G.R. No. 109289 October 3, 1994 RUFINO R. TAN, petitioner, vs. RAMON R. DEL ROSARIO, JR.

, as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 109446 October 3, 1994 CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs. RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents. Rufino R. Tan for and in his own behalf. Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws. In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 293, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships. The Solicitor General espouses the position taken by public respondents. The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective memoranda. G.R. No. 109289 Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289). The full text of the title actually reads: An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended. The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide: Sec. 21. Tax on citizens or residents. xxx xxx xxx

VITUG, J.: These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law. Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates the following provisions of the Constitution: Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of

this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein, determined in accordance with the following schedule: Not over P10,000 3% Over P10,000 P300 + 9% but not over P30,000 of excess over P10,000 Over P30,000 P2,100 + 15% but not over P120,00 of excess over P30,000 Over P120,000 P15,600 + 20% but not over P350,000 of excess over P120,000 Over P350,000 P61,600 + 30% of excess over P350,000 Sec. 29. Deductions from gross income. In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: (a) Raw materials, supplies and direct labor; (b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; (c) Telecommunications, electricity, fuel, light and water; (d) Business rentals; (e) Depreciation; (f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and (g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be

proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business. For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be. On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted a gross income, instead of as having still retained the netincome, taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate. Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate. Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us. Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us. G.R. No. 109446 The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496. The questioned regulation reads: Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income. The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its

enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of the law, thusly: MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return? MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals. (See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours). Other deliberations support this position, to wit: MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable? MR. PEREZ. That is correct, Mr. Speaker. (Id. at 6:40 P.M.; Emphasis ours). In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus: This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals. (Emphasis ours) The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax

purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit: Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. (b) In determining his distributive share in the net income of the partnership, each partner (1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and (2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions. There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive

tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income). Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax. "Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership. WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs. SO ORDERED.

G.R. No. L-26521

December 28, 1968

Section 1. A municipal license tax is hereby imposed on tenement houses in accordance with the schedule of payment herein provided. Section 2. Tenement house as contemplated in this ordinance shall mean any building or dwelling for renting space divided into separate apartments or accessorias. Section 3. The municipal license tax provided in Section 1 hereof shall be as follows: I. Tenement houses: (a) Apartment house made of strong materials (b) Apartment house made of mixed materials II Rooming house of strong materials

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee, vs. CITY OF ILOILO, defendants-appellants. Pelaez, Jalandoni and Jamir for plaintiff-appellees. Assistant City Fiscal Vicente P. Gengos for defendant-appellant. CASTRO, J.: Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License Tax On Persons Engaged In The Business Of Operating Tenement Houses," and ordering the City to refund to the plaintiffsappellees the sums of collected from them under the said ordinance. On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly engaged in or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly engaged in business in any other streets, P12.00 per apartment. The validity and constitutionality of this ordinance were challenged by the spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of four tenement houses containing 34 apartments. This Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires, "it not appearing that the power to tax owners of tenement houses is one among those clearly and expressly granted to the City of Iloilo by its Charter." On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority or power to enact an ordinance similar to that previously declared by this Court as ultra vires, enacted Ordinance 11, series of 1960, hereunder quoted in full: AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE BUSINESS OF OPERATING TENEMENT HOUSES Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of Republic Act No. 2264, otherwise known as the Autonomy Law of Local Government, that:

Rooming house of mixed materials III. Tenement house partly or wholly engaged in or dedicated to business in the following streets: J.M. Basa, Iznart, Aldeguer, Guanco and Ledesma from Plazoleto Gay to Valeria. St. IV. Tenement house partly or wholly engaged in or dedicated to business in any other street V. Tenement houses at the streets surrounding the super market as soon as said place is declared commercial Section 4. All ordinances or parts thereof inconsistent herewith are hereby amended. Section 5. Any person found violating this ordinance shall be punished with a fine note exceeding Two Hundred Pesos (P200.00) or an imprisonment of not more than six (6) months or both at the discretion of the Court. Section 6 This ordinance shall take effect upon approval. ENACTED, January 15, 1960. In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five tenement houses, aggregately containing 43 apartments, while the other appellees and the same Remedios S. Villanueva are owners of ten apartments. Each of the appellees' apartments has a door leading to a street and is rented by either

a Filipino or Chinese merchant. The first floor is utilized as a store, while the second floor is used as a dwelling of the owner of the store. Eusebio Villanueva owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City, Baguio City and Quezon City, which cities, according to him, do not impose tenement or apartment taxes. By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of P1,317.00. Eusebio Villanueva has likewise been paying real estate taxes on his property. On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended complaint, respectively, against the City of Iloilo, in the aforementioned court, praying that Ordinance 11, series of 1960, be declared "invalid for being beyond the powers of the Municipal Council of the City of Iloilo to enact, and unconstitutional for being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the equal protection clause of the Constitution," and that the City be ordered to refund the amounts collected from them under the said ordinance. On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the grounds that (a) "Republic Act 2264 does not empower cities to impose apartment taxes," (b) the same is "oppressive and unreasonable," for the reason that it penalizes owners of tenement houses who fail to pay the tax, (c) it constitutes not only double taxation, but treble at that and (d) it violates the rule of uniformity of taxation. The issues posed in this appeal are: 1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double taxation? 2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes? 3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal clause? 4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation? 1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:

SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges in chartered cities, municipalities or municipal districts by requiring them to secure licences at rates fixed by the municipal board or city council of the city, the municipal council of the municipality, or the municipal district council of the municipal district; to collect fees and charges for services rendered by the city, municipality or municipal district; to regulate and impose reasonable fees for services rendered in connection with any business, profession or occupation being conducted within the city, municipality or municipal district and otherwise to levy for public purposes, just and uniform taxes, licenses or fees; Provided, That municipalities and municipal districts shall, in no case, impose any percentage tax on sales or other taxes in any form based thereon nor impose taxes on articles subject to specific tax, except gasoline, under the provisions of the National Internal Revenue Code;Provided, however, That no city, municipality or municipal district may levy or impose any of the following: (a) Residence tax; (b) Documentary stamp tax; (c) Taxes on the business of persons engaged in the printing and publication of any newspaper, magazine, review or bulletin appearing at regular intervals and having fixed prices for for subscription and sale, and which is not published primarily for the purpose of publishing advertisements; (d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light, heat and power; (e) Taxes on forest products and forest concessions; (f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa; (g) Taxes on income of any kind whatsoever; (h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof; (i) Customs duties registration, wharfage dues on wharves owned by the national government, tonnage, and all other kinds of customs fees, charges and duties;

(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and (k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign insurance companies. A tax ordinance shall go into effect on the fifteenth day after its passage, unless the ordinance shall provide otherwise: Provided, however, That the Secretary of Finance shall have authority to suspend the effectivity of any ordinance within one hundred and twenty days after its passage, if, in his opinion, the tax or fee therein levied or imposed is unjust, excessive, oppressive, or confiscatory, and when the said Secretary exercises this authority the effectivity of such ordinance shall be suspended. In such event, the municipal board or city council in the case of cities and the municipal council or municipal district council in the case of municipalities or municipal districts may appeal the decision of the Secretary of Finance to the court during the pendency of which case the tax levied shall be considered as paid under protest. It is now settled that the aforequoted provisions of Republic Act 2264 confer on local governments broad taxing authority which extends to almost "everything, excepting those which are mentioned therein," provided that the tax so levied is "for public purposes, just and uniform," and does not transgress any constitutional provision or is not repugnant to a controlling statute.2 Thus, when a tax, levied under the authority of a city or municipal ordinance, is not within the exceptions and limitations aforementioned, the same comes within the ambit of the general rule, pursuant to the rules of expressio unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti. Does the tax imposed by the ordinance in question fall within any of the exceptions provided for in section 2 of the Local Autonomy Act? For this purpose, it is necessary to determine the true nature of the tax. The appellees strongly maintain that it is a "property tax" or "real estate tax," 3 and not a "tax on persons engaged in any occupation or business or exercising privileges," or a license tax, or a privilege tax, or an excise tax.4 Indeed, the title of the ordinance designates it as a "municipal license tax on persons engaged in the business of operating tenement houses," while section 1 thereof states that a "municipal license tax is hereby imposed on tenement houses." It is the phraseology of section 1 on which the appellees base their contention that the tax involved is a real estate tax which, according to them, makes the ordinance ultra vires as it imposes a levy "in excess of the one per centum real estate tax allowable under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.

It is our view, contrary to the appellees' contention, that the tax in question is not a real estate tax. Obviously, the appellees confuse the tax with the real estate tax within the meaning of the Assessment Law,6 which, although not applicable to the City of Iloilo, has counterpart provisions in the Iloilo City Charter. 7 A real estate tax is a direct tax on the ownership of lands and buildings or other improvements thereon, not specially exempted,8 and is payable regardless of whether the property is used or not, although the value may vary in accordance with such factor. 9The tax is usually single or indivisible, although the land and building or improvements erected thereon are assessed separately, except when the land and building or improvements belong to separate owners.10 It is a fixed proportion11 of the assessed value of the property taxed, and requires, therefore, the intervention of assessors.12 It is collected or payable at appointed times,13 and it constitutes a superior lien on and is enforceable against the property14 subject to such taxation, and not by imprisonment of the owner. The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not a tax on the land on which the tenement houses are erected, although both land and tenement houses may belong to the same owner. The tax is not a fixed proportion of the assessed value of the tenement houses, and does not require the intervention of assessors or appraisers. It is not payable at a designated time or date, and is not enforceable against the tenement houses either by sale or distraint. Clearly, therefore, the tax in question is not a real estate tax. "The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court looks less to its words and more to the context, subject-matter, consequence and effect. Accordingly, what is within the spirit is within the ordinance although it is not within the letter thereof, while that which is in the letter, although not within the spirit, is not within the ordinance." 15 It is within neither the letter nor the spirit of the ordinance that an additional real estate tax is being imposed, otherwise the subject-matter would have been not merely tenement houses. On the contrary, it is plain from the context of the ordinance that the intention is to impose a license tax on the operation of tenement houses, which is a form of business or calling. The ordinance, in both its title and body, particularly sections 1 and 3 thereof, designates the tax imposed as a "municipal license tax" which, by itself, means an "imposition or exaction on the right to use or dispose of property, to pursue a business, occupation, or calling, or to exercise a privilege." 16. "The character of a tax is not to be fixed by any isolated words that may beemployed in the statute creating it, but such words must be taken in the connection in which they are used and the true character is to be deduced from the nature and essence of the subject." 17 The subject-matter of the ordinance is tenement houses whose nature and essence are expressly set forth in section 2 which defines a tenement house as "any building or dwelling for renting space divided into separate apartments or accessorias." The Supreme Court, in City of Iloilo vs. Remedios Sian Villanueva, et al. , L12695, March 23, 1959, adopted the definition of a tenement house 18 as

"any house or building, or portion thereof, which is rented, leased, or hired out to be occupied, or is occupied, as the home or residence of three families or more living independently of each other and doing their cooking in the premises or by more than two families upon any floor, so living and cooking, but having a common right in the halls, stairways, yards, waterclosets, or privies, or some of them." Tenement houses, being necessarily offered for rent or lease by their very nature and essence, therefore constitute a distinct form of business or calling, similar to the hotel or motel business, or the operation of lodging houses or boarding houses. This is precisely one of the reasons why this Court, in the said case of City of Iloilo vs. Remedios Sian Villanueva, et al., supra, declared Ordinance 86 ultra vires, because, although the municipal board of Iloilo City is empowered, under sec. 21, par. j of its Charter, "to tax, fix the license fee for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding houses, livery garages, public warehouses, pawnshops, theaters, cinematographs," tenement houses, which constitute a different business enterprise,19 are not mentioned in the aforestated section of the City Charter of Iloilo. Thus, in the aforesaid case, this Court explicitly said:. "And it not appearing that the power to tax owners of tenement houses is one among those clearly and expressly granted to the City of Iloilo by its Charter, the exercise of such power cannot be assumed and hence the ordinance in question is ultra vires insofar as it taxes a tenement house such as those belonging to defendants." . The lower court has interchangeably denominated the tax in question as a tenement tax or an apartment tax. Called by either name, it is not among the exceptions listed in section 2 of the Local Autonomy Act. On the other hand, the imposition by the ordinance of a license tax on persons engaged in the business of operating tenement houses finds authority in section 2 of the Local Autonomy Act which provides that chartered cities have the authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges within their respective territories, and "otherwise to levy for public purposes, just and uniform taxes, licenses, or fees." . 2. The trial court condemned the ordinance as constituting "not only double taxation but treble at that," because "buildings pay real estate taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of the National Internal Revenue Code, besides the tenement tax under the said ordinance." Obviously, what the trial court refers to as "income taxes" are the fixed taxes on business and occupation provided for in section 182, Title V, of the National Internal Revenue Code, by virtue of which persons engaged in "leasing or renting property, whether on their account as principals or as owners of rental property or properties," are considered "real estate dealers" and are taxed according to the amount of their annual income.20.

While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the National Internal Revenue Code as real estate dealers, and still taxable under the ordinance in question, the argument against double taxation may not be invoked. The same tax may be imposed by the national government as well as by the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity by both the State and a political subdivision thereof.21. The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate taxes and the tenement tax imposed by the ordinance in question, is also devoid of merit. It is a well-settled rule that a license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax. The State may collect an ad valorem tax on property used in a calling, and at the same time impose a license tax on that calling, the imposition of the latter kind of tax being in no sensea double tax.22. "In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax." 23 It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the sametaxing authority, are not of the same kind or character. At all events, there is no constitutional prohibition against double taxation in the Philippines.24 It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform."25. 3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not only oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months or both, if the owner or owners of the tenement buildings divided into apartments do not pay the tenement or apartment tax fixed in said ordinance," but also unconstitutional as it subjects the owners of tenement houses to criminal prosecution for non-payment of an obligation which is purely sum of money." The lower court apparently had in mind, when it made the above ruling, the provision of the Constitution that "no person shall be imprisoned for a debt or non-payment of a poll tax."26 It is elementary, however, that "a tax is not a debt in the sense of an obligation incurred by contract, express or implied, and therefore is not within the meaning of constitutional or statutory provisions abolishing or prohibiting imprisonment for debt, and a statute or ordinance which punishes the non-payment thereof by fine or imprisonment is not, in conflict with that prohibition."27 Nor is the tax in question a poll tax, for the latter is a tax of a fixed amount upon all persons, or upon all persons of a certain class, resident within

a specified territory, without regard to their property or the occupations in which they may be engaged.28 Therefore, the tax in question is not oppressive in the manner the lower court puts it. On the other hand, the charter of Iloilo City29 empowers its municipal board to "fix penalties for violations of ordinances, which shall not exceed a fine of two hundred pesos or six months' imprisonment, or both such fine and imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court overruled the pronouncement of the lower court declaring illegal and void an ordinance imposing an occupation tax on persons exercising various professions in the City of Manilabecause it imposed a penalty of fine and imprisonment for its violation.30. 4. The trial court brands the ordinance as violative of the rule of uniformity of taxation. "... because while the owners of the other buildings only pay real estate tax and income taxes the ordinance imposes aside from these two taxes an apartment or tenement tax. It should be noted that in the assessment of real estate tax all parts of the building or buildings are included so that the corresponding real estate tax could be properly imposed. If aside from the real estate tax the owner or owners of the tenement buildings should pay apartment taxes as required in the ordinance then it will violate the rule of uniformity of taxation.". Complementing the above ruling of the lower court, the appellees argue that there is "lack of uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo are singled out to pay taxes on their tenement houses, while citizens of other cities, where their councils do not enact a similar tax ordinance, are permitted to escape such imposition." . It is our view that both assertions are undeserving of extended attention. This Court has already ruled that tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform and equal when imposed upon all property of the same class or character within the taxing authority." 31 The fact, therefore, that the owners of other classes of buildings in the City of Iloilo do not pay the taxes imposed by the ordinance in question is no argument at all against uniformity and equality of the tax imposition. Neither is the rule of equality and uniformity violated by the fact that tenement taxesare not imposed in other cities, for the same rule does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time.32So long as the burden of the tax falls equally and impartially on all owners or operators of tenement houses similarly classified or situated, equality and uniformity of taxation is accomplished. 33 The plaintiffsappellees, as owners of tenement houses in the City of Iloilo, have not shown that the tax burden is not equally or uniformly distributed among them, to overthrow the presumption that tax statutes are intended to operate uniformly and equally. 34.

5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a mere reproduction of Ordinance 86 of the City of Iloilo which was declared by this Court in L-12695, supra, as ultra vires, the decision in that case should be accorded the effect of res judicata in the present case or should constitute estoppel by judgment. To dispose of this contention, it suffices to say that there is no identity of subject-matter in that case andthis case because the subject-matter in L12695 was an ordinance which dealt not only with tenement houses but also warehouses, and the said ordinance was enacted pursuant to the provisions of the City charter, while the ordinance in the case at bar was enacted pursuant to the provisions of the Local Autonomy Act. There is likewise no identity of cause of action in the two cases because the main issue in L-12695 was whether the City of Iloilo had the power under its charter to impose the tax levied by Ordinance 11, series of 1960, under the Local Autonomy Act which took effect on June 19, 1959, and therefore was not available for consideration in the decision in L-12695 which was promulgated on March 23, 1959. Moreover, under the provisions of section 2 of the Local Autonomy Act, local governments may now tax any taxable subject-matter or object not included in the enumeration of matters removed from the taxing power of local governments.Prior to the enactment of the Local Autonomy Act the taxes that could be legally levied by local governments were only those specifically authorized by law, and their power to tax was construed in strictissimi juris. 35. ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid, the complaint is hereby dismissed. No pronouncement as to costs..

G.R. No. L-49336 August 31, 1981 THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial Assessor, petitioner, vs. HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF BANGUED, INC., represented by Bishop Odilo etspueler and Reverend Felipe Flores, respondents.

except upon condition that the taxpayer shall pay the just amount of the tax, as determined by the court in the pending proceeding." 6 When asked to comment, respondent Judge began with the allegation that there "is no question that the real properties sought to be taxed by the Province of Abra are properties of the respondent Roman Catholic Bishop of Bangued, Inc." 7 The very next sentence assumed the very point it asked when he categorically stated: "Likewise, there is no dispute that the properties including their procedure are actually, directly and exclusively used by the Roman Catholic Bishop of Bangued, Inc. for religious or charitable purposes." 8 For him then: "The proper remedy of the petitioner is appeal and not this special civil action." 9 A more exhaustive comment was submitted by private respondent Roman Catholic Bishop of Bangued, Inc. It was, however, unable to lessen the force of the objection raised by petitioner Province of Abra, especially the due process aspect. it is to be admitted that his opposition to the petition, pressed with vigor, ostensibly finds a semblance of support from the authorities cited. It is thus impressed with a scholarly aspect. It suffers, however, from the grave infirmity of stating that only a pure question of law is presented when a claim for exemption is made. The petition must be granted. 1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the present Constitution with that appearing in the 1935 Charter on the tax exemption of "lands, buildings, and improvements." There is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be exempt from taxation." 10 The present Constitution added "charitable institutions, mosques, and non-profit cemeteries" and required that for the exemption of ":lands, buildings, and improvements," they should not only be "exclusively" but also "actually and "directly" used for religious or charitable purposes. 11The Constitution is worded differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words "actually" as well as "directly" not added. There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be exempt from taxation. According to Commissioner of Internal Revenue v. Guerrero: 12"From 1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris." 13 In Manila Electric Company v. Vera, 14 a 1975 decision, such principle was reiterated, reference being made to Republic Flour Mills, Inc. v. Commissioner of Internal Revenue; 15 Commissioner of Customs v. Philippine Acetylene Co. & CTA; 16 andDavao Light and Power Co., Inc. v. Commissioner of Customs. 17

FERNANDO, C.J.: On the face of this certiorari and mandamus petition filed by the Province of Abra, 1 it clearly appears that the actuation of respondent Judge Harold M. Hernando of the Court of First Instance of Abra left much to be desired. First, there was a denial of a motion to dismiss 2 an action for declaratory relief by private respondent Roman Catholic Bishop of Bangued desirous of being exempted from a real estate tax followed by a summary judgment 3granting such exemption, without even hearing the side of petitioner. In the rather vigorous language of the Acting Provincial Fiscal, as counsel for petitioner, respondent Judge "virtually ignored the pertinent provisions of the Rules of Court; ... wantonly violated the rights of petitioner to due process, by giving due course to the petition of private respondent for declaratory relief, and thereafter without allowing petitioner to answer and without any hearing, adjudged the case; all in total disregard of basic laws of procedure and basic provisions of due process in the constitution, thereby indicating a failure to grasp and understand the law, which goes into the competence of the Honorable Presiding Judge." 4 It was the submission of counsel that an action for declaratory relief would be proper only before a breach or violation of any statute, executive order or regulation. 5 Moreover, there being a tax assessment made by the Provincial Assessor on the properties of respondent Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available under Presidential Decree No. 464 before filing such court action. Further, it was pointed out to respondent Judge that he failed to abide by the pertinent provision of such Presidential Decree which provides as follows: "No court shall entertain any suit assailing the validity of a tax assessed under this Code until the taxpayer, shall have paid, under protest, the tax assessed against him nor shall any court declare any tax invalid by reason of irregularities or informalities in the proceedings of the officers charged with the assessment or collection of taxes, or of failure to perform their duties within this time herein specified for their performance unless such irregularities, informalities or failure shall have impaired the substantial rights of the taxpayer; nor shall any court declare any portion of the tax assessed under the provisions of this Code invalid

2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural due process. If there is any case where proof is necessary to demonstrate that there is compliance with the constitutional provision that allows an exemption, this is it. Instead, respondent Judge accepted at its face the allegation of private respondent. All that was alleged in the petition for declaratory relief filed by private respondents, after mentioning certain parcels of land owned by it, are that they are used "actually, directly and exclusively" as sources of support of the parish priest and his helpers and also of private respondent Bishop. 18 In the motion to dismiss filed on behalf of petitioner Province of Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be questioned before the Local Board of Assessment Appeals and not with a court. There was also mention of a lack of a cause of action, but only because, in its view, declaratory relief is not proper, as there had been breach or violation of the right of government to assess and collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing to petitioner Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge failed to abide by the constitutional command of procedural due process. WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set aside. Respondent Judge, or who ever is acting on his behalf, is ordered to hear the case on the merit. No costs.

