G.R. No.

L-42780 January 17, 1936 operates a gas plant in the City of Manila and furnishes gas service
to the people of the metropolis and surrounding municipalities by
MANILA GAS CORPORATION, plaintiff-appellant,
virtue of a franchise granted to it by the Philippine Government.
vs.
Associated with the plaintiff are the Islands Gas and Electric
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Company domiciled in New York, United States, and the General
DeWitt, Perkins and Ponce Enrile for appellant. Finance Company domiciled in Zurich, Switzerland. Neither of these
Office of the Solicitor-General Hilado for appellee. last mentioned corporations is resident in the Philippines.

MALCOLM, J.: For the years 1930, 1931, and 1932, dividends in the sum of
P1,348,847.50 were paid by the plaintiff to the Islands Gas and
This is an action brought by the Manila Gas Corporation against the Electric Company in the capacity of stockholders upon which
Collector of Internal Revenue for the recovery of P56,757.37, which withholding income taxes were paid to the defendant totalling
the plaintiff was required by the defendant to deduct and withhold P40,460.03 For the same years interest on bonds in the sum of
from the various sums paid it to foreign corporations as dividends P411,600 was paid by the plaintiff to the Islands Gas and Electric
and interest on bonds and other indebtedness and which the Company upon which withholding income taxes were paid to the
plaintiff paid under protest. On the trial court dismissing the defendant totalling P12,348. Finally for the stated time period,
complaint, with costs, the plaintiff appealed assigning as the interest on other indebtedness in the sum of P131,644,90 was paid
principal errors alleged to have been committed the following: by the plaintiff to the Islands Gas and Electric Company and the
1. The trial court erred in holding that the dividends paid by the General Finance Company respectively upon which withholding
plaintiff corporation were subject to income tax in the hands of its income taxes were paid to the defendant totalling P3,949.34.
stockholders, because to impose the tax thereon would be to Some uncertainty existing regarding the place of payment, we will
impose a tax on the plaintiff, in violation of the terms of its not go into this factor of the case at this point, except to remark
franchise, and would, moreover, be oppressive and inequitable. that the bonds and other tokens of indebtedness are not to be
2. The trial court erred in not holding that the interest on bonds and found in the record. However, Exhibits E, F, and G, certified correct
other indebtedness of the plaintiff corporation, paid by it outside of by the Treasurer of the Manila Gas Corporation, purport to prove
the Philippine Islands to corporations not residing therein, were not, that the place of payment was the United States and Switzerland.
on the part of the recipients thereof, income from Philippine The appeal naturally divides into two subjects, one covered by the
sources, and hence not subject to Philippine income tax. first assigned error, and the other by the second assigned error. We
The facts, as stated by the appellant and as accepted by the shall discuss these subjects and errors in order.
appellee, may be summarized as follows: The plaintiff is a 1. Appellant first contends that the dividends paid by it to its
corporation organized under the laws of the Philippine Islands. It stockholders, the Islands Gas and Electric Company , were not
subject to tax because to impose a tax thereon would be to do so on For the foreign reasons, we are led to sustain the decision of the
the plaintiff corporation, in violation of the terms of its franchise trial court and to overrule appellant's first assigned error.
and would, moreover, be oppressive and inequitable. This argument
2. In support of its second assignment of error, appellant contends
is predicated on the constitutional provision that no law impairing
that, as the Islands Gas and Electric Company and the General
the obligation of contracts shall be enacted. The particular portion
Finance Company are domiciled in the United States and
of the franchise which is invoked provides:
Switzerland respectively, and as the interest on the bonds and other
The grantee shall annually on the fifth day of January of each year indebtedness earned by said corporations has been paid in their
pay to the City of Manila and the municipalities in the Province of respective domiciles, this is not income from Philippine sources
Rizal in which gas is sold, two and one half per centum of the gross within the meaning of the Philippine Income Tax Law. Citing
receipts within said city and municipalities, respectively, during the sections 10 (a) and 13 (e) of Act No. 2833, the Income Tax Law,
preceding year. Said payment shall be in lieu of all taxes, Insular, appellant asserts that their applicability has been squarely
provincial and municipal, except taxes on the real estate, buildings, determined by decisions of this court in the cases of Manila Railroad
plant, machinery, and other personal property belonging to the Co. vs. Collector of Internal Revenue (No. 31196, promulgated
grantee. December 2, 1929, nor reported), and Philippine Railway Co. vs.
Posadas (No. 38766, promulgated October 30, 1933 [58 Phil., 968])
The trial judge was of the opinion that the instant case was
wherein it was held that interest paid to non-resident individuals or
governed by our previous decision in the case of Philippine
corporations is not income from Philippine sources, and hence not
Telephone and Telegraph Co., vs. Collector of Internal
subject to the Philippine Income Tax. The Solicitor-General answers
Revenue ([1933], 58 Phil. 639). In this view we concur. It is true that
with the observation that the cited decisions interpreted the
the tax exemption provision relating to the Manila Gas Corporation
Income Tax Law before it was amended by Act No. 3761 to cover
hereinbefore quoted differs in phraseology from the tax exemption
the interest on bonds and other obligations or securities paid
provision to be found in the franchise of the Telephone and
"within or without the Philippine Islands." Appellant rebuts this
Telegraph Company, but the ratio decidendi of the two cases is
argument by "assuming, for the sake of the argument, that by the
substantially the same. As there held and as now confirmed, a
amendment introduced to section 13 of Act No. 2833 by Act No.
corporation has a personality distinct from that of its stockholders,
3761 the Legislature intended the interest from Philippine sources
enabling the taxing power to reach the latter when they receive
and so is subject to tax," but with the necessary sequel that the
dividends from the corporation. It must be considered as settled in
amendatory statute is invalid and unconstitutional as being the
this jurisdiction that dividends of a domestic corporation, which are
power of the Legislature to enact.
paid and delivered in cash to foreign corporations as stockholders,
are subject to the payment in the income tax, the exemption clause Taking first under observation that last point, it is to be observed
in the charter of the corporation notwithstanding. that neither in the pleadings, the decision of the trial court, nor the
assignment of errors, was the question of the validity of Act No.
3761 raised. Under such circumstances, and no jurisdictional issue and only possess value in the hands of the creditors. (Farmers Loan
being involved, we do not feel that it is the duty of the court to pass Co. vs. Minnesota [1930], 280 U.S., 204; Union Refrigerator Transit
on the constitutional question, and accordingly will refrain from Co. vs. Kentucky [1905], 199 U.S., 194 State Tax on Foreign held
doing so. (Cadwaller-Gibson Lumber Co. vs. Del Rosario [1913], 26 Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206 U. S., 392;
Phil., 192; Macondray and Co. vs. Benito and Ocampo, P. 137, ante; State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161
State vs. Burke [1912], 175 Ala., 561.) Wis., 111; United States Revenue Act of 1932, sec. 143.)

