FACTS: Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in Pasig City, is engaged in the design, engineering, and marketing of telecommunication facilities/system. In an Assessment Notice dated October 25, 2000 issued by the City Treasurer of Pasig City, petitioner was assessed a business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00 and P4,993,682.00, respectively, based on its gross revenues as reported in its audited financial statements for the years 1997 and 1998. Petitioner filed a Protest dated December 21, 2000, claiming that the computation of the local business tax should be based on gross receipts and not on gross revenue.

The City of Pasig (respondent) issued another Notice of Assessment to petitioner on November 19, 2001, this time based on business tax deficiencies for the years 2000 and 2001, amounting to P4,665,775.51 and P4,710,242.93, respectively, based on its gross revenues for the years 1999 and 2000. Again, petitioner filed a Protest on January 21, 2002, reiterating its position that the local business tax should be based on gross receipts and not gross revenue.

Respondent denied petitioner’s protest and gave the latter 30 days within which to appeal the denial. This prompted petitioner to file a petition for review with the Regional Trial Court (RTC) of Pasig, Branch 168, praying for the annulment and cancellation of petitioner’s deficiency local business taxes totaling P17,262,205.66.

Respondent and its City Treasurer filed a motion to dismiss on the grounds that the court had no jurisdiction over the subject matter and that petitioner had no legal capacity to sue. The RTC denied the motion in an Order dated December 3, 2002 due to respondents’ failure to include a notice of hearing. Thereafter, the RTC declared respondents in default and allowed petitioner to present evidence ex-parte.


HELD: YES. The law is clear. Gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold, exchanged or leased, whether actual or constructive. Revenue Regulations No. 16-2005 dated September 1, 2005 defined and gave examples of “constructive receipt”, to wit: STaIHc

SEC. 4. 108-4. Definition of Gross Receipts. — . . . 

Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. The following are examples of constructive receipts:

(1) deposit in banks which are made available to the seller of services without restrictions; 

(2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and

(3) transfer of the amounts retained by the payor to the account of the contractor.

There is, therefore, constructive receipt, when the consideration for the articles sold, exchanged or leased, or the services rendered has already been placed under the control of the person who sold the goods or rendered the services without any restriction by the payor.

In contrast, gross revenue covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received. This is in consonance with the International Financial Reporting Standards, which defines revenue as the gross inflow of economic benefits (cash, receivables, and other assets) arising from the ordinary operating activities of an enterprise (such as sales of goods, sales of services, interest, royalties, and dividends), which is measured at the fair value of the consideration received or receivable.

As aptly stated by the RTC:

“[R]evenue from services rendered is recognized when services have been performed and are billable.” It is “recorded at the amount received or expected to be received.” (Section E [17] of the Statements of Financial Accounting Standards No. 1).

In petitioner’s case, its audited financial statements reflect income or revenue which accrued to it during the taxable period although not yet actually or constructively received or paid. This is because petitioner uses the accrual method of accounting, where income is reportable when all the events have occurred that fix the taxpayer’s right to receive the income, and the amount can be determined with reasonable accuracy; the right to receive income, and not the actual receipt, determines when to include the amount in gross income.

The imposition of local business tax based on petitioner’s gross revenue will inevitably result in the constitutionally proscribed double taxation — taxing of the same person twice by the same jurisdiction for the same thing — inasmuch as petitioner’s revenue or income for a taxable year will definitely include its gross receipts already reported during the previous year and for which local business tax has already been paid.

Thus, respondent committed a palpable error when it assessed petitioner’s local business tax based on its gross revenue as reported in its audited financial statements, as Section 143 of the Local Government Code and Section 22 (e) of the Pasig Revenue Code clearly provide that the tax should be computed based on gross receipts.

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