G.R. No. L-39086 June 15, 1988 ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs. HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE,respondents.

And finally the case is hereby ordered dismissed with costs against the plaintiff. SO ORDERED. (Rollo, pp. 22-23) Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him. On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss the complaint. On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972. On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108). On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB Check No. 904369. On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. Said Stipulations reads: STIPULATION OF FACTS

PARAS, J.: This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads: IN VIEW OF ALL THE FOREGOING, the Court hereby declares: That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia located at Bangued, Abra, is valid; That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the amount of P5,140.31 and back taxes and penalties from the promulgation of this decision; That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated to apply for the payment of the back taxes and for the redemption of the property in question, if the amount is less than P6,000.00, the remainder must be returned to the Director of Pedro Borgonia, who represents the plaintiff herein; That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be returned to said Municipal Treasurer of Bangued, Abra;

COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the following agreed stipulation of facts: 1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone who is actually holding the position of Provincial Treasurer of the Province of Abra; 2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon located in Bangued, Abra under Original Certificate of Title No. 0-83; 3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit A; 4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public auction for the satisfaction of the unpaid real property taxes thereon and the same was sold to defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant Municipal Treasurer. 5. That all other matters not particularly and specially covered by this stipulation of facts will be the subject of evidence by the parties. WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation of facts on the point agreed upon by the parties. Bangued, Abra, April 12, 1973. Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is recognized by the government and is offering Primary, High School and College Courses, and has a school population of more than one thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance building; (c) that the elementary pupils are housed in a two-storey building across the street; (d) that the high school and college students are housed in

the main building; (e) that the Director with his family is in the second floor of the main building; and (f) that the annual gross income of the school reaches more than one hundred thousand pesos. From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or not the lot and building in question are used exclusively for educational purposes. (Rollo, p. 20) The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the school building and school lot used for educational purposes of the Abra Valley College, Inc., are exempted from the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49). Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner school for residential purposes. He thus ruled for the government and rendered the assailed decision. After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for review on certiorari with prayer for preliminary injunction before this Court, which petition was filed on August 17, 1974 (Rollo, p.2). In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74). Petitioner raised the following assignments of error: I THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER. II THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES. IV THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2) The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes." Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void. On the other hand, private respondents maintain that the college lot and building in question which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and rented by a commercial establishment, the Northern Marketing Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]). Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes ... Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise known as the Assessment Law, provides: The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx (c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, scientific or educational purposes. xxx xxx xxx In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof. As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still these do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation. In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in religious functions. The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a

firm used for the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430). The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]). It must be stressed however, that while this Court allows a more liberal and nonrestrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. It will be noted however that the aforementioned lease appears to have been raised for the first time in this Court. That the matter was not taken up in the to court is really apparent in the decision of respondent Judge. No mention thereof was made in the stipulation of facts, not even in the description of the school building by the trial judge, both embodied in the decision nor as one of the issues to resolve in order to determine whether or not said properly may be exempted from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even after it was raised in this Court. Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not squarely raised below, still in the interest of substantial justice, this Court is not prevented from considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]). Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner. SO ORDERED.

G.R. No. 189999

June 27, 2012

and the AUF Professional Schools building on July 27, 2000 and March 15, 2004, respectively.6 Respondent City Treasurer referred the matter to the Bureau of Local Government Finance (BLGF) of the Department of Finance, which in turn endorsed the query to the DOJ. Then Justice Secretary Raul M. Gonzalez, in his letter-reply dated December 6, 2005, cited previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982) declaring petitioner to be exempt from the payment of building permit fees. Under the 1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating further that "xxx the Department of Finance, thru this Bureau, has no authority to review the resolution or the decision of the DOJ."7 Petitioner wrote the respondents reiterating its request to reverse the disputed assessments and invoking the DOJ legal opinions which have been affirmed by Secretary Gonzalez. Despite petitioners plea, however, respondents refused to issue the building permits for the construction of the AUF Medical Center in the main campus and renovation of a school building located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo F. Lazatin but no written response was received by petitioner.8 Consequently, petitioner paid under protest9 the following: Medical Center (new construction) Building Permit and Electrical Fee Locational Clearance Fee Fire Code Fee P 217,475.20 283,741.64 144,690.00 Total - P 645,906.84

ANGELES UNIVERSITY FOUNDATION, Petitioner, vs. CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of Angeles City and ENGR. DONATO N. DIZON, in his capacity as Acting Angeles City Building Official, Respondents. DECISION VILLARAMA, JR., J.: Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, which seeks to reverse and set aside the Decision1 dated July 28, 2009 and Resolution2 dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 90591. The CA reversed the Decision3 dated September 21, 2007 of the Regional Trial Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt from the payment of building permit and other fees and ordering respondents to refund the same with interest at the legal rate. The factual antecedents: Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25, 1962 and was converted into a non-stock, non-profit education foundation under the provisions of Republic Act (R.A.) No. 6055 4on December 4, 1975. Sometime in August 2005, petitioner filed with the Office of the City Building Official an application for a building permit for the construction of an 11-storey building of the Angeles University Foundation Medical Center in its main campus located at MacArthur Highway, Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in the amount of P126,839.20. An Order of Payment was also issued by the City Planning and Development Office, Zoning Administration Unit requiring petitioner to pay the sum of P238,741.64 as Locational Clearance Fee.5 In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed that it is exempt from the payment of the building permit and locational clearance fees, citing legal opinions rendered by the Department of Justice (DOJ). Petitioner also reminded the respondents that they have previously issued building permits acknowledging such exemption from payment of building permit fees on the construction of petitioners 4-storey AUF Information Technology Center building

School Building (renovation) Building Permit and Electrical Fee Locational Clearance Fee Fire Code Fee P 37,857.20 6,000.57 5,967.74 Total - P 49,825.51

Petitioner likewise paid the following sums as required by the City Assessors Office: Real Property Tax Basic Fee SEF Locational Clearance Fee

P 86, 43, 1,

Twenty Six10 Thousand Six Hundred Sixty Two Pesos and 99/100 Centavos Total P130,930.64 [GRAND TOTAL - P(P826,662.99) 826,662.99] plus legal interest thereon at the rate of twelve percent (12%) per annum commencing on the date of extra-judicial demand or June 14, 2006, until the aforesaid amount is fully paid. By reason of the above payments, petitioner was issued the corresponding Building Permit, Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner formally requested the respondents to refund the fees it paid under protest. Under letters dated June 15, 2006 and August 7, 2006, respondent City Treasurer denied the claim for refund.11 On August 31, 2006, petitioner filed a Complaint12 before the trial court seeking the refund of P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of attorneys fees in the amount of P300,000.00 and litigation expenses. In its Answer,13 respondents asserted that the claim of petitioner cannot be granted because its structures are not among those mentioned in Sec. 209 of the National Building Code as exempted from the building permit fee. Respondents argued that R.A. No. 6055 should be considered repealed on the basis of Sec. 2104 of the National Building Code. Since the disputed assessments are regulatory in nature, they are not taxes from which petitioner is exempt. As to the real property taxes imposed on petitioners property located in Marisol Village, respondents pointed out that said premises will be used as a school dormitory which cannot be considered as a use exclusively for educational activities. Petitioner countered that the subject building permit are being collected on the basis of Art. 244 of theImplementing Rules and Regulations of the Local Government Code, which impositions are really taxes considering that they are provided under the chapter on "Local Government Taxation" in reference to the "revenue raising power" of local government units (LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu,14 fees may be regarded as taxes depending on the purpose of its exaction. In any case, petitioner pointed out that the Local Government Code of 1991 provides in Sec. 193 that non-stock and non-profit educational institutions like petitioner retained the tax exemptions or incentives which have been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building permit fees. 15 On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against the respondents. The dispositive portion of the trial courts decision16 reads: WHEREFORE, premises considered, judgment is rendered as follows: a. Plaintiff is exempt from the payment of building permit and other fees Ordering the Defendants to refund the total amount of Eight Hundred b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand Pesos (Php70,000.00), plus litigation expenses. c. Ordering the Defendants to pay the costs of the suit. SO ORDERED.17 Respondents appealed to the CA which reversed the trial court, holding that while petitioner is a tax-free entity, it is not exempt from the payment of regulatory fees. The CA noted that under R.A. No. 6055, petitioner was granted exemption only from income tax derived from its educational activities and real property used exclusively for educational purposes. Regardless of the repealing clause in the National Building Code, the CA held that petitioner is still not exempt because a building permit cannot be considered as the other "charges" mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax, import duties, assessments and other collections for revenue purposes, following the ejusdem generisrule. The CA further stated that petitioner has not shown that the fees collected were excessive and more than the cost of surveillance, inspection and regulation. And while petitioner may be exempt from the payment of real property tax, petitioner in this case merely alleged that "the subject property is to be used actually, directly and exclusively for educational purposes," declaring merely that such premises is intended to house the sports and other facilities of the university but by reason of the occupancy of informal settlers on the area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that petitioner is not entitled to the refund of building permit and related fees, as well as real property tax it paid under protest. Petitioner filed a motion for reconsideration which was denied by the CA. Hence, this petition raising the following grounds: THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE HONORABLE COURTS EXERCISE OF ITS POWER OF SUPERVISION CONSIDERING THAT: I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE COURT OF APPEALS EFFECTIVELY WITHDREW THE

PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF APPEALS TO DO. A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE, THE COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION THAT NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT. B. THE COURT OF APPEALS APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS IN RULING IN THE QUESTIONED DECISION THAT THE TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES IS BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES, IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE PURPOSES. C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES ARE NOT INCLUDED IN THE TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX MEASURE AND THEREFORE, STILL COVERED UNDER THE PRIVILEGE OF EXEMPTION. II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE.18 Petitioner stresses that the tax exemption granted to educational stock corporations which have converted into non-profit foundations was broadened to include any other charges imposed by the Government as one of the incentives for such conversion. These incentives necessarily included exemption from payment of building permit and related fees as otherwise there would have been no incentives for educational foundations if the privilege were only limited to exemption from taxation, which is already provided under the Constitution.

Petitioner further contends that this Court has consistently held in several cases that the primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum which bears no relation to the cost of inspection and which is payable into the general revenue of the state is a tax rather than an exercise of the police power. The standard set by law in the determination of the amount that may be imposed as license fees is such that is commensurate with the cost of regulation, inspection and licensing. But in this case, the amount representing the building permit and related fees and/or charges is such an exorbitant amount as to warrant a valid imposition; such amount exceeds the probable cost of regulation. Even with the alleged criteria submitted by the respondents (e.g., character of occupancy or use of building/structure, cost of construction, floor area and height), and the construction by petitioner of an 11-storey building, the costs of inspection will not amount to P645,906.84, presumably for the salary of inspectors or employees, the expenses of transportation for inspection and the preparation and reproduction of documents. Petitioner thus concludes that the disputed fees are substantially and mainly for purposes of revenue rather than regulation, so that even these fees cannot be deemed "charges" mentioned in Sec. 8 of R.A. No. 6055, they should properly be treated as tax from which petitioner is exempt. In their Comment, respondents maintain that petitioner is not exempt from the payment of building permit and related fees since the only exemptions provided in the National Building Code are public buildings and traditional indigenous family dwellings. Inclusio unius est exclusio alterius. Because the law did not include petitioners buildings from those structures exempt from the payment of building permit fee, it is therefore subject to the regulatory fees imposed under the National Building Code. Respondents assert that the CA correctly distinguished a building permit fee from those "other charges" mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to pecuniary liability, as rents, and fees against persons or property. Respondents point out that a building permit is classified under the term "fee." A fee is generally imposed to cover the cost of regulation as activity or privilege and is essentially derived from the exercise of police power; on the other hand, impositions for services rendered by the local government units or for conveniences furnished, are referred to as "service charges". Respondents also disagreed with petitioners contention that the fees imposed and collected are exorbitant and exceeded the probable expenses of regulation. These fees are based on computations and assessments made by the responsible officials of the City Engineers Office in accordance with the Schedule of Fees and criteria provided in the National Building Code. The bases of assessment cited by petitioner (e.g. salary of employees, expenses of transportation and preparation and reproduction of documents) refer to charges and fees on business and occupation under Sec. 147 of the Local Government Code, which do not apply to building permit fees. The parameters set by the National Building Code can be considered as complying with the reasonable cost of regulation in the assessment and collection of

building permit fees. Respondents likewise contend that the presumption of regularity in the performance of official duty applies in this case. Petitioner should have presented evidence to prove its allegations that the amounts collected are exorbitant or unreasonable. For resolution are the following issues: (1) whether petitioner is exempt from the payment of building permit and related fees imposed under the National Building Code; and (2) whether the parcel of land owned by petitioner which has been assessed for real property tax is likewise exempt. R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-stock, non-profit educational foundations. Section 8 of said law provides: SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties, assessments, and other charges imposed by the Government onall income derived from or property, real or personal, used exclusively for the educational activities of the Foundation.(Emphasis supplied.) On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National Building Code of the Philippines. The said Code requires every person, firm or corporation, including any agency or instrumentality of the government to obtain a building permit for any construction, alteration or repair of any building or structure.19Building permit refers to "a document issued by the Building Official x x x to an owner/applicant to proceed with the construction, installation, addition, alteration, renovation, conversion, repair, moving, demolition or other work activity of a specific project/building/structure or portions thereof after the accompanying principal plans, specifications and other pertinent documents with the duly notarized application are found satisfactory and substantially conforming with the National Building Code of the Philippines x x x and its Implementing Rules and Regulations (IRR)."20 Building permit fees refers to the basic permit fee and other charges imposed under theNational Building Code. Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional indigenous family dwellings.21 Not being expressly included in the enumeration of structures to which the building permit fees do not apply, petitioners claim for exemption rests solely on its interpretation of the term "other charges imposed by the National Government" in the tax exemption clause of R.A. No. 6055. A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee" pertains to a "charge fixed by law for services of public officers or for use of a privilege under control of government." 22 As used in the Local Government Code of 1991 (R.A. No. 7160), charges refers to pecuniary liability, as rents or fees against persons or property, while fee means a charge fixed by law or ordinance for the regulation or inspection of a business or activity.23

That "charges" in its ordinary meaning appears to be a general term which could cover a specific "fee" does not support petitioners position that building permit fees are among those "other charges" from which it was expressly exempted. Note that the "other charges" mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words "imposed by the Government on all x x x property used exclusively for the educational activities of the foundation." Building permit fees are not impositions on property but on the activity subject of government regulation. While it may be argued that the fees relate to particular properties, i.e., buildings and structures, they are actually imposed on certain activities the owner may conduct either to build such structures or to repair, alter, renovate or demolish the same. This is evident from the following provisions of the National Building Code: Section 102. Declaration of Policy It is hereby declared to be the policy of the State to safeguard life, health, property, and public welfare, consistent with theprinciples of sound environmental management and control; and tothis end, make it the purpose of this Code to provide for allbuildings and structures, a framework of minimum standards and requirements to regulate and control their location, site, design quality of materials, construction, use, occupancy, and maintenance. Section 103. Scope and Application (a) The provisions of this Code shall apply to the design,location, sitting, construction, alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof, and addition to public and private buildings andstructures, except traditional indigenous family dwellingsas defined herein. xxxx Section 301. Building Permits No person, firm or corporation, including any agency orinstrumentality of the government shall erect, construct, alter, repair, move, convert or demolish any building or structure or causethe same to be done without first obtaining a building permittherefor from the Building Official assigned in the place where thesubject building is located or the building work is to be done. (Italics supplied.) That a building permit fee is a regulatory imposition is highlighted by the fact that in processing an application for a building permit, the Building Official shall see to it that the applicant satisfies and conforms with approved standard requirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmental health, electrical and mechanical safety as well as with other rules and regulations implementing the National Building Code. 24 Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance must also be secured and

the corresponding fees paid before a building permit may be issued. And as can be gleaned from the implementing rules and regulations of the National Building Code, clearances from various government authorities exercising and enforcing regulatory functions affecting buildings/structures, like local government units, may be further required before a building permit may be issued.25 Since building permit fees are not charges on property, they are not impositions from which petitioner is exempt. As to petitioners argument that the building permit fees collected by respondents are in reality taxes because the primary purpose is to raise revenues for the local government unit, the same does not hold water. A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. 26 In this case, the Secretary of Public Works and Highways who is mandated to prescribe and fix the amount of fees and other charges that the Building Official shall collect in connection with the performance of regulatory functions,27 has promulgated and issued the Implementing Rules and Regulations28 which provide for the bases of assessment of such fees, as follows: 1. Character of occupancy or use of building 2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J) 3. Floor area 4. Height Petitioner failed to demonstrate that the above bases of assessment were arbitrarily determined or unrelated to the activity being regulated. Neither has petitioner adduced evidence to show that the rates of building permit fees imposed and collected by the respondents were unreasonable or in excess of the cost of regulation and inspection. In Chevron Philippines, Inc. v. Bases Conversion Development Authority, 29 this Court explained: In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state, even though

incidentally, revenue is generated. Thus, in Gerochi v. Department of Energy, the Court stated: "The conservative and pivotal distinction between these two (2) 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 does not make the imposition a tax."30 (Emphasis supplied.) Concededly, in the case of building permit fees imposed by the National Government under the National Building Code, revenue is incidentally generated for the benefit of local government units. Thus: Section 208. Fees Every Building Official shall keep a permanent record and accurate account of all fees and other charges fixed and authorized by the Secretary to be collected and received under this Code. Subject to existing budgetary, accounting and auditing rules and regulations, the Building Official is hereby authorized to retain not more than twenty percent of his collection for the operating expenses of his office. The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and shall accrue to the General Fund of the province, city or municipality concerned. Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced. Said provision states: SECTION 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. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.) Considering that exemption from payment of regulatory fees was not among those "incentives" granted to petitioner under R.A. No. 6055, there is no such incentive that is retained under the Local Government Code of 1991. Consequently, no reversible error was committed by the CA in ruling that petitioner is liable to pay the subject building permit and related fees.

Now, on petitioners claim that it is exempted from the payment of real property tax assessed against its real property presently occupied by informal settlers. Section 28(3), Article VI of the 1987 Constitution provides: xxxx (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. x x x x (Emphasis supplied.) Section 234(b) of the Local Government Code of 1991 implements the foregoing constitutional provision by declaring that -SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: xxxx (b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes; x x x x (Emphasis supplied.) In Lung Center of the Philippines v. Quezon City,31 this Court held that only portions of the hospital actually, directly and exclusively used for charitable purposes are exempt from real property taxes, while those portions leased to private entities and individuals are not exempt from such taxes. We explained the condition for the tax exemption privilege of charitable and educational institutions, as follows: Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be

substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. 1wphi1 What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.32 (Emphasis and underscoring supplied.) Petitioner failed to discharge its burden to prove that its real property is actually, directly and exclusively used for educational purposes. While there is no allegation or proof that petitioner leases the land to its present occupants, still there is no compliance with the constitutional and statutory requirement that said real property is actually, directly and exclusively used for educational purposes. The respondents correctly assessed the land for real property taxes for the taxable period during which the land is not being devoted solely to petitioners educational activities. Accordingly, the CA did not err in ruling that petitioner is likewise not entitled to a refund of the real property tax it paid under protest. WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED. No pronouncement as to costs. SO ORDERED.

