[G.R. No. 119286.

October 13, 2004]

PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,

vs. COURT OF APPEALS, COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
TINGA, J.:

The changes in the reportorial requirements and payment schedules of

corporate income taxes from annual to quarterly have created problems,
especially on the matter of tax refunds. In this case, the Court is called to
resolve the question of whether alleged excess taxes paid by a corporation
during a taxable year should be refunded or credited against its tax liabilities
for the succeeding year.
[1]

Paseo Realty and Development Corporation, a domestic corporation

engaged in the lease of two (2) parcels of land at Paseo de Roxas in Makati
City, seeks a review of the Decision of the Court of Appeals dismissing its
petition for review of the resolution of the Court of Tax Appeals (CTA) which,
in turn, denied its claim for refund.
[2]

[3]

The factual antecedents are as follows:

[4]

On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989
declaring a gross income of P1,855,000.00, deductions ofP1,775,991.00, net income
of P79,009.00, an income tax due thereon in the amount of P27,653.00, prior years
excess credit of P146,026.00, and creditable taxes withheld in 1989 of P54,104.00 or a
total tax credit of P200,130.00 and credit balance of P172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for the refund of
excess creditable withholding and income taxes for the years 1989 and 1990 in the
aggregate amount of P147,036.15.
On December 27, 1991 alleging that the prescriptive period for refunds for 1989
would expire on December 30, 1991 and that it was necessary to interrupt the
prescriptive period, petitioner filed with the respondent Court of Tax Appeals a
petition for review praying for the refund ofP54,104.00 representing creditable taxes

withheld from income payments of petitioner for the calendar year ending December
31, 1989.
On February 25, 1992, respondent Commissioner filed an Answer and by way of
special and/or affirmative defenses averred the following: a) the petition states no
cause of action for failure to allege the dates when the taxes sought to be refunded
were paid; b) petitioners claim for refund is still under investigation by respondent
Commissioner; c) the taxes claimed are deemed to have been paid and collected in
accordance with law and existing pertinent rules and regulations; d) petitioner failed
to allege that it is entitled to the refund or deductions claimed; e) petitioners
contention that it has available tax credit for the current and prior year is gratuitous
and does not ipso facto warrant the refund; f) petitioner failed to show that it has
complied with the provision of Section 230 in relation to Section 204 of the Tax Code.
After trial, the respondent Court rendered a decision ordering respondent
Commissioner to refund in favor of petitioner the amount of P54,104.00, representing
excess creditable withholding taxes paid for January to July1989.
Respondent Commissioner moved for reconsideration of the decision, alleging that
the P54,104.00 ordered to be refunded has already been included and is part and
parcel of the P172,477.00 which petitioner automatically applied as tax credit for the
succeeding taxable year 1990.
In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of
July 29, 1993 and dismissed the petition for review, stating that it has overlooked the
fact that the petitioners 1989 Corporate Income Tax Return (Exh. A) indicated that the
amount of P54,104.00 subject of petitioners claim for refund has already been
included as part and parcel of the P172,477.00 which the petitioner automatically
applied as tax credit for the succeeding taxable year 1990.
Petitioner filed a Motion for Reconsideration which was denied by respondent Court
on March 10, 1994.
[5]

Petitioner filed a Petition for Review dated April 3, 1994 with the Court of
Appeals. Resolving the twin issues of whether petitioner is entitled to a refund
of P54,104.00 representing creditable taxes withheld in 1989 and whether
petitioner applied such creditable taxes withheld to its 1990 income tax
liability, the appellate court held that petitioner is not entitled to a refund
because it had already elected to apply the total amount of P172,447.00,
[6]

which includes the P54,104.00 refund claimed, against its income tax liability
for 1990. The appellate court elucidated on the reason for its dismissal of
petitioners claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the
year 1989, it filled up the box stating that the total amount ofP172,477.00 shall be
applied against its income tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be
applied as tax credit to the succeeding taxable year, but merely marked an x to the box
indicating to be applied as tax credit to the succeeding taxable year. Unlike what
petitioner had done when it filed its income tax return for the year 1988, it specifically
stated that out of the P146,026.00 the entire refundable amount, only P64,623.00 will
be made available as tax credit, while the amount of P81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box to be applied as tax credit to
succeeding taxable year, which signified that instead of refund, petitioner will apply
the total amount of P172,447.00, which includes the amount of P54,104.00 sought to
be refunded, as tax credit for its tax liabilities in 1990. Thus, there is really nothing
left to be refunded to petitioner for the year 1989. To grant petitioners claim for refund
is tantamount to granting twice the refund herein sought to be refunded, to the
prejudice of the Government.
The Court of Appeals denied petitioners Motion for Reconsideration dated
November 8, 1994 in its Resolution dated February 21, 1995 because the
motion merely restated the grounds which have already been considered and
passed upon in its Decision.
[7]

