Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Padilla Law Office for petitioner.

CRUZ, J.:

On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for
refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases
No. 1251 and 1558 respectively.

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its
ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be capitalized and might be written off as a loss
only when a "dry hole" should result. ESSO then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed
deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the
amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to
April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin
fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York
head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of
P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the
additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as
overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have
been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of
the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central
Bank could not be considered taxes or allowed as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the
margin fees were deductible from gross income either as a tax or as an ordinary and necessary
business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same
reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for
1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v.
ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA
decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92
for 1960. That is the issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank
of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police
measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to
the Central Bank on its profit remittances to its New York head office should be deductible from
ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all
taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade,
business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and legislative history
of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax
on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-
1960. It was enacted by Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the measure was one of the major
sources of revenue used to finance the ordinary operating expenditures of the government. It was,
moreover, payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed
out that —

We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the passage of the law through
the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or
of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with,
and in any way connected with, the passage of the act, in order that they may properly interpret the
legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress become important. As a matter of
fact, there may be no resort to the legislative history of the enactment of a statute, the language of
which is plain and unambiguous, since such legislative history may only be resorted to for the
purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held that a margin
fee is not a tax but an exaction designed to curb the excessive demands upon our international
reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P.
Bengzon:

A margin levy on foreign exchange is a form of exchange control or restriction

designed to discourage imports and encourage exports, and ultimately, 'curtail any
excessive demand upon the international reserve' in order to stabilize the currency.
Originally adopted to cope with balance of payment pressures, exchange restrictions
have come to serve various purposes, such as limiting non-essential imports,
protecting domestic industry and when combined with the use of multiple currency
rates providing a source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their economic
development programs. The different measures of exchange control or restriction
cover different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the case of
the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For a member nation is not
supposed to alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin levy is part of the
rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence
should not form part of the exchange rate, suffice it to state that We have already held the contrary
for the reason that a tax is levied to provide revenue for government operations, while the proceeds
of the margin fee are applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the
same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:

Neither do we find merit in the argument that the 20% retention of exporter's foreign
exchange constitutes an export tax. A tax is a levy for the purpose of providing
revenue for government operations, while the proceeds of the 20% retention, as we
have seen, are applied to strengthen the Central Bank's international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its police power
and not the power of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from its gross income. The
fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the conduct of its corporate
affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:

SEC. 30. Deductions from gross income in computing net income there shall be
allowed as deductions
 (a) Expenses:

(1) In general. — All the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually rendered;
traveling expenses while away from home in the pursuit of a trade or business; and
rentals or other payments required to be made as a condition to the continued use or
possession, for the purpose of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations. —

In the case of a non-resident alien individual or a foreign corporation, the expenses
deductible are the necessary expenses paid or incurred in carrying on any business
or trade conducted within the Philippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus:

The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must
be able to prove that he is entitled to the deduction which the law allows. As
previously adverted to, the law allowing expenses as deduction from gross income
for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue
which allows a deduction of 'all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this section of the statute, must fall
squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense
is ordinary and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary' as used in the federal tax laws,
no adequate or satisfactory definition of those terms is possible. Similarly, this Court
has never attempted to define with precision the terms 'ordinary and necessary.'
There are however, certain guiding principles worthy of serious consideration in the
proper adjudication of conflicting claims. Ordinarily, an expense will be considered
'necessary' where the expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal
in relation to the business of the taxpayer and the surrounding circumstances. The
term 'ordinary' does not require that the payments be habitual or normal in the sense
that the same taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction depends in
each case on the particular facts and the relation of the payment to the type of
 business in which the taxpayer is engaged. The intention of the taxpayer often may
be the controlling fact in making the determination. Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's business, the answer to the
question as to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself, which in turn
depends on the extent and permanency of the work accomplished by the
expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held
on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and necessary

deductible expense, it may be asked: Were the margin fees paid by petitioner on its
profit remittance to its Head Office in New York appropriate and helpful in the
taxpayer's business in the Philippines? Were the margin fees incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were
the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in
the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not
expenses in connection with the production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition of said incomes;
expenses for the remittance of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income taxpayer.

xxx

Since the margin fees in question were incurred for the remittance of funds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never be
said therefore that the margin fees were appropriate and helpful in the development
of petitioner's business in the Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively
or for the purpose of realizing a profit or of minimizing a loss in the Philippines
exclusively. If at all, the margin fees were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly
not in the Philippines.

ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses
are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is
error. The public respondent is correct when it asserts that "the paramount rule is that claims for
deductions are a matter of legislative grace and do not turn on mere equitable considerations ... .
The taxpayer in every instance has the burden of justifying the allowance of any deduction
claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot
now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or
business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of
P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.

Narvasa (Chairman), Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Footnotes

1 Penned by Associate Judge E. Alvarez, with Presiding Judge Umali and Associate
Judge Avancena concurring.

2 22 SCRA 779.

3 14 SCRA 630.

4 102 SCRA 246.

5 Mertens, Law of Federal Income Taxation, Section 25.03.