G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, vs. ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT. x-----------------------x G.R. No. 195960 ST. LUKE'S MEDICAL CENTER, INC., PETITIONER, vs. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. DECISION CARPIO, J.: The Case These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary nonprofit hospitals. The Facts St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its articles of incorporation, among its corporate purposes are: (a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and surgeons who may be freely and individually contracted by patients; (b) To provide a career of health science education and provide medical services to the community through organized clinics in such specialties as the facilities and resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well as provide facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements that are available; (d) To cooperate with organized medical societies, agencies of both government and private sector; establish rules and regulations consistent with the highest professional ethics; xxxx3 On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting toP76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA. 4 On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA. The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, nonprofit charitable institutions and civic organizations promoting social welfare. 6 The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. 7 St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients wasP218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) ofP334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any individual. St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered to payP57,659,981.19 as deficiency income and expanded withholding tax for 1998 with surcharges and interest for late payment. The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited to "cases in which only an error or question of law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized exception. The Ruling of the Court of Tax Appeals The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February 2009 which held: WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the respective amounts of P5,496,963.54 andP778,406.84 or in the sum of P6,275,370.38, x x x. xxxx In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997. SO ORDERED. 13 The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable institution. The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable institution does not lose its charitable character and its consequent exemption from taxation merely because recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The generation of income from paying patients does not per se destroy the charitable nature of St. Luke's. Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at least insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus." 23 The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax code, indicating an intent to exempt this type of charitable organization from income tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25 The Issue The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals. The Ruling of the Court

St. Luke's Petition in G.R. No. 195960 As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion." 27 This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving. The CTA declared that it has "gone through the records of this case and found no other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29 The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32 The Main Issue The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides: SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx (B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on

their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis supplied) St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state: SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: xxxx (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; xxxx (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; xxxx Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1). Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit. "Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu,37 this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The club was nonprofit because of its purpose and there was no evidence that it was engaged in a profit-making enterprise. 39 The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government." 41 A non-profit club for the benefit of its members fails this test. An organization may be considered as nonprofit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30. To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for

free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. 42 Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress." 43 The requirements for a tax exemption are strictly construed against the taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the government. The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart College 46 which says that receiving income from paying patients does not destroy the charitable nature of a hospital. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. 47 For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property. The Constitution provides that "[c]haritable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." 48The test of exemption is not strictly a requirement on the intrinsic nature or character of the institution. The test requires that the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity. The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes. However, the way

Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable purpose. Section 30(E) of the NIRC provides that a charitable institution must be: (1) A non-stock corporation or association; (2) Organized exclusively for charitable purposes; (3) Operated exclusively for charitable purposes; and (4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person. Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes. The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends to its members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is intended to achieve." 51 The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person." The use of lands, buildings and improvements of the institution is but a part of its operations. There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E)

of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social welfare. However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied) In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the promotion of social welfare. Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%. In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives approximately P1.73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free Services" expenditure ofP218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income after expenses was allocated to free or charitable services" in 1998. 53 REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00

OPERATING EXPENSES Professional care of patients Administrative Household and Property P1,016,608,394.00 287,319,334.00 91,797,622.00 P1,395,725,350.00 INCOME FROM OPERATIONS Free Services INCOME FROM OPERATIONS, Net of FREE SERVICES OTHER INCOME EXCESS OF REVENUES OVER EXPENSES P334,642,615.00 -218,187,498.00 P116,455,117.00 100% 65.20% 34.80%

or used altogether to the charitable object which it is intended to achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable "regardless of the disposition made of such income." Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the phrase "or from any activity conducted for profit." P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad? xxxx

17,482,304.00 P133,937,421.00

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicin social econmica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57 The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted for profit." The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable activities from being taxed. The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption

In Lung Center, this Court declared: "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. 54 The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. 55 The P1.73 billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients. St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it cannot be said that the income is "devoted

if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1wphi1 St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest." 62 WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED. The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of Court. SO ORDERED.

G.R. No. 144104

June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City,respondents. DECISION CALLEJO, SR., J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its hospital building constructed thereon are subject to assessment for purposes of real property tax. The Antecedents

charitable institution. The petitioners request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QCLBAA, for brevity) for the reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is exempt from real property taxes. The QCLBAA rendered judgment dismissing the petition and holding the petitioner liable for real property taxes.6 The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of Quezon City (CBAA, for brevity) 7 which ruled that the petitioner was not a charitable institution and that its real properties were not actually, directly and exclusively used for charitable purposes; hence, it was not entitled to real property tax exemption under the constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA.8 Undaunted, the petitioner filed its petition in this Court contending that:

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by virtue of Presidential Decree No. 1823. 2 It is the registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes in the amount of P4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C021-01231 (15-2518-A) were issued for the land and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES. B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION. The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying patients and renders medical services to them, leases portions of the land to private parties, and rents out portions of the hospital to private medical practitioners from which it derives income to be used for operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of the hospitals 282 -bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives subsidies from the government attests to its character as a charitable institution. It contends that the "exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income, it does not lose its character as a charitable institution, and its exemption from the payment of real

estate taxes on its real property. The petitioner cited our ruling in Herrera v. QCBAA9 to bolster its pose. The petitioner further contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution. In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The petitioners real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution and that the said property is actually, directly and exclusively used for charitable purposes. The respondents noted that in a newspaper report, it appears that graft charges were filed with the Sandiganbayan against the director of the petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month, when the monthly rental should beP357,000 a month as determined by the Commission on Audit; and that instead of complying with the directive of the COA for the cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed the same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the subsidies granted by the government for charity patients and uses the rest of its income from the property for the benefit of paying patients, among other purposes. They aver that the petitioner failed to adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent patients. The respondents further assert, thus: 13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before a patient is admitted for treatment in the Center, first impression is that it is pay-patient and required to pay a certain amount as deposit. That even if a patient is living below the poverty line, he is charged with high hospital bills. And, without these bills being first settled, the poor patient cannot be allowed to leave the hospital or be discharged without first paying the hospital bills or issue a promissory note guaranteed and indorsed by an influential agency or person known only to the Center; that even the remains of deceased poor patients suffered the same fate. Moreover, before a patient is admitted for treatment as free or charity patient, one must undergo a series of interviews and must submit all the requirements needed by the Center, usually accompanied by endorsement by an influential agency or person known only to the Center. These facts were heard and admitted by the Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients, instead of seeking treatment with the Center, they prefer to be treated at the Quezon Institute. Can such practice by the Center be called charitable? 10 The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt from real property taxes. The Courts Ruling The petition is partially granted. On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and bylaws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.11 In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government.12 It may be applied to almost anything that tend to promote the welldoing and well-being of social man. It embraces the improvement and promotion of the happiness of man.13 The word "charitable" is not restricted to relief of the poor or sick.14 The test of a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage. Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The raison detre for the creation of the petitioner is stated in the decree, viz: Whereas, for decades, respiratory diseases have been a priority concern, having been the leading cause of illness and death in the Philippines, comprising more than 45% of the total annual deaths from all causes, thus, exacting a tremendous toll on human resources, which ailments are likely to increase and degenerate into serious lung diseases on account of unabated pollution, industrialization and unchecked cigarette smoking in the country;lavvph!l.net

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early and adequate medical care, immunization and through prompt and intensive prevention and health education programs; Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts at preventing, treating and rehabilitating people affected by lung diseases, and to undertake research and training on the cure and prevention of lung diseases, through a Lung Center which will house and nurture the above and related activities and provide tertiary-level care for more difficult and problematical cases; Whereas, to achieve this purpose, the Government intends to provide material and financial support towards the establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino people. 15 The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus: SECOND: That the purposes for which such corporation is formed are as follows: 1. To construct, establish, equip, maintain, administer and conduct an integrated medical institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases in line with the concern of the government to assist and provide material and financial support in the establishment and maintenance of a lung center primarily to benefit the people of the Philippines and in pursuance of the policy of the State to secure the well-being of the people by providing them specialized health and medical services and by minimizing the incidence of lung diseases in the country and elsewhere. 2. To promote the noble undertaking of scientific research related to the prevention of lung or pulmonary ailments and the care of lung patients, including the holding of a series of relevant congresses, conventions, seminars and conferences; 3. To stimulate and, whenever possible, underwrite scientific researches on the biological, demographic, social, economic, eugenic and physiological aspects of lung or pulmonary diseases and their control; and to collect and publish the findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung consciousness or awareness, and the development of fact-finding, information and reporting facilities for and in aid of the general purposes or objects aforesaid, especially in human lung requirements, general health and physical fitness, and other relevant or related fields; 5. To encourage the training of physicians, nurses, health officers, social workers and medical and technical personnel in the practical and scientific implementation of services to lung patients; 6. To assist universities and research institutions in their studies about lung diseases, to encourage advanced training in matters of the lung and related fields and to support educational programs of value to general health; 7. To encourage the formation of other organizations on the national, provincial and/or city and local levels; and to coordinate their various efforts and activities for the purpose of achieving a more effective programmatic approach on the common problems relative to the objectives enumerated herein; 8. To seek and obtain assistance in any form from both international and local foundations and organizations; and to administer grants and funds that may be given to the organization; 9. To extend, whenever possible and expedient, medical services to the public and, in general, to promote and protect the health of the masses of our people, which has long been recognized as an economic asset and a social blessing; 10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the people in any and all walks of life, including those who are poor and needy, all without regard to or discrimination, because of race, creed, color or political belief of the persons helped; and to enable them to obtain treatment when such disorders occur; 11. To participate, as circumstances may warrant, in any activity designed and carried on to promote the general health of the community; 12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and supplies by purchase, donation, or otherwise and to dispose of and distribute the same in

such manner, and, on such basis as the Center shall, from time to time, deem proper and best, under the particular circumstances, to serve its general and non-profit purposes and objectives;lavvphil.net 13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties, whether real or personal, for purposes herein mentioned; and 14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the powers herein set forth and to do every other act and thing incidental thereto or connected therewith.16 Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.17 As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the State Supreme Court of Illinois held, thus: [A]n institution does not lose its charitable character, and consequent exemption from taxation, by reason of the fact that those recipients of its benefits who are able to pay are required to do so, where no profit is made by the institution and the amounts so received are applied in furthering its charitable purposes, and those benefits are refused to none on account of inability to pay therefor. The fundamental ground upon which all exemptions in favor of charitable institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens.20 As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South Dakota v. Baker:21 [T]he fact that paying patients are taken, the profits derived from attendance upon these patients being exclusively devoted to the maintenance of the charity, seems rather to enhance the usefulness of the

institution to the poor; for it is a matter of common observation amongst those who have gone about at all amongst the suffering classes, that the deserving poor can with difficulty be persuaded to enter an asylum of any kind confined to the reception of objects of charity; and that their honest pride is much less wounded by being placed in an institution in which paying patients are also received. The fact of receiving money from some of the patients does not, we think, at all impair the character of the charity, so long as the money thus received is devoted altogether to the charitable object which the institution is intended to further.22 The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit. 23 Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a charitable institution simply because the gift or donation is in the form of subsidies granted by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt Lake County:24 Second, the government subsidy payments are provided to the project. Thus, those payments are like a gift or donation of any other kind except they come from the government. In both Intermountain Health Careand the present case, the crux is the presence or absence of material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a private benefactor, chose to make up the deficit resulting from the exchange between St. Marks Tower and the tenants by making a contribution to the landlord, just as it would have been irrelevant in Intermountain Health Care if the patients income supplements had come from private individuals rather than the government. Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government rather than private charitable contributions does not dictate the denial of a charitable exemption if the facts otherwise support such an exemption, as they do here.25 In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its operations. Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.26 As held in Salvation Army v. Hoehn:27 An intention on the part of the legislature to grant an exemption from the taxing power of the state will never be implied from language which will admit of any other reasonable construction. Such an intention must be expressed in clear and unmistakable terms, or must appear by necessary implication from the language used, for it is a well settled principle that, when a special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to be construed strictly against the property owner and in favor of the public. This principle applies with peculiar force to a claim of exemption from taxation . 28 Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall enjoy the tax exemptions and privileges: SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, nonstock corporation organized primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions, endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income and gift taxes, the same further deductible in full for the purpose of determining the maximum deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as amended. The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung Center.29 It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2: It is a settled rule of statutory construction that the express mention of one person, thing, or consequence implies the exclusion of all others. The rule is expressed in the familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the rule is the principle that what is expressed puts an end to that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to other matters. ... The rule of expressio unius est exclusio alterius and its variations are canons of restrictive interpretation. They are based on the rules of logic and the natural workings of the human mind. They are predicated upon ones own voluntary act and not upon that of others. They proceed from the premise that the legislature would not have made specified enumeration in a statute had the intention been not to restrict its meaning and confine its terms to those expressly mentioned.30 The exemption must not be so enlarged by construction since the reasonable presumption is that the State has granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the statute the favor would be intended beyond what was meant.31 Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. 32 The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes."34 Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows: SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: ...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, andexclusively used for religious, charitable or educational purposes.35 We note that under the 1935 Constitution, "... all lands, buildings, and improvements used exclusively for charitable purposes shall be exempt from taxation."36 However, under the 1973 and the present Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered exempt, the same should not only be "exclusively" used for charitable purposes; it is required that such property be used "actually" and "directly" for such purposes.37 In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39 Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be exempt from taxation." The present Constitution added "charitable institutions, mosques, and non-profit cemeteries" and required that for the exemption of "lands, buildings, and improvements," they should not only be "exclusively" but also "actually" and "directly" used for religious or charitable purposes. The Constitution is worded differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words "actually" as well as "directly" not added. There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be exempt from taxation. Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." 40 If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.41 The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law.42 Solely is synonymous with exclusively.43

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.44 The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center." Indeed, the petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees. Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes.45 On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the area thereof which are leased to private persons, and to compute the real property taxes due thereon as provided for by law. SO ORDERED.

G.R. No. 115349 April 18, 1997 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY,respondents.

PANGANIBAN, J.: In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CAG.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3 The Antecedent Facts The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the parties. Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the respondent court a petition for review of the said letter-decision of the petitioner. While the petition was pending before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest. On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads: WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost. SO ORDERED. Not in accord with said decision, petitioner has come to this Court via the present petition for review raising the following issues: 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and 2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE. The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide: Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's tax of threeper centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx (16) Business agents and other independent contractors except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors and except gross receipts of or from a pioneer industry registered with the Board of Investments under Republic Act No. 5186: xxx xxx xxx The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. xxx xxx xxx Petitioner contends that the respondent court erred in holding that private respondent is not an "independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as defined by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are the following: a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No. 5186; b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax Code); and c. Regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communication and

coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code). Petitioner thus submits that since private respondent falls under the definition of an "independent contractor" and is not among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's tax imposed under the same Code. 4 The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review. The Issues Petitioner submits before us the following issues: 1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code. 2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code. 5 In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch the Institute of Philippine Culture performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal Revenue Code? The Court's Ruling The petition is unmeritorious. Interpretation of Tax Laws The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read: Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of three per centum of the gross receipts is hereby imposed on the following: xxx xxx xxx

(16) Business agents and other independent contractors, except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions of Republic Act No. 5186; xxx xxx xxx The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The term "independent contractor" shall not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the AsiaPacific Region. The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor. Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law . We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private

respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9 To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such coverage is shown does the rule of construction that tax exemptions are to be strictly construed against the taxpayer come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA. The Ateneo de Manila University Did Not Contract for the Sale of the Service of its Institute of Philippine Culture After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of Internal Revenue contends that " the tax is due on its activity of conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the various contracts entered into between private respondent and its clients are almost of the same terms, showing, among others, the compensation and terms of payment." 11(Emphasis supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case. In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale of services were ever entered into by the private respondent. As appropriately pointed out by the latter: An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only the following documentary evidence was presented: Exhibit 1 BIR letter of authority no. 331844 2 Examiner's Field Audit Report 3 Adjustments to Sales/Receipts 4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr. None of the foregoing evidence even comes close to purport to be contracts between private respondent and third parties. 12 Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de Manila University are technically not a fee . They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution. 13 Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals: To our mind, private respondent hardly fits into the definition of an "independent contractor". For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business. Undisputedly, private respondent is mandated by law to undertake research activities to

maintain its university status. In fact, the research activities being carried out by the IPC is focused not on business or profit but on social sciences studies of Philippine society and culture. Since it can only finance a limited number of IPC's research projects, private respondent occasionally accepts sponsorship for unfunded IPC research projects from international organizations, private foundations and governmental agencies. However, such sponsorships are subject to private respondent's terms and conditions, among which are, that the research is confined to topics consistent with the private respondent's academic agenda; that no proprietary or commercial purpose research is done; and that private respondent retains not only the absolute right to publish but also the ownership of the results of the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private respondent is a contractor or is engaged in business. For another, it bears stressing that private respondent is a nonstock, non-profit educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the IPC is to undertake research projects under the academic agenda of the private respondent. Moreover the records do not show that in accepting sponsorship of research work, IPC realized profits from such work. On the contrary, the evidence shows that for about 30 years, IPC had continuously operated at a loss, which means that sponsored funds are less than actual expenses for its research projects. That IPC has been operating at a loss loudly bespeaks of the fact that education and not profit is the motive for undertaking the research projects. Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains that there is no proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in fact none was so distributed because they accrued to the benefit of the private respondent which is a non-profit educational institution. 14 Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the research, including the absolute right to publish the same. The copyrights over the results of the research are owned by

Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent contractor's tax. It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential element of the contract of sale, following modern codes, such as the German and the Swiss. Even in the absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an object. 19 In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture. Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining Ateneo's university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a reading of the regulations governing universities: 31. In addition to the legal requisites an institution must meet, among others, the following requirements before an application for university status shall be considered: xxx xxx xxx (e) The institution must undertake research and operate with a competent qualified staff at least three graduate departments in accordance with the rules and standards for graduate education . One of the departments shall be science and technology. The

competence of the staff shall be judged by their effective teaching, scholarly publications and research activities published in its school journal as well as their leadership activities in the profession. (f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion of which should be devoted to institutional development and research . (emphasis supplied) xxx xxx xxx 32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the standards and requirements therefor. 20 Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous because the former is not an independent juridical entity that is separate and distinct form the latter. Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo de Manila University may be deemed a subject of the three percent contractor's tax "through the evidence presented before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion reached by . . . 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 . . ." 22 This point becomes more evident in the case before us where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any palpable error. Public Service, Not Profit, is the Motive The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's Director for Accounting Services,

Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research activities done in furtherance of the university's purposes, as follows: Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as far as grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is a lot less than the grant who shoulders the additional cost? A The University. Q Now, why is this done by the University? A Because of our faculty development program as a university, because a university has to have its own research institute. 24 So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when it undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private respondent is not a contractor selling its services for a fee but an academic institution conducting these researches pursuant to its commitments to education and, ultimately, to public service. For the institute to have tenaciously continued operating for so long despite its accumulation of significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking the research projects." 25 WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby AFFIRMED in full. SO ORDERED.

G.R. No. 88291 May 31, 1991 ERNESTO M. MACEDA, petitioner, vs. HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President; HON. VICENTE R. JAYME, in his capacity as Secretary of the Department of Finance; HON. SALVADOR MISON, in his capacity as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in his capacity as Commissioner of Internal Revenue; NATIONAL POWER CORPORATION; the FISCAL INCENTIVES REVIEW BOARD; Caltex (Phils.) Inc.; Pilipinas Shell Petroleum Corporation; Philippine National Oil Corporation; and Petrophil Corporation, respondents. Villamor & Villamor Law Offices for petitioner. Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell Petroleum Corporation. Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.

