9/8/2016 G.R.No.

L31092

TodayisThursday,September08,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

FIRSTDIVISION

G.R.No.L31092February27,1987

COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
JOHNGOTAMCO&SONS,INC.andTHECOURTOFTAXAPPEALS,respondents.

YAP,J.:

The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay the 3%
contractor'staxunderSection191oftheNationalInternalRevenueCodeonthegrossreceiptsitrealizedfrom
theconstructionoftheWorldHealthOrganizationofficebuildinginManila.

The World Health Organization (WHO for short) is an international organization which has a regional office in
Manila.Asaninternationalorganization,itenjoysprivilegesandimmunitieswhicharedefinedmorespecificallyin
theHostAgreemententeredintobetweentheRepublicofthePhilippinesandthesaidOrganizationonJuly22,
1951. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets, income and other
propertiesshallbe:(a)exemptfromalldirectandindirecttaxes.Itisunderstood,however,thattheOrganization
willnotclaimexemptionfromtaxeswhichare,infact,nomorethanchargesforpublicutilityservices...

When the WHO decided to construct a building to house its own offices, as well as the other United Nations
offices stationed in Manila, it entered into a further agreement with the Govermment of the Republic of the
PhilippinesonNovember26,1957.Thisagreementcontainedthefollowingprovision(ArticleIII,paragraph2):

TheOrganizationmayimportintothecountrymaterialsandfixturesrequiredfortheconstructionfree
from all duties and taxes and agrees not to utilize any portion of the international reserves of the
Government.

ArticleVIIIoftheabovementionedagreementreferredtotheHostAgreementconcludedonJuly22,1951which
grantedtheOrganizationexemptionfromalldirectandindirecttaxes.

In inviting bids for the construction of the building, the WHO informed the bidders that the building to be
constructedbelongedtoaninternationalorganizationwithdiplomaticstatusandthusexemptfromthepaymentof
all fees, licenses, and taxes, and that therefore their bids "must take this into account and should not include
itemsforsuchtaxes,licensesandotherpaymentstoGovernmentagencies."

The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for short) on
February 10, 1958 for the stipulated price of P370,000.00, but when the building was completed the price
reachedatotalofP452,544.00.

SometimeinMay1958,theWHOreceivedanopinionfromtheCommissioneroftheBureauofInternalRevenue
statingthat"asthe3%contractor'staxisanindirecttaxontheassetsandincomeoftheOrganization,thegross
receipts derived by contractors from their contracts with the WHO for the construction of its new building, are
exempt from tax in accordance with . . . the Host Agreement." Subsequently, however, on June 3, 1958, the
CommissionerofInternalRevenuereversedhisopinionandstatedthat"asthe3%contractor'staxisnotadirect
noranindirecttaxontheWHO,butataxthatisprimarilyduefromthecontractor,thesameisnotcoveredby...
theHostAgreement."

OnJanuary2,1960,theWHOissuedacertificationstate91interalia,:

WhentherequestforbidsfortheconstructionoftheWorldHealthOrganizationofficebuildingwas
calledfor,contractorswereinformedthattherewouldbenotaxesorfeeslevieduponthemfortheir
workinconnectionwiththeconstructionofthebuildingasthiswillbeconsideredanindirecttaxtothe
Organizationcausedbytheincreaseofthecontractor'sbidinordertocoverthesetaxes.Thiswas
upheld by the Bureau of Internal Revenue and it can be stated that the contractors submitted their
bidsingoodfaithwiththeexemptioninmind.

Theundersigned,therefore,certifiesthatthebidofJohnGotamco&Sons,madeunderthecondition
stated above, should be exempted from any taxes in connection with the construction of the World
HealthOrganizationofficebuilding.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding
paymentofP16,970.40,representingthe3%contractor'staxplussurchargesonthegrossreceiptsitreceived
fromtheWHOintheconstructionofthelatter'sbuilding.

Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which after trial
renderedadecision,infavorofGotamcoandreversedtheCommissioner'sdecision.TheCourtofTaxAppeal's
decisionisnowbeforeusforreviewoncertiorari.

Inhisfirstassignmentoferror,petitionerquestionstheentitlementoftheWHOtotaxexemption,contendingthat
the Host Agreement is null and void, not having been ratified by the Philippine Senate as required by the
Constitution.Wefindnomeritinthiscontention.WhiletreatiesarerequiredtoberatifiedbytheSenateunderthe

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Constitution, less formal types of international agreements may be entered into by the Chief Executive and
become binding without the concurrence of the legislative body. 1 The Host Agreement comes within the latter
categoryitisavalidandbindinginternationalagreementevenwithouttheconcurrenceofthePhilippineSenate.

