CASES ON TAXATION 1 G.R. No. L-28896 February 17, 1988 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC.

, and THE COURT OF TAX APPEALS, respondents. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand,such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law. We deal first with the procedural question. The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the 1 total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the 2 same day in the office of the petitioner. On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to 3 receive it on the ground of the pending protest. A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who 4 deferred service of the warrant. On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy 5 earlier sought to be served. Sixteen days later, on April 23, 1965, Algue filed a petition for review of the 6 decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the 7 appeal may be made within thirty days after receipt of the decision or ruling challenged. It is true that as 8 a rule the warrant of distraint and levy is "proof of the finality of the assessment" and renders hopeless a 9 request for reconsideration," being "tantamount to an outright denial thereof and makes the said request 10 deemed rejected." But there is a special circumstance in the case at bar that prevents application of this accepted doctrine. The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted," the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
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Now for the substantive question. The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be 12 personal holding company income but later conformed to the decision of the respondent court rejecting 13 this assertion. In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment 14 Corporation, inducing other persons to invest in it. Ultimately, after its incorporation largely through the 15 promotion of the said persons, this new corporation purchased the PSEDC properties. For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the 16 P75,000.00 promotional fees were paid to the aforenamed individuals. There is no dispute that the payees duly reported their respective shares of the fees in their income tax 17 returns and paid the corresponding taxes thereon. The Court of Tax Appeals also found, after 18 examining the evidence, that no distribution of dividends was involved. The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump 19 sum but periodically and in different amounts as each payee's need arose. It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of 20 P75,000.00. Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation. We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was 21 P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code: 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 22 salaries or other compensation for personal services actually rendered; ... and Revenue Regulations No. 2, Section 70 (1), reading as follows: SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.) It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were 23 they its controlling stockholders. The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

G.R. No. L-68252 May 26, 1995 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS, respondents. For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for amounts representing pre-payment of income and common carrier's taxes under the National 1 Internal Revenue Code, section 24 (b) (2), as amended. Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, 2 3 NASUTRA chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. On 4 December 23, 1980, Mr. EdilbertoLising, the operations supervisor of Soriamont Agency, paid the required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTYSEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS 5 (P107,142.75) based on the expected gross receipts of the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private respondent filed a petition 6 for review before public respondent Court of Tax Appeals. Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed to have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the action for refund; and that claims for refund are construed 7 strictly against tax claimants. After trial, respondent tax court decided in favor of the private respondent. It held: It has been shown in this case that 1) the petitioner has complied with the mentioned statutory requirement by having filed a written claim for refund within the two-year period from date of payment; 2) the respondent has not issued any deficiency assessment nor disputed the correctness of the tax returns and the corresponding amounts of prepaid income and percentage taxes; and 3) the chartered vessel sailed out of the Philippine port with absolutely no cargo laden on board as cleared and certified by the Customs authorities; nonetheless 4) respondent's apparent bit of reluctance in validating the legal merit of the claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for refund which is the subject matter of this case has not yet submitted his report. Whether or not respondent will present his evidence will depend on the said report of the examiner." (Respondent's Manifestation and Motion dated September 7, 1982). Be that as it may the case was submitted for decision by respondent on the basis of the pleadings and records and by petitioner on the evidence presented by counsel sans the respective memorandum.

An examination of the records satisfies us that the case presents no dispute as to relatively simple material facts. The circumstances obtaining amply justify petitioner's righteous indignation to a more expeditious action. Respondent has offered no reason nor made effort to submit any controverting documents to bash that patina of legitimacy over the claim. But as might well be, towards the end of some two and a half years of seeming impotent anguish over the pendency, the respondent Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by manifesting that "it is now his turn to present evidence, however, the Appellate Division of the BIR has already recommended the approval of petitioner's claim for refund subject matter of this petition. The examiner who examined this case has also recommended the refund of petitioner's claim. Without prejudice to withdrawing this case after the final approval of petitioner's claim, the Court ordered the resetting to September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not fashion any further issue into an apparently settled legal situation as far be it from a comedy of errors it would be too much of a stretch to hold and deny the refund of the amount of prepaid income and common carrier's taxes for which petitioner could no longer be made accountable. On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review on certiorari. Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not present its charter agreement. We find no merit in the petition. There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at that time provides as follows: A corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income derived in the preceding taxable year from all sources within the Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to final destination. Gross revenue from chartered flights originating from the Philippines shall likewise form part of "Gross Philippine Billings" regardless of the place or payment of the passage documents . . . . . Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines. We agree with petitioner that a claim for refund is in the nature of a claim for exemption and should be 9 construed in strictissimijuris against the taxpayer. Likewise, there can be no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund. The pivotal issue involves a question of fact whether or not the private respondent was able to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it prepaid to the government. The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived no receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational
8

basis, and hence must be sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the Officer-inCharge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records also reveal that in the course of the proceedings in the court a quo, petitioner hedged and hawed when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner and the appellate division of the BIR have both recommended the approval of private respondent's claim for refund. The same counsel even represented that the government would withdraw its opposition to the petition after final approval of private respondents' claim. The case dragged on but petitioner never withdrew its opposition to the petition even if it did not present evidence at all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for good reason. Taxpayers owe honesty to government just as government owes fairness to taxpayers. In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The contention cannot succeed. It presupposes without any basis that the charter agreement 10 is prejudicial evidence against the private respondent. Allegedly, it will show that private respondent earned a charter fee with or without transporting its supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no court of justice will regard it as truth. Moreover, the charter agreement could have been presented by petitioner itself thru the proper use of a subpoena ducestecum. It never did either because of neglect or because it knew it would be of no help to bolster its 11 position. For whatever reason, the petitioner cannot take to task the private respondent for not presenting what it mistakenly calls "suppressed evidence." We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing that it was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation, the money that will be finally refunded to the private respondent is just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any 12 unreasonable delay what it has erroneously collected. Our ruling inRoxas v. Court of Tax Appeals is apropos to recall: The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is AFFIRMED in toto. No costs.

G.R. No. 122480

April 12, 2000

BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs.

COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL REVENUE,respondents. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich oneself at the expense of another. The Case Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals (CA) in 2 CA-GR SP No. 34240, which affirmed the December 24, 1993 Decision of the Court of Tax Appeals (CTA). The CA disposed as follows: WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of merit. On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows: WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED and this 4 Petition for Review is DISMISSED for lack of merit. Also assailed is the November 8, 1995 CA Resolution denying reconsideration. The Facts The facts of this case were summarized by the CA in this wise: This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld for the year 1989. In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected: Income P1,017,931,831.00 Deductions P1,026,218,791.00 Net Income (Loss) (P8,286,960.00) Taxable Income (Loss) (P8,286,960.00) Less: 1988 Tax Credit P185,001.00 1989 Tax Credit P112,491.00 TOTAL AMOUNT P297,492.00 REFUNDABLE
5 3 1

It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present case. However, petitioner declared in the same 1989 Income Tax Return that the said total refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable year. On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year. Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund, petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the refund of the amount of P112,491.00. The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is the subject of the present controversy) to its 1990 income tax liability. Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in its 6 Resolution dated May 6, 1994. As earlier noted, the CA affirmed the CTA. Hence, this Petition. Ruling of the Court of Appeals In affirming the CTA, the Court of Appeals ruled as follows: It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual income Tax Return, the amount of P297,492.00 (including P112,491.00), so as to refute its previous declaration in the 1989 Income Tax Return that the said amount will be applied as a tax credit in the succeeding year of 1990. Having failed to submit such requirement, there is no basis to grant the claim for refund. . . . Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimijuris against the person or entity claiming the exemption. In other words, the burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its 8 entitlement to the claim for refund. Issue In their Memorandum, respondents identify the issue in this wise: The sole issue to be resolved is whether or not petitioner is entitled to the refund of P112,491.90, 9 representing excess creditable withholding tax paid for the taxable year 1989. The Court's Ruling The Petition is meritorious. Main Issue: Petitioner Entitled to Refund
7

It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a 10 refund amounting to P112,491. Pursuant to Section 69 of the 1986 Tax Code which states that a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals. The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this presumption because it did not present its 1990 Return, which would have shown that the amount in dispute was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund. We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this Court. This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which if 11 considered would justify a different conclusion. This case is one such exception. In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioner's accounting department, testified to this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that the amount of P112,491 "has not been and/or will not be automatically credited/offset against any succeeding quarters' income tax liabilities for the rest of the calendar year ending December 31, 1990." Also presented were the quarterly returns for the first two quarters of 1990. The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's claim. To repeat, it did not do so. More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for 12 Reconsideration filed before the CTA. A final adjustment return shows whether a corporation incurred a loss or gained a profit during the taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit. Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's Motion and the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration, however, the CTA ignored the said Return. In the same vein, the CA did not pass upon that significant document. True, strict procedural rules generally frown upon the submission of the Return after the trial. 1wphi1 The law creating the Court of Tax Appeals, however, specifically provides that proceedings before it "shall not 13 be governed strictly by the technical rules of evidence." The paramount consideration remains the ascertainment of truth. Verily, the quest for orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed facts to arrive at a just determination of a controversy. In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate court committed a reversible error.

It should be stressed that the rationale of the rules of procedure is to secure a just determination of every 14 action. They are tools designed to facilitate the attainment of justice. But there can be no just determination of the present action if we ignore, on grounds of strict technicality, the Return submitted 15 before the CTA and even before this Court. To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which rightfully belongs to the petitioner. Public respondents maintain that what was attached to petitioner's Motion for Reconsideration was not 16 the final adjustment Return, but petitioner's first two quarterly returns for 1990. This allegation is wrong. An examination of the records shows that the 1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the other hand, the two quarterly returns for 1990 mentioned by respondent were in fact attached to the Petition for Review filed before the CTA. Indeed, to rebut respondents' specific contention, petitioner submitted before us its Surrejoinder, to which was attached the Motion for 17 Reconsideration and Exhibit "A" thereof, the Final Adjustment Return for 1990. CTA Case No. 4897 Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax 18 Court held that "petitioner suffered a net loss for the taxable year 1990 . . . ." Respondent, however, 19 urges this Court not to take judicial notice of the said case. As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even when such cases have been tried or are pending in the same court, and notwithstanding the fact 20 that both cases may have been heard or are actually pending before the same judge." Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known to judges because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case No. 4897 was attached to the Petition for Review filed before this Court. Significantly, respondents do not claim at all that the said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said Decision, claiming merely that the Court cannot take judicial notice thereof. To our mind, respondents' reasoning underscores the weakness of their case. For if they had really believed that petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail the fact appearing therein that petitioner suffered a net loss in 1990 in the same way that it refused to controvert the same fact established by petitioner's other documentary exhibits. In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is merely one more bit of information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990. Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimijuris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the amount claimed as tax credits. Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and

honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness. WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the amount of P112,491 as excess creditable taxes paid in 1989. No costs.

G.R. No. 112024. January 28, 1999] PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondents. This petition for review assails the Resolution of the Court of Appeals dated September 22, [2] [3] 1993, affirming the Decision and Resolution of the Court of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, and disposing as follows: IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto. SO ORDERED.
[4] [1]

The Court of Tax Appeals earlier ruled as follows: WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit. SO ORDERED.
[5]

The facts on record show the antecedent circumstances pertinent to this case. Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBComs tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) iss ued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1, 615,253.00, respectively. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income tax liability. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: Philippine Bank of Communications vs. Commissioner of Internal Revenue. The losses petitioner incurred as per the summary of petitioners claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows: 1985 (P25,317,228.00) NIL 5,016,954.00 282,795.50 P5,299,749.50* 1986 (P14,129,602.00) NIL --234,077.69 P234,077.69 ==============

Net Income (Loss) Tax Due Quarterly tax Payments Made Tax Withheld at Source Excess Tax Payments

==============

*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five centavo difference was noted. On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioners claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but the same was [6] denied due course for lack of merit. Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTAs resolution dated July 20, 1993. Hence this petition now before us. The issues raised by the petitioner are: I. Whether taxpayer PBCom-- which relied in good faith on the formal assurances of BIR in RMC No. 785 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments -- can be prejudiced by the subsequent BIR rejection, applied retroactively, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax [7] credit of excess quarterly income tax payments is not two years but ten (10). II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBComs claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, [8] that there were taxes due in 1987 and that PBCom availed of tax-crediting that year. Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioners reliance on RMC No. 7 -85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads: REVENUE MEMORANDUM CIRCULAR NO. 7-85 SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN TO: All Internal Revenue Officers and Others Concerned

Sections 85 and 86 of the National Internal Revenue Code provide: x xx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide: x xx xxx xxx

It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with Sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit. It should be noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code. In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this. In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit within the two-year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering [9] that it is an obligation created by law (Article 1144 of the Civil Code). (Emphasis supplied.) Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS-CBN Broadcasting Corporation vs. Court of Tax [10] Appeals petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers. In ABS-CBN case, the Court held that the government 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.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rule as follows: Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, 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 in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; c) where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, towit: ACCRA Investments Corp. vs. Court of Appeals, et [11] [12] al., and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioners cause of action. After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioners contention, the relaxation of revenue regulations by RMC 7 -85 is not warranted as it disregards the two-year prescriptive period set by law. Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds [13] for the State to finance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied [14] should be summary and interfered with as little as possible. From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.: Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding shall be maintained in any court forthe recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two yearsfrom the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Italics supplied) The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year. In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co. , the application of Sec. 230 of 1977 NIRC, as follows:
[15]

this Court explained

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. x xx As we have [16] [17] [18] earlier said in the TMX Sales case, Sections 68, 69, and 70 on Quarterly Corporate Income Tax [19] Payment and Section 321 should be considered in conjunction with it. When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be [20] erroneous. Thus, courts will not countenance administrative issuances that override, instead of [21] remaining consistent and in harmony with, the law they seek to apply and implement. In the case of People vs. Lim, it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter. Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO No. 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions of the latter. x xx In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the importance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possible misunderstanding or [23] confusion as in the present case. Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its [24] officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.
[22]

As aptly stated by respondent Court of Appeals: It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7 -85, is estopped by the principle of non-retroactivity of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and the corresponding petition for review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioners claim of refund or tax credi t. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 785 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, [25] cannot be given weight for to do so would in effect amend the statute. Article 8 of the Civil Code recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to [27] correct or overrule the same. Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed [28] in strictissimijuris against the taxpayer. On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTAs decision denying its claim for refund of P 234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987. Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return,shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other. As stated by respondent Court of Appeals: Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can [30] no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to
[29] [26]

controvert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no [31] showing of gross error or abuse on their part to disturb our reliance thereon. WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.

G.R. No. 76778 June 6, 1990 FRANCISCO I. CHAVEZ, petitioner, vs. JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her capacity as Acting Municipal Treasurer of the Municipality of Las Pias, respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor. The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986, which We quote in full, as follows (78 O.G. 5861): EXECUTIVE ORDER No. 73 PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE, AS AMENDED WHEREAS, the collection of real property taxes is still based on the 1978 revision of property values; WHEREAS, the latest general revision of real property assessments completed in 1984 has rendered the 1978 revised values obsolete; WHEREAS, the collection of real property taxes based on the 1984 real property values was deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local government units of an additional source of revenue; WHEREAS, there is an urgent need for local governments to augment their financial resources to meet the rising cost of rendering effective services to the people; NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order: SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors during the latest general revision of assessments shall take effect beginning January 1, 1987 for purposes of real property tax collection. SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to implement this Executive Order. SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed. SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with this Executive Order are hereby repealed or modified accordingly. SEC. 5. This Executive Order shall take effect immediately.