On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress declared as a national policy the total electrification of the Philippines through the development of power from all sources to meet the needs of industrial development and rural electrification which should be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions. 2 The corporate existence of NPC was extended to carry out this policy, specifically to undertake the development of hydro electric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis. 3 Being a non-profit corporation, Section 13 of the law provided in detail the exemption of the NPC from all taxes, duties, fees, imposts and other charges by the government and its instrumentalities. On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of Republic Act No. 6395 by specifying, among others, the exemption of NPC from such taxes, duties, fees, imposts and other charges imposed "directly or indirectly," on all petroleum products used by NPC in its operation. Presidential Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by integrating the tax exemption in general terms under one paragraph. On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of government-owned or controlled corporations including their subsidiaries. 4 However, said law empowered the President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally, the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and duty. Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and duty exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985. However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty incentives granted to government and private entities which had been restored under Presidential Decree Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the scope and prescribe the date of effectivity of such tax and/or duty exemptions. On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges effective March 10, 1987. On October 5, 1987, the President, through respondent Executive Secretary Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87. As alleged in the petition, the following are the background facts:

GANCAYCO, J.:p This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the Fiscal Incentives Review Board FIRB for exempting the National Power Corporation (NPC) from indirect tax and duties. The relevant facts are not in dispute. On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake the development of hydraulic power and the production of power from other sources. 1 On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and municipalities.

The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties originally paid by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the BIR; and for Customs duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its crude oil importation. Many of the factual statements are reproduced from the Senate Committee on Accountability of Public Officers and Investigations (Blue Ribbon) Report No. 474 dated January 12, 1989 and approved by the Senate on April 21, 1989 (copy attached hereto as Annex "A") and are identified in quotation marks: 1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931 was promulgated abolishing the tax exemptions of all government-owned or-controlled corporations, the oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to the NPC. This nonpayment of taxes therefore spanned a period of eight (8) years. (par. 23, p. 7, Annex "A") During this period, the Bureau of Internal Revenue was not collecting specific taxes on the purchases of NPC of petroleum products from the oil companies on the erroneous belief that the National Power Corporation (NPC) was exempt from indirect taxes as reflected in the letter of Deputy Commissioner of Internal Revenue (DCIR) Romulo Villa to the NPC dated October 29, 1980 granting blanket authority to the NPC to purchase petroleum products from the oil companies without payment of specific tax (copy of this letter is attached hereto as petitioner's Annex "B"). 2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC only after the promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all exemptions granted in favor of government-owned or-controlled corporations and empowering the FIRB to recommend to the President or to the Minister of Finance the restoration of the exemptions which were withdrawn. "Specifically, Caltex paid the total amount of P58,020,110.79 in specific and ad valorem taxes for deliveries of petroleum products to NPC covering the period from October 31, 1984 to April 27, 1985." (par. 23, p. 7, Annex "A") 3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion. Beginning June 11, 1984, when P.D. 1931 was promulgated abolishing NPC's tax exemptions, Caltex's billings to NPC always included both duties

and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5) (par. 24, p, 7, Annex "A") 4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to April, 1985, NPC was billed a total of P522,016,77.34 (sic) including both duties and taxes, the specific tax component being valued at P58,020,110.79. (par. 25, p. 8, Annex "A"). 5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true copy of which is hereto attached as Annex "C", restored the tax exemption privileges of NPC effective retroactively to June 11, 1984 up to June 30, 1985. The first paragraph of said resolution reads as follows: 1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation under C.A. No. 120, as amended, are restored up to June 30, 1985. Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for a "refund of Specific Taxes paid on petroleum products . . . in the total amount of P58,020,110.79. (par. 26, pp. 8-9, Annex "A") 6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex "D"), Acting BIR Commissioner Ruben Ancheta declared: FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum products from the oil companies free of specific and ad valorem taxes, during the period in question. The "period in question" is June 1 1, 1 984 to June 30, 1 985. 7. On June 6, 1985The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata, Chairman of the FIRB (Annex "E"), requesting "the FIRB to resolve conflicting rulings on the tax exemption privileges of the National Power Corporation (NPC)." These rulings involve FIRB Resolutions No. 1-84 and 10-85. (par. 40, p. 12, Annex "A")

8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata confirmed the ruling of May 8, 1985 of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A") 9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development Co., Ltd., a Korean contractor of NPC for its infrastructure projects, certified true copy of which is attached hereto as petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled: In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by P.D. 938, this Office is of the opinion, and so holds, that the scope of the tax exemption privilege enjoyed by NPC under said section covers only taxes for which it is directly liable and not on taxes which are only shifted to it. (Phil. Acetylene vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since contractor's tax is directly payable by the contractor, not by NPC, your request for exemption, based on the stipulation in the aforesaid contract that NPC shall assume payment of your contractor's tax liability, cannot be granted for lack of legal basis." (Annex "H") (emphasis added) Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is directly liable and does not cover taxes which are only shifted to it or for indirect taxes. The BIR, through Ancheta, reversed its previous position of May 8, 1985 adopted by Ancheta himself favoring NPC's indirect tax exemption privilege. 10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex (Annex "F"), the BIR Commissioner declared that PAL's tax exemption is limited to taxes for which PAL is directly liable, and that the payment of specific and ad valorem taxes on petroleum products is a direct liability of the manufacturer or producer thereof". (par. 51, p. 15, Annex "A") 11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions retroactively from July 1, 1985 to a indefinite period, certified true copy of which is hereto attached as petitioner's Annex "H".

12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79 (corresponding to Caltex) was approved and released by way of a Tax Credit Memo (Annex "Q") dated July 7, 1986, certified true copy of which [is) attached hereto as petitioner's Annex "F," which was assigned by NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment on July 30, 1987, certified true copy of which is hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15, Annex "A") The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in partial settlement of its outstanding obligations to the latter while Caltex, in turn, would apply the assigned tax credit against its specific tax payments for two (2) months. (per memorandum dated July 28, 1986 of DCIR Villa, copy attached as petitioner Annex "G") 13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit assigned to Caltex, the NPC reiterated its request for the release of the balance of its pending refunds of taxes paid by respondents Petrophil, Shell and Caltex covering the period from June 11, 1984 to early part of 1986 amounting to P410.58 million. (The claim of the first two (2) oil companies covers the period from June 11, 1984 to early part of 1986; while that of Caltex starts from July 1, 1985 to early 1986). This request was denied on August 18, 1986, under BIR Ruling 152-86 (certified true copy of which is attached hereto as petitioner's Annex "I"). The BIR ruled that NPC's tax free privilege to buy petroleum products covered only the period from June 11, 1984 up to June 30, 1985. It further declared that, despite FIRB No. 1-86, NPC had already lost its tax and duty exemptions because it only enjoys special privilege for taxes for which it is directly liable. This ruling, in effect, denied the P410 Million tax refund application of NPC (par. 28, p. 9, Annex "A") 14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not resolved the motion. (Benigna, II 3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988, p. 15)." (par. 29, p. 9, Annex "A") 15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR Commissioner Tan, Jr. (certified true copy of which is hereto attached and made a part hereof as petitioner's Annex "J"), reversed his previous position and states this time that all deliveries of petroleum products to NPC are tax exempt, regardless of the period of delivery.

16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93, entitled "Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions, Expanding the Powers of the Fiscal Incentives Review Board and Other Purposes." 17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption privilege and included in the exemption "those pertaining to its domestic purchases of petroleum and petroleum products, and the restorations were made to retroact effective March 10, 1987, a certified true copy of which is hereto attached and made a part hereof as Annex "K". 18. On August 6, 1987, the Hon. Sedfrey A. Ordoez, Secretary of Justice, issued Opinion No. 77, series of 1987, opining that "the power conferred upon Fiscal Incentives Review Board by Section 2a (b), (c) and (d) of Executive order No. 93 constitute undue delegation of legislative power and, therefore, [are] unconstitutional," a copy of which is hereto attached and made a part hereof as Petitioner's Annex "L." 19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the Chairman of the FIRB a certified true copy of which is hereto attached and made a part hereof as petitioner's Annex "M," confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987, allegedly pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93. 20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who by letter dated May 2, 1988 asked him to rule "on whether or not, as the law now stands, the National Power Corporation is still exempt from taxes, duties . . . on its local purchases of . . . petroleum products . . ." declared that "NPC under the provisions of its Revised Charter retains its exemption from duties and taxes imposed on the petroleum products purchased locally and used for the generation of electricity," a certified true copy of which is attached hereto as petitioner's Annex "N." (par. 30, pp. 9-10, Annex "A") 21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5, 1988 but without the usual official form of "By the Authority of the President," a certified true copy of which is hereto attached and made a part hereof as Petitioner's Annex "O".

22. The actions of respondents Finance Secretary and the Executive Secretary are based on the RESOLUTION No. 17-87 of FIRB restoring the tax and duty exemption of the respondent NPC pertaining to its domestic purchases of petroleum products (petitioner's Annex K supra). 23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988 reported that the Office of the President and the Department of Finance had ordered the BIR to refund the tax payments of the NPC amounting to Pl.58 Billion which includes the P410 Million Tax refund already rejected by BIR Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July 28, 1988 of Undersecretary Marcelo B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was ordered released to NPC (par. 31, p. 1 0, Annex "A") 24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan requesting them to hold in abeyance the release of the Pl.58 billion and await the outcome of the investigation in regard to Senate Resolution No. 227," copies attached as Petitioner's Annexes "P" and "P-1 " (par. 32, p. 10, Annex "A"). Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the BIR dated August, 1988 requesting him to hold in abeyance the release of the tax refunds to NPC until after the termination of the Blue Ribbon investigation. 25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from customs custody, the corresponding customs duties and ad valorem taxes are paid. Bunker fuel oil is one of the petroleum products processed from the crude oil; and same is sold to NPC. After the sale, NPC applies for tax credit covering the duties and ad valorem exemption under its Charter. Such applications are processed by the Bureau of Customs and the corresponding tax credit certificates are issued in favor of NPC which, in turn assigns it to the oil firm that imported the crude oil. These certificates are eventually used by the assignee-oil firms in payment of their other duty and tax liabilities with the Bureau of Customs. (par. 70, p. 19, Annex "A") A lesser amount totalling P740 million, covering the period from 1985 to the present, is being sought by respondent NPC for refund from the Bureau of Customs for duties paid by the oil companies on the importation of crude oil from which the processed products

sold locally by them to NPC was derived. However, based on figures submitted to the Blue Ribbon Committee of the Philippine Senate which conducted an investigation on this matter as mandated by Senate Resolution No. 227 of which the herein petitioner was the sponsor, a much bigger figure was actually refunded to NPC representing duties and ad valorem taxes paid to the Bureau of Customs by the oil companies on the importation of crude oil from 1979 to 1985. 26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227, entitled: Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct a Formal and Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by Oil Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were Made Possible By Their Availing of the Non-Existing Exemption of National Power Corporation (NPC) from Indirect Taxes, Resulting Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the Department of Finance, Their Refusal to Pay Since 1976 Customs Duties Amounting to Billions of Pesos on Imported Crude Oil Purportedly for the Use of the National Power Corporation, the Non-Payment of Surtax on Windfall Profits from Increases in the Price of Oil Products in August 1987 amounting Maybe to as Much as Pl.2 Billion Surtax Paid by Them in 1984 and For Other Purposes. 27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a lengthy formal inquiry on the matter, calling all parties interested to the witness stand including representatives from the different oil companies, and in due time submitted its Committee Report No. 474 . . . The Blue Ribbon Committee recommended the following courses of action. 1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power Corporation (NPC) and its approval of Tax Credit memo covering said amount (Annex "P" hereto), dated July 7, 1986, and cancel its approval of the Deed of Assignment (Annex "Q"

hereto) by NPC to Caltex, dated July 28, 1986, and collect from Caltex its tax liabilities which were erroneously treated as paid or settled with the use of the tax credit certificate that NPC assigned to said firm.: 1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD 938 was issued. Therefore, the grant of a tax refund to NPC in the amount of P58 million was illegal, and therefore, null and void. Such refund was a nullity right from the beginning. Hence, it never transferred any right in favor of NPC. 2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil companies on the same ground that the NPC, since May 27, 1976 up to June 17, 1987 was never granted any indirect tax exemption. So, the P1.58 billion represent taxes legally and properly paid by the oil firms. 3. Start collection actions of specific or excise and ad valorem taxes due on petroleum products sold to NPC from May 27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance of EO 195). B. For the Bureau of Customs (BOC) to do the following: 1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of petroleum products by NPC and allegedly granted under the NPC charter covering the years 19781988 . . . 28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to direct the Bureau of Internal Revenue and of Customs to proceed with the processing of claims for tax credits/refunds of the NPC, respondent Executive Secretary rendered his ruling, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained by proper authorities, that department and/or its line-tax bureaus may now proceed with the processing of the claims of the National Power Corporation for duty and tax free exemption and/or tax credits/ refunds, if there be any, in accordance with the ruling of that Department dated May 20,1988, as confirmed by this Office on June 15, 1988 . . . 5 Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary injunction and/or restraining order, praying among others that: 1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent FIRB Executive Secretary Macaraig, and Secretary of Finance Jayme restraining them and other persons acting for, under, and in their behalf from enforcing their resolution, orders and ruling, to wit: A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K"); B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M"); C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O"); D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"). 2. Said temporary restraining order should also include respondent Commissioners of Customs Mison and Internal Revenue Ong restraining them from processing and releasing any pending claim or application by respondent NPC for tax and duty refunds. 3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction against above-named respondents and all persons acting for and in their behalf.

4. A decision be rendered in favor of the petitioner and against the respondents: A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27, 1976 up to the present; B. Nullifying the setting aside the following: 1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K"); 2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M"); 3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O"); 4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q"); 5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N" 6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund for P58,020,110.79 (petitioner's Annex "F"); 7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987 (petitioner's Annex "G"); 8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the Bureau of Internal Revenue and 9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by way of tax credit certificates from 1979 up to the present. C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent NPC with the Bureau of Customs and the Bureau of Internal Revenue;

D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue from enforcing the abovequestioned resolution, orders and ruling of respondents Executive Secretary, Secretary of Finance, and FIRB by processing and releasing respondent NPC's tax and duty refunds; E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending claims for refund of respondent NPC with the Bureau of Customs covering the period from 1985 to the present; to cancel and invalidate the illegal payment made by respondents Caltex, Shell and PNOC by using the tax credit certificates assigned to them by NPC and to recover from respondents Caltex, Shell and PNOC all the amounts appearing in said tax credit certificates which were used to settle their duty and tax liabilities with the Bureau of Customs. F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the pending claims for refund of respondent NPC with the Bureau of Internal Revenue covering the period from June 11, 1984 to June 17, 1987. PETITIONER prays for such other relief and remedy as may be just and equitable in the premises. 6 The issues raised in the petition are the following: To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds, this Honorable Court must resolve the following issues: Main issue Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the enactment of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974. Corollary issues 1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax exemption privilege effective June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986 restoring NPC's tax exemption privilege effective July 1, 1985 included the restoration of indirect tax exemption to NPC and

2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987 which restored NPC's tax exemption privilege effective March 10, 1987; and if said Resolution was validly issued, the nature and extent of the tax exemption privilege restored to NPC. 7 In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required respondents to comment thereon, within ten (10) days from notice. The respondents having submitted their comment, on October 10, 1989 the Court required petitioner to file a consolidated reply to the same. After said reply was filed by petitioner on November 15, 1989 the Court gave due course to the petition, considering the comments of respondents as their answer to the petition, and requiring the parties to file simultaneously their respective memoranda within twenty (20) days from notice. The parties having submitted their respective memoranda, the petition was deemed submitted for resolution. First the preliminary issues. Public respondents allege that petitioner does not have the standing to challenge the questioned orders and resolution. In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected Senator of the Philippines." Public respondent argues that petitioner must show he has sustained direct injury as a result of the action and that it is not sufficient for him to have a mere general interest common to all members of the public. 8 The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the ruling in Lozada when it involves illegal expenditure of public money. The petition questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs. Assuming petitioner has the personality to file the petition, public respondents also allege that the proper remedy for petitioner is an appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125 instead of this petition. However Section 11 of said law provides Sec. 11. Who may appeal; effect of appealAny person, association or corporation adversely affected by a decision or ruling of the Commissioner of Internal Revenue, the Collector of Customs (Commissioner of Customs) or any provincial or City Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after receipt of such decision or ruling.

From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner of Internal Revenue, the Commissioner of Customs or any provincial or city Board of Assessment Appeal who may appeal to the Court of Tax Appeals. Petitioner does not fall under this category. Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal Revenue to impose a tax assessment not found by him to be proper. It would be tantamount to a usurpation of executive functions. 9 Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the Commissioners of Internal Revenue and Customs when the exercise of discretion is tainted with arbitrariness and grave abuse as to go beyond statutory authority. 10 Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an unlawful exercise of jurisdiction 11 or to prevent the oppressive exercise of legal authority. 12 Precisely, petitioner questions the lawfulness of the acts of public respondents in this case. Now to the main issue. It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an indirect tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. Examples are the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal Revenue after converting the crude oil into petroleum products. On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else ." 13 For example, the excise and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the "cash" and/or "selling price." The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential Decree No. 938, the exemption of NPC from indirect taxation was revoked and repealed. While petitioner concedes that NPC enjoyed broad exemption privileges from both direct and indirect taxes on the petroleum products it used, under Section 13 of Republic Act No, 6395 and more so under Presidential Decree No. 380, however, by the deletion of the phrases "directly or indirectly" and "on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power" he contends that the exemption from indirect taxes was withdrawn by P.D. No. 938.

Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No. 938 regarding the payments of "all forms of taxes, etc." cannot be interpreted to include indirect tax exemption. He citesPhilippine Aceytelene Co. Inc. vs. Commissioner of Internal Revenue. 14 Petitioner emphasizes the principle in taxation that the exception contained in the tax statutes must be strictly construed against the one claiming the exemption, and that the rule that a tax statute granting exemption must be strictly construed against the one claiming the exemption is similar to the rule that a statute granting taxing power is to be construed strictly, with doubts resolved against its existence. 15 Petitioner cites rulings of the BIR that the phrase exemption from "all taxes, etc." from "all forms of taxes" and "in lieu of all taxes" covers only taxes for which the taxpayer is directly liable. 16 On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree No. 1931, the relevant provision of which are to wit: P.D. No. 1931 provides as follows: Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes . . . heretofore granted in favor of government-owned or controlled corporations are hereby withdrawn. (Emphasis supplied.) Sec. 2. The President of the Philippines and/or the Minister of Finance, upon therecommendation of the Fiscal Incentives Review Board . . . is hereby empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above . . . (Emphasis supplied.) The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following: Resolution. No. 10-85 BE IT RESOLVED AS IT IS HEREBY RESOLVED, That: 1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation under C.A. No. 120 as amended are restored up to June 30, 1985. 2. Provided, That to restoration does not apply to the following:

a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84; b. commercially-funded importations; and c. interest income derived from any investment source. 3. Provided further, That in case of importations funded by international financing agreements, the NPC is hereby required to furnish the FIRB on a periodic basis the particulars of items received or to be received through such arrangements, for purposes of tax and duty exemptions privileges. 17 Resolution No. 1-86 BE IT RESOLVED AS IT IS HEREBY RESOLVED: That: 1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation (NPC) under Commonwealth Act No. 120, as amended, are restored: Provided, That importations of fuel oil (crude oil equivalent), and coal of the herein grantee shall be subject to the basic and additional import duties; Provided, further, that the following shall remain fully taxable: a. Commercially-funded importations; and b. Interest income derived by said grantee from bank deposits and yield or any other monetary benefits from deposit substitutes, trust funds and other similar arrangements. 2. The NPC as a government corporation is exempt from the real property tax on land and improvements owned by it provided that the beneficial use of the property is not transferred to another pursuant to the provisions of Sec. 10(a) of the Real Property Tax Code, as amended. 18 Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86. Indeed, they were issued in compliance with the requirement of Section 2, P.D. No. 1931, whereby the FIRB should make the recommendation subject to the approval of "the President of the Philippines and/or the Minister of Finance." While said Resolutions do not appear to have been approved by the

President, they were nevertheless approved by the Minister of Finance who is also duly authorized to approve the same. In fact it was the Minister of Finance who signed and promulgated said resolutions. 19 The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and 1-86 which were promulgated by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister of Finance Cesar E.A Virata, as Chairman of FIRB respectively, should be separately approved by said Minister of Finance as required by P.D. 1931 is, a superfluity. An examination of the said resolutions which are reproduced in full in the dissenting opinion show that the said officials signed said resolutions in the dual capacity of Chairman of FIRB and Minister of Finance. Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of Albay, 20wherein the Court observed that under P.D. No. 776 the power of the FIRB was only recommendatory and requires the approval of the President to be valid. Thus, in said case the Court held that FIRB Resolutions Nos. 10-85 and 1-86 not having been approved by the President were not valid and effective while the validity of FIRB 17-87 was upheld as it was duly approved by the Office of the President on October 5, 1987. However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended P.D. No. 776, it is clearly provided for that such FIRB resolution, may be approved by the "President of the Philippines and/or the Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly approved by the Minister of Finance, hence they are valid and effective. To this extent, this decision modifies or supersedes the Court's earlier decision in Albay afore-referred to. Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges enjoyed by the NPC under its charter, C.A. No. 120, as amended, are restored, that is, only its direct tax exemption privilege; and that it cannot be interpreted to cover indirect taxes under the principle that tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a tax credit certificate 21 which was assigned to respondent Caltex through a deed of assignment approved by the BIR 22 is patently illegal. He also contends that the pending claim of respondent NPC in the amount of P410.58 million with respondent BIR for the sale and delivery to it of bunker fuel by respondents Petrophil, Shell and Caltex from July 1, 1985 up to 1986, being illegal, should not be released. Now to the second corollary issue involving the validity of FIRB Resolution No. 1787 issued on June 24, 1987. It was issued under authority of Executive Order No. 93

dated December 17, 1986 which grants to the FIRB among others, the power to recommend the restoration of the tax and duty exemptions/incentives withdrawn thereunder. Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect that the powers conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive Order No. 93 "constitute undue delegation of legislative power and is, therefore, unconstitutional." Petitioner observes that the FIRB did not merely recommend but categorically restored the tax and duty exemption of the NPC so that the memorandum of the respondent Executive Secretary dated October 5, 1987 approving the same is a surplusage. Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine in Philippine Aceytelene, petitioner avers that the restoration cannot cover indirect taxes and it cannot create new indirect tax exemption not otherwise granted in the NPC charter as amended by Presidential Decree No. 938. The petition is devoid of merit. The NPC is a non-profit public corporation created for the general good and welfare 23 wholly owned by the government of the Republic of the Philippines. 24 From the very beginning of its corporate existence, the NPC enjoyed preferential tax treatment 25 to enable the Corporation to pay the indebtedness and obligation and in furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No. 6395" 26which provides: Sec. 1. Declaration of PolicyCongress hereby declares that (1) the comprehensive development, utilization and conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the total electrification of the Philippines through the development of power from all sources to meet the need of rural electrification are primary objectives of the nation which shall be pursued coordinately and supported by all instrumentalities and agencies of the government including its financial institutions. From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious. Under Republic Act No. 358, its exemption is provided as follows: Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities and municipalities."