[8]

[9]

Petitioner thus filed the instant Petition for Review dated April 14, 1995
arguing that the evidence presented before the lower courts conclusively
shows that it did not apply the P54,104.00 to its 1990 income tax liability; that
the Decision subject of the instant petition is inconsistent with a final
decision of the Sixteenth Division of the appellate court in C.A.-G.R. Sp. No.
32890 involving the same parties and subject matter; and that the affirmation
of the questioned Decision would lead to absurd results in the manner of
claiming refunds or in the application of prior years excess tax credits.
[10]

[11]

The Office of the Solicitor General (OSG) filed a Comment dated May 16,
1996 on behalf of respondents asserting that the claimed refund
[12]

of P54,104.00 was, by petitioners election in its Corporate Annual Income Tax

Return for 1989, to be applied against its tax liability for 1990. Not having
submitted its tax return for 1990 to show whether the said amount was indeed
applied against its tax liability for 1990, petitioners election in its tax return
stands. The OSG also contends that petitioners election to apply its overpaid
income tax as tax credit against its tax liabilities for the succeeding taxable
year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply dated August 31, 1996
insisting that the issue in this case is not whether the amount of P54,104.00
was included as tax credit to be applied against its 1990 income tax liability
but whether the same amount was actually applied as tax credit for 1990.
Petitioner claims that there is no need to show that the amount of P54,104.00
had not been automatically applied against its 1990 income tax liability
because the appellate courts decision in C.A.-G.R. Sp. No. 32890 clearly held
that petitioner charged its 1990 income tax liability against its tax credit for
1988 and not 1989. Petitioner also disputes the OSGs assertion that the
taxpayers election as to the application of excess taxes is irrevocable averring
that there is nothing in the law that prohibits a taxpayer from changing its mind
especially if subsequent events leave the latter no choice but to change its
election.
[13]

The OSG filed a Rejoinder dated March 5, 1997 stating that petitioners
1988 tax return shows a prior years excess credit ofP81,403.00, creditable tax
withheld of P92,750.00 and tax due of P27,127.00. Petitioner indicated that
the prior years excess credit ofP81,403.00 was to be refunded, while the
remaining amount of P64,623.00 (P92,750.00 - P27,127.00) shall be
considered as tax credit for 1989. However, in its 1989 tax return, petitioner
included the P81,403.00 which had already been segregated for refund in the
computation of its excess credit, and specified that the full amount
of P172,479.00 (P81,403.00 + P64,623.00 + P54,104.00 -P27,653.00 ) be
considered as its tax credit for 1990. Considering that it had obtained a
favorable ruling for the refund of its excess credit for 1988 in CA-G.R. SP. No.
32890, its remaining tax credit for 1989 should be the excess credit to be
applied against its 1990 tax liability. In fine, the OSG argues that by its own
election, petitioner can no longer ask for a refund of its creditable taxes
withheld in 1989 as the same had been applied against its 1990 tax due.
[14]

**

***

In its Resolution dated July 16, 1997, the Court gave due course to the
petition and required the parties to simultaneously file their respective
memoranda within 30 days from notice. In compliance with this directive,
petitioner submitted its Memorandum dated September 18, 1997 in due time,
while the OSG filed its Memorandum dated April 27, 1998 only on April 29,
1998 after several extensions.
[15]

[16]

[17]

The petition must be denied.

