ABS-CBN v.

CTA
G.R. No. L-52306
12 October 1981
P was engaged in the business of telecasting local as well as foreign films acquired
from FCs not engaged in trade or business within the Philippines for which P paid
rentals after withholding income tax of 30% of one-half of the film rentals.
Section 24 (b) of the NIRC s amended by RA No. 2343 dated June 20, 1959, used to
provide:
(b)
Tax on FCs.(1) Non-resident corporations. There shall be levied, collected,
and paid for each taxable year, upon the amount received by every FC 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.
On April 12, 1961, in implementation of the aforequoted provision, the CIR issued
General Circular No. V-334 reading thus:
"It had 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."
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.

P dutifully withheld and turned over to the BIR the amount of 30% of one-half of the
film rentals paid by it to FCs not engaged in trade or business within the Philippines.
The last year that P withheld taxes pursuant to the foregoing Circular was in 1968
from 1965.

On June 27, 1968, RA 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 CIR 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:
1

After a restudy and analysis of Section 24 (b) of the NIRC, as amended by RA 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 FCs, is
erroneous for lack of legal basis.
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 FCs, 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 this Circular is likewise revoked.
On the basis of this new Circular, R CIR issued against P a letter of assessment and
demand dated April 15, 1971, but allegedly released by it and received by P 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.
On May 5, 1971, P requested for a reconsideration and withdrawal of the
assessment. However, without acting thereon, R, on April 6, 1976, issued a warrant
of distraint and levy over P's personal as well as real properties. The P then filed its
Petition for Review with the CTAs
CTA:
For the reasons given, the Court finds the assessment issued by R on April 16, 1971
against P in the amounts of P75,895.24, P 99,239.18, 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, and P ABS-CBN Broadcasting
Corporation is hereby ordered to pay the sum of P525,897.06 to R CIR as deficiency
withholding income tax for the taxable years 1965 thru 1968, plus the surcharge
and interest which have accrued thereon incident to delinquency pursuant to
Section 51 (e) of the NIRC, as amended.

Issues:
I.
Whether or not R can apply General Circular No. 4-71 retroactively and issue
a deficiency assessment against P in the amount of P 525,897.06 as deficiency
withholding income tax for the years 1965, 1966, 1967 and 1968.

II.
Whether or not the right of the CIR to assess the deficiency withholding
income tax for the year 1965 has prescribed.

In point is Sec. 338-A (now Sec. 327) of the Tax Code.

Sec. 338-A. Non-retroactivity of rulings. Any revocation, modification, or reversal
of and of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the CIR shall not be given
retroactive application if the relocation, modification, or reversal will be prejudicial
to the taxpayers, except in the following cases: (a) where the taxpayer deliberately
misstates or omits material facts from his return or any document required of him
by the BIR: (b) where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or (c) where the taxpayer
acted in bad faith.

Rulings or circulars promulgated by the CIR have no retroactive application where to

so apply them would be prejudicial to taxpayers. P was no longer in a position to
withhold taxes due from FCs because it had already remitted all film rentals and no
longer had any control over them when the new Circular was issued. P does not fall
under any of the enumerated exceptions.

CTAs further required the P to pay interest and surcharge in addition to the
deficiency withholding tax of P 525,897.06. This additional requirement is much less
called for because the P 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
BIR and approved by the then Secretary of Finance.

With the foregoing conclusions arrived at, resolution of the issue of prescription
becomes unnecessary.

WHEREFORE, the judgment of the CTAs is hereby reversed, and the questioned
assessment set aside. No costs.

SO ORDERED.