On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of Executive Order No. 73 until June 30, 1987. The petitioner, Francisco I. Chavez, is a taxpayer and an owner of three parcels of land. He alleges the following: that Executive Order No. 73 accelerated the application of the general revision of assessments to January 1, 1987 thereby mandating an excessive increase in real property taxes by 100% to 400% on improvements, and up to 100% on land; that any increase in the value of real property brought about by the revision of real property values and assessments would necessarily lead to a proportionate increase in real property taxes; that sheer oppression is the result of increasing real property taxes at a period of time when harsh economic conditions prevail; and that the increase in the market values of real property as reflected in the schedule of values was brought about only by inflation and economic recession. The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national association of owners-lessors, joins Chavez in his petition to declare unconstitutional Executive Order No. 73, but additionally alleges the following: that Presidential Decree No. 464 is unconstitutional insofar as it imposes an additional one percent (1%) tax on all property owners to raise funds for education, as real property tax is admittedly a local tax for local governments; that the General Revision of Assessments does not meet the requirements of due process as regards publication, notice of hearing, opportunity to be heard and insofar as it authorizes "replacement cost" of buildings (improvements) which is not provided in Presidential Decree No. 464, but only in an administrative regulation of the Department of 2 Finance; and that the Joint Local Assessment/Treasury Regulations No. 2-86 is even more oppressive and unconstitutional as it imposes successive increase of 150% over the 1986 tax. The Office of the Solicitor General argues against the petition. The petition is not impressed with merit. Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73 insofar as the revision of the assessments and the effectivity thereof are concerned. It should be emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that: SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors during the latest general revision of assessments shall take effect beginning January 1, 1987 for purposes of real property tax collection. (emphasis supplied) The general revision of assessments completed in 1984 is based on Section 21 of Presidential Decree No. 464 which provides, as follows: SEC. 21. General Revision of Assessments. Beginning with the assessor shall make a calendar year 1978, the provincial or city general revision of real property assessments in the province or city to take effect January 1, 1979, and once every five years thereafter: Provided; however, That if property values in a province or city, or in any municipality, have greatly changed since the last general revision, the provincial or city assesor may, with the approval of the Secretary of Finance or upon bis direction, undertake a general revision of assessments in the province or city, or in any municipality before the fifth year from the effectivity of the last general revision. Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73 has no legal basis as the general revision of assessments is a continuing process mandated by Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which should be challenged as constitutionally infirm. However, Chavez failed to raise any objection against said decree. It was ROAP which questioned the constitutionality thereof. Furthermore, Presidential Decree No. 464 furnishes the procedure by which a tax assessment may be questioned:
1

SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the action of the provincial or city assessor in the assessment of his property may, within sixty days from the date of receipt by him of the written notice of assessment as provided in this Code, appeal to the Board of Assessment Appeals of the province or city, by filing with it a petition under oath using the form prescribed for the purpose, together with copies of the tax declarations and such affidavit or documents submitted in support of the appeal. xxxxxxxxx SEC. 34. Action by the Local Board of assessment Appeals. The Local Board of Assessment Appeals shall decide the appeal within one hundred and twenty days from the date of receipt of such appeal. The decision rendered must be based on substantial evidence presented at the hearing or at least contained in the record and disclosed to the parties or such relevant evidence as a reasonable mind might accept as adequate to support the conclusion. In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena and subpoenaducestecum. The proceedings of the Board shall be conducted solely for the purpose of ascertaining the truth without-necessarily adhering to technical rules applicable in judicial proceedings. The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor with a copy each of the decision of the Board. In case the provincial or city assessor concurs in the revision or the assessment, it shall be his duty to notify the property owner of such fact using the form prescribed for the purpose. The owner or administrator of the property or the assessor who is not satisfied with the decision of the Board of Assessment Appeals, may, within thirty days after receipt of the decision of the local Board, appeal to the Central Board of Assessment Appeals by filing his appeal under oath with the Secretary of the proper provincial or city Board of Assessment Appeals using the prescribed form stating therein the grounds and the reasons for the appeal, and attaching thereto any evidence pertinent to the case. A copy of the appeal should be also furnished the Central Board of Assessment Appeals, through its Chairman, by the appellant. Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment Appeals concerned shall forward the same and all papers related thereto, to the Central Board of Assessment Appeals through the Chairman thereof. xxxxxxxxx SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall have jurisdiction over appealed assessment cases decided by the Local Board of Assessment Appeals. The said Board shall decide cases brought on appeal within twelve (12) months from the date of receipt, which decision shall become final and executory after the lapse of fifteen (15) days from the date of receipt of a copy of the decision by the appellant. In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon express authority, the Hearing Commissioner, shall have the power to summon witnesses, administer oaths, take depositions, and issue subpoenas and subpoenas ducestecum. The Central Board of assessment Appeals shall adopt and promulgate rules of procedure relative to the conduct of its business. Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any owner who doubts the assessment of his property, may appeal to the Local Board of Assessment Appeals. In case the, owner or administrator of the property or the assessor is not satisfied with the decision of the Local Board of Assessment Appeals, he may, within thirty days from the receipt of the decision, appeal to

the Central Board of Assessment Appeals. The decision of the Central Board of Assessment Appeals shall become final and executory after the lapse of fifteen days from the date of receipt of the decision. Chavez argues further that the unreasonable increase in real property taxes brought about by Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila (G.R. No. L-24693, July 31, 1967, 20 SCRA 849) andSison v. Ancheta, et al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654). The reliance on these two cases is certainly misplaced because the due process requirement called for therein applies to the "power to tax." Executive Order No. 73 does not impose new taxes nor increase taxes. Indeed, the government recognized the financial burden to the taxpayers that will result from an increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985, deferring the implementation of the increase in real property taxes resulting from the revised real property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof is quoted herein as follows: SEC. 5. The increase in real property taxes resulting from the revised real property assessments as provided for under Section 21 of Presidential Decree No. 464, as amended by Presidential Decree No. 1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order to enable the Ministry of Finance and the Ministry of Local Government to establish the new systems of tax collection and assessment provided herein and in order to alleviate the condition of the people, including real property owners, as a result of temporary economic difficulties. (emphasis supplied) The issuance of Executive Order No. 73 which changed the date of implementation of the increase in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed Executive Order No. 1019, also finds ample justification in its "whereas' clauses, as follows: WHEREAS, the collection of real property taxes based on the 1984 real property values was deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local government units of an additional source of revenue; WHEREAS, there is an urgent need for local governments to augment their financial resources to meet the rising cost of rendering effective services to the people; (emphasis supplied) xxxxxxxxx The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to be resolved in the present petition. As stated at the outset, the issue here is limited to the constitutionality of Executive Order No. 73. Intervention is not an independent proceeding, but an ancillary and supplemental one which, in the nature of things, unless otherwise provided for by legislation (or Rules of Court), must be in subordination to the main proceeding, and it may be laid down as a general rule that an intervention is limited to the field of litigation open to the original parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279). We agree with the observation of the Office of the Solicitor General that without Executive Order No. 73, the basis for collection of real property taxes will still be the 1978 revision of property values. Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations. ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.

G.R. No. 125704 August 28, 1998 PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS,respondents. Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 1 in CA-G.R. SP No. 36975 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated 2 March 16, 1995 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows: PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE TAX DUE 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88 47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88 43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13 90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 ========= ========= ========= ========= In a letter dated August 20, 1992, Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied
4 3

against the tax liabilities, citing our ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, 5 Inc. In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise 7 tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52. Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit: Thus, for legal compensation to take place, both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia 8 General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since 9 10 claim for taxes is not a debt or contract." The dispositive portion of the CTA decision provides: In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended. Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR. 11 CV No. 36975. Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax Appeals 12 observation. The pertinent portion of which reads: WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED. Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 13 1996. However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as 14 follows: Period Covered Tax Credit Date By Claims For Certificate of VAT refund/creditNumberIssueAmount
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1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01 1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 1989 007732 11 July 1996 P37,322,799.19 1990-1991 007751 16 July 1996 P84,662,787.46 1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95 In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, 15 off-set its excise tax liabilities since both had already become "due and demandable, as well as fully 16 liquidated;" hence, legal compensation can properly take place. We see no merit in this contention. In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not 17 creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign 18 capacity. We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate Court, taxes cannot be subject to set-off or compensation, thus:
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we categorically held that

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission 20 on Audit, which reiterated that: . . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the 21 refund has not yet been approved by the Commissioner, is no longer without any support in statutory law. It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was 22 omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed 23 period since, after all, it still has pending claims for VAT input credit/refund with BIR.

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary 24 hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of 25 26 bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is 27 contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to 28 29 waive the collection thereof. The same cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106 (e) of the National Internal Revenue Code of 31 1977, which requires the refund of input taxes within 60 days, when it took five years for the latter to 32 grant its tax claim for VAT input credit/refund. In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to 33 establish the factual basis of his or her claim for tax credit or refund, however, once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government 34 render fair service to the taxpayers. In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple 35 justice requires the speedy refund of wrongly-held taxes. Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax 36 Appeals: The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents 37 and officers. Nowhere is this more true than in the field of taxation. Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet
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needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek 38 judicial remedy before the Court of Tax Appeals in the manner prescribed by law. Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of. Art. 27 of the Civil Code provides: Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken. More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states: xxxxxxxxx (c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoyed by law. Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the 39 performance of official duties. In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong. In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.

G.R. No. 159796

July 17, 2007

ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST CONSUMERS NETWORK, INC. (ECN), Petitioners, vs. DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY ELECTRIC COMPANY INC. (PECO),Respondents. Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc. (ECN) (petitioners), come before this Court in this original action praying that Section 34 of Republic Act (RA) 9136, otherwise known as the "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the 1 2 Universal Charge, and Rule 18 of the Rules and Regulations (IRR) which seeks to implement the said imposition, be declared unconstitutional. Petitioners also pray that the Universal Charge imposed upon the consumers be refunded and that a preliminary injunction and/or temporary restraining order (TRO) be

issued directing the respondents to refrain from implementing, charging, and collecting the said 3 charge. The assailed provision of law reads: SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the following purposes: (a) Payment for the stranded debts in excess of the amount assumed by the National Government and 5 stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry; (b) Missionary electrification;
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(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-vis imported energy fuels; (d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and (e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years. The universal charge shall be a non-bypassable charge which shall be passed on and collected from all end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO. The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only for the purposes specified herein in an open and transparent manner. All amount collected for the universal charge shall be distributed to the respective beneficiaries within a reasonable period to be provided by the ERC. The Facts Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.
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On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition for the availment from the 9 Universal Charge of its share for Missionary Electrification, docketed as ERC Case No. 2002-165. On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194, praying that the proposed share from the Universal Charge for the Environmental charge of P0.0025 per kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for withdrawal from the Special Trust Fund (STF) managed by respondent Power Sector Assets and Liabilities Management Group (PSALM)
10

for the rehabilitation and management of watershed areas.

12

11

On December 20, 2002, the ERC issued an Order in ERC Case No. 2002-165 provisionally approving the computed amount of P0.0168/kWh as the share of the NPC-SPUG from the Universal Charge for Missionary Electrification and authorizing the National Transmission Corporation (TRANSCO) and Distribution Utilities to collect the same from its end-users on a monthly basis.

On June 26, 2003, the ERC rendered its Decision December 20, 2002, thus:

13

(for ERC Case No. 2002-165) modifying its Order of

WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated December 20, 2002 is hereby modified to the effect that an additional amount of P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatt-hour provisionally authorized by the Commission in the said Order. Accordingly, a total amount of P0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust Fund managed by PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME) effective on the following billing cycles: (a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and (b) July 2003 for Distribution Utilities (Dus). Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day of the succeeding month. In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed report to include Audited Financial Statements and physical status (percentage of completion) of the projects using the prescribed format.1avvphi1 Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus). SO ORDERED. On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among others, to set aside the above-mentioned Decision, which the ERC granted in its Order dated October 7, 2003, disposing: WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by petitioner National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby GRANTED. Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly. Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following: 1. Projects for CY 2002 undertaken; 2. Location 3. Actual amount utilized to complete the project; 4. Period of completion; 5. Start of Operation; and 6. Explanation of the reallocation of UC-ME funds, if any. SO ORDERED.
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Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw up toP70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject to the availability of 16 funds for the Environmental Fund component of the Universal Charge. On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as reflected in their 17 respective electric bills starting from the month of July 2003. Hence, this original action. Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are unconstitutional on the following grounds: 1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric end-users and self-generating entities. The power to tax is strictly a legislative function and as such, the delegation of said power to any executive or administrative agency like the ERC is unconstitutional, giving the same unlimited authority. The assailed provision clearly provides that the Universal Charge is to be determined, fixed and approved by the ERC, hence leaving to the latter complete discretionary legislative authority. 2) The ERC is also empowered to approve and determine where the funds collected should be used. 3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and amounts to taxation without representation as the consumers were not given a chance to be heard and 18 represented. Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the 19 operations of the NPC. They argue that the cases invoked by the respondents clearly show the regulatory purpose of the charges imposed therein, which is not so in the case at bench. In said cases, 20 the respective funds were created in order to balance and stabilize the prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in prices, peso devaluation, and other variables which cannot be adequately and timely monitored by the legislature. Thus, there was a need to delegate 21 powers to administrative bodies. Petitioners posit that the Universal Charge is imposed not for a similar purpose. On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC) contends that unlike a tax which is imposed to provide income for public purposes, such as support of the government, administration of the law, or payment of public expenses, the assailed Universal Charge is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent police power. On this premise, PSALM submits that there is no undue delegation of legislative power to the ERC since the latter merely exercises a limited authority or discretion as to the execution and implementation of the provisions of the 22 EPIRA. Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General (OSG), share the same view that the Universal Charge is not a tax because it is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power industry, and is, therefore, an exaction in the exercise of the State's police power. Respondents further contend that said Universal Charge does not possess the essential characteristics of a tax, that its imposition would redound to the benefit of the electric power industry and not to the public, and that its rate is uniformly levied on electricity end-users, unlike a tax which is imposed based on the individual taxpayer's ability to pay. Moreover, respondents deny that there is undue delegation of legislative power to the ERC since the EPIRA sets forth sufficient determinable standards which would guide the ERC in the exercise of the powers granted to it. Lastly, respondents argue that the imposition of the Universal Charge is not

oppressive and confiscatory since it is an exercise of the police power of the State and it complies with 23 the requirements of due process. On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining to the Missionary Electrification and Environmental Fund components of the Universal Charge, pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO 24 could be held liable under Sec. 46 of the EPIRA, which imposes fines and penalties for any violation of 25 its provisions or its IRR. The Issues The ultimate issues in the case at bar are: 1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and 2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC. Before we discuss the issues, the Court shall first deal with an obvious procedural lapse. Petitioners filed before us an original action particularly denominated as a Complaint assailing the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's IRR. No doubt, petitioners have locus standi. They impugn the constitutionality of Sec. 34 of the EPIRA because they sustained a direct injury as a result of the imposition of the Universal Charge as reflected in their electric bills. However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint" directly with us. Furthermore, the Complaint is bereft of any allegation of grave abuse of discretion on the part of the ERC or any of the public respondents, in order for the Court to consider it as a petition for certiorari or prohibition. Article VIII, Section 5(1) and (2) of the 1987 Constitution
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categorically provides that:

SECTION 5. The Supreme Court shall have the following powers: 1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus. 2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court may provide, final judgments and orders of lower courts in: (a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas corpus, while concurrent with that of the regional trial courts and the Court of Appeals, does not give 28 litigants unrestrained freedom of choice of forum from which to seek such relief. It has long been established that this Court will not entertain direct resort to it unless the redress desired cannot be obtained in the appropriate courts, or where exceptional and compelling circumstances justify availment 29 of a remedy within and call for the exercise of our primary jurisdiction. This circumstance alone warrants the outright dismissal of the present action.

This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will certainly resurface in the near future, resulting in a repeat of this litigation, and probably involving the same parties. In the public interest and to avoid unnecessary delay, this Court renders its ruling now. The instant complaint is bereft of merit. The First Issue To resolve the first issue, it is necessary to distinguish the States power of taxation from the police power. The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature 30 which imposes the tax on the constituency that is to pay it. It is based on the principle that taxes are the 31 lifeblood of the government, and their prompt and certain availability is an imperious need. Thus, the theory behind the exercise of the power to tax emanates from necessity; without taxes, government 32 cannot fulfill its mandate of promoting the general welfare and well-being of the people. On the other hand, police power is the power of the state to promote public welfare by restraining and 33 regulating the use of liberty and property. It is the most pervasive, the least limitable, and the most demanding of the three fundamental powers of the State. The justification is found in the Latin maxims saluspopuliestsupremalex (the welfare of the people is the supreme law) and sic uteretuoutalienum non laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty which virtually extends to all public needs, police power grants a wide panoply of instruments through which the State, as parenspatriae, gives effect to a host of its regulatory 34 powers. We have held that the power to "regulate" means the power to protect, foster, promote, preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility 35 and of its patrons. The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised 36 does not make the imposition a tax. In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates 37 the purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory in character. The EPIRA resonates such regulatory purposes, thus: SECTION 2.Declaration of Policy. It is hereby declared the policy of the State: (a) To ensure and accelerate the total electrification of the country; (b) To ensure the quality, reliability, security and affordability of the supply of electric power; (c) To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market; (d) To enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and distribution sectors;

(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the process of restructuring the electric power industry; (f) To protect the public interest as it is affected by the rates and services of electric utilities and other providers of electric power; (g) To assure socially and environmentally compatible energy sources and infrastructure; (h) To promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy; (i) To provide for an orderly and transparent privatization of the assets and liabilities of the National Power Corporation (NPC); (j) To establish a strong and purely independent regulatory body and system to ensure consumer protection and enhance the competitive operation of the electricity market; and (k) To encourage the efficient use of energy and other modalities of demand side management. From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power. Public welfare is surely promoted. Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police 38 39 40 power. InValmonte v. Energy Regulatory Board, et al. and in Gaston v. Republic Planters Bank, this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the police power. The doctrine was reiterated in Osmea v. 41 Orbos with respect to the OPSF. Thus, we disagree with petitioners that the instant case is different from the aforementioned cases. With the Universal Charge, a Special Trust Fund (STF) is also created 42 under the administration of PSALM. The STF has some notable characteristics similar to the OPSF and the SSF, viz.: 1) In the implementation of stranded cost recovery, the ERC shall conduct a review to determine whether there is under-recovery or over recovery and adjust (true-up) the level of the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount shall be remitted to the STF. A separate account shall be created for these amounts which shall be held in trust for any future claims of distribution utilities for stranded cost recovery. At the end of the stranded cost recovery period, 43 any remaining amount in this account shall be used to reduce the electricity rates to the end-users. 2) With respect to the assailed Universal Charge, if the total amount collected for the same is greater than the actual availments against it, the PSALM shall retain the balance within the STF to pay for periods 44 where a shortfall occurs. 3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the DOF or 45 any of the DOF attached agencies as designated by the DOF Secretary. The OSG is in point when it asseverates: Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power and responsibility of the government to secure the physical and economic survival and well-being of the community, that 46 comprehensive sovereign authority we designate as the police power of the State.