As a matter of principle, it is not advisable for this Court to set aside the
conclusion reached by an agency such as the CTA which is, by the very
nature of its functions, 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 its authority.
[18]

This interdiction finds particular application in this case since the CTA,
after careful consideration of the merits of the Commissioner of Internal
Revenues motion for reconsideration, reconsidered its earlier decision which
ordered the latter to refund the amount of P54,104.00 to petitioner. Its
resolution cannot be successfully assailed based, as it is, on the pertinent
laws as applied to the facts.
Petitioners 1989 tax return indicates an aggregate creditable tax
of P172,477.00, representing its 1988 excess credit ofP146,026.00 and 1989
creditable tax of P54,104.00 less tax due for 1989, which it elected to apply as
tax credit for the succeeding taxable year. According to petitioner, it
successively utilized this amount when it obtained refunds in CTA Case No.
4439 (C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No.
32890), and applied its 1990 tax liability, leaving a balance of P54,104.00, the
amount subject of the instant claim for refund. Represented mathematically,
petitioner accounts for its claim in this wise:
[19]

[20]

P172,477.00 Amount indicated in petitioners 1989 tax return to be applied as tax

credit for the succeeding taxable year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
P146,854.00 Balance as of April 16, 1990

- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No.
32890)
P87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15,
1991
P54,104.00 Balance as of April 15, 1991 now subject of the instant claim for
refund
[21]

Other than its own bare allegations, however, petitioner offers no proof to
the effect that its creditable tax of P172,477.00 was applied as claimed above.
Instead, it anchors its assertion of entitlement to refund on an alleged finding
in C.A.-G.R. Sp. No. 32890 involving the same parties to the effect that
petitioner charged its 1990 income tax liability to its tax credit for 1988 and not
its 1989 tax credit. Hence, its excess creditable taxes withheld of P54,104.00
for 1989 was left untouched and may be refunded.
[22]

Note should be taken, however, that nowhere in the case referred to by

petitioner did the Court of Appeals make a categorical determination that
petitioners tax liability for 1990 was applied against its 1988 tax credit. The
statement adverted to by petitioner was actually presented in the appellate
courts decision in CA-G.R. Sp No. 32890 as part of petitioners own narration
of facts. The pertinent portion of the decision reads:
It would appear from petitioners submission as follows:
xxx since it has already applied to its prior years excess credit of P81,403.00 (which
petitioner wanted refunded when it filed its 1988 Income Tax Return on April 14,
1989) the income tax liability for 1988 of P28,127.00 and the income tax liability for
1989 of P27,653.00, leaving a balance refundable of P25,623.00 subject of C.T.A.
Case No. 4439, the P92,750.00 (P64,623.00 plus P28,127.00, since this second
amount was already applied to the amount refundable of P81,403.00) should be the
refundable amount. But since the taxpayer again used part of it to satisfy its income
tax liability of P33,240.00 for 1990, the amount refundable was P59,510.00, which is
the amount prayed for in the claim for refund and also in the petitioner (sic) for
review.

That the present claim for refund already consolidates its claims for refund for 1988,
1989, and 1990, when it filed a claim for refund of P59,510.00 in this case (CTA Case
No. 4528). Hence, the present claim should be resolved together with the previous
claims.
[23]

The confusion as to petitioners entitlement to a refund could altogether

have been avoided had it presented its tax return for 1990. Such return would
have shown whether petitioner actually applied its 1989 tax credit
of P172,477.00, which includes the P54,104.00 creditable taxes withheld for
1989 subject of the instant claim for refund, against its 1990 tax liability as it
had elected in its 1989 return, or at least, whether petitioners tax credit
of P172,477.00 was applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess
credit refundable to petitioner after deducting its tax liability for 1990. As it is,
we only have petitioners allegation that its tax due for 1990 was P33,240.00
and that this was applied against its remaining tax credits using its own first in,
first out method of computation.
It would have been different had petitioner not included the P54,104.00
creditable taxes for 1989 in the total amount it elected to apply against its
1990 tax liabilities. Then, all that would have been required of petitioner are:
proof that it filed a claim for refund within the two (2)-year prescriptive period
provided under Section 230 of the NIRC; evidence that the income upon
which the taxes were withheld was included in its return; and to establish the
fact of withholding by a copy of the statement (BIR Form No. 1743.1) issued
by the payor to the payee showing the amount paid and the amount of tax
withheld therefrom. However, since petitioner opted to apply its aggregate
excess credits as tax credit for 1990, it was incumbent upon it to present its
tax return for 1990 to show that the claimed refund had not been automatically
credited and applied to its 1990 tax liabilities.
[24]

The grant of a refund is founded on the assumption that the tax return is
valid, i.e., that the facts stated therein are true and correct. Without the tax
return, it is error to grant a refund since it would be virtually impossible to
determine whether the proper taxes have been assessed and paid.
[25]