Under Republic Act No. 6395: Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and other Charges by Government and Governmental Instrumentalities. The Corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby declared exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power. (Emphasis supplied.) Under Presidential Decree No. 380: Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts and other Charges by the Government and Government Instrumentalities. The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared, exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other governmental agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operation and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum produced used by the Corporation in the generation, transmission,utilization, and sale of electric power. (Emphasis supplied.) Under Presidential Decree No. 938: Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities.The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay the indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries hereby declared exempt from the payment of all forms of taxes,duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds,supersedeas bonds, in any court or administrative proceedings. (Emphasis supplied.) It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover "all taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. No. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 amended the

tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC "shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay the indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, . . ." 27 The preamble of P.D. No. 938 states WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit character of the NPC has not been fully utilized because of restrictive interpretations of the taxing agencies of the government on said provisions. . . . (Emphasis supplied.) It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938 shall be construed strictly against NPC. On the contrary, the law mandates that it should be interpreted liberally so as to enhance the tax exempt status of NPC. Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes granting tax exemptions to NPC. Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. 28 The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or deductions, even more obvious than with reference to the affirmative or levying provisions of tax statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of treatment among tax payers. The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting

exemptions to government agencies may be construed liberally, in favor of non tax liability of such agencies.29 In the case of property owned by the state or a city or other public corporations, the express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exception." 30 The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No. 6395 and P.D. No. 380, is deemed repealed by P.D. No. 938 when the reference to it was deleted is not well-taken. Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are presumed to be passed with deliberation and with knowledge of all existing ones on the subject, it is logical to conclude that in passing a statute it is not intended to interfere with or abrogate a former law relating to the same subject matter, unless the repugnancy between the two is not only irreconcilable but also clear and convincing as a result of the language used, or unless the latter Act fully embraces the subject matter of the earlier. 31 The first effort of a court must always be to reconcile or adjust the provisions of one statute with those of another so as to give sensible effect to both provisions. 32 The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated part or a particular provision alone. 33 When construing a statute, the reason for its enactment should be kept in mind and the statute should be construed with reference to its intended scope and purpose 34 and the evil sought to be remedied. 35 The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric generation of power and production of electricity from other sources, as well as the transmission of electric power on a nationwide basis, to improve the quality of life of the people pursuant to the State policy embodied in Section E, Article II of the 1987 Constitution. It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No. 380 if it is to attain its goals. Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given controlling weight. 36 Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June 26, 1985 confirming said ruling, the letters of the BIR of August 18, 1986, and December 22, 1986, the letter of the Secretary of Finance of February 19, 1987, the Memorandum of the Executive Secretary of October 9, 1987, by

authority of the President, confirming and approving FIRB Resolution No. 17-87, the letter of the Secretary of Finance of May 20, 1988 to the Executive Secretary rendering his opinion as requested by the latter, and the latter's reply of June 15, 1988, it was uniformly held that the grant of tax exemption to NPC under C.A. No. 120, as amended, included exemption from payment of all taxes relative to NPC's petroleum purchases including indirect taxes. 37 Thus, then Secretary of Finance Vicente Jayme in his letter of May 20, 1988 to the Executive Secretary Macaraig aptly stated the justification for this tax exemption of NPC The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase 'taxes imposed indirectly on oil products and its exemption from 'all forms of taxes.' It is suggested that the change in language evidenced an intention to exempt NPC only from taxes directly imposed on or payable by it; since taxes on fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC locally are levied on and paid by its oil suppliers, NPC thereby lost its exemption from those taxes. The principal authority relied on is the 1967 case of Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA 1056. First of all, tracing the changes made through the years in the Revised Charter, the strengthening of NPC's preferential tax treatment was clearly the intention. To the extent that the explanatory "whereas clauses" may disclose the intent of the lawmaker, the changes effected by P.D. 938 can only be read as being expansive rather than restrictive, including its version of Section 13. Our Tax Code does not recognize that there are taxes directly imposed and those imposed indirectly. The textbook distinction between a direct and an indirect tax may be based on the possibility of shifting the incidence of the tax. A direct tax is one which is demanded from the very person intended to be the payor, although it may ultimately be shifted to another. An example of a direct tax is the personal income tax. On the other hand, indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. An example of this type of tax is the sales tax levied on sales of a commodity. The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no moment. What is more relevant is that when an "indirect tax" is paid by those upon whom the tax ultimately falls, it is paid not as a tax but as an additional part of the cost or of the market price of the commodity.

This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he analyzed the nature of the percentage (sales) tax to determine whether it is a tax on the producer or on the purchaser of the commodity. Under out Tax Code, the sales tax falls upon the manufacturer or producer. The phrase "pass on" the tax was criticized as being inaccurate. Justice Castro says that the tax remains on the manufacturer alone. The purchaser does not pay the tax; he pays an amount added to the price because of the tax. Therefore, the tax is not "passed on" and does not for that reason become an "indirect tax" on the purchaser. It is eminently possible that the law maker in enacting P.D. 938 in 1976 may have used lessons from the analysis of Chief Justice Castro in 1967 Philippine Acetylene case. When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-called oil crunch had already drastically pushed up crude oil Prices from about $1 .00 per bbl in 1971 to about $10 and a peak (as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC was operating the Meralco thermal plants under a lease agreement. The power generated by the leased plants was sold to Meralco for distribution to its customers. This lease and sale arrangement was entered into for the benefit of the consuming public, by reducing the burden on the swiftly rising world crude oil prices.This objective was achieved by the use of NPC's "tax umbrella under its Revised Charterthe exemption from specific taxes on locally purchased fuel oil. In this context, I can not interpret P.D. 938 to have withdrawn the exemption from tax on fuel oil to which NPC was already entitled and which exemption Government in fact was utilizing to soften the burden of high crude prices. There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil products sold to NPC, whether paid to them by NPC or no never entered into the rates charged by NPC to its customers not even during those periods of uncertainty engendered by the issuance of P.D. 1931 and E. 0. 93 on NP/Cs tax status. No tax component on the fuel have been charged or recovered by NPC through its rates. There is an import duty on the crude oil imported by the local refineries. After the refining process, specific and ad valorem taxes are levied on the finished products including fuel oil or residue upon their withdrawal from the refinery. These taxes are paid by the oil companies as the manufacturer thereof.

In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component.NPC pays the oil companies' invoices including the duty component but net of the tax component.NPC then applies for drawback of customs duties paid and for a credit in amount equivalent to the tax paid (by the oil companies) on the products purchased. The tax credit is assigned to the oil companiesas payment, in effect, of the tax component shown in the sales invoices. (NOTE: These procedures varied over timeThere were instances when NPC paid the tax component that was shifted to it and then applied for tax credit. There were also side issues raised because of P.D. 1931 and E.O. 93 which withdrew all exemptions of government corporations. In these latter instances, the resolutions of the Fiscal Incentives Review Board (FIRB) come into play. These incidents will not be touched upon for purposes of this discussion). NPC rates of electricity are structured such that changes in its cost of fuel are automatically (without need of fresh approvals) reflected in the subsequent months billing rates. This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability to the tax and duty component on the oil products, such amount will go into its fuel cost and be passed on to its customers through corresponding increases in rates. Since 1974, when NPC operated the oil-fired generating stations leased from Meralco (which plants it bought in 1979), until the present time, no tax on fuel oil ever went into NPC's electric rates. That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon me by yet another circumstance. It is conceded that NPC at the very least, is exempt from taxes to which it is directly liable. NPC therefore could very well have imported its fuel oil or crude residue for burning at its thermal plants. There would have been no question in such a case as to its exemption from all duties and taxes, even under the strictest interpretation that can be put forward. However, at the time P.D. 938 was issued in 1976, there were already operating in the Philippines three oil refineries. The establishment of these refineries in the Philippines involved heavy investments, were economically desirable and enabled the country to import crude oil and process / refine the same into the various petroleum products at a savings to the industry and the public. The refining process produced as its largest output, in volume, fuel oil or residue, whose conventional economic use was for burning in electric or steam generating plants. Had there been no use locally

for the residue, the oil refineries would have become largely unviable. Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-pass the local oil refineries and import its fossil fuel requirements directly in order to avail itself of its exemption from "direct taxes." The oil refineries had to keep operating both for economic development and national security reasons. In fact, the restoration by the FIRB of NPC's exemption after P.D. 1931 and E.O. 93 expressly excluded direct fuel oil importations, so as not to prejudice the continued operations of the local oil refineries. To answer your query therefore, it is the opinion of this Department that NPC under the provisions of its Revised Charter retains its exemption from duties and taxes imposed on the petroleum products purchased locally and used for the generation of electricity. The Department in issuing this ruling does so pursuant to its power and function to supervise and control the collection of government revenues by the application and implementation of revenue laws. It is prepared to take the measures supplemental to this ruling necessary to carry the same into full effect. As presented rather extensively above, the NPC electric power rates did not carry the taxes and duties paid on the fuel oil it used. The point is that while these levies were in fact paid to the government, no part thereof was recovered from the sale of electricity produced. As a consequence, as of our most recent information, some P1.55 B in claims represent amounts for which the oil suppliers and NPC are "out-of-pocket. There would have to be specific order to the Bureaus concerned for the resumption of the processing of these claims." 38 In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the said opinion ruling of the latter was confirmed and its implementation was directed. 39 The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the Secretary of Finance as confirmed by the then Executive Secretary are well-taken. When the NPC was exempted from all forms of taxes, duties, fees, imposts and other charges, under P.D. No. 938, it means exactly what it says, i.e., all forms of taxes including those that were imposed directly or indirectly on petroleum products used in its operation.

Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC extends only to taxes for which it is directly liable and not to taxes merely shifted to it. However, these rulings are predicated on Philippine Acytelene. The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It involved the sales tax of products the plaintiff sold to NPC from June 2, 1953 to June 30,1958 when NPC was enjoying tax exemption from all taxes under Commonwealth Act No. 120, as amended by Republic Act No. 358 issued on June 4, 1949 hereinabove reproduced. In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so plaintiff cannot claim exemptions simply because the NPC, the buyer, was exempt. However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC whereby Section 13 thereof was amended by emphasizing its nonprofit character and expanding the extent of its tax exemption. As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells out clearly the exemption of the NPC from indirect taxes. And as hereinabove stated, in P.D. No. 380, the exemption of NPC from indirect taxes was emphasized when it was specified to include those imposed "directly and indirectly." Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the same in general terms to cover " all forms of taxes, duties, fees, imposts, etc." which, as hereinabove discussed, logically includes exemption from indirect taxes on petroleum products used in its operation. This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the authority of which FIRB Resolution Nos. 10-85 and 1-86 were issued, and when Executive Order No. 93 was promulgated, by which FIRB Resolution 17-87 was issued. Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental circumstances. As a matter of fact, the amendments of Section 13, under R.A. No. 6395, P.D. No, 380 and P.D. No. 838 appear to have been brought about by the earlier inconsistent rulings of the tax agencies due to the doctrine in Philippine Acetylene, so as to leave no doubt as to the exemption of the NPC from indirect taxes on petroleum products it uses in its operation. Effectively, said amendments superseded if not abrogated the ruling inPhilippine Acetylene that the tax exemption of NPC should be limited to direct taxes only.

In the light of the foregoing discussion the first corollary issue must consequently be resolved in the affirmative, that is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986 which restored NPC's tax exemption privileges included the restoration of the indirect tax exemption of the NPC on petroleum products it used. On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which restored NPC's tax exemption privilege effective March 10, 1987, the Court finds that the same is valid and effective. It provides as follows:

Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted " to government and private entities are hereby withdrawn, except: a) those covered by the non-impairment clause of the Constitution; b) those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory; c) those enjoyed-by enterprises registered with:

BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the National Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating the National Power Corporation, defining its powers, objectives and functions, and for other purposes), as amended, are restored effective March 10, 1987, subject to the following conditions: 1. The restoration of the tax and duty exemption privileges does not apply to the following: 1.1. Importation of fuel oil (crude equivalent) and coal; 1.2. Commercially-funded importations (i.e., importations which include but are not limited to those financed by the NPC's own internal funds, domestic borrowings from any source whatsoever, borrowing from foreign-based private financial institutions, etc.); and 1.3. Interest income derived from any source. 2. The NPC shall submit to the FIRB a report of its expansion program, including details of disposition of relieved tax and duty payments for such expansion on an annual basis or as often as the FIRB may require it to do so. This report shall be in addition to the usual FIRB reporting requirements on incentive availment. 40 Executive Order No. 93 provides as follows

(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended; (ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended; (iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended; d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416; e) those conferred under the four basic codes namely: (i) the Tariff and Customs Code, as amended; (ii) the National Internal Revenue Code, as amended; (iii) the Local Tax Code, as amended; (iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board. Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is hereby authorized to: a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part; b) revise the scope and coverage of tax and/of duty exemption that may be restored. c) impose conditions for the restoration of tax and/or duty exemption; d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption; e) formulate and submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration the international commitments of the Philippines and the necessary precautions such that the grant of subsidies does not become the basis for countervailing action. Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into account any or all of the following considerations: a) the effect on relative price levels; b) relative contribution of the beneficiary to the revenue generation effort; c) nature of the activity the beneficiary is engaged;

d) in general, the greater national interest to be served. True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that the powers conferred upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93 constitute undue delegation of legislative power and is therefore unconstitutional. However, he was overruled by the respondent Executive Secretary in a letter to the Secretary of Finance dated March 30, 1989. The Executive Secretary, by authority of the President, has the power to modify, alter or reverse the construction of a statute given by a department secretary. 41 A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The standards of the delegated power are also clearly provided for. The required "standard" need not be expressed. In Edu vs. Ericta 42 and in De la Llana vs. Alba 43 this Court held: "The standard may be either express or implied. If the former, the non-delegated objection is easily met. The standard though does not have to be spelled out specifically. It could be implied from the policy and purpose of the act considered as a whole." In People vs. Rosenthal 44 the broad standard of "public interest" was deemed sufficient. In Calalang vs. Williams,45, it was "public welfare" and in Cervantes vs. Auditor General, 46 it was the purpose of promotion of "simplicity, economy and efficiency." And, implied from the purpose of the law as a whole, "national security" was considered sufficient standard 47 and so was "protection of fish fry or fish eggs. 48 The observation of petitioner that the approval of the President was not even required in said Executive Order of the tax exemption privilege approved by the FIRB unlike in previous similar issuances, is not well-taken. On the contrary, under Section l(f) of Executive Order No. 93, aforestated, such tax and duty exemptions extended by the FIRB must be approved by the President. In this case, FIRB Resolution No. 17-87 was approved by the respondent Executive Secretary, by authority of the President, on October 15, 1987. 49 Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its non-delegation the exception. The reason is the increasing complexity of modern life and many technical fields of governmental functions as in matters pertaining to tax exemptions. This is coupled by the growing inability of the legislature to cope directly with the many problems demanding its attention. The growth of society has ramified its

activities and created peculiar and sophisticated problems that the legislature cannot be expected reasonably to comprehend. Specialization even in legislation has become necessary. To many of the problems attendant upon present day undertakings, the legislature may not have the competence, let alone the interest and the time, to provide the required direct and efficacious, not to say specific solutions. 50 Thus, in the case of Tablarin vs. Gutierrez, 51 this Court enunciated the rationale in favor of delegation of legislative functions One thing however, is apparent in the development of the principle of separation of powers and that is that the maxim of delegatus non potest delegare or delegati potestas non potest delegare, adopted this practice (Delegibus et Consuetudiniis Anglia edited by G.E. Woodline, Yale University Press, 1922, Vol. 2, p. 167) but which is also recognized in principle in the Roman Law d. 17.18.3) has been made to adapt itself to the complexities of modern government, giving rise to the adoption, within certain limits, of the principle of subordinate legislation, not only in the United States and England but in practically all modern governments. (People vs. Rosenthal and Osmea, 68 Phil. 318, 1939).Accordingly, with the growing complexities of modern life, the multiplication of the subjects of governmental regulation, and the increased difficulty of administering the laws, there is a constantly growing tendency toward the delegation of greater power by the legislative, and toward the approval of the practice by the Courts. (Emphasis supplied.) The legislative authority could not or is not expected to state all the detailed situations wherein the tax exemption privileges of persons or entities would be restored. The task may be assigned to an administrative body like the FIRB. Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such presumption can be overturned if its invalidity is proved beyond reasonable doubt. Otherwise, a liberal interpretation in favor of constitutionality of legislation should be adopted. 52 E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as above discussed, the tax exemption privilege that was restored to NPC by FIRB Resolution No. 17-87 of June 1987 includes exemption from indirect taxes and duties on petroleum products used in its operation. Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld in Albay.53

In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by President Marcos in 1984 are invalid as they were presumably promulgated under the infamous Amendment No. 6 and that as they cover tax exemption, under Section 17(4), Article VIII of the 1973 Constitution, the same cannot be passed "without the concurrence of the majority of all the members of the Batasan Pambansa." And, even conceding that the reservation of legislative power in the President was valid, it is opined that it was not validly exercised as there is no showing that such presidential encroachment was justified under the conditions then existing. Consequently, it is concluded that Executive Order No. 93, which was intended to implement said decrees, is also illegal. The authority of the President to sub-delegate to the FIRB powers delegated to him is also questioned. In Albay, 54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree withdrew tax exemptions of government-owned or controlled corporations including their subsidiaries but authorized the FIRB to restore the same. Nevertheless, in Albay, as above-discussed, this Court ruled that the tax exemptions under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions were only recommendatory and were not duly approved by the President of the Philippines as required by P.D. No. 776. 55 The Court also sustained in Albay the validity of Executive Order No. 93, and of the tax exemptions restored under FIRB Resolution No. 17-87 which was issued pursuant thereto, as it was duly approved by the President as required by said executive order. Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is provided that: All existing laws, decrees, executive orders, proclamation, letters of instructions, and other executive issuances not inconsistent with this constitution shall remain operative until amended, repealed or revoked. Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with the Constitution. Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are unconstitutional, the result would be the same, as then the latest applicable law would be P.D. No. 938 which amended the NPC charter by granting exemption to NPC from all forms of taxes. As above discussed, this exemption of NPC covers direct and indirect taxes on petroleum products used in its operation. This is as it should be, if We are to hold as invalid and inoperative the withdrawal of such tax exemptions under P.D. No. 1931 as well as under Executive Order No. 93 and the delegation of the power to restore these exemptions to the FIRB. The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court ruled that the NPC is liable for real estate taxes as of June 11,