This feature of the Universal Charge further boosts the position that the same is an exaction imposed primarily in pursuit of the State's police objectives. The STF reasonably serves and assures the attainment and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to ensure the viability of the country's electric power industry. The Second Issue The principle of separation of powers ordains that each of the three branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim potestasdelegata non delegaripotest (what has been delegated cannot be delegated). This is based on the ethical principle that such delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not 47 through the intervening mind of another. In the face of the increasing complexity of modern life, delegation of legislative power to various 48 specialized administrative agencies is allowed as an exception to this principle. Given the volume and variety of interactions in today's society, it is doubtful if the legislature can promulgate laws that will deal adequately with and respond promptly to the minutiae of everyday life. Hence, the need to delegate to administrative bodies - the principal agencies tasked to execute laws in their specialized fields - the authority to promulgate rules and regulations to implement a given statute and effectuate its policies. All that is required for the valid exercise of this power of subordinate legislation is that the regulation be germane to the objects and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards prescribed by the law. These requirements are denominated as the completeness test and the sufficient standard test. Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's 49 authority and prevent the delegation from running riot. The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its essential terms and conditions, and that it contains sufficient standards. Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users," and therefore, does not state the specific amount to be paid as Universal Charge, the amount nevertheless is made certain by the legislative parameters provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides: SECTION 43.Functions of the ERC. The ERC shall promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the restructured electricity industry. In appropriate cases, the ERC is authorized to issue cease and desist order after due notice and hearing. Towards this end, it shall be responsible for the following key functions in the restructured industry: x xxx (b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law, a National Grid Code and a Distribution Code which shall include, but not limited to the following: x xxx

(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities and suppliers: Provided, That in the formulation of the financial capability standards, the nature and function of the entity shall be considered: Provided, further, That such standards are set to ensure that the electric power industry participants meet the minimum financial standards to protect the public interest. Determine, fix, and approve, after due notice and public hearings the universal charge, to be imposed on all electricity end-users pursuant to Section 34 hereof; Moreover, contrary to the petitioners contention, the ERC does not enjoy a wide latitude of discretion in 50 the determination of the Universal Charge. Sec. 51(d) and (e) of the EPIRA clearly provides: SECTION 51.Powers. The PSALM Corp. shall, in the performance of its functions and for the attainment of its objective, have the following powers: x xxx (d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall form the basis for ERC in the determination of the universal charge; (e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property contributed to it, including the proceeds from the universal charge. Thus, the law is complete and passes the first test for valid delegation of legislative power. As to the second test, this Court had, in the past, accepted as sufficient standards the following: "interest 51 52 53 54 of law and order;" "adequate and efficient instruction;" "public interest;" "justice and equity;" "public 55 56 convenience and welfare;" "simplicity, economy and efficiency;" "standardization and regulation of 57 58 medical education;" and "fair and equitable employment practices." Provisions of the EPIRA such as, among others, "to ensure the total electrification of the country and the quality, reliability, security and 59 60 affordability of the supply of electric power" and "watershed rehabilitation and management" meet the requirements for valid delegation, as they provide the limitations on the ERCs power to formulate the IRR. These are sufficient standards. It may be noted that this is not the first time that the ERC's conferred powers were challenged. 61 In Freedom from Debt Coalition v. Energy Regulatory Commission, the Court had occasion to say: In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be read in separate parts. Rather, the law must be read in its entirety, because a statute is passed as a whole, and is animated by one general purpose and intent. Its meaning cannot to be extracted from any single part thereof but from a general consideration of the statute as a whole. Considering the intent of Congress in enacting the EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded the jurisdiction of the regulatory body, the ERC in this case, to enable the latter to implement the reforms sought to be accomplished by the EPIRA. When the legislators decided to broaden the jurisdiction of the ERC, they did not intend to abolish or reduce the powers already conferred upon ERC's predecessors. To sustain the view that the ERC possesses only the powers and functions listed under Section 43 of the EPIRA is to frustrate the objectives of the law. In his Concurring and Dissenting Opinion in the same case, then Associate Justice, now Chief Justice, Reynato S. Puno described the immensity of police power in relation to the delegation of powers to the ERC and its regulatory functions over electric power as a vital public utility, to wit: Over the years, however, the range of police power was no longer limited to the preservation of public health, safety and morals, which used to be the primary social interests in earlier times. Police power now requires the State to "assume an affirmative duty to eliminate the excesses and injustices that are the
62

concomitants of an unrestrained industrial economy." Police power is now exerted "to further the public welfare a concept as vast as the good of society itself." Hence, "police power is but another name for the governmental authority to further the welfare of society that is the basic end of all government." When police power is delegated to administrative bodies with regulatory functions, its exercise should be given a wide latitude. Police power takes on an even broader dimension in developing countries such as ours, where the State must take a more active role in balancing the many conflicting interests in society. The Questioned Order was issued by the ERC, acting as an agent of the State in the exercise of police power. We should have exceptionally good grounds to curtail its exercise. This approach is more compelling in the field of rate-regulation of electric power rates. Electric power generation and distribution is a traditional instrument of economic growth that affects not only a few but the entire nation. It is an important factor in encouraging investment and promoting business. The engines of progress may come to a screeching halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result of power outages or unreliable electric power services. The State thru the ERC should be able to exercise its police power with great flexibility, when the need arises. This was reiterated in National Association of Electricity Consumers for Reforms v. Energy Regulatory 63 Commission where the Court held that the ERC, as regulator, should have sufficient power to respond in real time to changes wrought by multifarious factors affecting public utilities. From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative power to the ERC. Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition of the Universal Charge on all end-users is oppressive and confiscatory, and amounts to taxation without 64 representation. Hence, such contention is deemed waived or abandoned per Resolution of August 3, 65 2004. Moreover, the determination of whether or not a tax is excessive, oppressive or confiscatory is an issue which essentially involves questions of fact, and thus, this Court is precluded from reviewing the 66 same. As a penultimate statement, it may be well to recall what this Court said of EPIRA: One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It established a new policy, legal structure and regulatory framework for the electric power industry. The new thrust is to tap private capital for the expansion and improvement of the industry as the large government debt and the highly capital-intensive character of the industry itself have long been acknowledged as the critical constraints to the program. To attract private investment, largely foreign, the jaded structure of the industry had to be addressed. While the generation and transmission sectors were centralized and monopolistic, the distribution side was fragmented with over 130 utilities, mostly small and uneconomic. The pervasive flaws have caused a low utilization of existing generation capacity; extremely high and uncompetitive power rates; poor quality of service to consumers; dismal to forgettable performance of the government power sector; high system losses; and an inability to develop a clear strategy for overcoming these shortcomings. Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of the assets of the National Power Corporation (NPC), the transition to a competitive structure, and the delineation of the roles of various government agencies and the private entities. The law ordains the division of the industry into four (4) distinct sectors, namely: generation, transmission, distribution and supply. Corollarily, the NPC generating plants have to privatized and its transmission business spun off and 67 privatized thereafter. Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification, there must be a clear and unequivocal breach of the Constitution and not one that is doubtful, speculative, or

argumentative. Indubitably, petitioners failed to overcome this presumption in favor of the EPIRA. We find no clear violation of the Constitution which would warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional and void. WHEREFORE, the instant case is hereby DISMISSED for lack of merit.

68

G.R. No. L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties: (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province; (2) A residential house and lot located at Wright St., Malate, Manila; and (3) Shares of stocks in different corporations. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania. AGRICULTURAL LANDS At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code. RESIDENTIAL HOUSE During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they resided

somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year. ASSESSMENTS On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax. The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of securities. In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows: 1953 Antonio Roxas P7,010.00 Eduardo Roxas 7,281.00 Jose Roxas 6,323.00 1955 P5,813.00 5,828.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed. The following deductions were disallowed: ROXAS Y CIA.: 1953 Tickets for Banquet in honor of S. Osmea Gifts of San Miguel beer Contributions to Philippine Air Force Chapel Manila Police Trust Fund Philippines Herald's fund for Manila's neediest families 1955 Contributions to Contribution 100.00 150.00 100.00 50.00 P 40.00 28.00

to Our Lady of Fatima Chapel, FEU ANTONIO ROXAS: 1953 Contributions to Pasay City Firemen Christmas Fund Pasay City Police Dept. X'mas fund 1955 Contributions to Baguio City Police Christmas fund Pasay City Firemen Christmas fund Pasay City Police Christmas fund EDUARDO ROXAS: 1953 Contributions to Hijas de Jesus' Retiro de Manresa Philippines Herald's fund for Manila's neediest families 1955 Contributions to Philippines Herald's fund for Manila's neediest families JOSE ROXAS: 1955 Contributions to Philippines Herald's fund for Manila's neediest families 450.00 100.00 25.00 25.00 50.00 25.00 50.00

120.00

120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads: WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in

Sec. 51(a) of the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against petitioners. Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal. The issues: (1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable? (2) Are the deductions for business expenses and contributions deductible? (3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers? The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below: 4. (a) La explotacion de fincasurbanespertenecientes a la misma o quepuedenpertenecer a ella en el futuro, alquilandolespor los plazos y demascondiciones, estimeconvenientes y vendiendoaquellasque a juicio de susgerentes no debenconservarse; The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call. In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained. The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University. The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions. The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code. Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders. The disallowance should be sustained. Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law, which states: 1wph1.t . . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) . is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.1wph1.t

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, * respectively, computed as follows: ANTONIO ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia. Less amount declared P 153,249.15 146,135.46 P315,476.59

Amount understated Contributions disallowed

P 7,113.69 115.00

P 7,228.69 Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but allowed to partners

7,042.02

186.67

Net income per review Less: Exemptions

P315,663.26 4,200.00

Net taxable income Tax due Tax paid 154,169.00 154,060.00

P311,463.26

Deficiency

P 109.00 ==========

EDUARDO ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia Less profits declared Amount understated P 153,249.15 146,052.58 P 304,166.92

P 7,196.57 Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but allowed to partners

7,042.02

155.55

Net income per review Less: Exemptions

P304,322.47 4,800.00

Net taxable income Tax Due Tax paid P147,250.00 147,159.00

P299,592.47

Deficiency

P91.00 ===========

JOSE ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia. Less amount reported P153,429.15 146,135.46 P222,681.76

Amount understated Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners

7,113.69

7,042.02

71.67

Net income per review Less: Exemption

P222,753.43 1,800.00

Net income subject to tax Tax due Tax paid P102,763.00 102,714.00

P220,953.43

Deficiency

P 49.00 ===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year 1955. No costs. So ordered. G.R. No. 167330 June 12, 2008

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. Is a health care agreement in the nature of an insurance contract and therefore subject to the documentary stamp tax (DST) imposed under Section 185 of Republic Act 8424 (Tax Code of 1997)? This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its August 16, 1 2004 decision in CA-G.R. SP No. 70479. Petitioner Philippine Health Care Providers, Inc. believes otherwise and assails the CA decision in this petition for review under Rule 45 of the Rules of Court. Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the 2 administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, 3 operated or accredited by it. The pertinent part of petitioner's membership or health care agreement provides: VII BENEFITS Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for reimbursement] of this Agreement, Members shall have the following Benefits under this Agreement: In-Patient Services. In the event that a Member contract[s] sickness or suffers injury which requires confinement in a participating Hospital[,] the services or benefits stated below shall be provided to the Member free of charge, but in no case shall [petitioner] be liable to pay more than P75,000.00 in benefits with respect to anyone sickness, injury or related causes. If a member has exhausted such maximum benefits with respect to a particular sickness, injury or related causes, all accounts in excess of P75,000.00 shall be borne by the enrollee. It is[,] however, understood that the payment by [petitioner] of the said maximum in In-Patient Benefits to any one member shall preclude a subsequent payment of benefits to such member in respect of an unrelated sickness, injury or related causes happening during the remainder of his membership term. (a) Room and Board (b) Services of physician and/or surgeon or specialist
4

(c) Use of operating room and recovery room (d) Standard Nursing Services (e) Drugs and Medication for use in the hospital except those which are used to dissolve blood clots in the vascular systems (i.e., trombolytic agents) (f) Anesthesia and its administration (g) Dressings, plaster casts and other miscellaneous supplies (h) Laboratory tests, x-rays and other necessary diagnostic services (i) Transfusion of blood and other blood elements Condition for in-Patient Care. The provision of the services or benefits mentioned in the immediately preceding paragraph shall be subject to the following conditions: (a) The Hospital Confinement must be approved by [petitioner's] Physician, Participating Physician or [petitioner's] Medical Coordinator in that Hospital prior to confinement. (b) The confinement shall be in a Participating Hospital and the accommodation shall be in accordance with the Member[']s benefit classification. (c) Professional services shall be provided only by the [petitioner's] Physicians or Participating Physicians. (d) If discharge from the Hospital has been authorized by [petitioner's] attending Physician or Participating Physician and the Member shall fail or refuse to do so, [petitioner] shall not be responsible for any charges incurred after discharge has been authorized. Out-Patient Services. A Member is entitled free of charge to the following services or benefits which shall be rendered or administered either in [petitioner's] Clinic or in a Participating Hospital under the direction or supervision of [petitioner's] Physician, Participating Physician or [petitioner's] Medical Coordinator. (a) Gold Plan Standard Annual Physical Examination on the anniversary date of membership, to be done at [petitioner's] designated hospital/clinic, to wit: (i) Taking a medical history (ii) Physical examination (iii) Chest x-ray (iv) Stool examination (v) Complete Blood Count (vi) Urinalysis (vii) Fasting Blood Sugar (FBS)

(viii) SGPT (ix) Creatinine (x) Uric Acid (xi) Resting Electrocardiogram (xii) Pap Smear (Optional for women 40 years and above) (b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination. The following tests are to be done as part of the Member[']s Annual check-up program at [petitioner's] designated clinic, to wit: 1) Routine Physical Examination 2) CBC (Complete Blood Count) * Hemoglobin * Hematocrit * Differential * RBC/WBC 3) Chest X-ray 4) Urinalysis 5) Fecalysis (c) Preventive Health Care, which shall include: (i) Periodic Monitoring of Health Problems (ii) Family planning counseling (iii) Consultation and advices on diet, exercise and other healthy habits (iv) Immunization but excluding drugs for vaccines used (d) Out-Patient Care, which shall include: (i) Consultation, including specialist evaluation (ii) Treatment of injury or illness (iii) Necessary x-ray and laboratory examination (iv) Emergency medicines needed for the immediate relief of symptoms

(v) Minor surgery not requiring confinement Emergency Care. Subject to the conditions and limitations in this Agreement and those specified below, a Member is entitled to receive emergency care [in case of emergency. For this purpose, all hospitals and all attending physician(s) in the Emergency Room automatically become accredited. In participating hospitals, the member shall be entitled to the following services free of charge: (a) doctor's fees, (b) emergency room fees, (c) medicines used for immediate relief and during treatment, (d) oxygen, intravenous fluids and whole blood and human blood products, (e) dressings, casts and sutures and (f) xrays, laboratory and diagnostic examinations and other medical services related to the emergency 5 treatment of the patient.] Provided, however, that in no case shall the total amount payable by [petitioner] for said Emergency, inclusive of hospital bill and professional fees, exceed P75,000.00. If the Member received care in a non-participating hospital, [petitioner] shall reimburse [him] 80% of the hospital bill or the amount of P5,000.00[,] whichever is lesser, and 50% of the professional fees of nonparticipating physicians based on [petitioner's] schedule of fees provided that the total amount[,] inclusive of hospital bills and professional fee shall not exceed P5,000.00. On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. The assessment represented the following: Value Added Tax (VAT) P 45,767,596.23 54,738,434.03 P 100,506,030.26 DST P 55,746,352.19 68,450,258.73 P 124,196,610.92
6

1996 1997

The deficiency DST assessment was imposed on petitioner's health care agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code which provides: Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employer's liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (emphasis supplied) Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
7

and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED.
8

Respondent appealed the CTA decision to the CA insofar as it cancelled the DST assessment. He claimed that petitioner's health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code. On August 16, 2004, the CA rendered its decision. It held that petitioner's health care agreement was in the nature of a non-life insurance contract subject to DST: WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE. Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid. SO ORDERED.
11 10

Petitioner moved for reconsideration but the CA denied it. Hence, this petition. Petitioner essentially argues that its health care agreement is not a contract of insurance but a contract for the provision on a prepaid basis of medical services, including medical check-up, that are not based on loss or damage. Petitioner also insists that it is not engaged in the insurance business. It is a health maintenance organization regulated by the Department of Health, not an insurance company under the jurisdiction of the Insurance Commission. For these reasons, petitioner asserts that the health care agreement is not subject to DST. We do not agree. The DST is levied on the exercise by persons of certain privileges conferred by law for the creation, 12 revision, or termination of specific legal relationships through the execution of specific instruments. It is an excise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the 13 business. In particular, the DST under Section 185 of the 1997 Tax Code is imposed on the privilege of making or renewing any policy of insurance (except life, marine, inland and fire insurance), bond or obligation in the nature of indemnity for loss, damage, or liability. Under the law, a contract of insurance is an agreement whereby one undertakes for a consideration to 14 indemnify another against loss, damage or liability arising from an unknown or contingent event. The 15 event insured against must be designated in the contract and must either be unknown or contingent. Petitioner's health care agreement is primarily a contract of indemnity. And in the recent case of Blue 16 Cross Healthcare, Inc. v. Olivares, this Court ruled that a health care agreement is in the nature of a non-life insurance policy. Contrary to petitioner's claim, its health care agreement is not a contract for the provision of medical services. Petitioner does not actually provide medical or hospital services but merely arranges for the

same and pays for them up to the stipulated maximum amount of coverage. It is also incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury. Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner. Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance. Petitioner's health care agreement is substantially similar to that involved in Philamcare Health Systems, 18 Inc. v. CA. The health care agreement in that case entitled the subscriber to avail of the hospitalization benefits, whether ordinary or emergency, listed therein. It also provided for "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services. This Court ruled in Philamcare Health Systems, Inc.: [T]he insurable interest of [the subscriber] in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingency, the health care provider must pay for the same to the 19 extent agreed upon under the contract. (emphasis supplied) Similarly, the insurable interest of every member of petitioner's health care program in obtaining the health care agreement is his own health. Under the agreement, petitioner is bound to indemnify any member who incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingency to the extent agreed upon under the contract. Petitioner's contention that it is a health maintenance organization and not an insurance company is irrelevant. Contracts between companies like petitioner and the beneficiaries under their plans are treated 20 as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity, or 21 facility offered at exchanges for the transaction of the business. It is an excise on the facilities used in 22 the transaction of the business, separate and apart from the business itself. WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is AFFIRMED. Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency documentary stamp tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000 until full payment thereof.