As to the applicability of the local cases cited and of the Porto Rican These views concerning situs for taxation purposes apply as well to
case of Domenech vs. United Porto Rican Sugar co. ([1932], 62 F. an organized, unincorporated territory or to a Commonwealth
[2d], 552), we need only observe that these cases announced good having the status of the Philippines.
law, but that each he must be decided on its particular facts. In
Pushing to one side that portion of Act No. 3761 which permits
other words, in the opinion of the majority of the court, the facts at
taxation of interest on bonds and other indebtedness paid without
bar and the facts in those cases can be clearly differentiated. Also, in
the Philippine Islands, the question is if the income was derived
the case at bar there is some uncertainty concerning the place of
from sources within the Philippine Islands.
payment, which under one view could be considered the Philippines
and under another view the United States and Switzerland, but In the judgment of the majority of the court, the question should be
which cannot be definitely determined without the necessary answered in the affirmative. The Manila Gas Corporation operates
documentary evidence before, us. its business entirely within the Philippines. Its earnings, therefore
come from local sources. The place of material delivery of the
The approved doctrine is that no state may tax anything not within
interest to the foreign corporations paid out of the revenue of the
its jurisdiction without violating the due process clause of the
domestic corporation is of no particular moment. The place of
constitution. The taxing power of a state does not extend beyond its
payment even if conceded to be outside of tho country cannot alter
territorial limits, but within such it may tax persons, property,
the fact that the income was derived from the Philippines. The word
income, or business. If an interest in property is taxed, the situs of
"source" conveys only one idea, that of origin, and the origin of the
either the property or interest must be found within the state. If an
income was the Philippines.
income is taxed, the recipient thereof must have a domicile within
the state or the property or business out of which the income issues In synthesis, therefore, we hold that conditions have not been
must be situated within the state so that the income may be said to provided which justify the court in passing on the constitutional
have a situs therein. Personal property may be separated from its question suggested; that the facts while somewhat obscure differ
owner, and he may be taxed on its account at the place where the from the facts to be found in the cases relied upon, and that the
property is although it is not the place of his own domicile and even Collector of Internal Revenue was justified in withholding income
though he is not a citizen or resident of the state which imposes the taxes on interest on bonds and other indebtedness paid to non-
tax. But debts owing by corporations are obligations of the debtors, resident corporations because this income was received from
sources within the Philippine Islands as authorized by the Income
Tax Law. For the foregoing reasons, the second assigned error will
be overruled.

Before concluding, it is but fair to state that the writer's opinion on

Judgment affirmed, with the cost of this instance assessed against