1984 (the date of promulgation of P.D. No. 1931) when NPC had ceased to enjoy tax exemption privileges since FIRB Resolution Nos. 1085 and 1-86 were not validly issued. The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is estimated to amount to P7.49 billion plus another P4.76 billion in fuel import duties the firm had earlier paid to the government which the NPC now proposed to pass on to the consumers by another 33-centavo increase per kilowatt hour in power rates on top of the 17-centavo increase per kilowatt hour that took effect just over a week ago., 56 Hence, another case has been filed in this Court to stop this proposed increase without a hearing. As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated August 24, 1975 was already amended by P.D. No. 1931 , 57 wherein it is provided that such FIRB resolutions may be approved not only by the President of the Philippines but also by the Minister of Finance. Such resolutions were promulgated by the Minister of Finance in his own right and also in his capacity as FIRB Chairman. Thus, a separate approval thereof by the Minister of Finance or by the President is unnecessary. As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and consequently,Albay must be considered superseded to this extent by this decision. This is because P.D. No. 938 which is the latest amendment to the NPC charter granting the NPC exemption from all forms of taxes certainly covers real estate taxes which are direct taxes. This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the country but more importantly, to assure cheaper rates to be paid by the consumers. The allegation that this is in effect allowing tax evasion by oil companies is not quite correct. There are various arrangements in the payment of crude oil purchased by NPC from oil companies. Generally, the custom duties paid by the oil companies are added to the selling price paid by NPC. As to the specific and ad valorem taxes, they are added a part of the seller's price, but NPC pays the price net of tax, on condition that NPC would seek a tax refund to the oil companies. No tax component on fuel had been charged or recovered by NPC from the consumers through its power rates. 58 Thus, this is not a case of tax evasion of the oil companies but of tax relief for the NPC. The billions of pesos involved in these exemptions will certainly inure to the ultimate good and benefit of the consumers who are thereby spared the additional burden of increased power rates to cover these taxes paid or to be paid by the NPC if it is held liable for the same. The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors may claim the same privilege should be dispelled by the fact that (a) this decision particularly treats of only the exemption of the NPC from all taxes, duties, fees, imposts and all other charges imposed by the government on the

petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A. No. 6395 and Section 13(d) of P.D. No. 380, both specifically exempt the NPC from all taxes, duties, fees, imposts and all other charges imposed by the government on all petroleum products used in its operation only, which is the very exemption which this Court deems to be carried over by the passage of P.D. No. 938. As a matter of fact in Section 13(d) of P.D. No. 380 it is specified that the aforesaid exemption from taxes, etc. covers those "directly or indirectly" imposed by the "Republic of the Philippines, its provincies, cities, municipalities and other government agencies and instrumentalities" on said petroleum products. The exemption therefore from direct and indirect tax on petroleum products used by NPC cannot benefit the suppliers, importers and contractors of NPC of other products or services. The Court realizes the laudable objective of petitioner to improve the revenue of the government. The amount of revenue received or expected to be received by this tax exemption is, however, not going to any of the oil companies. There would be no loss to the government. The said amount shall accrue to the benefit of the NPC, a government corporation, so as to enable it to sustain its tremendous task of providing electricity for the country and at the least cost to the consumers. Denying this tax exemption would mean hampering if not paralyzing the operations of the NPC. The resulting increased revenue in the government will also mean increased power rates to be shouldered by the consumers if the NPC is to survive and continue to provide our power requirements. 59The greater interest of the people must be paramount. WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED.

G.R. No. 147188

September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents. DECISION DAVIDE, JR., C.J.: This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax. The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision 2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995. The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City. On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.4 On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5 For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6 On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes ofP254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725. On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11 On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special coadministrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows: The Estate thereafter filed a letter of protest.13 In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed. In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability. In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable

period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995. In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals. In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate." 22 Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds: I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION. II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION. III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED. The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property. To resolve the grounds raised by the Commissioner, the following questions are pertinent: 1. Is this a case of tax evasion or tax avoidance? 2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and 3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any? We shall discuss these questions in seriatim. Is this a case of tax evasion or tax avoidance? Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. 23 Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24 All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv. Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as "other inv. Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
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The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed. Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied]. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30 Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.
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Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows: Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following: Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos. CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld. Has the period of assessment prescribed? No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read: Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof . Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be. It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31 Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress. 33 To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991. 37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period. Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation? A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when: 1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons; 2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action.38 It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides: g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied]. When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid. Costs against respondent. SO ORDERED.

G.R. No. L-18384

September 20, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. HEIRS OF CESAR JALANDONI, ET AL., defendants-appellants. Office of the Solicitor General for plaintiff-appellee. Jaime R. Nuevas for defendants-appellants heirs of Cesar Jalandoni. Filemon Flores and Aniano Bagabaldo for defendants-appellants Angeles Jalandoni, et al.

reported in the return filed by Cesar Jalandoni was underdeclared in the amount of P365,149.50; (2) that seven lots which were registered in the Talisay-Silay cadastre of Negros Occidental as belonging to the deceased, including their improvements, were omitted from the return the same having a market value of P100,200.00; and (3) the shares of stock owned by the deceased in the Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de la Carlota, though included in the return, were however underdeclared in the amount of P16,355.36, and on the basis of these findings a third assessment was made against the estate on May 9, 1956 wherein the heirs were required to pay the amounts of P29,995.30 and P49,842.05 as deficiency estate and inheritance taxes, respectively, including accrued interests, with the warning that failure on their part to pay the same would subject them to the payment of surcharge, interest, and penalty for late payment of the tax. In answer to this third assessment after notice was served on the administrator of the estate, Bernardino Jalandoni, Lorenzo J. Teves, in his capacity as counsel of the heirs of the deceased, wrote a letter to the Collector of Internal Revenue setting up the defense of prescription in the sense that the deficiency in the estate and inheritance taxes payment of which was required therein can no longer be collected since more than five years had already elapsed from the filing of the return invoking in his favor Section 331 of the National Internal Revenue Code. To this defense, the Collector retorted claiming that the stand of counsel cannot be entertained for the reason that, it appearing that the estate and inheritance tax return which was filed by the administrator or by the heirs contained omissions which amount to fraud indicative of an intention to evade payment of the proper tax due the government, the taxes then being collected could still be demanded within ten years from the discovery of the falsity or omission pursuant to Section 332(a) of said Code, which period had not yet expired, and as a consequence, the assessment notice was reiterated with the request that the deficiency estate and inheritance taxes therein demanded be settled as soon as possible. And noting that the 30-day period within which the heirs could appeal the Collector's assessment to the Court of Tax Appeals had already elapsed, while on the other hand they indicated their unwillingness to settle the claim, the Collector of Internal Revenue filed the present case before the Court of First Instance of Manila pressing the collection of the deficiency estate and inheritance taxes assessed against the heirs of the deceased Isabel Ledesma Jalandoni. While this case was pending hearing on the merits, the lower court set a date for pre-trial in an effort to have the parties agree on a stipulation of facts, and this having failed, upon request of defendants, the lower court ordered the Collector of Internal Revenue to verify the allegation that the seven lots in Negros Occidental which were claimed not to have been included in the return filed by Cesar Jalandoni were in fact included therein, and to this effect the Collector designated Examiner Genaro Butas to conduct the examination. In his report Examiner Butas stated that of the seven lots that were previously reported not included in the return, two were actually declared therein, though he reaffirmed his previous finding as regards the

BAUTISTA ANGELO, J.: Isabel Ledesma died intestate on June 23, 1948 leaving real properties situated in the provinces of Negros Occidental and Rizal and in the cities of Manila and Baguio, and personal properties consisting of shares of stock in various domestic corporations. She left as heirs her husband Bernardino Jalandoni and three children, namely, Cesar, Angeles and Delfin, all surnamed Jalandoni. On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an estate and inheritance tax return reporting the following: (1) that the real and personal properties owned by the deceased and her surviving husband had a total market value of P1,324,555.80; (2) that after deducting therefrom the conjugal share of her husband and some expenses the net estate subject to estate tax was P28,148.04; and (3) that the amount subject to inheritance tax was P542,225.83. This return also shows that no testamentary or intestate proceedings were instituted. On the basis of this return the Bureau of Internal Revenue made an assessment on November 20, 1948 calling for the payment of the amounts of P31,435.95 and P58,863.52 as estate and inheritance taxes, respectively, stating therein that the assessment was "to be considered partial pending investigation of the return." These sums were paid by Cesar Jalandoni. After a preliminary investigation was made of the properties reported in the abovementioned return, a second assessment was made on January 27, 1953 by the Bureau of Internal Revenue showing that there was due from the estate the amounts of P5,539.67 and P9,899.37 as deficiency estate and inheritance taxes, respectively, for which reason a demand was made on Bernardino Jalandoni stating therein that the same was still "to be considered partial pending further investigation of the return," which amounts were paid by Bernardino Jalandoni on February 28, 1953. True to the foregoing reservation, the Bureau of Internal Revenue conducted another investigation and this time it found (1) that the market value of the lands

other five lots and the market value of the sugar lands and rice lands left by the deceased and the value of the shares of stock owned by her in several domestic corporations. There being no additional evidence, oral or documentary, submitted by the parties, and passing solely on the allegations appearing in the pleadings which appear to be undisputed, the trial court rendered its decision on February 16, 1960 ordering defendants, jointly and severally, to pay plaintiff the sum of P79,837.35 as estate and inheritance taxes, plus the interest that had accrued thereon as a result of their delinquency. Defendants interposed the present appeal. It is claimed that the lower court erred in finding that the return submitted by Cesar Jalandoni in behalf of the heirs concerning the estate of the deceased for the purpose of the payment of the required estate and inheritance taxes is false and fraudulent there being no evidence on record showing that said return was filed in bad faith for which reason fraud cannot be imputed to appellants. As against this claim appellee advances the theory that since fraudulent intent is a state of mind which cannot be proven by direct evidence, the same may be inferred from facts and circumstances that appear to be undisputed as was done by the court a quo as follows: The difference between the amounts appearing in the returns filed and the undeclared properties of the estate of the deceased is a substantial understatement of the true value of the estate in question. The court is of the opinion, and so holds that the tax returns filed were false. A substantial understatement of stocks and the omission of seven (7) parcels of land belonging to the estate of the deceased, makes it impossible for the court to believe that the omission or understatements were due to inadvertence, negligence, or honest statement of error. Circumstances such as this are competent to base a finding of willful intent.1awphl.nt And to bolster up this finding appellee submits the following facts which, it contends, appear in the record: (1) among the real properties belonging to the deceased five lots in Negros Occidental, including improvements thereon, with a market value of P58,570.00 were not included in the return filed by a representative of appellants; (2) the value of the sugar and rice lands that were reported in the return were underdeclared in the amount of P365,149.50; and (3) the market value of the shares of stock owned by the deceased in the Victorias Milling Company, HawaiianPhilippine Company and the Central Azucarera de la Carlota was underdeclared in the amount of P16,355.36. In other words, it is claimed that a total amount of P440,074.86 which constitutes real asset of the estate has been deliberately omitted from the return thereby evincing an intention to evade the payment of the correct amount of tax due to the government.

We are of the opinion that this finding is neither fair nor reasonable. To begin with, it should be here noted that when this case was pending hearing on the merits before the lower court, the latter, upon request of appellants, ordered the Collector of Internal Revenue to verify the allegation that there were seven lots in Negros Occidental which were claimed not to have been included in the return filed by Cesar Jalandoni, and to this effect the Collector designated Examiner Genaro Butas to conduct the examination. Examiner Butas, after conducting the examination, submitted his report the pertinent of which reads: Lot No. Classification Assessed Value Fair Market Value 493 Sugarland P15,140.00 P21,630.00 710 390.00 550.00 521 21,000.00 30,000.00 954 820.00 1,230.00 939 1,210.00 1,720.00 Lot 6,080.00 6,080.00 229 House 12,000.00 12,000.00 Commercial 6,400.00 6,400.00 228 Concrete House 10,000.00 10,000.00 Camarin 500.00 500.00 TOTAL P73,650.00 P90,110.00

In other words, from the report of Examiner Butas the following may be gleaned: that of the seven lots alleged to have been excluded from the return, three were actually included, with the particularity that they were the most valuable, to wit: Lot 493 with a market value of P21,630.00; Lot 521 with a market value of P30,000.00; and Lot 229 with a market value of P12,000.00, while another lot was not also included because it belonged to Delfin Jalandoni, or Lot 228 which, including improvements, has a market value of P16,900.00. Hence, from the foregoing we find that the aggregate value of the aforesaid four lots is P86,610.00 which, if deducted from the total value of the seven lots amounting to P90,110.00, gives a balance of P3,500.00 as the value of the three remaining lots. These three lots being conjugal property, one-half thereof belonging to the deceased's spouse should still be deducted, thus leaving a small balance of P1,750.00. If to this we add that, as the record shows, these three lots were already declared in the return submitted by Bernardino Jalandoni as part of his property and his wife for purposes of income tax, there is reason to believe that their omission from the return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly explained by appellants. We can hardly dispute this conclusion as it would be stretching too much the imagination if we would find that, because of such inadvertence, which appears to be inconsequential, the heirs of the deceased deliberately omitted from the

return the three lots with the only purpose of defrauding the government after declaring therein as asset of the estate property worth P1,324,555.80. The same thing may be said with regard to the alleged undervaluation of certain sugar and rice lands reported by Cesar Jalandoni which appellee fixes at P365,149.50, for the same can at most be considered as the result of an honest difference of opinion and not necessarily an intention to commit fraud. It should be stated that in the estate and inheritance tax returns submitted by Cesar Jalandoni on November 19, 1948 he reported said lands as belonging to the deceased with a statement of what in his opinion represent their reasonable actual value but which happened not to tally with the valuation made by the Collector of Internal Revenue. Certainly if there is any mistake in the valuation made by Jalandoni the same can only be considered as honest mistake, or one based on excusable inadvertence, he being not an expert in appraising real estate. The deficiency assessment, moreover, was made by the Collector of Internal Revenue more than five years from the filing of the return, and experience shows that such an intervening period is sufficiently long to, warrant an increase in value of real estate which is precisely what was found by the Collector of Internal Revenue with regard to the lands in question. It is certainly an error to impute fraud based on an honest difference of opinion. Finally, we find unreasonable to impute with regard to the appraisal made by appellants of the shares of stock of the deceased in Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de la Carlota, simply because Cesar Jalandoni placed in his return an aggregate market value of P95,480.00, instead of mentioning the book value declared by said corporations in the returns filed by them with the Bureau of Internal Revenue. The fact that the value given in the returns did not tally with the book value appearing in the corporate books is not in itself indicative of fraud especially when we take into consideration the circumstance that said book value only became known several months after the death of the deceased. Moreover, it is a known fact that stock securities frequently fluctuate in value and a mere difference of opinion in relation thereto cannot serve as proper basis for assessing an intention to defraud the government. Having reached the conclusion that the heirs of the deceased have not committed any act indicative of an intention to evade the payment of the inheritance or estate taxes due the government, as evidenced by their willingness in the past to pay all the taxes properly assessed against them, it is evident that the instant claim of appellee has already prescribed under Section 331 of the National Internal Revenue Code. And with this conclusion, a discussion of the other errors assigned by appellants would seem to be unnecessary. WHEREFORE, the decision appealed from is reversed and the complaint of appellee is dismissed. No pronouncement as to costs.

G.R. No. L-22814

August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiffappellant, vs. CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD, THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-appellees. Sabido, Sabido and Associates for plaintiff-appellant. The City Attorney of Butuan City for defendants-appellees. CONCEPCION, C.J.: Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing plaintiff's complaint, with costs. Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal place of business in Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its municipal board and its City Treasurer. Plaintiff seeks to recover the sums paid by it to the City of Butuan hereinafter referred to as the City and collected by the latter, pursuant to its Municipal Ordinance No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which plaintiff assails as null and void, and to prevent the enforcement thereof. Both parties submitted the case for decision in the lower court upon a stipulation to the effect: 1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province of Agusan. These "PepsiCola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and sale in the City of Butuan and all municipalities of Agusan. . 2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently amended by Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110, Series of 1960 and Ordinance No. 122 are incorporated herein as Exhibits "A" and "B", respectively. 3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961.

4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of P14,177.03 paid under protest and those that if may later on pay until the termination of this case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed is excessive and that it is unconstitutional. 5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has prepared a form to be accomplished by the plaintiff for the computation of the tax. A copy of the form is enclosed herewith as Exhibit "C". 6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to July 30, 1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this Profit and Loss Statement, the defendants claim that the plaintiff is not entitled to a depreciation of P3,052.63 but only P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to P3,104.52. The plaintiff differs only on the claim of depreciation which the company claims to be P3,052.62. This is in accordance with the findings of the representative of the undersigned City Attorney who verified the records of the plaintiff. 7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was increased to P1.92 which price is uniform throughout the Philippines. Said increase was made due to the increase in the production cost of its manufacture. 8. That the parties reserve the right to submit arguments on the constitutionality and illegality of Ordinance No. 110, as amended of the City of Butuan in their respective memoranda. xxx xxx x x x1wph1.t

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the purview thereof. Section 2 provides for the payment by "any agent and/or consignee" of any dealer "engaged in selling liquors, imported or local, in the City," of taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the soft drinks and carbonated beverages therein named, and "all other soft drinks or carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent" for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at the end of every calendar month." Pursuant to Section 5, the taxes "shall be based and computed from the cargo manifest or bill of lading or any other record showing the number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks received within the month." Sections 6, 7 and 8 specify the surcharge to be added for failure to pay the taxes within the period prescribed and the penalties imposable for "deliberate and willful refusal to pay the tax mentioned in Sections 2

and 3" or for failure "to furnish the office of the City Treasurer a copy of the bill of lading or cargo manifest or record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside" but "sold within" the City. Section 10 of the ordinance provides that the revenue derived therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the General Fund and 20% for the School Fund." Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature of an import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2 of Republic Act No. 2264, upon the authority of which it was enacted, is an unconstitutional delegation of legislative powers. The second and last objections are manifestly devoid of merit. Indeed independently of whether or not the tax in question, when considered in relation to the sales tax prescribed by Acts of Congress, amounts to double taxation, on which we need not and do not express any opinion - double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double taxation found in the Constitution of the United States and of some States of the Union.1 Then, again, the general principle against delegation of legislative powers, in consequence of the theory of separation of powers2 is subject to one well-established exception, namely: legislative powers may be delegated to local governments to which said theory does not apply3 in respect of matters of local concern. The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks or carbonated drinks in the production and sale of which plaintiff is engaged or less than P0.0042 per bottle, is manifestly too small to be excessive, oppressive, or confiscatory. The first and the fourth objections merit, however, serious consideration. In this connection, it is noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers "engaged in selling" soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the sale of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed only upon "any agent and/or consignee of any person, association, partnership, company or corporation engaged in selling ... soft drinks or carbonated drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122: ... Definition of the Term Consignee or Agent. For purposes of this Ordinance, a consignee of agent shall mean any person, association, partnership, company or corporation who acts in the place of another by authority from him or one entrusted with the business of another or to whom is consigned or shipped no less than 1,000 cases of hard liquors or soft drinks every month for resale, either retail or wholesale. As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject to the tax,unless they are agents and/or consignees of another dealer, who, in the very nature of things, must be one engaged in business outside the City. Besides, the tax would not be applicable to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or shipped to him every month. When we consider, also, that the tax "shall be based and computed from the cargo manifest or bill of lading ... showing the number of cases"

not sold but "received" by the taxpayer, the intention to limit the application of the ordinance to soft drinks and carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from this angle, the tax partakes of the nature of an import duty, which is beyond defendant's authority to impose by express provision of law. 4 Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the City of Butuan, would be exempt from the disputed tax. It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation.5 The classification made in the exercise of this authority, to be valid, must, however, be reasonable6 and this requirement is not deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and (4) the classification applies equally all those who belong to the same class.7 These conditions are not fully met by the ordinance in question. 8 Indeed, if its purpose were merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sealers other than agents or consignees of producers or merchants established outside the City of Butuan should be exempt from the tax. WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered annulling Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the City of Butuan to refund to plaintiff herein the amounts collected from and paid under protest by the latter, with interest thereon at the legal rate from the date of the promulgation of this decision, in addition to the costs, and defendants herein are, accordingly, restrained and prohibited permanently from enforcing said Ordinance, as amended. It is so ordered.