17

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. ARTICLE II Declaration of Principles and State Policies Section 15. The State shall protect and promote the right to health of the people and instill health consciousness among them. ARTICLE XIII Social Justice and Human Rights Section 11. The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, 1 women, and children. The State shall endeavor to provide free medical care to paupers. For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 2 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc. We recall the facts of this case, as follows: Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health car e agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED. Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code. On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the nature of a non-life insurance contract subject to DST. WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE. Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid. SO ORDERED. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case. xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners health care agreement during the pertinent period was in the nature of non -life insurance 3 which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares and Philamcare Health 4 Systems, Inc. v. CA. We also ruled that petitioners contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business. Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments: (a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company. (b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CAs disposition that health care services are not in the nature of an insurance business. (c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002. (e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those contemplated under Section 185. (f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered by Section 185. (g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185. (h) The June 12, 2008 decision should only apply prospectively. (i) Petitioner availed of the tax amnesty benefits under RA 9480 for the taxable year 2005 and all prior years. Therefore, the questioned assessments on the DST are now rendered moot and 6 academic. Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009. In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under 7 RA 9480 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of P5,127,149.08 8 representing 5% of its net worth as of the year ending December 31, 2005. We find merit in petitioners motion for reconsideration. Petitioner was formally registered and incorporated with the Securities and Exchange Commission on 9 June 30, 1987. It is engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it: Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and advices on diet, exercise and other healthy habits, and immunization; Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and the like and Curative medical services which pertain to the performing of other remedial and therapeutic processes in 10 the event of an injury or sickness on the part of the enrolled member. Individuals enrolled in its health care program pay an annual membership fee. Membership is on a yearto-year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services 11 are to be provided only by petitioner's physicians, i.e. those directly employed by it or whose services 12 are contracted by it. Petitioner also provides hospital services such as room and board accommodation, 13 laboratory services, operating rooms, x-ray facilities and general nursing care. If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other health 14 care providers for the services rendered, at pre-agreed rates. To avail of petitioners health care programs, the individual members are required to sign and execute a standard health care agreement embodying the terms and conditions for the provision of the health care
5

services. The same agreement contains the various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time. Health Maintenance Organizations Are Not Engaged In The Insurance Business We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the business but 15 an excise on the privilege, opportunity or facility used in the transaction of the business. Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in 16 turn to the issue of whether or not it is liable for DST on its health care agreements. A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious. Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied) It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which makes some words idle and 17 nugatory. This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the 18 interpretation which gives effect to the whole of the statute its every word. From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker should be transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance). Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated health services needed by 19 plan members for a fixed prepaid premium." The payments do not vary with the extent, frequency or type of services provided. The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it was not.

Section 2 (2) of PD 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or "transacting an insurance business:" a) making or proposing to make, as insurer, any insurance contract; b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance. Applying the "principal object and purpose test," there is significant American case law supporting the argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business. The rule was enunciated in Jordan v. Group Health Association wherein the Court of Appeals of the District of Columbia Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the distribution of health care services rather than the assumption of insurance risk. xxx Although Group Healths activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or
23 22 21

20

generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered. That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its 24 principal object purpose. (Emphasis supplied) In California Physicians Service v. Garrison, the California court felt that, after scrutinizing the plan of operation as a whole of the corporation, it was service rather than indemnity which stood as its principal purpose. There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service rather than indemnity is its principal object and purpo se. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of a high order and not 26 indemnity. (Emphasis supplied) American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue 27 Shield of New Jersey is clear on this point: The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy. xxx xxx xxx
25

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporation s plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided , but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws. A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the 28 health service corporation agrees to make payment directly to the participating provider . (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical services as needed, with payment made directly to the provider of these 29 services. In short, even if petitioner assumes the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business. By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating health providers would still be incidental to petitioners purpose of providing and arranging for health care services and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object. In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services 30 intended to keep members from developing medical conditions or diseases. As an HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize the possibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed to 31 prevent such loss or damage. Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of petitioners business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business. It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to those cases. What we are stating is that, for the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful that there are other 32 American authorities who have found particular HMOs to be actually engaged in insurance activities. Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from 33 the fact that it is not supervised by the Insurance Commission but by the Department of Health. In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The 34 reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals: The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias 35 Sugar Central, Inc. vs. Commissioner of Customs, the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to the government agency officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact 36 that they frequently are the drafters of the law they interpret.

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997 Section 185 states that DST is imposed on "all policies of insurance or obligations of the nature of indemnity for loss, damage, or liability." In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of indemnity and are therefore insurance contracts: It is incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury. Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner. Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other 37 members of the health care program. This is insurance. We reconsider. We shall quote once again the pertinent portion of Section 185: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied) In construing this provision, we should be guided by the principle that tax statutes are strictly construed 38 against the taxing authority. This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support 39 of the government. Hence, tax laws may not be extended by implication beyond the clear import of their 40 language, nor their operation enlarged so as to embrace matters not specifically provided. We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur: 1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril; 3. The insurer assumes the risk; 4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk and 5. In consideration of the insurers promise, the insured pays a premium.
41

Do the agreements between petitioner and its members possess all these elements? They do not. First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance: It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of 42 actions for malpractice. (Emphasis supplied) Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements. Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part. Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury. In Michigan Podiatric Medical Association v. National Foot Care Program, Inc. , although the health care contracts called for the defendant to partially reimburse a subscriber for treatment received from a non43

designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that "the primary activity of the defendant (was) the provision of podiatric services to subscribers in consideration 44 of prepayment for such services." Since indemnity of the insured was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the 45 basis of assumptions made relative to the insured. However, assuming that petitioners commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer. In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code. There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs Furthermore, militating in convincing fashion aga inst the imposition of DST on petitioners health care agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise 46 known as the "Internal Revenue Law of 1904") enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit: ARTICLE XI Stamp Taxes on Specified Objects Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following: xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained. On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917. Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the same. Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1 Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was 47 renumbered as Section 198. And under Section 23 of EO 273 dated July 25, 1987, it was again renumbered and became Section 185. On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax. Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST 48 provisions were introduced by RA 9243 but Section 185 was untouched. On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 49 36 registered HMOs with a total enrollment of more than 2 million. We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its 50 DST liability only on January 27, 2000, after more than a decade in the business as an HMO. Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the 51 responsibility of the legislature which imposes the tax on the constituency who is to pay it. So potent 52 indeed is the power that it was once opined that "the power to tax involves the power to destroy." Petitioner claims that the assessed DST to date which amounts to P376 million is way beyond its net 54 worth of P259 million. Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to 55 throttle private business. On the contrary, the government ought to encourage private enterprise. Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a 56 57 legitimate business. As aptly held in Roxas, et al. v. CTA, et al.: The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally 58 and uniformly, lest the tax collector kill the "hen that lays the golden egg." Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter-productive and ultimately subversive of the 59 nations thrust towards a better economy which will ultimately benefit the majority of our people. Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840 Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 60 1997 became moot and academic when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all 61 internal revenue taxes for taxable year 2005 and prior years. Far from disagreeing with petitioner, respondent manifested in its memorandum: Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years. In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under 62 Section 10 of said amnesty law. (Emphasis supplied) Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program 63 under RA 9480. There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480. Is The Court Bound By A Minute Resolution In Another Case?
53

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by 64 65 the ruling of the CA in CIR v. Philippine National Bank that a health care agreement of Philamcare Health Systems is not an insurance contract for purposes of the DST. In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing 66 the appeal in Philippine National Bank (G.R. No. 148680). Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract. It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being 67 questioned. As a result, our ruling in that case has already become final. When a minute resolution denies or dismisses a petition for failure to comply with formal and substantive requirements, the 68 challenged decision, together with its findings of fact and legal conclusions, are deemed sustained. But what is its effect on other cases? With respect to the same subject matter and the same issues concerning the same parties, it constitutes 69 res judicata. However, if other parties or another subject matter (even with the same parties and issues) 70 is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted 71 that a previous case, CIR v. Baier-Nickel involving the same parties and the same issues , was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved different subject matters as they were concerned with the taxable income 72 of different taxable years. Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the 73 proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice. Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the fact that petitioners health care agreements are not subject to DST. A Final Note Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage. It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer advantages over the pay-for-service system (wherein individuals are charged a fee each time they receive medical services), including the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they

play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens with affordable health services. The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. Its imposition will elevate the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the indispensability of the services offered by HMOs. WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.
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G.R. No. L-23771 August 4, 1988 THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX APPEALS, respondents. This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity) dated September 15, 1964 in C.T.A. Cases Nos. 581 and 1302, which were jointly heard upon agreement of the parties, absolving the respondent taxpayer from liability for the deficiency percentage, franchise, and fixed taxes and surcharge assessed against it in the sums of P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961, respectively. The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric power plant serving the adjoining municipalities of Lingayen and Binmaley, both in the province of Pangasinan, pursuant to the municipal franchise granted it by their respective municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946, respectively. Section 10 of these franchises provide that: ...The said grantee in consideration of the franchise hereby granted, shall pay quarterly into the Provincial Treasury of Pangasinan, one per centum of the gross earnings obtained thru this privilege during the first twenty years and two per centum during the remaining fifteen years of the life of said franchise. On February 24, 1948, the President of the Philippines approved the franchises granted to the private respondent. On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and demanded from the private respondent the total amount of P19,293.41 representing deficiency franchise taxes and surcharges for the years 1946 to 1954 applying the franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as prescribed in Section 259 of the National Internal Revenue Code, instead of the lower rates as provided in the municipal franchises. On September 29, 1956, the private respondent requested for a reinvestigation of the case on the ground that instead of incurring a deficiency liability, it made an overpayment of the franchise tax. On April 30, 1957, the BIR through its regional director, denied the private respondent's request for reinvestigation and reiterated the demand for payment of the same. In its letters dated July 2, and August 9, 1958 to the petitioner Commissioner, the private respondent protested the said assessment and requested for a conference with a view to settling the liability amicably. In his letters dated July 25 and August 28, 1958, the Commissioner denied the request of the private respondent. Thus, the appeal to the respondent Court of Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.

In a letter dated August 21, 1962, the Commissioner demanded from the private respondent the payment of P3,616.86 representing deficiency franchise tax and surcharges for the years 1959 to 1961 again applying the franchise tax rate of 5% on gross receipts as prescribed in Section 259 of the National Internal Revenue Code. In a letter dated October 5, 1962, the private respondent protested the assessment and requested reconsideration thereof The same was denied on November 9, 1962. Thus, the appeal to the respondent Court of Appeals on November 29, 1962, docketed as C.T.A. No. 1302. Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22, 1 963, granting to the private respondent a legislative franchise for the operation of the electric light, heat, and power system in the same municipalities of Pangasinan. Section 4 thereof provides that: In consideration of the franchise and rights hereby granted, the grantee shall pay into the Internal Revenue office of each Municipality in which it is supplying electric current to the public under this franchise, a tax equal to two per centum of the gross receipts from electric current sold or supplied under this franchise. Said tax shall be due and payable quarterly and shall be in lieu of any and all taxes and/or licenses of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal, provincial or national, now or in the future, on its poles, wires, insulator ... and on its franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or licenses, the grantee is hereby expressly exempted and effective further upon the date the original franchise was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts as provided for in the original franchise shall be collected, any provision of law to the contrary notwithstanding. On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843 should apply and accordingly dismissed the claim of the Commissioner of Internal Revenue. The said ruling is now the subject of the petition at bar. The issues raised for resolution are: 1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code assessed against the private respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible. 2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and equality of taxation" clause of the Constitution. 3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be given retroactive effect so as to render uncollectible the taxes in question which were assessed before its enactment. 4. Whether or not the respondent taxpayer is liable for the fixed and deficiency percentage taxes in the amount of P3,025.96 for the period from January 1, 1946 to February 29, 1948, the period before the approval of its municipal franchises. The first issue raised by the petitioner before us is whether or not the five percent (5%) franchise tax prescribed in Section 259 of the National Internal Revenue Code (Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against the private respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible. It is the contention of the petitioner Commissioner of Internal Revenue that the private respondent should have been held liable for the 5% franchise tax on gross receipts prescribed in Section 259 of the Tax Code, instead of the lower franchise tax rates provided in the municipal franchises (1% of gross earnings for the first twenty years and 2% for the remaining fifteen years of the life of the franchises) because Section 259 of the Tax Code, as amended by RA No. 39 of October 1, 1946, applied to existing and future franchises. The franchises of the private respondent were already in existence at the time of the adoption of the said amendment, since the franchises were accepted on March 1, 1948 after approval by the President of the Philippines on February 24, 1948. The private respondent's original franchises did not contain the proviso that the tax provided therein "shall be

in lieu of all taxes;" moreover, the franchises contained a reservation clause that they shag be subject to amendment, alteration, or repeal, but even in the absence of such cause, the power of the Legislature to alter, amend, or repeal any franchise is always deemed reserved. The franchise of the private respondent have been modified or amended by Section 259 of the Tax Code, the petitioner submits. We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a legislative franchise in June, 1963, amending, altering, or even repealing the original municipal franchises, and providing that the private respondent should pay only a 2% franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national, now or in the future ... and effective further upon the date the original franchise was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts ... shall be collected, any provision of law to the contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the private respondent was liable to pay only the 2% franchise tax, effective from the date the original municipal franchise was granted. On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and equality of taxation" clause of the Constitution, and, if adjudged valid, whether or not it should be given retroactive effect, the petitioner submits that the said law is unconstitutional insofar as it provides for the payment by the private respondent of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated were subject to the 5% franchise tax imposed in Section 259 of the Tax Code, thereby discriminatory and violative of the rule on uniformity and equality of taxation. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity means that all property belonging to the same class shall be taxed alike The Legislature has the inherent power not only to select the subjects of taxation but to grant exemptions. Tax 1 exemptions have never been deemed violative of the equal protection clause. It is true that the private 2 respondents municipal franchises were obtained under Act No. 667 of the Philippine Commission, but these original franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843. As correctly held by the respondent court, the latter was granted subject to the terms and conditions 3 established in Act No. 3636, as amended by C.A. No. 132. These conditions Identify the private respondent's power plant as falling within that class of power plants created by Act No. 3636, as amended. The benefits of the tax reduction provided by law (Act No. 3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's power plant and others circumscribed within this class. R.ANo. 3843 merely transferred the petitioner's power plant from that class provided for in Act No. 667, as amended, to which it belonged until the approval of R.A- No. 3843, and placed it within the class falling under Act No. 3636, as amended. Thus, it only effected the transfer of a taxable property from one class to another. We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax 4 rate provided in Section 259 of the Tax Code was never intended to have a universal application. We note that the said Section 259 of the Tax Code expressly allows the payment of taxes at rates lower than 5% when the charter granting the franchise of a grantee, like the one granted to the private respondent under Section 4 of R.A. No. 3843, precludes the imposition of a higher tax. R.A. No. 3843 did not only fix and specify a franchise tax of 2% on its gross receipts, but made it "in lieu of any and all taxes, all laws to the contrary notwithstanding," thus, leaving no room for doubt regarding the legislative intent. "Charters or special laws granted and enacted by the Legislature are in the nature of private contracts. They do not constitute a part of the machinery of the general government. They are usually adopted after careful consideration of the private rights in relation with resultant benefits to the State ... in passing a special charter the attention of the Legislature is directed to the facts and circumstances which the act or charter is intended to meet. The Legislature consider (sic) and make (sic) provision for all the circumstances of a 5 particular case." In view of the foregoing, we find no reason to disturb the respondent court's ruling upholding the constitutionality of the law in question. Given its validity, should the said law be applied retroactively so as to render uncollectible the taxes in question which were assessed before its enactment? The question of whether a statute operates

retrospectively or only prospectively depends on the legislative intent. In the instant case, Act No. 3843 provides that "effective ... upon the date the original franchise was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts ... shall be collected, any provision to the contrary notwithstanding." Republic Act No. 3843 therefore specifically provided for the retroactive effect of the law. The last issue to be resolved is whether or not the private respondent is liable for the fixed and deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from January 1, 1946 to February 29, 1948) before the approval of its municipal franchises. As aforestated, the franchises were approved by the President only on February 24, 1948. Therefore, before the said date, the private respondent was liable for the payment of percentage and fixed taxes as seller of light, heat, and power which as the petitioner claims, amounted to P3,025.96. The legislative franchise (R.A. No. 3843) exempted the grantee from all kinds of taxes other than the 2% tax from the date the original franchise was granted. The exemption, therefore, did not cover the period before the franchise was granted, i.e. before February 24, 1948. However, as pointed out by the respondent court in its findings, during the period covered by the instant case, that is from January 1, 1946 to December 31, 1961, the private respondent paid the amount of P34,184.36, which was very much more than the amount rightfully due from it. Hence, the private respondent should no longer be made to pay for the deficiency tax in the amount of P3,025.98 for the period from January 1, 1946 to February 29, 1948. WHEREFORE, the appealed decision of the respondent Court of Tax Appeals is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