The privileges and immunities granted to the WHO under the Host Agreement have been recognized by this
CourtaslegallybindingonPhilippineauthorities.2

PetitionermaintainsthatevenassumingthattheHostAgreementgrantingtaxexemptiontotheWHOisvalidand
enforceable,the3%contractor'staxassessedonGotamcoisnotan"indirecttax"withinitspurview.Petitioner's
position is that the contractor's tax "is in the nature of an excise tax which is a charge imposed upon the
performanceofanact,theenjoymentofaprivilegeortheengaginginanoccupation...Itisataxdueprimarily
anddirectlyonthecontractor,notontheownerofthebuilding.SincethistaxhasnobearingupontheWHO,it
cannotbedeemedanindirecttaxationuponit."

WeagreewiththeCourtofTaxAppealsinrejectingthiscontentionofthepetitioner.Saidtherespondentcourt:

In context, direct taxes are those that are demanded from the very person who, it is intended or
desired,shouldpaythemwhileindirecttaxesarethosethataredemandedinthefirstinstancefrom
one person in the expectation and intention that he can shift the burden to someone else. (Pollock
vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of
coursepayablebythecontractorbutinthelastanalysisitistheownerofthebuildingthatshoulders
theburdenofthetaxbecausethesameisshiftedbythecontractortotheownerasamatterofself
preservation.Thus,itisanindirecttax.AnditisanindirecttaxontheWHObecause,althoughitis
payablebythepetitioner,thelattercanshiftitsburdenontheWHO.InthelastanalysisitistheWHO
thatwillpaythetaxindirectlythroughthecontractoranditcertainlycannotbesaidthat'thistaxhas
nobearingupontheWorldHealthOrganization.

Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal
Revenue,etal., 3the3%contractor'staxfansdirectlyonGotamcoandcannotbeshiftedtotheWHO.TheCourtofTax
Appeals,however,heldthatthesaidcaseisnotcontrollinginthiscase,sincetheHostAgreementspecificallyexemptsthe
WHOfrom"indirecttaxes."Weagree.ThePhilippineAcetylenecaseinvolvedataxonsalesofgoodswhichunderthelaw
hadtobepaidbythemanufacturerorproducerthefactthatthemanufacturerorproducermighthaveaddedtheamountof
thetaxtothepriceofthegoodsdidnotmakethesalestax"ataxonthepurchaser."TheCourtheldthatthesalestaxmust
bepaidbythemanufacturerorproducerevenifthesaleismadetotaxexemptentitiesliketheNationalPowerCorporation,
anagencyofthePhilippineGovernment,andtotheVoiceofAmerica,anagencyoftheUnitedStatesGovernment.

TheHostAgreement,inspecificallyexemptingtheWHOfrom"indirecttaxes,"contemplatestaxeswhich,although
notimposeduponorpaidbytheOrganizationdirectly,formpartofthepricepaidortobepaidbyit.Thisismade
clearinSection12oftheHostAgreementwhichprovides:

WhiletheOrganizationwillnot,asageneralrule,inthecaseofminorpurchases,claimexemption
fromexciseduties,andfromtaxesonthesaleofmovableandimmovablepropertywhichformpart
of the price to be paid, nevertheless, when the Organization is making important purchases for
official use of property on which such duties and taxes have been charged or are chargeable the
Government of the Republic of the Philippines shall make appropriate administrative arrangements
fortheremissionorreturnoftheamountofdutyortax.(Emphasissupplied).

The abovequoted provision, although referring only to purchases made by the WHO, elucidates the clear
intentionoftheAgreementtoexempttheWHOfrom"indirect"taxation.

ThecertificationissuedbytheWHO,datedJanuary20,1960,soughtexemptionofthecontractor,Gotamco,from
anytaxesinconnectionwiththeconstructionoftheWHOofficebuilding.The3%contractor'staxwouldbewithin
thiscategoryandshouldbeviewedasaformofan"indirecttax"OntheOrganization,asthepaymentthereofor
itsinclusioninthebidpricewouldhavemeantanincreaseintheconstructioncostofthebuilding.

Accordingly,findingnoreversibleerrorcommittedbytherespondentCourtofTaxAppeals,theappealeddecision
isherebyaffirmed.

SOORDERED.

Narvasa,MelencioHerrera,Cruz,Feliciano,GancaycoandSarmiento,JJ.,concur.

Footnotes

1UsaffeVeteransAssociation,Inc.vs.TreasurerofthePhilippines,et.al.,105Phil.1030.

2WorldHealthOrganizationandDr.LeonceVerstuyftv.Hon.BenjaminAquino,etc.,etal.,48SCRA
242.

3127Phil.461.

TheLawphilProjectArellanoLawFoundation

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