resident

corporations. — There shall be levied, collected and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph,
upon the amount received by every foreign corporation not engaged in
trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed
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 or determinable annual or periodical OR CASUAL gains, profits and
income, AND CAPITAL GAINS, a tax equal to thirty per centum of such
amount." 6 (double emphasis supplied)

The principle of legislative approval of administrative interpretation by

re-enactment clearly obtains in this case. It provides that "the re-enactment
of a statute substantially unchanged is persuasive indication of the adoption
by Congress of a prior executive construction." 7 Note should be taken of the
fact that this case involves not a mere opinion of the Commissioner or ruling
rendered on a mere query, but a Circular formally issued to "all internal
revenue officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which
became the basis of Revenue Memorandum Circular No. 4-71, that Sec.
24(b) was amended to refer specifically to 35% of the "gross income." cdasia

This Court is not unaware of the well-entrenched principle that the

Government is never estopped from collecting taxes because of mistakes or
errors on the part of its agents. 8 In fact, utmost caution should be taken in
this regard. 9 But, like other principles of law, this also admits of exceptions
in the interest of justice and fairplay. The insertion of Sec. 338-A into the
National Internal Revenue Code, as held in the case of Tuason, Jr. vs. Lingad,
10 is indicative of legislative intention to support the principle of good faith.

In fact, in the United States, from where Sec. 24(b) was patterned, it has
been held that the Commissioner or Collector is precluded from adopting a
position inconsistent with one previously taken where injustice would result
therefrom, 11 or where there has been a misrepresentation to the taxpayer.
12

We have also noted that in its Decision, the Court of Tax Appeals
further required the petitioner to pay interest and surcharge as provided for
in Sec. 51(e) of the Tax Code in addition to the deficiency withholding tax of
P525,897.06. This additional requirement is much less called for because the
petitioner relied in good faith and religiously complied with no less than a
Circular issued "to all internal revenue officials" by the highest official of the
Bureau of Internal Revenue and approved by the then Secretary of Finance.
13

With the foregoing conclusions arrived at, resolution of the issue of

prescription becomes unnecessary.
WHEREFORE, the judgment of the Court of Tax Appeals is hereby
reversed, and the questioned assessment set aside. No costs.
SO ORDERED.
Makasiar, Fernandez, Guerrero and De Castro *, JJ ., concur.

Footnotes
1. Comment of Respondents, Rollo, pp. 73-74.
2. Decision, Annex "A", Rollo, pp. 53-54.

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 3. Memorandum of petitioner, Rollo, p. 97.
4. Decision, Annex "A", Rollo, p. 41.
5. Comment of commissioner of Internal Revenue, p. 3.
6. The omission of the proviso "Provided, however, That premiums shall not
include reinsurance premiums" appears to be due to oversight as the
purpose of the amendment was to include capital gains in gross income of
foreign non-resident corporations. See footnote 13, Filipinas Life Assurance
Co. vs. Court of Tax Appeals, 21 SCRA 622 (1967).

7. Biddle vs. Commissioner, 302 U.S., 573 (1938); Alexander Howden & Co.,
Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 (1965).
8. Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13
SCRA 357 (1965); Zamora vs. Court of Tax Appeals, 36 SCRA 77 (1970);
Balmaceda vs. Corominas & Co., Inc. 66 SCRA 555 (1975).
9. Senator James Couzens, 11 BTA 1040 (1928), 48 Harvard Law Review 1281,
1300 cited in 10A Metens, Law of Federal Income Taxation, Sec. 60. 13, p.
189.
10. 58 SCRA 170 (1974).
11. Ford Motor Co. vs. U.S., 9 F. Supp. 590 (1935).
12. J.W. Carter Music Co. vs. Bass, 20 F. 2d 390 (1927).
13. Tuason, Jr. vs. Lingad, 58 SCRA 170 (1974); Connel Bros. Co. (Phil.) vs.
Collector of Internal Revenue, 10 SCRA 470 (1964).
* Justice Pacifico P. De Castro was designated to sit in the First Division, Justice
Claudio Teehankee being on official leave.

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