G.R. No. 119252 August 18, 1997 COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners, vs. HON. APOLINARIO B. SANTOS, in his capacity as Presiding Judge of the Regional Trial Court, Branch 67, Pasig City; ANTONIO M. MARCO; JEWELRY BY MARCO & CO., INC., and GUILD OF PHILIPPINE JEWELLERS, INC., respondents. Of grave concern to this Court is the judicial pronouncement of the court a quo that certain provisions of the Tariff & Customs Code and the National Internal Revenue Code are unconstitutional. This provokes the issue: Can the Regional Trial Courts declare a law inoperative and without force and effect or otherwise unconstitutional? If it can, under what circumstances? In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs jointly seek the 1 reversal of the Decision, dated February 16, 1995, of herein public respondent, Hon. Apolinario B. Santos, Presiding Judge of Branch 67 of the Regional Trial Court of Pasig City. The following facts, concisely related in the petition of the Office of the Solicitor General, appear to be undisputed: 1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino jewelers engaged in the manufacture of jewelries (sic) and allied undertakings. Among its members are Hans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., Diagem Trading Corporation, and private respondent Jewelry by Marco & Co., Inc. Private respondent Antonio M. Marco is the President of the Guild. 2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of the Bureau of Internal Revenue, acting for and in behalf of the Commissioner of Internal Revenue, issued Regional Mission Order No. 109-88 to BIR officers, led by EliseoCorcega, to conduct surveillance, monitoring, and
2

inventory of all imported articles of Hans Brumann, Inc., and place the same under preventive embargo. The duration of the mission was from August 8 to August 20, 1988 (Exhibit "1"; Exhibit "A"). 3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR officers proceeded to the establishment of Hans Brumann, Inc., served the Mission Order, and informed the establishment that they were going to make an inventory of the articles involved to see if the proper taxes thereon have been paid. They then made an inventory of the articles displayed in the cabinets with the assistance of an employee of the establishment. They listed down the articles, which list was signed by the assistant employee. They also requested the presentation of proof of necessary payments for excise tax and valueadded tax on said articles (pp. 10-15, TSN, April 12, 1993, Exhibits "2", "2-A", "3", "3-A"). 4. The BIR officers requested the establishment not to sell the articles until it can be proven that the necessary taxes thereon have been paid. Accordingly, Mr. Hans Brumann, the owner of the establishment, signed a receipt for Goods, Articles, and Things Seized under Authority of the National Internal Revenue Code (dated August 17, 1988), acknowledging that the articles inventoried have been seized and left in his possession, and promising not to dispose of the same without authority of the 3 Commissioner of Internal Revenue pending investigation. 5. Subsequently, BIR officer EliseoCorcega submitted to his superiors a report of the inventory conducted and a computation of the value-added tax and ad valorem tax on the articles for evaluation and 4 disposition. 6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the BIR on the preventive 5 embargo of the articles. 7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy Commissioner Eufracio D. Santos to BIR officers to examine the books of accounts and other accounting records of Hans Brumann, Inc., for "stocktaking investigation for excise tax purposes for the period January 1, 1988 to present" (Exhibit "C"). In a letter dated October 27, 1988, in connection with the physical count of the inventory (stocks on hand) pursuant to said Letter of Authority, Hans Brumann, Inc. was requested to prepare and make available to the BIR the documents indicated therein (Exhibit "D"). 8. Hans Brumann, Inc., did not produce the documents requested by the BIR.
6

9. Similar Letter of Authority were issued to BIR officers to examine the books of accounts and other accounting records of Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., 7 (Exhibits "E", "G" and "N") and Diagem Trading Corporation for "stocktaking/investigation far excise tax purpose for the period January 1, 1988 to present." 10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of what actually transpired in the implementation of the Letters of Authority. 11. In the case of Solid Gold International Traders Corporation, the BIR officers made an inventory of the 8 9 articles in the establishment. The same is true with respect to Diagem Traders Corporation. 12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By Marco & Co., Inc. filed with the Regional Trial Court, National Capital Judicial Region, Pasig City, Metro Manila, a petition for declaratory relief with writ of preliminary injunction and/or temporary restraining order against herein petitioners and Revenue Regional Director Felicidad L. Viray (docketed as Civil Case No. 56736) praying that Sections 126, 127(a) and (b) and 150(a) of the National Internal Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs Code of the Philippines be declared unconstitutional and void, and that the Commissioner of Internal Revenue and Customs be prevented or enjoined from issuing mission orders and other orders of similar nature. . . .

13. On February 9, 1989, herein petitioners filed their answer to the petition. . . . 14 On October 16, 1989, private respondents filed a Motion with Leave to Amend Petition by including as petitioner the Guild of Philippine Jewelers, Inc., which motion was granted. . . . 15. The case, which was originally assigned to Branch 154, was later reassigned to Branch 67. 16. On February 16, 1995, public respondents rendered a decision, the dispositive portion of which reads: In view of the foregoing reflections, judgment is hereby rendered, as follows: 1. Declaring Section 104 of the Tariff and the Customs Code of the Philippines, Hdg. 71.01, 71.02, 71.03, and 71.04, Chapter 71 as amended by Executive Order No. 470, imposing three to ten (3% to 10%) percent tariff and customs duty on natural and cultured pearls and precious or semi-precious stones, and Section 150 par. (a) the National Internal Revenue Code of 1977, as amended, renumbered and rearranged by Executive Order 273, imposing twenty (20%) percent excise tax on jewelry, pearls and other precious stones, as INOPERATIVE and WITHOUT FORCE and EFFECT insofar as petitioners are concerned. 2. Enforcement of the same is hereby enjoined. No cost. SO ORDERED. Section 150 (a) of Executive Order No. 273 reads: Sec. 150.Non-essential goods. There shall be levied, assessed and collected a tax equivalent to 20% based on the wholesale price or the value of importation used by the Bureau of Customs in determining tariff and customs duties; net of the excise tax and value-added tax, of the following goods: (a) All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones and imitations thereof; goods made of, or ornamented, mounted and fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mountings for spectacles or eyeglasses, and dental gold or gold alloys and other precious metals used in filling, mounting or fitting of the teeth); opera glasses and lorgnettes. The term "precious metals" shall include platinum, gold, silver, and other metals of similar or greater value. The term "imitations thereof" shall include platings and alloys of such metals. Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988, amended the then Section 163 (a) of the Tax Code of 1986 which provided that: Sec. 163.Percentage tax on sales of non-essential articles. There shall be levied, assessed and collected, once only on every original sale, barter, exchange or similar transaction for nominal or valuable consideration intended to transfer ownership of, or title to, the articles herein below enumerated a tax equivalent to 50% of the gross value in money of the articles so sold, bartered, exchanged or transferred, such tax to be paid by the manufacturer or producer: (a) All articles commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones, and imitations thereof, articles made of, or ornamented, mounted or fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mounting for spectacles or eyeglasses, and dental gold or gold alloys and other precious metal used in filling, mounting or fitting of the teeth); opera glasses, and lorgnettes. The term

"precious metals" shall include platinum, gold, silver, and other metals of similar or greater value. The term "imitations thereof" shall include platings and alloys of such metals; Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code and Section 184(a) of the Tax code, as amended by Presidential Decree No. 69, which took effect on January 1, 1974. It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in addition to a 10% value-added tax under the old law, it was subjected to 50% percentage tax. It was even subjected to a 70% percentage tax under then Section 184(a) of the Tax Code, as amended by P.D. 69. Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71 of the Tariff and Customs Code, as amended by Executive Order No. 470, dated July 20, 1991, imposes import duty on natural or cultured pearls and precious or semi-precious stones at the rate of 3% to 10% to be applied in stages from 1991 to 1994 and 30% in 1995. Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when the petition was filed in the court a quo. In support of their petition before the lower court, the private respondents submitted a position paper purporting to be an exhaustive study of the tax rates on jewelry prevailing in other Asian countries, in 10 comparison to tax rates levied on the same in the Philippines. The following issues were thus raised therein: 1. Whether or not the Honorable Court has jurisdiction over the subject matter of the petition. 2. Whether the petition states a cause of action or whether the petition alleges a justiciable controversy between the parties. 3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs Code are unconstitutional. 4. Whether the issuance of the Mission Order and Letters of Authority is valid and legal. In the assailed decision, the public respondent held indeed that the Regional Trial Court has jurisdiction to take cognizance of the petition since "jurisdiction over the nature of the suit is conferred by law and it is determine[d] through the allegations in the petition," and that the "Court of Tax Appeals has no jurisdiction to declare a statute unconstitutional much less issue writs of certiorari and prohibition in order to correct acts of respondents allegedly committed with grave abuse of discretion amounting to lack of jurisdiction." As to the second issue, the public respondent, made the holding that there exists a justiciable controversy between the parties, agreeing with the statements made in the position paper presented by the private respondents, and considering these statements to be factual evidence, to wit: Evidence for the petitioners indeed reveals that government taxation policy treats jewelry, pearls, and other precious stones and metals as non-essential luxury items and therefore, taxed heavily; that the atmospheric cost of taxation is killing the local manufacturing jewelry industry because they cannot compete with neighboring and other countries where importation and manufacturing of jewelry is not taxed heavily, if not at all; that while government incentives and subsidies exit, local manufacturers cannot avail of the same because officially many of them are unregistered and are unable to produce the required official documents because they operate underground, outside the tariff and tax structure; that local jewelry manufacturing is under threat of extinction, otherwise discouraged, while domestic trading

has become more attractive; and as a consequence, neighboring countries, such as: Hongkong, Singapore, Malaysia, Thailand, and other foreign competitors supplying the Philippine market either through local channels or through the black market for smuggled goods are the ones who are getting business and making money, while members of the petitioner Guild of Philippine Jewelers, Inc. are constantly subjected to bureaucratic harassment instead of being given by the government the necessary support in order to survive and generate revenue for the government, and most of all fight competitively not only in the domestic market but in the arena of world market where the real contest is. Considering the allegations of fact in the petition which were duly proven during the trial, the Court holds that the petition states a cause of action and there exists a justiciable controversy between the parties which would require determination of constitutionality of the laws imposing excise tax and customs duty 11 on jewelry. (emphasis ours) The public respondent, in addressing the third issue, ruled that the laws in question are confiscatory and oppressive. Again, virtually adopting verbatim the reasons presented by the private respondents in their position paper, the lower court stated: The Court finds that indeed government taxation policy trats(sic) hewelry(sic) as non-essential luxury item and therefore, taxed heavily. Aside from the ten (10%) percent value added tax (VAT), local jewelry manufacturers contend with the (manufacturing) excise tax of twenty (20%) percent (to be applied in stages) customs duties on imported raw materials, the highest in the Asia-Pacific region. In contrast, imported gemstones and other precious metals are duty free in Hongkong, Thailand, Malaysia and Singapore. The Court elaborates further on the experiences of other countries in their treatment of the jewelry sector. MALAYSIA Duties and taxes on imported gemstones and gold and the sales tax on jewelry were abolished in Malaysia in 1984. They were removed to encourage the development of Malaysia's jewelry manufacturing industry and to increase exports of jewelry. THAILAND Gems and jewelry are Thailand's ninth most important export earner. In the past, the industry was overlooked by successive administrations much to the dismay of those involved in developing trade. Prohibitive import duties and sales tax on precious gemstones restricted the growht ( sic) of the industry, resulting in most of the business being unofficial. It was indeed difficult for a government or businessman to promote an industry which did not officially exist. Despite these circumstances, Thailand's Gem business kept growing up in ( sic) businessmen began to realize it's potential. In 1978, the government quietly removed the severe duties on precious stones, but imposed a sales tax of 3.5%. Little was said or done at that time as the government wanted to see if a free trade in gemstones and jewelry would increase local manufacturing and exports or if it would mean more foreign made jewelry pouring into Thailand. However, as time progressed, there were indications that local manufacturing was indeed being encouraged and the economy was earning mom from exports. The government soon removed the 3% sales tax too, putting Thailand at par with Hongkong and Singapore. In these countries, there are no more import duties and sales tax on gems. (Cited in pages 6 and 7 of Exhibit "M".The Center for Research and Communication in cooperation with the Guild of Philippine Jewelers, Inc., June 1986). To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry and other precious and semi-precious stones compared to other neighboring countries, to wit:

Tariff on imported Jewelry and (Manufacturing) Sales Tax 10% (VAT) precious stones Excise tax Philippines 3% to 10% to be 20% 10% VAT applied in stages Malaysia None NoneNone Thailand None NoneNone Singapore None NoneNone Hongkong None NoneNone In this connection, the present tariff and tax structure increases manufacturing costs and renders the local jewelry manufacturers uncompetitive against other countries even before they start manufacturing and trading. Because of the prohibitive cast (sic) of taxation, most manufacturers source from black market for smuggled goods, and that while manufacturers can avail of tax exemption and/or tax credits from the (manufacturing) excise tax, they have no documents to present when filing this exemption because, or pointed out earlier, most of them source their raw materials from the block market, and since many of them do not legally exist or operate onofficially (sic), or underground, again they have no records (receipts) to indicate where and when they will utilize such tax credits. (Cited in Exhibit "M" Buencamino Report). Given these constraints, the local manufacturer has no recourse but to the back door for smuggled goods if only to be able to compete even ineffectively, or cease manufacturing activities and instead engage in the tradinf (sic) of smuggled finished jewelry. Worthy of note is the fact that indeed no evidence was adduced by respondents to disprove the foregoing allegations of fact. Under the foregoing factual circumstances, the Court finds the questioned statutory provisions confiscatory and destructive of the proprietary right of the petitioners to engage in business in violation of Section 1, Article III of the Constitution which states, as follows: No person shall be deprived of the life, liberty, or property without due process of law . . . .
12

Anent the fourth and last issue, the herein public respondent did not find it necessary to rule thereon, since, in his opinion, "the same has been rendered moot and academic by the aforementioned 13 pronouncement." The petitioners now assail the decision rendered by the public respondent, contending that the latter has no authority to pass judgment upon the taxation policy of the government. In addition, the petitioners impugn the decision in question by asserting that there was no showing that the tax laws on jewelry are confiscatory and destructive of private respondent's proprietary rights. We rule in favor of the petitioners. It is interesting to note that public respondent, in the dispositive portion of his decision, perhaps keeping in mind his limitations under the law as a trial judge, did not go so far as to declare the laws in question to be unconstitutional. However, therein he declared the laws to be inoperative and without force and effect insofar as the private respondents are concerned. But, respondent judge, in the body of his decision, unequivocally but wrongly declared the said provisions of law to be violative of Section 1, Article 14 III of the Constitution. In fact, in their Supplemental Comment on the Petition for Review, the private

respondents insist that Judge Santos, in his capacity as judge of the Regional Trial Court, acted within his authority in passing upon the issues, to wit: A perusal of the appealed decision would undoubtedly disclose that public respondent did not pass judgment on the soundness or wisdom of the government's tax policy on jewelry. True, public respondent, in his questioned decision, observed, inter alia, that indeed government tax policy treats jewelry as nonessential item, and therefore, taxed heavily; that the present tariff and tax structure increase manufacturing cost and renders the local jewelry manufacturers uncompetitive against other countries even before they start manufacturing and trading; that many of the local manufacturers do not legally exist or operate unofficially or underground; and that the manufacturers have no recourse but to the back door for smuggled goods if only to be able to compete even if ineffectively or cease manufacturing activities. BUT, public respondent did not, in any manner, interfere with or encroach upon the prerogative of the legislature to determine what should be the tax policy on jewelry. On the other hand, the issue raised before, and passed upon by, the public respondent was whether or not Section 150, paragraph (a) of the National Internal Revenue Code (NIRC) and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs Code are unconstitutional, or differently stated, whether or not the questioned statutory provisions affect the constitutional right of private respondents to engage in business. It is submitted that public respondent confined himself on this issue which is clearly a judicial question. We find it incongruous, in the face of the sweeping pronouncements made by Judge Santos in his decision, that private respondents can still persist in their argument that the former did not overreach the restrictions dictated upon him by law. There is no doubt in the Court's mind, despite protestations to the contrary, that respondent judge encroached upon matters properly falling within the province of legislative functions. In citing as basis for his decision unproven comparative data pertaining to differences between tax rates of various Asian countries, and concluding that the jewelry industry in the Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative policy regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simply because other countries have adopted such policies, the respondent judge overlooked the fact that such matters are not for him to decide. There are reasons why jewelry, a non-essential item, is taxed as it is in this country, and these reasons, deliberated upon by our legislature, are beyond the reach of judicial questioning. As held in Macasiano 15 vs. National Housing Authority: The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers which enjoins upon each department a becoming respect for the acts of the other departments. The theory is that as the joint act of Congress and the President of the Philippines, a law has been carefully studied and determined to be in accordance with the fundamental low before it was finally enacted. (emphasis ours) What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC 16 is not competent to rule. As Cooley observed: "Debatable questions are for the legislature to decide. 17 The courts do not sit to resolve the merits of conflicting issues." In Angara vs. Electoral 18 Commission, Justice Laurel made it clear that "the judiciary does not pass upon questions of wisdom, justice or expediency of legislation." And fittingly so, for in the exercise of judicial power, we are allowed only "to settle actual controversies involving rights which are legally demandable and enforceable", and may not annul an act of the political departments simply because we feel it is unwise or 19 impractical. This is not to say that Regional Trial Courts have no power whatsoever to declare a law 20 unconstitutional. In J.M. Tuason and Co. v. Court of Appeals, we said that "[p]lainly the Constitution contemplates that the inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality happens to be in issue." This authority of lower courts to decide questions of

constitutionality in the first instance reaffirmed in Ynos v. Intermediate Court of Appeals. authority does not extend to deciding questions which pertain to legislative policy.

21

But this

The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. The arguments they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional Trial Courts can only look into the validity of a provision, that is, whether or not it has been passed according to the procedures laid down by law, and thus cannot inquire as to the reasons for its existence. Granting arguendo that the private respondents may have provided convincing arguments why the jewelry industry in the Philippines should not be taxed as it is, it is to the legislature that they must resort to for relief, since with the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) andsitus (place) of taxation. This Court cannot freely 22 delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. As succinctly put in Lim vs. Pacquing: "Where a controversy may be settled on a platform other than one involving constitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question." As judges, we can only interpret and apply the law and, despite our doubts about 24 its wisdom, cannot repeal or amend it. The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian countries. This is meant to convince us that compared to other countries, the tax rates imposed on said industry in the Philippines is oppressive and confiscatory. This Court, however, cannot subscribe to the theory that the tax rates of other countries should be used as a yardstick in determining what may be the proper subjects of taxation in our own country. It should be pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislative and executive branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out or 25 one particular class for taxation, or exemption, infringe no constitutional limitation." WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in Civil Case No. 56736 is hereby REVERSED and SET ASIDE. No costs.
23

G.R. No. 120082 September 11, 1996 MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents. For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22 March 1 1995 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International Airport Authority vs. City of Cebu", 2 and its order of 4, May 1995 denying the motion to reconsider the decision. We resolved to give due course to this petition for its raises issues dwelling on the scope of the taxing power of local government-owned and controlled corporations. The uncontradicted factual antecedents are summarized in the instant petition as follows: Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act No. 6958, mandated to "principally undertake the economical, efficient and effective control, management and

supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . . and such other Airports as may be established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated to: a) encourage, promote and develop international and domestic air traffic in the Central Visayas and Mindanao regions as a means of making the regions centers of international trade and tourism, and accelerating the development of the means of transportation and communication in the country; and b) upgrade the services and facilities of the airports and to formulate internationally acceptable standards of airport accommodation and service. Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. Sec. 14.Tax Exemptions. The authority shall be exempt from realty taxes imposed by the National Government or any of its political subdivisions, agencies and instrumentalities . . . On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79. Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also asserted that it is an instrumentality of the government performing governmental functions, citing section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of local government units: Sec. 133.Common Limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangay shall not extend to the levy of the following: a) . . . xxxxxxxxx o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. (Emphasis supplied) Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA is a government-controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code that took effect on January 1, 1992: Sec. 193.Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons whether natural or juridical,including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock, and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code . (Emphasis supplied) xxxxxxxxx Sec. 234.Exemptions from Real Property taxes. . . .