Why petitioner failed to present such a vital piece of evidence confounds

the Court. Petitioner could very well have attached a copy of its final

adjustment return for 1990 when it filed its claim for refund on November 13,
1991. Annex B of its Petition for Review dated December 26, 1991 filed with
the CTA, in fact, states that its annual tax return for 1990 was submitted in
support of its claim. Yet, petitioners tax return for 1990 is nowhere to be found
in the records of this case.
[26]

Had petitioner presented its 1990 tax return in refutation of respondent

Commissioners allegation that it did not present evidence to prove that its
claimed refund had already been automatically credited against its 1990 tax
liability, the CTA would not have reconsidered its earlier Decision. As it is, the
absence of petitioners 1990 tax return was the principal basis of the
CTAs Resolutionreconsidering its earlier Decision to grant petitioners claim for
refund.
Petitioner could even still have attached a copy of its 1990 tax return to its
petition for review before the Court of Appeals. The appellate court, being a
trier of facts, is authorized to receive it in evidence and would likely have
taken it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals, although petitioner
failed to present its 1990 tax return, it presented other evidence to prove its
claim that it did not apply and could not have applied the amount in dispute as
tax credit. Importantly, petitioner therein attached a copy of its final adjustment
return for 1990 to its motion for reconsideration before the CTA buttressing its
claim that it incurred a net loss and is thus entitled to refund. Considering this
fact, the Court held that there is no reason for the BIR to withhold the tax
refund.
[27]

In this case, petitioners failure to present sufficient evidence to prove its

claim for refund is fatal to its cause. After all, it is axiomatic that a claimant has
the burden of proof to establish the factual basis of his or her claim for tax
credit or refund. Tax refunds, like tax exemptions, are construed strictly
against the taxpayer.
[28]

Section 69, Chapter IX, Title II of the National Internal Revenue Code of
the Philippines (NIRC) provides:
Sec. 69. Final Adjustment Return.Every corporation liable to tax under Section 24
shall file a final adjustment return covering the total net income for the preceding

calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable net income of that
year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly
income taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of income tax. A final
or an adjustment return on B.I.R. Form No. 1702 covering the total taxable income of
the corporation for the preceding calendar or fiscal year shall be filed on or before the
15th day of the fourth month following the close of the calendar or fiscal year. The
return shall include all the items of gross income and deductions for the taxable year.
The amount of income tax to be paid shall be the balance of the total income tax
shown on the final or adjustment return after deducting therefrom the total quarterly
income taxes paid during the preceding first three quarters of the same calendar or
fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and
shown in the adjustment or final corporate income tax return shall either (a) be
refunded to the corporation, or (b) may be credited against the estimated quarterly
income tax liabilities for the quarters of the succeeding taxable year. The corporation
must signify in its annual corporate adjustment return its intention whether to
request for refund of the overpaid income tax or claim for automatic credit to be
applied against its income tax liabilities for the quarters of the succeeding taxable
year by filling up the appropriate box on the corporate tax return (B.I.R. Form
No. 1702). [Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the
corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may
be credited against the estimated quarterly income tax liabilities for the

taxable quarters of the succeeding year. The carrying forward of any excess
or overpaid income tax for a given taxable year is limited to the succeeding
taxable year only.
In the recent case of AB Leasing and Finance Corporation v.
Commissioner of Internal Revenue, where the Court declared that [T]he
carrying forward of any excess or overpaid income tax for a given taxable year
then is limited to the succeeding taxable year only, we ruled that since the
case involved a claim for refund of overpaid taxes for 1993, petitioner could
only have applied the 1993 excess tax credits to its 1994 income tax liabilities.
To further carry-over to 1995 the 1993 excess tax credits is violative of Section
69 of the NIRC.
[29]

In this case, petitioner included its 1988 excess credit of P146,026.00 in

the computation of its total excess credit for 1989. It indicated this amount,
plus the 1989 creditable taxes withheld of P54,104.00 or a total
of P172,477.00, as its total excess credit to be applied as tax credit for 1990.
By its own disclosure, petitioner effectively combined its 1988 and 1989 tax
credits and applied its 1990 tax due of P33,240.00 against the total, and not
against its creditable taxes for 1989 only as allowed by Section 69. This is a
clear admission that petitioners 1988 tax credit was incorrectly and illegally
applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for
refund or have its excess taxes applied as tax credit for the succeeding
taxable year, such election is not final. Prior verification and approval by the
Commissioner of Internal Revenue is required. The availment of the remedy of
tax credit is not absolute and mandatory. It does not confer an absolute right
on the taxpayer to avail of the tax credit scheme if it so chooses. Neither does
it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the
taxpayer.
[30]

Contrary to petitioners assertion however, the taxpayers election, signified

by the ticking of boxes in Item 10 of BIR Form No. 1702, is not a mere
technical exercise. It aids in the proper management of claims for refund or
tax credit by leading tax authorities to the direction they should take in
addressing the claim.