G.R. No. 117359 July 23, 1998 DAVAO GULF LUMBER CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

On December 13, 1982, petitioner filed before Respondent Commissioner of Internal Revenue (CIR) a claim for refund in the amount of P120,825.11, representing 25% of the specific taxes actually paid on the above-mentioned fuels and oils that were used by petitioner in its operations as forest concessionaire. The claim was based on Insular Lumber Co. vs. Court of Tax Appeals 8 and Section 5 of RA 1435 which reads: Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the routes or location thereof shall have been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953. It is an unquestioned fact that petitioner complied with the procedure for refund, including the submission of proof of the actual use of the aforementioned oils in its forest concession as required by the above-quoted law. Petitioner, in support of its claim for refund, submitted to the CIR the affidavits of its general manager, the president of the Philippine Wood Products Association, and three disinterested persons, all attesting that the said manufactured diesel and fuel oils were actually used in the exploitation and operation of its forest concession. On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA Case No. 3574. On June 21, 1994, the CTA rendered its decision finding petitioner entitled to a partial refund of specific taxes the latter had paid in the reduced amount of P2,923.15. The CTA ruled that the claim on purchases of lubricating oil (from July 1, 1980 to January 19, 1981) and on manufactured oils other than lubricating oils (from July 1, 1980 to January 4, 1981) had prescribed. Disallowed on the ground that they were not included in the original claim filed before the CIR were the claims for refund on purchases of manufactured oils from January 1, 1980 to June 30, 1980 and from February 1, 1982 to June 30, 1982. In regard to the other purchases, the CTA granted the claim, but it computed the refund based on rates deemed paid under RA 1435, and not on the higher rates actualhy paid by petitioner under the NIRC.

PANGANIBAN, J.: Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. Statement of the Case This principium is applied by the Court in resolving this petition for review under Rule 45 of the Rules of Court, assailing the Decision 1 of Respondent Court of Appeals 2 in CA-GR SP No. 34581 dated September 26, 1994, which affirmed the June 21, 1994 Decision 3 of the Court of Tax Appeals 4 in CTA Case No. 3574. The dispositive portion of the CTA Decision affirmed by Respondent Court reads: WHEREFORE, judgment is hereby rendered ordering the respondent to refund to the petitioner the amount of P2,923.15 representing the partial refund of specific taxes paid on manufactured oils and fuels. 5 The Antecedent Facts The facts are undisputed. 6 Petitioner is a licensed forest concessionaire possessing a Timber License Agreement granted by the Ministry of Natural Resources (now Department of Environment and Natural Resources). From July 1, 1980 to January 31, 1982 petitioner purchased, from various oil companies, refined and manufactured mineral oils as well as motor and diesel fuels, which it used exclusively for the exploitation and operation of its forest concession. Said oil companies paid the specific taxes imposed, under Sections 153 and 156 7 of the 1977 National Internal Revenue Code (NIRC), on the sale of said products. Being included in the purchase price of the oil products, the specific taxes paid by the oil companies were eventually passed on to the user, the petitioner in this case.

Insisting that the basis for computing the refund should be the increased rates prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of Appeals. As noted earlier, the Court of Appeals affirmed the CTA Decision. Hence, this petition for review. 9 Public Respondent's Ruling In its petition before the Court of Appeals, petitioner raised the following arguments: I. The respondent Court of Tax Appeals failed to apply the Supreme Court's Decision in Insular Lumber Co. v. Court of Tax Appeals which granted the claim for partial refund of specific taxes paid by the claimant, without qualification or limitation. II. The respondent Court of Tax Appeals ignored the increase in rates imposed by succeeding amendatory laws,under which the petitioner paid the specific taxes on manufactured and diesel fuels. III. In its decision, the respondent Court of Tax Appeals ruled contrary to established tenets of law when it lent itself to interpreting Section 5 of R.A. 1435, when the construction of said law is not necessary. IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be applied but rather, Sections 153 and 156 of the National Internal Revenue Code, as amended. V. To rule that the basis for computation of the refunded taxes should be Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of the National Internal Revenue Code is unfair, erroneous, arbitrary, inequitable and oppressive. 10 The Court of Appeals held that the claim for refund should indeed be computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling, it cited our pronouncement in Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation 11 and subsequent Resolution dated June 15, 1992 clarifying the said Decision. Respondent Court further ruled that the claims for refund which prescribed and those which were not filed at the administrative level must be excluded. The Issue In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of 25% of the amount of specific taxes it actually paid on various refined and manufactured mineral oils and other oil products taxed under Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the 1939) National Internal Revenue Code. 12 In the main, the question before us pertains only to the computation of the tax refund. Petitioner argues that the refund should be based on the increased rates of specific taxes which it actually paid, as prescribed in Sections 153 and 156 of the NIRC. Public respondent, on the other hand, contends that it should be based on specific taxes deemed paid under Sections 1 and 2 of RA 1435. The Court's Ruling The petition is not meritorious. Petitioner Entitled to Refund Under Sec. 5 of RA 1435 At the outset, it must be stressed that petitioner is entitled to a partial refund under Section 5 of RA 1435, which was enacted to provide means for increasing the Highway Special Fund. The rationale for this grant of partial refund of specific taxes paid on purchases of manufactured diesel and fuel oils rests on the character of the Highway Special Fund. The specific taxes collected on gasoline and fuel accrue to the Fund, which is to be used for the construction and maintenance of the highway system. But because the gasoline and fuel purchased by mining and lumber concessionaires are used within their own compounds and roads, and their vehicles seldom use the national highways, they do not directly benefit from the Fund and its use. Hence, the tax refund gives the mining and the logging companies a measure of relief in light of their peculiar situation. 13 When the Highway Special Fund was abolished in 1985, the reason for the refund likewise ceased to exist. 14 Since petitioner purchased the subject manufactured diesel and fuel oils from July 1, 1980 to January 31, 1982 and submitted the required proof that these were actually used in operating its forest concession, it is entitled to claim the refund under Section 5 of RA 1435. Tax Refund Strictly Constrtued Against the Grantee Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had actually paid for the petroleum products used in its operations. In other words, it

claims a refund based on the increased rates under Sections 153 and 156 of the NIRC. 15 Petitioner argues that the statutory grant of the refund privilege, specifically the phrase "twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue," is "clear and unambiguous" enough to require construction or qualification thereof. 16 In addition, it cites our pronouncement in Insular Lumber vs. Court of Tax Appeals: 17 . . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section 1 only for the purpose of prescribing the procedure for refund. This express reference cannot be expanded in scope to include the limitation of the period of refund. If the limitation of the period of refund of specific taxes paid on oils used in aviation and agriculture is intended to cover similar taxes paid on oil used by miners and forest concessionaires, there would have been no need of dealing with oil used by miners and forest concessions separately and Section 5 would very well have been included in Section 1 of Republic Act No. 1435, notwithstanding the different rate of exemption. Petitioner then reasons that "the express mention of Section 1 of RA 1435 in Section 5 cannot be expanded to include a limitation on the tax rates to be applied . . . [otherwise,] Section 5 should very well have been included in Section 1 . . . ." 18 The Court is nor persuaded. The relevant statutory provisions do not clearly support petitioner's claim for refund. RA 1435 provides: Sec. 1 Section one hundred and forty-two of the National Internal Revenue Code, as amended, is further amended to read as follows: Sec. 142. Specific tax on manufactured oils and other fuels. On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes: (a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos; (b) Lubricating oils, per liter of volume capacity, seven centavos; (c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity, eight centavos; and (d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo:Provided, That if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be subject to the

tax herein prescribed. For the purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary. Whenever any of the oils mentioned above are, during the five years from June eighteen, nineteen hundred and fifty two, used in agriculture and aviation, fifty per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon the submission of the following: (1) A sworn affidavit of the producer and two disinterested persons proving that the said oils were actually used in agriculture, or in lieu thereof. (2) Should the producer belong to any producers' association or federation, duly registered with the Securities and Exchange Commission, the affidavit of the president of the association or federation, attesting to the fact that the oils were actually used in agriculture. (3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the said oils were actually used in aviation: Provided, That no such refunds shall be granted in respect to the oils used in aviation by citizens and corporations of foreign countries which do not grant equivalent refunds or exemptions in respect to similar oils used in aviation by citizens and corporations of the Philippines. Sec. 2 Section one hundred and forty-five of the National Internal Revenue Code, as amended, is further amended to read as follows: Sec. 145. Specific Tax on Diesel fuel oil. On fuel oil, commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the same generating power, there shall be collected, per metric ton, one peso. xxx xxx xxx Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their

operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the route or location thereof shall have been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953. Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions, renumbering them and prescribing higher rates. Accordingly, petitioner paid specific taxes on petroleum products purchased from July 1, 1980 to January 31, 1982 under the following statutory provisions. From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows: Sec. 153. Specific tax on manufactured oils and other fuels. On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the articles hereunder enumerated as soon as they are in existence as such: (a) Kerosene, per liter of volume capacity, seven centavos; (b) Lubricating oils, per liter of volume capacity, eighty centavos; (c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity, ninety-one centavos: Provided, That on premium and aviation gasoline, the tax shall be one peso per liter of volume capacity; (d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo:Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be subject to the tax herein prescribed. For the purposes of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary; (e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos; (g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That liquefied petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax on diesel fuel oil; (h) Asphalts, per kilogram, eight centavos; (i) Greases, waxes and petrolatum, per kilogram, fifty centavos; (j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As amended by Sec. 1, P.D. No. 1672.) xxx xxx xxx Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the same generating power, per liter of volume capacity, seventeen and one-half centavos, which tax shall attach to this fuel oil as soon as it is in existence as such. Then on March 21, 1981, these provisions were amended by EO 672 to read: Sec. 153. Specific tax on manufactured oils and other fuels. On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the articles hereunder enumerated as soon as they are in existence as such: (a) Kerosene, per liter of volume capacity, nine centavos; (b) Lubricating oils, per liter of volume capacity, eighty centavos; (c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity, one peso and six centavos: Provided, That on premium and aviation gasoline, the tax shall be one peso and ten centavos and one peso, respectively, per liter of volume capacity; (d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo;Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the

alcohol content shall be subject to the tax herein prescribed. For the purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary; (e) Processed gas, per liter of volume capacity, three centavos; (f) Thinners and solvents, per liter of volume capacity, sixty-one centavos; (g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided, That, liquified petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax on diesel fuel oil; (h) Asphalts, per kilogram, twelve centavos; (i) Greases, waxes and petrolatum, per kilogram, fifty centavos; (j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos. xxx xxx xxx Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil, and all similar fuel oils, having more or less the same generating power, per liter of volume capacity, twenty-five and one-half centavos, which tax shall attach to this fuel oil as soon as it is in existence as such. A tax cannot be imposed unless it is supported by the clear and express language of a statute; 19 on the other hand, once the tax is unquestionably imposed, "[a] claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken." 20 Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption, 21 it must be construed strictissimi Juris against the grantee. Hence, petitioner's claim of refund on the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken. We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no expression of a legislative will authorizing a refund based on the higher rates claimed by petitioner. The mere fact that the privilege of refund was included in Section 5, and not in Section 1, is insufficient to support petitioner's claim. When the

law itself does not explicitly provide that a refund under RA 1435 may be based on higher rates which were nonexistent at the time of its enactment, this Coure cannot presume otherwise. A legislative lacuna cannot be filled by judicial fiat. 22 The issue is not really novel. In Commissioner of Internal Revenue vs. Court of Appeals and Atlas Consolidated Mining and Development Corporation 23 (the second Atlas case), the CIR contended that the refund should be based on Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of 1977. In categorically ruling that Private Respondent Atlas Consolidated Mining and Development Corporation was entitled to a refund based on Sections 1 and 2 of RA 1435, the Court, through Mr. Justice Hilario G. Davide, Jr., reiterated our pronouncement in Commissioner of Internal Revenue vs. Rio Tuba Nickel and Mining Corporation: Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in the Rio Tuba case sets forth the controlling doctrine. In that Resolution, we stated: Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983 then we find that the private respondent is entitled to a refund. It should be made clear, however, that Rio Tuba is not entitled to the whole amount it claims as refund. The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated under Sections 153 and 156 of the National Internal Revenue Code of 1977. We note however, that the latter law does not specifically provide for a refund to these mining and lumber companies of specific taxes paid on manufactured and diesel fuel oils. In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the authorized partial refund under Section 5 of R.A. No. 1435 partakes of the nature of a tax exemption and therefore cannot be allowed unless granted in the most explicit and categorical language. Since the grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund shall be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435. ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435 , without interest. 24

We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435 and not on the increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the claims are not yet barred by prescription. (Emphasis supplied.) Insular Lumber Co. and First Atlas Case Not Inconsistent With Rio Tuba and Second Atlas Case Petitioner argues that the applicable jurisprudence in this case should be Commissioner of Internal Revenue vs. Atlas Consolidated and Mining Corp . (the first Atlas case), an unsigned resolution, and Insular Lumber Co. vs. Court of Tax Appeals, an en banc decision. 25 Petitioner also asks the Court to take a "second look" at Rio Tubaand the second Atlas case, both decided by Divisions, in view of Insular which was decided en banc. Petitioner posits that "[I]n view of the similarity of the situation of herein petitioner with Insular Lumber Company (claimant inInsular Lumber) and Rio Tuba Nickel Mining Corporation (claimant in Rio Tuba), a dilemma has been created as to whether or not Insular Lumber, which has been decided by the Honorable Court en banc, or Rio Tuba, which was decided only [by] the Third Division of the Honorable Court, should apply." 26 We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the first Atlas case ruled on the issue of whether the refund privilege under Section 5 should be computed based on the specific tax deemed paid under Sections 1 and 2 of RA 1435, regardless of what was actually paid under the increased rates. Rio Tuba and the second Atlas case did. Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products purchased in the year 1963, when the increased rates under the NIRC of 1977 were nor yet in effect. Thus, the issue now before us did not exist at the time, since the applicable rates were still those prescribed under Sections 1 and 2 of RA 1435. On the other hand, the issue raised in the first Atlas case was whether the claimant was entitled to the refund under Section 5, notwithstanding its failure to pay any additional tax under a municipal or city ordinance. Although Atlas purchased petroleum products in the years, 1976 to 1978 when the rates had already been changed, the Court did not decide or make any pronouncement on the issue in that case.

Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio Tuba and second Atlas case, in which we ruled that the refund granted be computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In this light, we find no basis for petitioner's invocation of the constitutional proscription that "no doctrine or principle of law laid down by the Court in a decision rendered en banc or in division may be modified or reversed except by the Court sitting en banc. 27 Finally, petitioner asserts that "equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC." 28 We disagree. According to an eminent authority on taxation, "there is no tax exemption solely on the, ground of equity." 29 WHEREFORE, the petition is hereby DENIED and the assailed Decision of the Court of Appeals is AFFIRMED. SO ORDERED.

G.R. No. 163653

July 19, 2011

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. FILINVEST DEVELOPMENT CORPORATION, Respondent. x - - - - - - - - - - - - - - - - - - - - - - -x G.R. No. 167689 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. FILINVEST DEVELOPMENT CORPORATION, Respondent. DECISION PEREZ, J.: Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the following cases: (a) Decision dated 16 December 2003 of the then Special Fifth Division in CA-G.R. SP No. 72992;1 and, (b) Decision dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.2 The Facts The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate development of medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI.3 As a result of the exchange, FLIs ownership structure was changed to the extent reflected in the following tabular prcis, viz.: On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the request, the BIR issued Ruling No. S34-046-97 dated 3 February 1997, finding that the exchange is among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code

(NIRC)4 which provides that "(n)o gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation."5 With the BIRs reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by FLI,6 the latter, together with FDC and FAI, complied with all the requirements imposed in the ruling.7 On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).8 Duly evidenced by instructional letters as well as cash and journal vouchers, said cash advances amounted toP2,557,213,942.60 in 19969 and P3,360,889,677.48 in 1997.10 On 15 November 1996, FDC also entered into a Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked to develop and manage FDCs 50% ownership of its PBCom Office Tower Project (the Project). With their equity participation in FAC respectively pegged at 60% and 40% in the Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said joint venture company to RHPLs subscription worth P433.8 million. Having paid its subscription by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.11 On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests and compromise penalties,12 covered by the following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum ofP150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-9600020-2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 for 1997.13 The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC executed with RHPL as well as the "armslength" interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates.14 On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the year 1997.15 Covered by Assessment Notice No. SP-INC-97-0027-2000,16said

deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC and FLI.17 On 26 January 2000 or within the reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI filed their respective requests for reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis.18 Having submitted the relevant supporting documents pursuant to the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting an early resolution of their request for reconsideration/protest on the ground that the 180 days prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20 September 2000.19 In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition alleged, among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of a stipulation to the effect; that not being promissory notes or certificates of obligations, the instructional letters as well as the cash and journal vouchers evidencing said cash advances were not subject to documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC both prayed that the subject assessments for deficiency income and documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled.20 On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain further control of said corporation. Likewise calling attention to the fact that the cash advances FDC extended to its affiliates were interest free despite the interest bearing loans it obtained from banking institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion income or deductions between or among such organizations, trades or business in order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes on the instructional letters as well as cash and journal vouchers for said cash advances on the strength of Section 180 of the NIRC and Revenue Regulations

No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether or not they are evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement with RHPL.21 At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues22 which was admitted in the 16 February 2001 resolution issued by the CTA. With the further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC and FAI23 and the conclusion of the testimony of Susana Macabelda anent the cash advances FDC extended in favor of its affiliates,24 the CTA went on to render the Decision dated 10 September 2002 which, with the exception of the deficiency income tax on the interest income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997,25 thus: WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the Tax Code.26 Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the gain derived from the exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in FAC did not result in economic advantage in the absence of actual sale or conversion thereof. While likewise finding that the documents evidencing the cash advances FDC extended to its affiliates cannot be considered as loan agreements that are subject to documentary stamp tax, the CTA enunciated, however, that the CIR was justified in assessing undeclared interests on the same cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income Taxation.27

Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of the express stipulation on interest required under Article 1956 of the Civil Code, FDC questioned the imposition of an arm's-length interest rate thereon on the ground, among others, that the CIR's authority under Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on said transactions; (b) is directed only against controlled taxpayers and not against mother or holding corporations; and, (c) can only be invoked in cases of understatement of taxable net income or evident tax evasion.28 Upholding FDC's position, the CA's then Special Fifth Division rendered the herein assailed decision dated 16 December 2003,29 the decretal portion of which states: WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No. 6182 directing petitioner Filinvest Development Corporation to pay the amount of P5,691,972.03 representing deficiency income tax on allegedly undeclared interest income for the taxable year 1997, plus 20% delinquency interest computed from February 16, 2000 until full payment thereof is REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner for taxable year 1997. No pronouncement as to costs.30 With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution issued by the CTA,31 the CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly erred in cancelling the assessment notices: (a) for deficiency income taxes on the exchange of property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income tax on the gain FDC purportedly realized from the increase of the value of its shareholdings in FAC.32 The foregoing petition was, however, denied due course and dismissed for lack of merit in the herein assailed decision dated 26 January 200533 rendered by the CA's then Fourteenth Division, upon the following findings and conclusions, to wit: 1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996 Deed of Exchange resulted in the combined control by FDC and FAI of more than 51% of the outstanding shares of FLI, hence, no taxable gain can be recognized from the transaction under Section 34 (c) (2) of the old NIRC;

2. The instructional letters as well as the cash and journal vouchers evidencing the advances FDC extended to its affiliates are not subject to documentary stamp taxes pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they do not partake the nature of loan agreements; 3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable on inter-office memos evidencing cash advances similar to those extended by FDC, said latter ruling cannot be given retroactive application if to do so would be prejudicial to the taxpayer; 4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the Shareholders' Agreement it executed with RHPL cannot be considered taxable income since, until actually converted thru sale or disposition of said shares, they merely represent unrealized increase in capital.34 Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for review on certiorari assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by this Courts Third Division. The Issues In G.R. No. 163653, the CIR urges the grant of its petition on the following ground: THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX.35 In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution: I THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,

INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE NONRECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE NIRC. II THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC. III THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC IS NOT TAXABLE.36 The Courts Ruling While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in G.R. No. 167689 impressed with partial merit. In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest income should likewise be declared when the same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate, distribute or apportion income or deductions between or among controlled organizations, trades or businesses even in the absence of fraud, since said power is intended "to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses." In addition, the CIR asseverates that the CA should have accorded weight and respect to the findings of the CTA which, as the specialized court dedicated to the study and consideration of tax matters, can take judicial notice of US income tax laws and regulations.37

Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business." In amplification of the equivalent provision39 under Commonwealth Act No. 466,40 Sec. 179(b) of Revenue Regulation No. 2 states as follows: Determination of the taxable net income of controlled taxpayer. (A) DEFINITIONS. When used in this section (1) The term "organization" includes any kind, whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not. (2) The terms "trade" or "business" include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on. (3) The term "controlled" includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or mode of exercise. A presumption of control arises if income or deductions have been arbitrarily shifted. (4) The term "controlled taxpayer" means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests. (5) The term "group" and "group of controlled taxpayers" means the organizations, trades or businesses owned or controlled by the same interests. (6) The term "true net income" means, in the case of a controlled taxpayer, the net income (or as the case may be, any item or element affecting net income) which would have

resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction, arrangement or other act) dealt with the other members or members of the group at arms length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled taxpayer, or the interest controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto). (B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayer are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has not been done and the taxable net income are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply its provisions. (C) APPLICATION Transactions between controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled

taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another uncontrolled taxpayer.41 As may be gleaned from the definitions of the terms "controlled" and "controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes. Despite the broad parameters provided, however, we find that the CIR's powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,42 after all, the term "gross income" is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property;" interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the gross income of general professional partnership.43 While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money coming to a person within a specific time" or "something distinct from principal or capital."44 Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. Our circumspect perusal of the record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed

fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks,45 Susan Macabelda - FDC's Funds Management Department Manager who was the sole witness presented before the CTA - clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997.46 More significantly, said witness testified that said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters."47 Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares,48 the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.49 Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.50 While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself.51 In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows: Sec. 34. Determination of amount of and recognition of gain or loss.xxxx (c) Exception x x x x No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for shares of stock in such corporation of which as a

result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be considered as issued in return of property. As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,52 the requisites for the non-recognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee.53 Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97.54 With the BIR's reiteration of said ruling upon the request for clarification filed by FLI,55 there is also no dispute that said transferee and transferors subsequently complied with the requirements provided for the non-recognition of gain or loss from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.56 Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that FDC's controlling interest in FLI was actually decreased as a result thereof. For said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporations controlling interest was supposedly reduced to 61%.03 when reckoned from the transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of FDC and in the sum ofP3,088,711,367.00 on the part of FAI.57 The paucity of merit in the CIR's position is, however, evident from the categorical language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case the exchange of property for stocks results in the control of the transferee by the transferor, alone or with other transferors not exceeding four persons. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's

4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI which represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision. Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and Jurisprudence, opined that said provision could be inapplicable if control is already vested in the exchangor prior to exchange.58 Aside from the fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and FLI was penned by no less than Justice Acosta himself,59 FDC and FAI significantly point out that said authors have acknowledged that the position taken by the BIR is to the effect that "the law would apply even when the exchangor already has control of the corporation at the time of the exchange."60 This was confirmed when, apprised in FLI's request for clarification about the change of percentage of ownership of its outstanding capital stock, the BIR opined as follows: Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in a corporation by possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.61 At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued to its said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to the exchange. This much was

admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the CTA.62 Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the supposed gain which resulted from the subject transfer. On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are concerned, Section 180 of the NIRC provides follows: Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bill of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000.00) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of documentary stamp tax provided under this Section. When read in conjunction with Section 173 of the 1993 NIRC,63 the foregoing provision concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows: Section 3. Definition of Terms. For purposes of these Regulations, the following term shall mean:

(b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings. The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax Code, as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed under Section 195." "Section 6. Stamp on all Loan Agreements. All loan agreements whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located in the Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreements, pursuant to Section 180 in relation to Section 173 of the Tax Code. In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code. Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could be invoked only by ASB Development Corporation, the taxpayer who sought the same. In said ruling, the CIR opined that documents like those evidencing the advances FDC extended to its affiliates are not subject to documentary stamp tax, to wit: On the matter of whether or not the inter-office memo covering the advances granted by an affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings or borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a certificate of

obligation, which are, more or less, categorized as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds of the corporate affiliates.
1avvphi1

In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that interoffice memos evidencing lendings or borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject to documentary stamp taxes.64 In brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993 NIRC65 from which proceeds the settled principle that rulings, circulars, rules and regulations promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers.66 Admittedly, this rule does not apply: (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; or (c) where the taxpayer acted in bad faith.67 Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on nonretroactivity of BIR rulings. Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes due on the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total ofP10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR similarly assessedP1,721,099.78 in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the same "at the rate of twenty percent (20%), or such higher rate as may be prescribed by regulations", from the date prescribed for the payment of the unpaid amount of tax until full payment.68 The imposition of the compromise penalty is, in turn, warranted under Sec. 25069 of the NIRC which prescribes the imposition thereof "in case of each failure to file an information or return, statement or list, or keep any record or supply any information required" on the date prescribed therefor. To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating the Assessment Notice issued by the CIR for the

deficiency income taxes FDC is supposed to have incurred as a consequence of the dilution of its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record shows that the parties were in agreement about the following factual antecedents narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted before the CTA,70 viz.: "1.11. On November 15, 1996, FDC entered into a Shareholders Agreement (SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint venture company named Filinvest Asia Corporation (FAC) which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer). 1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and manage the 50% ownership interest of FDC in its PBCom Office Tower Project (Project) with the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer). 1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL in FAC was 60% and 40% respectively. 1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock of FAC representing a 40% equity participation in FAC. 1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a portion of FDCs right and interests in the Project to the extent of P500.7 million. 1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996."71 Alongside the principle that tax revenues are not intended to be liberally construed,72 the rule is settled that the findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise of authority.73 Absent showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the value of said shares cannot be considered income for taxation

purposes. Since "a mere advance in the value of the property of a person or corporation in no sense constitute the income specified in the revenue law," it has been held in the early case of Fisher vs. Trinidad,74 that it "constitutes and can be treated merely as an increase of capital." Hence, the CIR has no factual and legal basis in assessing income tax on the increase in the value of FDC's shareholdings in FAC until the same is actually sold at a profit. WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED. Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST97-00021-2000 issued for deficiency documentary stamp taxes due on the instructional letters as well as journal and cash vouchers evidencing the advances FDC extended to its affiliates are declared valid. The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the "arms-length" interest from said advances; (b) the gain from FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution resulting from FDCs Shareholders Agreement with RHPL is, however, upheld. SO ORDERED.

G.R. No. L-37251 August 31, 1981 CITY OF MANILA and CITY TREASURER, petitioners-appellants, vs. JUDGE AMADOR E. GOMEZ of the Court of First Instance of Manila and ESSO PHILIPPINES, INC.,respondents-appellees.

After hearing, the trial court declared the tax ordinance void and ordered the city treasurer of Manila to refund to Esso the said tax. The City of Manila and its treasurer appealed to this Court under Republic Act No. 5440 (which superseded Rule 42 of the Rules of Court). The only issue is the validity of the tax ordinance or the legality of the additional one-half percent realty tax. The petitioners in their manifestation of March 17, 1981 averred that the said tax ordinance is still in force; that Ordinance No. 7566, which was enacted on September 10, 1974, imposed a two percent tax on commercial real properties (like the real properties of Esso and that that two percent tax plus the one percent tax under the Special Education Fund Law gives a total of three percent realty tax on commercial properties. Esso Philippines, Inc., now Petrophil Corporation, in its manifestation of March 2, 1981, revealed that up to this time it has been paying the additional one-half percent tax and that from 1975 to 1980 it paid the total sum of P4,206,240.71 as three percent tax on its real properties. In this connection, it is relevant to note that section 39(2) of the Real Property Tax Code, Presidential Decree No. 464, which took effect on June 1, 1974, provides that a city council may, by ordinance, impose a realty tax "of not less than one half of one percent but not more than two percent of the assessed value of real property". Section 41 of the said Code reaffirms the one percent tax on real property for the Special Education Fund in addition to the basic two percent realty tax. So, there is no question now that the additional one-half percent realty tax is valid under the Real Property Tax Code. What is in controversy is the legality of the additional one-half percent realty tax for the two-year period from the third quarter of 1972 up to the second quarter of 1974. We hold that the doctrine of implications in statutory construction sustains the City of Manila's contention that the additional one-half percent realty tax is sanctioned by the provision in section 4 of the Special Education Fund Law that "the total real property tax shall not exceed a maximum of three per centum. The doctrine of implications means that "that which is plainly implied in the language of a statute is as much a part of it as that which is expressed" ( In re McCulloch Dick, 38 Phil. 41, 45, 90; 82 C.J.S. 632, 73 Am Jur 2nd 404). While the 1949 Revised Charter of Manila fixed the realty tax at one and a half percent, on the other hand, the 1968 Special Education Fund Law definitively fixed

AQUINO, J.: This case is about the legality of the additional one-half percent (%) realty tax imposed by the City of Manila. Section 64 of the Revised Charter of Manila, Republic Act No. 409, which took effect on June 18, 1949, fixes the annual realty tax at one and one-half percent (1- %). On the other hand, section 4 of the Special Education Fund Law, Republic Act No. 5447, which took effect on January 1, 1969, imposed "an annual additional tax of one per centum on the assessed value of real property in addition to the real property tax regularly levied thereon under existing laws" but "the total real property tax shall not exceed a maximum of three per centrum. That maximum limit gave the municipal board of Manila the Idea of fixing the realty tax at three percent. So, by means of Ordinance No. 7125, approved by the city mayor on December 26, 1971 and effective beginning the third quarter of 1972, the board imposed an additional one-half percent realty tax. The ordinance reads: SECTION 1. An additional annual realty tax of one-half percent (1/2%), or in short a total of three percent (3%) realty tax (1-% pursuant to the Revised Charter of Manila; 1% per Republic Act No. 5447; and % per this Ordinance) on the assessed value ... is hereby levied and imposed. Esso Philippines, Inc. paid under protest the sum of P16,092.69 as additional onehalf percent realty tax for the third quarter of 1972 on its land and machineries located in Manila. On November 9, 1972, Esso filed a complaint in the Court of First Instance of Manila for the recovery of the said amount. It contended that the additional one-half percent tax is void because it is not authorized by the city charter nor by any law (Civil Case No. 88827).

three percent as the maximum real property tax of which one percent would accrue to the Special Education Fund. The obvious implication is that an additional one-half percent tax could be imposed by municipal corporations. Inferentially, that law fixed at two percent the realty tax that would accrue to a city or municipality. And the fact that the 1974 Real Property Tax Code specifically fixes the real property tax at two percent confirms the prior intention of the lawmaker to impose two percent as the realty tax proper. That was also the avowed intention of the questioned ordinance. In invalidating the ordinance, the trial court upheld the view of Esso Philippines, Inc, that the Special Education Fund Law refers to a contingency where the application of the additional one percent realty tax would have the effect of raising the total realty tax to more than three percent and that it cannot be construed as an authority to impose an additional realty tax beyond the one percent fixed by the said law. At first glance, that appears to be a specious or reasonable contention. But the fact remains that the city charter fixed the realty tax at 1-% and the later law, the Special Education Fund Law, provides for three percent as the maximum realty tax of which one percent would be earmarked for the education fund. The unavoidable inference is that the later law authorized the imposition of an additional one-half percent realty tax since the contingency referred to by the complaining taxpayer would not arise in the City of Manila. It is true, as contended by the taxpayer, that the power of a municipal corporation to levy a tax should be expressly granted and should not be merely inferred. But in this case, the power to impose a realty tax is not controverted. What is disputed is the amount thereof, whether one and one-half percent only or two percent. (See sec. 2 of Rep. Act No. 2264.) As repeatedly observed, section 4 of the Special Education Fund Law, as confirmed by the Real Property Tax Code, in prescribing a total realty tax of three percent impliedly authorizes the augmentation by one-half percent of the pre-existing one and one- half percent realty tax. WHEREFORE, the decision of the trial court is reversed and set aside. The complaint of Esso Philippines, Inc. for recovery of the realty tax paid under protest is dismissed. No costs. SO ORDERED.

G.R. No. L-52306 October 12, 1981 ABS-CBN BROADCASTING CORPORATION, petitioner, vs. COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

MELENCIO-HERRERA, J.: This is a Petition for Review on certiorari of the Decision of the Court of Tax Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which affirmed the assessment by the Commissioner of Internal Revenue, dated April 16, 1971, of a deficiency withholding income tax against petitioner, ABS-CBN Broadcasting Corporation, for the years 1965, 1966, 1967 and 1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222, 260.64, or a total of P525,897.06. During the period pertinent to this case, petitioner corporation was engaged in the business of telecasting local as well as foreign films acquired from foreign corporations not engaged in trade or business within the Philippines. for which petitioner paid rentals after withholding income tax of 30%of one-half of the film rentals. In so far as the income tax on non-resident corporations is concerned, section 24 (b) of the National Internal Revenue Code, as amended by Republic Act No. 2343 dated June 20, 1959, used to provide: (b) Tax on foreign corporations.(1) Non-resident corporations. There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from an sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount. (Emphasis supplied) On April 12, 1961, in implementation of the aforequoted provision, the Commissioner of Internal Revenue issued General Circular No. V-334 reading thus: In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic Act No. 2343, under which an income tax equal to 30% is levied upon the amount received by every foreign

corporation not engaged in trade or business within the Philippines from all sources within this country as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, it has been determined that the tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation (Sec. 39, Income Tax Regulations), and that a mere return of capital or investment is not income (Par. 5,06, 1 Mertens Law of Federal 'Taxation). Since according to the findings of the Special Team who inquired into business of the non-resident foreign film distributors, the distribution or exhibition right on a film is invariably acquired for a consideration, either for a lump sum or a percentage of the film rentals, whether from a parent company or an independent outside producer, apart of the receipts of a nonresident foreign film distributor derived from said film represents, therefore, a return of investment. xxx xxx xxx 4. The local distributor should withhold 30% of one-half of the film rentals paid to the non-resident foreign film distributor and pay the same to this office in accordance with law unless the nonresident foreign film distributor makes a prior settlement of its income tax liability. (Emphasis ours). Pursuant to the foregoing, petitioner dutifully withheld and turned over to the Bureau of Internal Revenue the amount of 30% of one-half of the film rentals paid by it to foreign corporations not engaged in trade or business within the Philippines. The last year that petitioner withheld taxes pursuant to the foregoing Circular was in 1968. On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from 30 % to 35 % and revising the tax basis from "such amount" referring to rents, etc. to "gross income," as follows: (b) Tax on foreign corporations.(1) Non-resident corporations.A foreign corporation not engaged in trade or business in the Philippines including a foreign life insurance company not engaged in the life insurance business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received during each taxable year from all sources within the Philippines, as interests, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable annual, periodical or casual gains, profits, and

income, and capital gains, Provided however, That premiums shah not include reinsurance premiums. (Emphasis supplied) On February 8, 1971, the Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-334, and holding that the latter was "erroneous for lack of legal basis," because "the tax therein prescribed should be based on gross income without deduction whatever," thus: After a restudy and analysis of Section 24 (b) of the National Internal Revenue Code, as amended by Republic Act No. 5431, and guided by the interpretation given by tax authorities to a similar provision in the Internal Revenue Code of the United States, on which the aforementioned provision of our Tax Code was patterned, this Office has come to the conclusion that the tax therein prescribed should be based on gross income without t deduction whatever. Consequently, the ruling in General Circular No. V-334, dated April 12, 1961, allowing the deduction of the proportionate cost of production or exhibition of motion picture films from the rental income of non- resident foreign corporations, is erroneous for lack of legal basis. In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby revoked and henceforth, local films distributors and exhibitors shall deduct and withhold 35% of the entire amount payable by them to non-resident foreign corporations, as film rental or royalty, or whatever such payment may be denominated, without any deduction whatever, pursuant to Section 24 (b), and pay the withheld taxes in accordance with Section 54 of the Tax Code, as amended. All rulings inconsistent with this Circular is likewise revoked. (Emphasis ours) On the basis of this new Circular, respondent Commissioner of Internal Revenue issued against petitioner a letter of assessment and demand dated April 15, 1971, but allegedly released by it and received by petitioner on April 12, 1971, requiring them to pay deficiency withholding income tax on the remitted film rentals for the years 1965 through 1968 and film royalty as of the end of 1968 in the total amount of P525,897.06 computed as follows: On May 5, 1971, petitioner requested for a reconsideration and withdrawal of the assessment. However, without acting thereon, respondent, on April 6, 1976, issued a warrant of distraint and levy over petitioner's personal as well as real properties. The petitioner then filed its Petition for Review with the Court of Tax Appeals whose

Decision, dated November 29, 1979, is, in turn, the subject of this review. The Tax Court held: For the reasons given, the Court finds the assessment issued by respondent on April 16, 1971 against petitioner in the amounts of P75,895.24, P 99,239.18, P128,502.00 and P222,260.64 or a total of P525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967 and 1968, respectively, in accordance with law. As prayed for, the petition for review filed in this case is dismissed, and petitioner ABS-CBN Broadcasting Corporation is hereby ordered to pay the sum of P525,897.06 to respondent Commissioner of Internal Revenue as deficiency withholding income tax for the taxable years 1965 thru 1968, plus the surcharge and interest which have accrued thereon incident to delinquency pursuant to Section 51 (e) of the National Internal Revenue Code, as amended. WHEREFORE, the decision appealed from is hereby affirmed at petitioner's cost. SO ORDERED. 2 The issues raised are two-fold: I. Whether or not respondent can apply General Circular No. 4-71 retroactively and issue a deficiency assessment against petitioner in the amount of P 525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967 and 1968. II. Whether or not the right of the Commissioner of Internal Revenue to assess the deficiency withholding income tax for the year 196,5 has prescribed. 3 Upon the facts and circumstances of the case, review is warranted. In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act No. 6110 on August 9, 1969, it provides: Sec. 338-A. Non-retroactivity of rulings. Any revocation, modification, or reversal of and of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the relocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases: (a) where the taxpayer

deliberately mis-states or omits material facts from his return or 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; or (c) where the taxpayer acted in bad faith. ( italics for emphasis) It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or three years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The assessment and demand on petitioner to pay deficiency withholding income tax was also made three years after 1968 for a period of time commencing in 1965. Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already remitted all film rentals and no longer had any control over them when the new Circular was issued. And in so far as the enumerated exceptions are concerned, admittedly, petitioner does not fall under any of them. Respondent claims, however, that the provision on non-retroactivity is inapplicable in the present case in that General Circular No. V-334 is a nullity because in effect, it changed the law on the matter. The Court of Tax Appeals sustained this position holding that: "Deductions are wholly and exclusively within the power of Congress or the law-making body to grant, condition or deny; and where the statute imposes a tax equal to a specified rate or percentage of the gross or entire amount received by the taxpayer, the authority of some administrative officials to modify or change, much less reduce, the basis or measure of the tax should not be read into law." 4 Therefore, the Tax Court concluded, petitioner did not acquire any vested right thereunder as the same was a nullity. The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha(d) been determined that the tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation ...and that a mere return of capital or investment is not income ... ." "A part of the receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment." The Circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the portion of the rentals covering the return of capital." 5 Were the "gross income" base clear from Sec. 24 (b), perhaps, the ratiocination of the Tax Court could be upheld. It should be noted, however, that said Section was not too plain and simple to understand. The fact that the issuance of the General Circular in question was rendered necessary leads to no other conclusion than that it was not easy of comprehension and could be subjected to different interpretations.

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was just one in a series of enactments regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on June 22, 1963 without changing the basis but merely adding a proviso (in bold letters). (b) Tax on foreign corporation.(1) Non-resident corporations. There shall be levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. (double emphasis ours). Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some words (also in bold letters). (b) Tax on foreign corporations.(1) Non-resident corporations.There shall be levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal to thirty per centum of such amount. 6 (double emphasis supplied) The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction. 7 Note should be taken of the fact that this case involves not a mere opinion of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all internal revenue officials" by the then Commissioner of Internal Revenue. It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24 (b) was amended to refer specifically to 35% of the " gross income."

This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like other principles of law, this also admits of exceptions in the interest of justice and fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code, as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative of legislative intention to support the principle of good faith. In fact, in the United States, from where Sec. 24 (b) was patterned, it has been held that the Commissioner of Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, 11 or where there has been a misrepresentation to the taxpayer. 12 We have also noted that in its Decision, the Court of Tax Appeals further required the petitioner to pay interest and surcharge as provided for in Sec. 51 (e) of the Tax Code in addition to the deficiency withholding tax of P 525,897.06. This additional requirement is much less called for because the petitioner relied in good faith and religiously complied with no less than a Circular issued "to all internal revenue officials" by the highest official of the Bureau of Internal Revenue and approved by the then Secretary of Finance. 13 With the foregoing conclusions arrived at, resolution of the issue of prescription becomes unnecessary. WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed, and the questioned assessment set aside. No costs. SO ORDERED.