(a) . . . xxxxxxxxx (c) . . . Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations are hereby withdrawn upon the effectivity of this Code. As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter was compelled to pay its tax account "under protest" and thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing powers of local government units do not extend to the levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner insisted that while it is indeed a governmentowned corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national government by the very nature of its powers and functions. Respondent City, however, asserted that MACIAA is not an instrumentality of the government but merely a government-owned corporation performing proprietary functions As such, all exemptions previously granted to it were deemed withdrawn by operation of law, as provided under Sections 193 and 234 of the 3 Local Government Code when it took effect on January 1, 1992. The petition for declaratory relief was docketed as Civil Case No. CEB-16900. In its decision of 22 March 1995, the trial court dismissed the petition in light of its findings, to wit: A close reading of the New Local Government Code of 1991 or RA 7160 provides the express cancellation and withdrawal of exemption of taxes by government owned and controlled corporation per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and 234] Petitioners claimed that its real properties assessed by respondent City Government of Cebu are exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the same (citing Section 14 of RA 6958). However, RA 7160 expressly provides that "All general and special laws, acts, city charters, decress [sic], executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly." ( [f], Section 534, RA 7160). With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local Government Code of 1991. So that petitioner in this case has to pay the assessed realty tax of its properties effective after January 1, 1992 until the present. This Court's ruling finds expression to give impetus and meaning to the overall objectives of the New Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that the territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy to enable them
4

to attain their fullest development as self-reliant communities and make them more effective partners in the attainment of national goals. Towards this end, the State shall provide for a more responsive and accountable local government structure instituted through a system of decentralization whereby local government units shall be given more powers, authority, responsibilities, and resources. The process of 5 decentralization shall proceed from the national government to the local government units. . . . Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the instant petition based on the following assignment of errors: I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT. II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU. Anent the first assigned error, the petitioner asserts that although it is a government-owned or controlled corporation it is mandated to perform functions in the same category as an instrumentality of Government. An instrumentality of Government is one created to perform governmental functions 6 primarily to promote certain aspects of the economic life of the people. Considering its task "not merely to efficiently operate and manage the Mactan-Cebu International Airport, but more importantly, to carry out the Government policies of promoting and developing the Central Visayas and Mindanao regions as centers of international trade and tourism, and accelerating the development of the means of 7 transportation and communication in the country," and that it is an attached agency of the Department of 8 Transportation and Communication (DOTC), the petitioner "may stand in [sic] the same footing as an agency or instrumentality of the national government." Hence, its tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage of the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing powers of local government units shall not extend to the levy of taxes of fees or charges of any kind on the national government its agencies and instrumentalities." As to the second assigned error, the petitioner contends that being an instrumentality of the National Government, respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine Amusement 9 and Gaming Corporation; Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original character, PD 1869. All its shares of stock are owned by the National Government. . . . PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is governmental, which places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local government. The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation of constitutional laws enacted by Congress to carry into execution the powers vested in the federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579). This doctrine emanates from the "supremacy" of the National Government over local government. Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States

(Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau Modern Constitutional Law, Vol. 2, p. 140) Otherwise mere creature of the State can defeat National policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it. (Emphasis supplied) It then concludes that the respondent Judge "cannot therefore correctly say that the questioned provisions of the Code do not contain any distinction between a governmental function as against one performing merely proprietary ones such that the exemption privilege withdrawn under the said Code would apply to allgovernment corporations." For it is clear from Section 133, in relation to Section 234, of the LGC that the legislature meant to exclude instrumentalities of the national government from the taxing power of the local government units. In its comment respondent City of Cebu alleges that as local a government unit and a political subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such power 10 is guaranteed by the Constitution and enhanced further by the LGC. While it may be true that under its 11 Charter the petitioner was exempt from the payment of realty taxes, this exemption was withdrawn by Section 234 of the LGC. In response to the petitioner's claim that such exemption was not repealed because being an instrumentality of the National Government, Section 133 of the LGC prohibits local government units from imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the petitioner is likewise a government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish between government-owned or controlled corporations performing governmental and purely proprietary functions. Respondent city of Cebu urges this the Manila International Airport Authority is a governmental-owned 12 corporation, and to reject the application of Basco because it was "promulgated . . . before the enactment and the singing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the framers of the said law. As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Nevertheless, 13 effective limitations thereon may be imposed by the people through their Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform and equitable and Congress 14 shall evolve a progressive system of taxation. So potent indeed is the power that it was once opined 15 that "the power to tax involves the power to destroy." Verily, taxation is a destructive power which interferes with the personal and property for the support of the government. Accordingly, tax statutes 16 must be construed strictly against the government and liberally in favor of the taxpayer. But since taxes 17 are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimijuris against 18 the taxpayers and liberally in favor of the taxing authority. A claim of exemption from tax payment must 19 be clearly shown and based on language in the law too plain to be mistaken. Elsewise stated, taxation 20 is the rule, exemption therefrom is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the 21 course of its operations. The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct 22 authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the

power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of a mutual nature, 23 which then becomes contractual and is thus covered by the non-impairment clause of the Constitution. The LGC, enacted pursuant to Section 5, Article X of the constitution provides for the exercise by local government units of their power to tax, the scope thereof or its limitations, and the exemption from taxation. Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units as follows: Sec. 133.Common Limitations on the Taxing Power of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein (d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all other kinds of customs fees charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned: (e) Taxes, fees and charges and other imposition upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise or charges for wharfages, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise; (f) Taxes fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterprise certified to be the Board of Investment as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (j) Taxes on the gross receipts of transportation contractor and person engage in the transportation of passengers of freight by hire and common carriers by air, land, or water, except as provided in this code; (k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving of thereof, except, tricycles; (m) Taxes, fees, or other charges on Philippine product actually exported, except as otherwise provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and Cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines; and (o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis supplied) Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred to are "of any kind", hence they include all of these, unless otherwise provided by the LGC. The term "taxes" is well understood so as to need no further elaboration, especially in the light of the above enumeration. The term "fees" means charges fixed by law or Ordinance for the regulation or inspection of business 24 25 activity, while "charges" are pecuniary liabilities such as rents or fees against person or property. Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232. It reads as follows: Sec. 232.Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area may levy on an annual ad valorem tax on real property such as land, building, machinery and other improvements not hereafter specifically exempted. Section 234 of LGC provides for the exemptions from payment of real property taxes and withdraws previous exemptions therefrom granted to natural and juridical persons, including government owned and controlled corporations, except as provided therein. It provides: Sec. 234.Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof had been granted, for reconsideration or otherwise, to a taxable person; (b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques nonprofits or religious cemeteries and all lands, building and improvements actually, directly, and exclusively used for religious charitable or educational purposes; (c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and; (e) Machinery and equipment used for pollution control and environmental protection. Except as provided herein, any exemptions from payment of real property tax previously granted to or presently enjoyed by, all persons whether natural or juridical, including all government owned or controlled corporations are hereby withdrawn upon the effectivity of his Code. These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives. (b) Character Exemptions. Exempted from real property taxes on the basis of their character are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) non profit or religious cemeteries. (c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to which they are devoted are: (i) all lands buildings and improvements which are actually, directed and exclusively used for religious, charitable or educational purpose; (ii) all machineries and equipment actually, directly and exclusively used or by local water districts or by government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; and (iii) all machinery and equipment used for pollution control and environmental protection. To help provide a healthy environment in the midst of the modernization of the country, all machinery and equipment for pollution control and environmental protection may not be taxed by local governments. 2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical persons 26 including government-owned or controlled corporations are withdrawn upon the effectivity of the Code. Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides: Sec. 193.Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including government-owned, or controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non stock and non profit hospitals and educational constitutions, are hereby withdrawn upon the effectivity of this Code. On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus, Section 192 thereof provides: Sec. 192.Authority to Grant Tax Exemption Privileges. Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto. The use of exceptions of provisos in these section, as shown by the following clauses: (1) "unless otherwise provided herein" in the opening paragraph of Section 133; (2) "Unless otherwise provided in this Code" in section 193; (3) "not hereafter specifically exempted" in Section 232; and (4) "Except as provided herein" in the last paragraph of Section 234 initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided herein," with the "herein" to mean, of course, the section, it should have used the clause "unless otherwise provided in this Code." The former results in absurdity since the section itself enumerates what are

beyond the taxing powers of local government units and, where exceptions were intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which excepts the income taxes "when livied on banks and other financial institutions", item (d) which excepts "wharfage on wharves constructed and maintained by the local government until concerned"; and item (1) which excepts taxes, fees, and charges for the registration and issuance of license or permits for the driving of "tricycles". It may also be observed that within the body itself of the section, there are exceptions which can be found only in other parts of the LGC, but the section interchangeably uses therein the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in item (j). These clauses would be obviously unnecessary or mere surplus-ages if the opening clause of the section were" "Unless otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event, even if the latter is used, since under Section 232 local government units have the power to levy real property tax, except those exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section 133. Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in Section 133 the taxing powers of local government units cannot extend to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalties, and local government units"; however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted, for consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph of Section 234. As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has been granted to taxable person for consideration or otherwise. Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is qualified by Section 232 and 234. In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of the local government units cannot extend to the levy of: (o) taxes, fees, or charges of any kind on the National Government, its agencies, or instrumentalities, and local government units. I must show that the parcels of land in question, which are real property, are any one of those enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most likely, it could only be the first, but not under any explicit provision of the said section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the Government", it could only be within be first item of

the first paragraph of the section by expanding the scope of the terms Republic of the Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote: (a) real property owned by the Republic of the Philippines, or any of the Philippines, or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of the Government is based on Section 133(o), which expressly mentions the word "instrumentalities"; and in the second place it fails to consider the fact that the legislature used the phrase "National Government, its agencies and instrumentalities" "in Section 133(o),but only the phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a). The terms "Republic of the Philippines" and "National Government" are not interchangeable. The former is boarder and synonymous with "Government of the Republic of the Philippines" which the Administrative Code of the 1987 defines as the "corporate governmental entity though which the functions of the government are exercised through at the Philippines, including, saves as the contrary appears from the context, the various arms through which political authority is made effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city, municipal or barangay subdivision or other 27 forms of local government." These autonomous regions, provincial, city, municipal or barangay 28 subdivisions" are the political subdivision. On the other hand, "National Government" refers "to the entire machinery of the central government, as 29 distinguished from the different forms of local Governments." The National Government then is 30 composed of the three great departments the executive, the legislative and the judicial. An "agency" of the Government refers to "any of the various units of the Government, including a department, bureau, office instrumentality, or government-owned or controlled corporation, or a local 31 government or a distinct unit therein;" while an "instrumentality" refers to "any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy; usually through a charter. This term includes regulatory agencies, chartered 32 institutions and government-owned and controlled corporations". If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from payment of real property taxes under the last sentence of the said section to the agencies and instrumentalities of the National Government mentioned in Section 133(o), then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress did not wish to expand the scope of the exemption in Section 234(a) to include real property owned by other instrumentalities or agencies of the government including government-owned and controlled corporations is further borne out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code, which reads: Sec 40.Exemption from Real Property Tax. The exemption shall be as follows: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned or controlled corporations so exempt by is charter: Provided, however, that this exemption shall not apply to real property of the above mentioned entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person. Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled corporation so exempt by its charter" was excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to limit further tax exemption privileges, specially in light of the general provision on withdrawal of exemption from payment of real property taxes in the last paragraph of

property taxes in the last paragraph of Section 234. These policy considerations are consistent with the 33 State policy to ensure autonomy to local governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant 34 communities and make them effective partners in the attainment of national goals. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for this entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes 35 and other charges due from them. The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the petitioner is a "taxable person". Section 15 of the petitioner's Charter provides: Sec. 15.Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities, runways, lands, buildings and other properties, movable or immovable, belonging to or presently administered by the airports, and all assets, powers, rights, interests and privileges relating on airport works, or air operations, including all equipment which are necessary for the operations of air navigation, acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to the Authority: Provided however, that the operations control of all equipment necessary for the operation of radio aids to air navigation, airways communication, the approach control office, and the area control center shall be retained by the Air Transportation Office. No equipment, however, shall be removed by the Air Transportation Office from Mactan without the concurrence of the authority. The authority may assist in the maintenance of the Air Transportation Office equipment. The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International AirPort in the 36 Province of Cebu", which belonged to the Republic of the Philippines, then under the Air Transportation 37 Office (ATO). It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by the Lahug Air Port and includes the parcels of land the respondent City of Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among other things, to the petitioner and not just the transfer of the beneficial use thereof, with the ownership being retained by the Republic of the Philippines. This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's authorized capital stock consists of, inter alia "the value of such real estate owned and/or administered by 38 the airports." Hence, the petitioner is now the owner of the land in question and the exception in Section 234(c) of the LGC is inapplicable. Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax. Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be an "agency" or "instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in the

last paragraph of Section 234 of exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the petitioner. Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine 39 Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED. G.R. No. L-30232 July 29, 1988 LUZON STEVEDORING CORPORATION, petitioner-appellant, vs. COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL REVENUE, respondents-appellees. This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals in CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal Revenue", denying the various claims for tax refund; and the February 20, 1969 Resolution of the same court denying the motion for reconsideration. Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its tugboats, imported various engine parts and other equipment for which it paid, under protest, the assessed compensating tax. Unable to secure a tax refund from the Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals, docketed therein as CTA Case No. 1484, praying among others, that it be granted the refund of the amount of P33,442.13. The Court of Tax Appeals, however, in a Decision dated October 21, 1969 (Ibid., pp. 22-27), denied the various claims for tax refund. The decretal portion of the said decision reads: WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13 without sufficient legal justification, the said claims have to be, as they are hereby, denied. With costs against petitioner. On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 28-34), but the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant petition. This Court, in a Resolution dated March 13, 1969, gave due course to the petition ( Ibid., p. 40). Petitionerappellant raised three (3) assignments of error, to wit: I The lower court erred in holding that the petitioner-appellant is engaged in business as stevedore, the work of unloading and loading of a vessel in port, contrary to the evidence on record. II The lower court erred in not holding that the business in which petitioner-appellant is engaged, is part and parcel of the shipping industry. III

The lower court erred in not allowing the refund sought by petitioner-appellant. The instant petition is without merit. The pivotal issue in this case is whether or not petitioner's tugboats" can be interpreted to be included in the term "cargo vessels" for purposes of the tax exemption provided for in Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176. Said law provides: Sec. 190.Compensating tax. ... And Provided further, That the tax imposed in this section shall not apply to articles to be used by the importer himself in the manufacture or preparation of articles subject to specific tax or those for consignment abroad and are to form part thereof or to articles to be used by the importer himself as passenger and/or cargo vessel, whether coastwise or oceangoing, including engines and spare parts of said vessel. .... Petitioner contends that tugboats are embraced and included in the term cargo vessel under the tax exemption provisions of Section 190 of the Revenue Code, as amended by Republic Act. No. 3176. He argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former towing the latter for loading and unloading of a vessel in part, constitute a single vessel. Accordingly, it concludes that the engines, spare parts and equipment imported by it and used in the repair and maintenance of its tugboats are exempt from compensating tax (Rollo, p. 23). On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are not "Cargo vessel" because they are neither designed nor used for carrying and/or transporting persons or goods by themselves but are mainly employed for towing and pulling purposes. As such, it cannot be claimed that the tugboats in question are used in carrying and transporting passengers or cargoes as a common carrier by water, either coastwise or oceangoing and, therefore, not within the purview of Section 190 of the Tax Code, as amended by Republic Act No. 3176 (Brief for Respondents-Appellees, pp. 45). This Court has laid down the rule that "as the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any reduction or dimunition thereof with respect to its mode or its rate, must be strictly construed, and the same must be coached in clear and unmistakable terms in order that it may be applied." (84 C.J.S. pp. 659-800), More specifically stated, the general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]). As correctly analyzed by the Court of Tax Appeals, in order that the importations in question may be declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation (Decision, CTA Case No. 1484; Rollo, p. 24). As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No. 3176 limit tax exemption from the compensating tax to imported items to be used by the importer himself as operator of passenger and/or cargo vessel (Ibid., p. 25). As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows: A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also used for attendance on vessel. (Webster New International Dictionary, 2nd Ed.)

A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and from piers for towing barges and lighters in harbors, rivers and canals. (Encyclopedia International Grolier, Vol. 18, p. 256). A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law Dictionary.)(Rollo, p. 24). Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L26419, 35 SCRA 270 [1970]). And, even if construction and interpretation of the law is insisted upon, following another fundamental rule that statutes are to be construed in the light of purposes to be achieved and the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978], it will be noted that the legislature in amending Section 190 of the Tax Code by Republic Act 3176, as appearing in the records, intended to provide incentives and inducements to bolster the shipping industry and not the business of stevedoring, as manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p. 26). On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no evidence was adduced by petitioner-appellant that tugboats are passenger and/or cargo vessels used in the shipping industry as an independent business. On the contrary, petitioner-appellant's own evidence supports the view that it is engaged as a stevedore, that is, the work of unloading and loading of a vessel in port; and towing of barges containing cargoes is a part of petitioner's undertaking as a stevedore. In fact, even its trade name is indicative that its sole and principal business is stevedoring and lighterage, taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an entity which transports passengers or freight for hire which is taxed under Section 192 of the same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25). Under the circumstances, there appears to be no plausible reason to disturb the findings and conclusion of the Court of Tax Appeals. As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority (Reyes v. Commissioner of Internal Revenue, 24 SCRA 199 [1981]), which is not present in the instant case. PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of Tax Appeals is AFFIRMED.