The amendment of Section 69 by what is now Section 76 of Republic Act

No. 8424 emphasizes that it is imperative to indicate in the tax return or the
final adjustment return whether a tax credit or refund is sought by making the
taxpayers choice irrevocable. Section 76 provides:
[31]

SEC. 76. Final Adjustment Return.Every corporation liable to tax under Section 27
shall file a final adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable income of that year,
the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return
may be carried over and credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been made, such option shall
be considered irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed therefore. [Emphasis
supplied]
As clearly seen from this provision, the taxpayer is allowed three (3)
options if the sum of its quarterly tax payments made during the taxable year
is not equal to the total tax due for that year: (a) pay the balance of the tax still
due; (b) carry-over the excess credit; or (c) be credited or refunded the
amount paid. If the taxpayer has paid excess quarterly income taxes, it may
be entitled to a tax credit or refund as shown in its final adjustment return
which may be carried over and applied against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years.
However, once the taxpayer has exercised the option to carry-over and to
apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years, such option is irrevocable for that

taxable period and no application for cash refund or issuance of a tax credit
certificate shall be allowed.
Had this provision been in effect when the present claim for refund was
filed, petitioners excess credits for 1988 could have been properly applied to
its 1990 tax liabilities. Unfortunately for petitioner, this is not the case.
Taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property
for the support of the government. And since taxes are what we pay for
civilized society, or are the lifeblood of the nation, the law frowns against
exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi jurisagainst the taxpayer and liberally in favor of the
taxing authority. A claim of refund or exemption from tax payments must be
clearly shown and be based on language in the law too plain to be mistaken.
Elsewise stated, taxation is the rule, exemption therefrom is the exception.
[32]

WHEREFORE, the instant petition is DENIED. The challenged decision of

the Court of Appeals is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 120082. September 11, 1996]

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs. HON. FERDINAND J. MARCOS, in his capacity as the
Presiding Judge of the Regional Trial Court, Branch 20, Cebu
City, THE CITY OF CEBU, represented by its Mayor, HON.
TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.
DECISION
DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law
are the decision of 22 March 1995[1] of the Regional Trial Court (RTC)
of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil
Case No. CEB-16900, entitled Mactan Cebu International Airport Authority vs.

City of Cebu, and its order of 4 May 1995[2]denying the motion to reconsider
the decision.
We resolved to give due course to this petition for it raises issues dwelling
on the scope of the taxing power of local government units and the limits of
tax exemption privileges of government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant
petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by
virtue of Republic Act No. 6958, mandated to principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, x x
x and such other airports as may be established in the Province of Cebu x x x (Sec. 3,
RA 6958). It is also mandated to:
a) encourage, promote and develop international and domestic air traffic in the Central
Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country; and,
b) upgrade the services and facilities of the airports and to formulate internationally
acceptable standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes imposed
by the National Government or any of its political subdivisions, agencies and
instrumentalities x x x.
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of
the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount
of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming
in its favor the aforecited Section 14 of RA 6958 which exempts it from payment of
realty taxes. It was also asserted that it is an instrumentality of the government
performing governmental functions, citing Section 133 of the Local Government
Code of 1991 which puts limitations on the taxing powers of local government units:
Section 133. Common Limitations on the Taxing Powers of Local Government Units.
-- Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
a) x x x
xxx
o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (underscoring supplied)
Respondent City refused to cancel and set aside petitioners realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Government Code that took effect on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under RA No. 6938, nonstock and non-profit hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code. (underscoring supplied)
xxx
Section 234. Exemptions from Real Property Taxes. x x x
(a) x x x
xxx
(e) x x x

