ABS-CBN Broadcasting Corp. v.
CTA
108 SCRA 142, G.R. No. 52306, October 12, 1981
Facts:
Petitioner ABS-CBN 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. This was
pursuant to Section 24 (b) of the National Internal Revenue Code, as amended by Republic Act No. 2343
dated June 20, 1959.
On April 12, 1961, in implementation of the aforequoted provision, the Commissioner of
Internal Revenue issued General Circular No. V-334 which requires local distributors to withhold 30% of
one-half of the film rentals paid to the non-resident foreign film distributor and pay the same to Bureau
of Internal Revenue (BIR) in accordance with law unless the non- resident foreign film distributor makes
a prior settlement of its income tax liability.
Petitioner faithfully complied to the Circular and dutifully withheld and turned over to the BIR
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.
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.”
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," because "the tax therein prescribed should be based on gross income without
deduction whatever.” Thus, “All rulings inconsistent with this Circular is likewise revoked.”
Pursuant to the new Circular, respondent Commissioner of Internal Revenue (CIR) issued against
ABS-CBN a letter of assessment and demand, 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.
Petitioner ABS-CBN requested for reconsideration but to no avail. It filed a petition for review
with the Court of Tax Appeals but the latter affirmed the assessment issued by CIR and ordered
petitioner to pay the amount due.
Commented [KJAL1]: (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 an 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)
Commented [KJAL2]: In connection with Section 24 (b) of
Tax Code, the amendment 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, apart of the receipts of a non-
resident foreign film distributor derived from said film
represents, therefore, a return of investment.
Commented [KJAL3]: (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 services or otherwise, emoluments or other fixed or
determinable annual, periodical or casual gains, profits, and
income, and capital gains, Provided however, That premiums
shah not include reinsurance premiums.
Issue:

WON General Circular No. 4-71 can be applied retroactively against the petitioner on the ground
that the petitioner has not acquired any vested rights under the revoked General Circular No. V-334
which erroneously construed Sec. 24 (b) of the Tax Code?

Ruling:

No, the Supreme Court held that General Circular No. 4-71 cannot be applied retroactively
against the petitioner since it will be prejudicial to the latter.

It is a well-settled rule in statutory construction that erroneous executive or contemporaneous

construction of a law or provisions thereof does not create vested right on the part of those who relied
upon and followed such construction. With this rule alone, General Circular No. 4-71 can be applied
retroactively against ABS-CBN.

However, especially in tax cases, this rule is not absolute; instead, it admits exceptions in the
interest of justice and fair play. The insertion of Sec. 338-A into the National Internal Revenue Code, as
held in the case of Tuason, Jr. vs. Lingad, 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 of 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.

In the instant case, there will be injustice if General Circular No. 4-71 will be applied
retroactively against the petitioner as it will prejudice the latter since:

a) it was issued only in 1971, or 3 years after 1968, the last year that petitioner had withheld taxes
under General Circular No. V-334.
b) 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.
c) ABS-CBN 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.

Thus, in the name of justice and fair play, the judgment of the Court of Tax Appeals was
reversed, and the questioned assessment set aside, in favor of the petitioner.