G.R. No. L-18330

July 31, 1963

JOSE DE BORJA, petitioner-appellee, vs. VICENTE G. GELLA, ET AL., respondents-appellants. Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for properties located in the City of Manila and Pasay City and has offered to pay them with two negotiable, certificates

of indebtedness Nos. 3064 and 3065 in the amounts of P793.40 and P717.69, respectively. Borja was, however, a mere assignee of the aforesaid negotiable certificates, the applicants for backpay rights covered by them being respectively Rafael Vizcaya and Pablo Batario Luna. The offers to pay the estate taxes in question were rejected by the city treasurers of both Manila and Pasay cities on the ground of their limited negotiability under Section 2, Republic Act No. 304, as amended by Republic Act 800, and in the case of the city treasurer of Manila on the further ground that he was ordered not to accept them by the city mayor, for which reason Borja was prompted to bring the question to the Treasurer of the Philippines who opined, among others, that the negotiable certificates cannot be accepted as payment of real estate taxes inasmuch as the law provides for their acceptance from their backpay holder only or the original applicant himself, but not his assignee. In his letter of April 29, 1960 to the Treasurer of the Philippines, however, Borja entertained hope that the certificates would be accepted for payment in view of the fact that they are already long past due and redeemable, but his hope was frustrated. So on June 30, 1960, Borja filed an action against the treasurers of both the City of Manila and Pasay City, as well as the Treasurer of the Philippines, to impel them to execute an act which the law allegedly requires them to perform, to wit: to accept the above-mentioned certificates of indebtedness considering that they were already due and redeemable so as not to deprive him illegally of his privilege to pay his obligation to the government thru such means. Respondents in due time filed their answer setting up the reasons for their refusal to accept the certificates, and after the requisite trial was held, the court a quo rendered judgment the dispositive part of which reads: WHEREFORE, the treasurers of the City of Manila and Pasay City, their agents and other persons acting in their behalf are hereby enjoined from including petitioner's properties in the payment of real estate, taxes, and to sell them at public auction and respondent Treasurer of the Philippines, and the treasurers of the City of Manila and Pasay City are hereby ordered to accept petitioner's Negotiable Certificates of Indebtedness Nos. 3064 and 3065 in the sums of P793.40 and P717.39 in payment of real estate taxes of his properties in the City of Manila and Pasay City, respectively, without costs. Respondents took this appeal on purely questions of law. 1wph1.t Reduced to bare essentials, the 12 errors assigned by appellants may be boiled down to the following: (a) has appellee the right to apply to the payment of his real estate taxes to the government of Manila and Pasay cities the certificates of indebtedness he holds while appellants have the correlative legal duty to accept the certificates in payment of said taxes?; (b) can compensation be invoked to extinguish appellee's real estate tax liability between the latter's obligation and the credit represented by said certificates of indebtedness? Anent the first issue, the pertinent legal provision to be reckoned with is Section 2 of Republic Act No. 304, as amended by Republic Act No. 800, which in part reads: SEC. 2. The Treasurer of the Philippines shall, upon application, and within one year from the approval of this Act, and under such rules and regulations as may be promulgated by the Secretary of Finance, acknowledge and file requests for the recognition of the right to the salaries and wages as provided in section one hereof, and notice of such acknowledgment shall be issued to the applicant which shall state the total amount of such salaries or wages due to the applicant, and certify that it shall be redeemed by the Government of the Philippines within ten years from the date of their issuance without interest: Provided, that upon application . . . a certificate of indebtedness may be issued by the Treasurer of the Philippines covering the whole or part of the total salaries or wages the right to which has been duly acknowledged and recognized, provided that the face value of such certificate of indebtedness shall not exceed the amount that the applicant may need for the payment of (1) obligations subsisting at the time of the approval of this Act for which the applicant may directly be liable to the Government or to any of its branches or instrumentalities, or the corporations owned or controlled by the Government, or to any

citizen of the Philippines, who may be willing to accept the same for such settlement; (2) his taxes; . . . and Provided, also, That any person who is not an alien, bank or other financial institution at least sixty per centum of whose capital is owned by Filipinos may, notwithstanding any provision of its charter, articles of incorporation, by-laws, or rules and regulations to the contrary, accept or discount at not more than three and one-half per centum per annum for ten years a negotiable certificate of indebtedness which shall be issued by the Treasurer of the Philippines upon application by a holder of a back pay acknowledgment. . . . . To begin with, it cannot be contended that appellants are in duty bound to accept the negotiable certificates of indebtedness held by appellee in payment of his real estate taxes for the simple reason that they were not obligations subsisting at the time of the approval of Republic Act No. 304 which took effect on June 18, 1948. It should be noted that the real estate taxes in question have reference to those due in 1958 and subsequent years. The law is explicit that in order that a certificate may be used in payment of an obligation the same must be subsisting at the time of its approval even if we hold that a tax partakes of this character, neither can it be contended that appellee can compel the government to accept the alleged certificates of indebtedness in payment of his real estate taxes under proviso No. 2 abovequoted also for the reason that in order that such payment may be allowed the tax must be owed by the applicant himself . This is the correct implication that may be drawn from the use by the law of the words "his taxes". Verily, the right to use the backpay certificate in settlement of taxes is given only to the applicant and not to any holder of any negotiable certificate to whom the law only gives the right to have it discounted by a Filipino citizen or corporation under certain limitations. Here appellee is not himself the applicant of the certificate, in question. He is merely an assignee thereof, or a subsequent holder whose right is at most to have it discounted upon maturity or to negotiate it in the meantime. A fortiori, it may be included that, not having the right to use said certificates to pay his taxes, appellee cannot compel appellants to accept them as he requests in the present petition for mandamus. As a consequence, we cannot but hold that mandamus does not lie against appellants because they have in no way neglected to perform an act enjoined upon them by law as a duty, nor have they unlawfully excluded appellee from the 1 use or enjoyment of a right to which be is entitled. We are aware of the cases cited by the court a quo wherein the government banking institutions were ordered to accept the backpay certificates of petitioners in payment of their indebtedness to them, but they are not here in point because in the cases mentioned the petitioners were applicants and original holders of the corresponding backpay certificates. Here appellee is not. With regard to the second issue, i.e., whether compensation can be invoked insofar as the two obligations are concerned, Articles 1278 and 1279 of the new Civil Code provide: ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. ART. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they two liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
2

It is clear from the above legal provisions that compensation cannot be effected with regard to the two obligations in question. In the first place, the debtor insofar as the certificates of indebtedness are concerned is the Republic of the Philippines, whereas the real estate taxes owed by appellee are due to the City of Manila and Pasay City, each one of which having a distinct and separate personality from our Republic. With regard to the certificates, the creditor is the appellee while the debtor is the Republic of the Philippines. And with regard to the taxes, the creditors are the City of Manila and Pasay City while the debtor is the appellee. It appears, therefore, that each one of the obligors concerning the two obligations is not at the same time the principal creditor of the other. It cannot also be said for certain that the certificates are already due. Although on their faces the certificates issued to appellee state that they are redeemable on June 18, 1958, yet the law does not say that they are redeemable from its approval on June 18, 1948 but "within ten years from the date of issuance" of the certificates. There is no certainty, therefore, when the certificates are really redeemable within the meaning of the law. Since the requisites for the accomplishment of legal compensation cannot be fulfilled, the latter cannot take place with regard to the two obligations as found by the court a quo. WHEREFORE, the decision appealed from is reversed. The petition for mandamus is dismissed. The injunction issued against respondents-appellants is hereby lifted. No costs.

G.R. No. L-15778

April 23, 1962

TAN TIONG BIO, ET AL., petitioners, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. On October 19, 1946, the Central Syndicate, a corporation organized under the laws of the Philippines, thru its General Manager, David Sycip, sent a letter to the Collector of Internal Revenue advising the latter that it purchased from Dee Hong Lue the entire stock of surplus properties which the said Dee Hong Lue had bought from the Foreign Liquidation Commission and that as it assumed Dee Hong Lue's obligation to pay the 3-1/2% sales tax on said surplus goods, it was remitting the sum of P43,750.00 in his behalf as deposit to answer for the payment of said sales tax with the understanding that it would later be adjusted after the determination of the exact consideration of the sale. On January 31, 1948, the syndicate again wrote the Collector requesting the refund of P1,103.28 representing alleged excess payment of sales tax due to the adjustment and reduction of the purchase price in the amount of P31,522.18. Said letter was referred to an agent for verification and report. On September 18, 1951, after a thorough investigation of the facts and circumstances surrounding the transaction, the agent reported (1) that Dee Hong Lue purchased the surplus goods as trustee for the Central Syndicate which was in the process of organization at the time of the bidding; (2) that it was the representatives of the Central Syndicate that removed the surplus goods from their base at Leyte on February 21, 1947; (3) that the syndicate must have realized a gross profit of 18.8% from its sales thereof; and (4) that if the sales tax were to be assessed on its gross sales it would still be liable for the amount of P33,797.88 as deficiency sales tax and surcharge in addition to the amount of P43,750.00 which the corporation had deposited in the name of Dee Hong Lue as estimated sales tax due from the latter. Based on the above findings of the agent in charge of the investigation, the Collector decided that the Central Syndicate was the importer and original seller of the surplus goods in question and, therefore, the one liable to pay the sales tax. Accordingly, on January 4, 1952, the Collector assessed against the syndicate the amount of P33,797.88 and P300.00 as deficiency sales tax, inclusive of the 25% surcharge and compromise penalty, respectively, and on the same date, in a separate letter, he denied the request of the syndicate for the refund of the sum of P1,103.28.

On September 8, 1954, the Central Syndicate elevated the case to the Court of Tax Appeals questioning the ruling of the Collector which denies its claim for refund as well as the assessment made against it of the sum of P33,797.88, plus the sum of P300.00 as compromise penalty, as stated above. The Collector filed his answer thereto wherein he reiterated his ruling and prayed that the Central Syndicate be ordered to pay the deficiency sales tax and surcharge as demanded in his letters dated January 4, 1952 and August 5, 1954. On October 28, 1954, the syndicate filed a motion requesting that the issue of prescription it has raised against the collection of the tax be first determined as a preliminary question, but action thereon was deferred by the Court of Tax Appeals until after the trial of the case on the merits. On November 5, 1954, the Collector filed a motion requiring the syndicate to file a bond to guarantee the payment of the tax assessed against it which motion was denied by the Court of Tax Appeals on the ground that cannot be legally done it appearing that the syndicate is already a non-existing entity due to the expiration of its corporate existence. In view of this development, the Collector filed a motion to dismiss the appeal on the ground of lack of personality on the part of the syndicate, which met an opposition on the part of the latter, but on January 25, 1955, the Court of Tax Appeals issued a resolution dismissing the appeal primarily on the ground that the Central Syndicate has no personality to maintain the action then pending before it. From this order the syndicate appealed to the Supreme Court wherein it intimated that the appeal should not be dismissed because it could be substituted by its successors-ininterest, to wit: Tan Tiong Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue, Lim Shui Ty, SySeng Tong, Sy En, Co Giap and David Sycip. And taking cue from this suggestion, this Court ruled against the dismissal and held: "The resolution appealed from is set aside and the respondent court is ordered to permit the substitution of the officers and directors of the defunct Central Syndicate as appellants, and to proceed with the hearing of the appeal upon its merits." In permitting the substitution, this Court labored under the premise that said officers and directors "may be held personally liable for the unpaid deficiency assessments made by the Collector of Internal Revenue against the defunct syndicate." After trial, the Court of Tax Appeals rendered decision the dispositive part of which reads as follows: WHEREFORE, in view of the foregoing considerations, the decision of the Collector of Internal Revenue appealed from is hereby affirmed, except with regard to the imposition of the compromise penalty of P300.00 the collection of which is unauthorized and illegal in the absence of a compromise agreement between the parties. (Collector of Internal Revenue vs. University of Sto. Tomas, G. R. No. L-11274, November 28, 1958; Collector of Internal Revenue vs. Bautista & Tan, G.R. No. L-12250, May 27, 1959.) . The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En alias SySeng Sui, Dee Hong Lue, and SySeng Tong, who appear in the Articles of Incorporation of the Central Syndicate Annex A (pp. 60-66, CTA rec.) as incorporators and directors of the corporation, the second named being in addition its President and the seventh its Treasurer, are hereby ordered to pay jointly and severally, to the Collector of Internal Revenue, the sum of P33,797.88 as deficiency sales tax and surcharge on the surplus goods purchased by them from the Foreign Liquidation Commission on July 5, 1946, from which they realized an estimated gross sales of P1,447,551.65, with costs. .. Petitioners interposed the present appeal. ISSUES:The important issues to be determined in this appeal are: (1) whether the importer of the surplus goods in question the sale of which is subject to the present tax liability is Dee Hong Lue or the Central Syndicate who has been substituted by the present petitioners; (2) whether the deficiency sales tax which is now sought to be collected has already prescribed; and (3) the Central Syndicate having already been dissolved because of the expiration of its corporate existence, whether the sales tax in question can be enforced against its successors-in-interest who are the present petitioners. 1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency sales tax in question because it is not the importer of the surplus goods purchased from the Foreign Liquidation

Commission for the reason that said surplus goods were purchased by Dee Hong Lue as shown by the contract executed between him and the Foreign Liquidation Commission and the fact that the Central Syndicate only purchased the same from Dee Hong Lue and not from the Foreign Liquidation Commission as shown by Exhibit 13. This contention cannot be sustained. As correctly observed by the Court of Tax Appeals, the overwhelming evidence presented by the Collector points to the conclusion that Dee Hong Lue purchased the surplus goods in question not for himself but for the Central Syndicate which was then in the process of incorporation such that the deed of sale Exhibit 13 which purports to show that Dee Hong Lue sold said goods to the syndicate for a consideration of P1,250,000.00 (the same amount paid by Dee Hong Lue to the Foreign Liquidation Commission) "is but a ruse to evade payment of a greater amount of percentage tax." The aforesaid conclusion of the lower court was arrived at after a thorough analysis of the evidence on record, pertinent portion of which we quote hereunder with approval: Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as early as July 23, 1946, or before the organization and incorporation of Central Syndicate, Mr. David Sycip, who was subsequently appointed General Manager of the corporation, together with Messrs. Sy En alias SySeng Sui (one of the incorporators of Central Syndicate), Serge Gordeof and Chin Siu Bun (an employee of the same corporation), for and in the name of Central Syndicate then in the process of organization, went to Leyte to take over the surplus properties sold by the FLC to Dee Hong Lue, which the latter held in trust for the corporation. Exhibit 38-A, which is a certificate issued by no less than David Sycip himself who was subsequently appointed General Manager of the corporation admits in express terms the following "... the surplus property sold by the Foreign Liquidation Commission to Dee Hong Lue (and held in trust by the latter for the Syndicate ...." (Emphasis ours.) We give full weight and credence to the adverse admissions made by David Sycip against the petitioners as appearing in his certificate Exhibit 38-A (p. 178, BIR rec.) considering that at the time he made them, he was a person jointly interested with the petitioners in the transaction over which there was yet no controversy over any sales tax liability. (Secs. 11 and 33, Rule 123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W. 2d 223; Street vs. Masterson, Tex. Cir. App. 277 S.W. 407.) . Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a letter of Mr. Yu Khe Thai President, Director and biggest stockholder of Central Syndicate (Exhibit A, pp. 60-65, CTA rec.) dated September 17, 1946 and addressed to the Commanding General AFWESPAC, Manila, contains the following categorical admissions which corroborate the admissions made by David Sycip; that the so-called Leyte 'Mystery Pile' surplus properties were owned by Central Syndicate by virtue of a purchase from the FLC, effected in the name of Dee Hong Lue on July 5, 1946, inasmuch as Central Syndicate was then still in the process of organization; that Dee Hong Lue held the said surplus properties in trust until the mere formal turnover to the corporation on August 20, 1946, when the corporation had already been organized and incorporated under the laws of the Philippines; and that on July 23, 1946 viz., twenty-two (22) days before the incorporation of Central Syndicate on August 15, 1946 'our General Manager, Mr. David Sycip accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties.' Before passing on to the rest of the evidence supporting the finding of respondent, we would like to call attention to this significant detail. It is stated in the letter, Exhibit 39 (pp. 184-187, BIR rec.) of Mr. Yu Khe Thai that 'on July 23, 1946, our General Manager, Mr. David Sycip, accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties,' We ask: Why was there such a hurry on the part of the promoters of Central Syndicate in taking over the surplus properties when the formal agreement, Exhibit 13 (p. 66, BIR rec.), purporting to be a contract of sale of the 'Mystery Pile' between Dee Hong Lue as vendor, and the Central Syndicate, as vendee, for the amount of P1,250,000.00, was effected twenty-eight (28) days later viz., on August 20, 1946? Is this not another clear and unmistakable indication that from the very start, as is the theory of the respondent, the real purchasers of the 'Mystery Pile' from the FLC and as such the 'importers' of the goods, were the Central Syndicate and/or the group of big financiers composing it before said corporation was incorporated on August 15, 1946; and, that Dee Hong Lue acted merely as agent of these persons when he purchased the pile from the FLC? As a

general rule, one does not exercise all the acts of ownership over a property especially if it involves a big amount until after the documents evidencing such ownership are fully accomplished. Moreover, it appears that on October 3, 1946, Dee Hong Lue was investigated by Major Primitivo San Agustin, Jr., G-2 of the Philippine Army, because of the discovery of some gun parts found in his shipment of surplus material from Palo, Leyte. In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before said officer, Dee Hong Lue admitted the following: That he paid the FLC the amount of P1,250,000.00 "with the checks of Yu Khe Thai, maybe also Alfonso Sycip and my checks with many others"; that "at the beginning I was trying to buy the pile for myself without telling other people and other friends of mine." "Watkins came to me and he bid for me for P600,000 or P700,000, but later on when the price went up to P1,250,000, I talked to my friends who said I could get money." "So, I bought it with their checks and mine" (Exhibit 16-B, p. 138, BIR rec.) and, that after buying the "Mystery Pile", he (Dee Hong Lue) never inspected the same personally. (p. 141, BIR rec.) In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted that of the amount of P1,250,000.00 which he paid in two installments sometime in July, 1946, to the FLC, P1,181,250.00 (should be P1,181,000.00) of the amount came from the following: Yu Khe Thai who advanced to him P250,000.00; SySeng Tong P375,000.00; Alfonso Z. Sycip - P375,000.00; Tan Tiong Bio - P125,000.00; Robert Dee Se Wee P25,000.00; and, Jose S. Lim P31,000.00 that his understanding with these persons was that should they eventually join him in Central Syndicate, such advances would be adjusted to constitute their investments; and, that soon after the "Mystery Pile" was purchased from the FLC, all the abovenamed persons with the exception of Robert Dee Se Wee and Jose S. Lim, formed the Central Syndicate and a re-allocation of shares was made corresponding to the amounts advanced by them. Added to these, we have before us other documentary evidence for the respondent consisting of Exhibits 18, 19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88, 92-96, 99-103, 117-128, 119-120, 121-128, BIR rec.) all tending to prove the same thing - that the Central Syndicate and/or the group of big financiers composing it and not Dee Hong Lue was the real purchaser (importer) of the "Mystery Pile" from the FLC; that in the contract of sale between Dee Hong Lue and the FLC the former acted principally as agent (Article 1930, New Civil Code) of the petitioners Yu Khe Thai, SySeng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced the purchased price of P1,125,000.00 out of the P1,250,000.00 paid to the FLC, Dee Hong Lue being the purchaser in his own right only with respect to the amount of P69,000.00; and, that the deed, Exhibit 13 (p. 77, BIR rec.) purporting to show that Dee Hong Lue sold the "Mystery Pile" to the Central Syndicate for consideration of P1,250.000.00 is but a ruse to evade payment of a greater amount of percentage tax. 1wph1.t To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as the circumstances surrounding the incorporation of the Central Syndicate, are shrouded with as much mystery as the so-called "Mystery Pile" subject of the transaction. But, as oil is to water, the truth and underlying motives behind these transactions have to surface in the end. Petitioners would want us to believe that Dee Hong Lue bought in his own right and for himself the surplus goods in question for P1,250,000.00 from the FLC and then, by virtue of a valid contract of sale, Exhibit 13 (p. 66, BIR rec.) transferred and conveyed the same to the Central Syndicate at cost. If this be so, what need was there for Dee Hong Lue to agree in the immediate organization and incorporation of the Central Syndicate with six other capitalists when he could very well have disposed of the surplus goods to the public in his individual capacity and keep all the profits to himself without sharing 9/10th of it to the other six incorporators and stockholders of the newly incorporated Syndicate. It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the same price barely forty-six (46) days after acquiring it from FLC and exactly five (5) days after the Syndicate was registered with the Securities and Exchange Commission on August 19, 1946. This is indeed most unusual for a businessman like Dee Hong Lue who, it is to be presumed, was out to make a killing when he acquired the surplus goods from the FLC for the staggering amount of P1,750,000.00 in cash.

Again, why did Dee Hong Lue waste all his time and effort not to say his good connections with the FLC by acquiring the goods from that agency only to sell it for the same amount to the Central Syndicate? This would have been understandable if Dee Hong Lue were the biggest and controlling stockholder of the Syndicate. He could perhaps reason out to himself, "the profits which I am sacrificing now in this sale to the Syndicate, I will get it anyway in the form of dividends from it after it shall have disposed of all the "Mystery Pile" to the public.' But then, how could this be possible when Dee Hong Lue was the smallest subscriber to the capital stock of the Syndicate? It appears from the Articles of Incorporation that of the authorized capital stock of the corporation in the amount of P500,000.00, Dee Hong Lue subscribes to only P20,000.00 or 1/25th of the capital stock authorized and of this amount only P5,000.00 was paid by him at the time of incorporation. So here is an experienced businessman like Dee Hong Lue who, following the theory of petitioners' counsel, bought the "'Mystery Pile" for himself for P1,250,000.00 in cash, and after a few days sold the same at cost to a corporation wherein he owned only 1/25th of the authorized capital stock and wherein he was not even an officer, thus doling out to the other six incorporators and stockholders net profits in the sum conservatively estimated by the respondent to be P206,116.45 out of a total of P229,073.83 which normally could all go to him. We take judicial notice of the fact that as a result of our immense losses in property throughout the archipelago the during the Japanese occupation, either through destruction or systematic commandering by the enemy and our forces, surplus properties commanded a very good price in the open market after the liberation and that quite a number of surplus dealers made immense fortunes out of it. We believe the respondent was quite charitable if not more than fair to the Central Syndicate in computing the profits realized by it in the resale of the "Mystery Pile" to the public at only 18.8% of the acquisition price. Now, from the side of the Central Syndicate. This corporation, as its articles of incorporation, Exhibit A (pp. 60-66, CTA rec.) will show, was incorporated on August 15, 1946 with an authorized capital stock of P500,000.00 of which P200,000.00 worth was subscribed by seven (7) persons and P50,000.00 paid-up in cash at the time of incorporation. Five (5) days after its incorporation, as the Deed of Sale, Exhibit 13 (p. 66, BIR rec.) purports to show, the said corporation bought from Dee Hong Lue the "Mystery Pile" for P1,250,000.00 in cash. This is indeed quite phenomenal and fantastic not to say the utmost degree of finance considering that the corporation had a subscribed capital stock of only P200,000.00 of which only P50,000.00 was paid-up at the time of incorporation and with not the least proof showing that it never borrowed money in its own name from outside source to raise the enormous amount allegedly paid to Dee Hong Lue nor evidence to show that it had by then in so short a time is five (5) days accumulated a substantial reserve to meet Dee Hong Lue's selling price. Furthermore, at first blush it would seem quite difficult to understand why the seven (7) incorporators and stockholders of the Central Syndicate formed a corporation with a subscribed capital stock of only P200,000.00, and with cash on hand of only P50,000.00 knowing fully well that there was a transaction awaiting the newly registered corporation involving an outlay of P1,250,000.00 in cash. We believe this was done after mature deliberation and for some ulterior motive. As we see it, the only logical answer is that the incorporator wanted to limit whatever civil liability that might arise in favor of third persons, as the present tax liability has now arisen, up to the amount of their subscriptions, although the surplus deal they transacted and which we believe was the only purpose in the incorporation of the Central Syndicate, was very much over and above their authorized capital. Moreover, by limiting its capital, the corporation was also able to save on incidental expenses, such as attorney's fee and the filing fee paid to the Securities and Exchange Commission, which were based on the amount of the authorized capital stock. Another mystery worth unravelling is what happened to the P1,181,240.00 (should be P1,181,000.00) which Dee Hong Lue in his affidavit, Exhibit 15 (p. 144, BIR rec.) claims to have received from Messrs. UyKhe Thai, SySeng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all incorporators of the Syndicate) and two others as 'advances' with which to pay the FLC. There is no evidence on record to show that Dee Hong Lue ever returned this amount to those six (6) persons after he supposedly received P1,250,000.00 from the newly incorporated Syndicate by virtue of the Deed of Sale, Exhibit 13. This is the explanation that Dee Hong Lue gave in this regard as appearing in his affidavit, Exhibit 15: "That soon after the abovementioned property was purchased, the above parties, with the exception of Robert Dee Se Wee and Jose S. Lim decided to join the proposed Central Syndicate and a re-allocation of shares was made for

the reason that some of the above parties in turn had to get advances from third parties." If this were true, why was it that Messrs. Yu Khe Thai, SySeng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced P250,000.00; P375,000.00 and P125,000.00 to Dee Hong Lue were made to appear in the Articles of incorporation of the Central Syndicate as having subscribed to shares worth only P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having paid only P10,000.00, P7,500.00, P7,500.00, and P5,000.00 on their subscriptions, respectively? Would it not be more in keeping with corporate practice, following the explanation of Dee Hong Lue, to just credit those four (4) persons in the corporation with shares worth the amount advanced by them to Dee Hong Lue? On the basis of the above figures, the re-allocation of shares in favor of the four (4) incorporators who advanced enormous sums for the Syndicate seems at first glance to be totally disproportionate and unfair to them. However, in the final analysis it is not so as we will now show. Immediately after the incorporation of the Syndicate, as the evidence shows, Dee Hong Lue was made to execute a deed of transfer under the guise of a contract of sale, conveying full and complete ownership of the "Mystery Pile" to the newly organized corporation. So we have, on the face of the Articles of Incorporation and Exhibit 13, a corporation with assets worth only P50,000.00 cash owning properties worth over a million pesos. Obviously, the incorporators of the Syndicate, particularly those four who advanced enormous sums to Dee Hong Lue, are not ordinary businessmen who could easily be taken for a ride. With the precipitated execution of the "Deed of Sale" by Dee Hong Lue in favor of the Syndicate, transferring and conveying ownership over the entire pile to the latter, the recoupment of their advances from the newly acquired assets of the corporation was sufficiently secured, and at the same time, by making the document appear to be a deed of sale instead of a deed of transfer as it should be under Article 1891 of the New Civil Code, they have reduced (at least attempted to) their sales tax liability with the argument that Dee Hong Lue was the original "purchaser" or "importer" of the goods and therefore the taxable sale was that one made by him to the Syndicate and not the sales made by the latter to the public. After going over the Articles of Incorporation of the Central Syndicate and the other circumstances of this case, we draw the conclusion that it was organized just for this particular transaction that its life span was expressly limited to two (2) years from and after the date of incorporation just to give it time to dispose of the "Mystery Pile" to the public and then liquidate all its assets among the seven incorporators-stockholders as in fact it was done on August 15, 1948; that from the very start, the seven (7) incorporators had intended it to be a closed corporation without the least intention of ever selling to other persons the remaining authorized capital stock of P300,000.00 still unsubscribed; and, that upon its liquidation, the seven (7) incorporators composing it got much more than their investments including those who advanced P1,181,000.00 to the FLC for the corporation. Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the Central Syndicate when he purchased the surplus goods in question from the Foreign Liquidation Commission on July 5, 1946 considering that on that date the syndicate has not yet been incorporated on the theory that no legal relation may exist between parties one of whom has yet no legal existence. Technically this may be true, but the fact remains that it cannot be denied that Dee Hong Lue purchased the goods on behalf of those who advanced the money for the purchase thereof who later became the incorporators and only stockholders of the syndicate with the understanding that the amounts they had respectively advanced would be their investment and would represent their interest in the corporation. And this is further evidenced by the fact that this purchase made by Dee Hong Lue was later approved and adopted as the act of the Central Syndicate itself as can be gleaned from the certificate executed by David Sycip, general manager of said syndicate, on September 16, 1946, wherein he emphasized that the persons named therein (from whom Dee Hong Lue obtained the money) merely acted on behalf of the syndicate and in fact were the ones who went to Leyte to take over the aforesaid surplus goods. In any event, even if Dee Hong Lue may be deemed as the purchaser of the surplus goods in his own right, nevertheless, the corporation still may be regarded as the importer of the same goods for the reason that Dee Hong Lue transferred to it all his rights and interests in the contract with the Foreign Liquidation Commission, and it was said corporation that took delivery thereof from the place where they were stored in Leyte as may be seen from the letter of Dee Hong Lue to the Foreign Liquidation Commission dated September 2, 1946 and the letter of the Central Syndicate to the said Commission bearing the same date. Under these facts,

it is clear that the Central Syndicate is the importer of the surplus goods as correctly observed by Judge Umali in his concurring opinion, from which we quote: . It is now well settled that a person who bought surplus goods from the Foreign Liquidation Commission and who removed the goods bought from the U.S. military bases in the Philippines is considered an importer of such goods and is subject to the sales tax or compensating tax, as the case may be. (Go Cheng Tee v. Meer, 47 O.G. 269; Saura Import and Export v. Meer, G.R. No. L-2927, Jan. 26, 1951; P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24, 1953; Soriano y Cia v. Coll. of Int. Rev., 51 O.G. 4548.) In this case it appearing that the Central Syndicate was the owner of the 'Mystery Pile' before its removal from Base K and that it was the one which actually took delivery thereof and removed the same from the U.S. military base, it is the importer within the meaning of Section 186 of the Revenue Code, as it stood before the enactment of Republic Act No. 594, and its sales of the surplus goods are the original sales taxable under said section and not the sale to it by Dee Hong Lue. 2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus goods in question, it was its duty under Section 183 of the Internal Revenue Code to file a return of its gross sales within 20 days after the end of each quarter in order that the office of the internal revenue may assess the sales tax that may be due thereon, but, as the record shows, the Central Syndicate failed to file any return of its quarterly sales on the pretext that it was Dee Hong Lue who imported the surplus goods and it merely purchased them from said importer. This is in fact what the syndicate intended to impress upon the Collector when it wrote to him its letter of October 19, 1946 informing him that it purchased from Dee Hong Lue the entire stock of the surplus goods which the latter had bought from the Foreign Liquidation Commission and was therefore depositing in his name the sum of P43,750.00 to answer for his sales tax liability, but this letter certainly cannot be considered as a return that may set in operation the application of the prescriptive period provided for in Section 331 of the Tax Code, for, evidently, said letter if at all could only be considered as such in behalf of Dee Hong Lue and not in behalf of the Central Syndicate because such is the only nature and import of the letter. Besides, how can such letter be considered as a return of the sales of the Central Syndicate when it was only on February 21, 1947 when it removed the surplus goods in question from their base at Leyte? How can such return inure to the benefit of the syndicate when the same surplus goods which were removed on said date could not have been sold by the corporation earlier than the aforesaid date? It is obvious that the letter of October 19, 1946 cannot possibly be considered as a return filed by the syndicate and so cannot serve as basis for the computation of the prescriptive period of five years prescribed by law. Nor can the fact that the Collector did not include in the assessment a surcharge of 50% serve as an argument that a return had already been filed, for such failure can only mean that an oversight had been committed in the non-inclusion of said surcharge. The syndicate having failed to file its quarterly returns as required by Section 183 of the Tax Code, the period that has to be reckoned with is that embodied in Section 332 of the same Code which provides that in case of failure to file the return the tax may be assessed within 10 years after discovery of the falsity, fraud or omission of the payment of the proper tax. Since it appears that the Collector discovered the failure of the syndicate to file the return only on September 12, 1951 he has therefore up to September 18, 1961 within which to assess or collect the deficiency tax in question. Consequently the assessment made on January 4, 1952 was made within the prescribed period. 3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in holding them liable as officers or directors of the defunct Central Syndicate for the tax liability of the latter; (2) that petitioners cannot be held liable for said tax liability there being no statutory provision in this jurisdiction authorizing the government to proceed against the stockholders of a defunct corporation as transferees of the corporate assets upon liquidation; (3) that assuming that the stockholders can be held so liable, they are only liable to the extent of the benefits derived by them from the corporation and there is no evidence showing that petitioners had been the beneficiaries of the defunct syndicate; (4) that considering that the Collector instituted the present action on September 23, 1954 when he filed his answer to the appeal of petitioners, said action was already barred by prescription pursuant to Sections 77 and 78 of the Corporation Law which allows corporations to continue as a body corporate only for three years from its

dissolution; and (5) that assuming that petitioners are liable to pay the tax, their liability is not solidary, but only limited to the benefits derived by them from the corporation. It should be stated at the outset that it was petitioners themselves who caused their substitution as parties in the present case, being the successors-in-interest of the defunct syndicate, when they appealed this case to the Supreme Court for which reason the latter Court declared that "the respondent Court of Tax Appeals should have allowed the substitution of its former officers and directors is parties-appellants, since they are proper parties in interest insofar as they may be (and in fact are) held personally liable for the unpaid deficiency assessments made by the Collector of Internal Revenue against the defunct Syndicate." In fact, because of this directive their substitution was effected. They cannot, therefore, be now heard to complain if they are made responsible for the tax liability of the defunct syndicate whose representation they assumed and whose assets were distributed among them. In the second place, there is good authority to the effect that the creditor of a dissolved corporation may follow its assets once they passed into the hands of the stockholders. Thus, recognized are the following rules in American jurisprudence: The dissolution of a corporation does not extinguish the debts due or owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed., 406; Curron v. State, 16 How. 304, 14 L. Ed., 705). A creditor of a dissolve corporation may follow its assets, as in the nature of a trust fund, into the hands of its stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a corporation to the federal government for income and excess profit taxes is not extinguished by the dissolution of the corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32). And it has been stated, with reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation, hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct. Cl. 6 F. Supp. 288). Bearing in mind that our corporation law is of American origin, the foregoing authorities have persuasive effect in considering similar cases in this jurisdiction. This must have been taken into account when in G.R. No. L-8800 this Court said that petitioners could be held personally liable for the taxes in question as successors-in-interest of the defunct corporation. Considering that the Central Syndicate realized from the sale of the surplus goods a net profit of P229,073.83, and that the sale of said goods was the only transaction undertaken by said syndicate, there being no evidence to the contrary, the conclusion is that said net profit remained intact and was distributed among the stockholders when the corporation liquidated and distributed its assets on August 15, 1948, immediately after the sale of the said surplus goods. Petitioners are therefore the beneficiaries of the defunct corporation and as such should be held liable to pay the taxes in question. However, there being no express provision requiring the stockholders of the corporation to be solidarily liable for its debts which liability must be express and cannot be presumed, petitioners should be held to be liable for the tax in question only in proportion to their shares in the distribution of the assets of the defunct corporation. The decision of the trial court should be modified accordingly.