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations are hereby withdrawn upon
the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account under protest and thereafter
filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu, Branch
20, on December 29, 1994. MCIAA basically contended that the taxing powers of
local government units do not extend to the levy of taxes or fees of any kind on
an instrumentality of the national government. Petitioner insisted that while it is
indeed a government-owned corporation, it nonetheless stands on the same footing as
an agency or instrumentality of the national government by the very nature of its
powers and functions.
Respondent City, however, asserted that MCIAA is not an instrumentality of the
government but merely a government-owned corporation performing proprietary
functions. As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992.[3]
The petition for declaratory relief was docketed as Civil Case No. CEB16900.
In its decision of 22 March 1995,[4] the trial court dismissed the petition in
light of its findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government-owned and
controlled corporation per Sections after the effectivity of said Code on January 1,
1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of
Cebu are exempted from paying realty taxes in view of the exemption granted under
RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that All general and special laws, acts, city
charters, decrees [sic], executive orders, proclamations and administrative regulations,

or part of parts thereof which are inconsistent with any of the provisions of this Code
are hereby repealed or modified accordingly. (/f/, Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed by
the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.
This Courts ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Toward this end, the State shall provide
for a more responsive and accountable local government structure instituted through a
system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization shall
proceed from the national government to the local government units. x x x[5]
Its motion for reconsideration having been denied by the trial court in its 4
May 1995 order, the petitioner filed the instant petition based on the following
assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS
VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN
THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a
government-owned or controlled corporation, it is mandated to perform
functions in the same category as an instrumentality of Government. An
instrumentality of Government is one created to perform governmental
functions primarily to promote certain aspects of the economic life of the
people.[6] Considering its task not merely to efficiently operate and manage the
Mactan-Cebu International Airport, but more importantly, to carry out the
Government policies of promoting and developing the Central Visayas and

Mindanao regions as centers of international trade and tourism, and

accelerating the development of the means of transportation and
communication in the country,[7] and that it is an attached agency of the
Department of Transportation and Communication (DOTC),[8] the petitioner
may stand in [sic] the same footing as an agency or instrumentality of the
national government. Hence, its tax exemption privilege under Section 14 of
its Charter cannot be considered withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the `taxing powers of local government units shall not
extend to the levy of taxes or fees or charges of any kind on the national
government, its agencies and instrumentalities.
As to the second assigned error, the petitioner contends that being an
instrumentality of the National Government, respondent City of Cebu has no
power nor authority to impose realty taxes upon it in accordance with the
aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine
Amusement and Gaming Corporation:[9]
Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes.Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (McCulloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)
This doctrine emanates from the supremacy of the National Government over local
governments.
Justice Holmes, speaking for the Supreme Court, made reference to the entire absence
of power on the part of the States to touch, in that way (taxation) at least, the

instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them. (Antieau, Modern Constitutional
Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as a tool for regulation (U.S. v. Sanchez, 340 US 42). The power to
tax which was called by Justice Marshall as the power to destroy (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (underscoring supplied)
It then concludes that the respondent Judge cannot therefore correctly say
that the questioned provisions of the Code do not contain any distinction
between a government corporation performing governmental functions as
against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to all government
corporations. For it is clear from Section 133, in relation to Section 234, of the
LGC that the legislature meant to exclude instrumentalities of the national
government from the taxing powers of the local government units.
In its comment, respondent City of Cebu alleges that as a local
government unit and a political subdivision, it has the power to impose, levy,
assess, and collect taxes within its jurisdiction. Such power is guaranteed by
the Constitution[10] and enhanced further by the LGC. While it may be true that
under its Charter the petitioner was exempt from the payment of realty taxes,
[11]
this exemption was withdrawn by Section 234 of the LGC. In response to
the petitioners claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits
local government units from imposing taxes, fees, or charges of any kind on it,
respondent City of Cebu points out that the petitioner is likewise a
government-owned corporation, and Section 234 thereof does not distinguish
between government-owned or controlled corporations performing
governmental and purely proprietary functions. Respondent City of Cebu
urges this Court to apply by analogy its ruling that the Manila International
Airport Authority is a government-owned corporation, [12] and to reject the
application of Basco because it was promulgated . . . before the enactment

and the signing into law of R.A. No. 7160, and was not, therefore, decided in
the light of the spirit and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions.[13] Our Constitution, for instance, provides that the
rule of taxation shall be uniform and equitable and Congress shall evolve a
progressive system of taxation.[14] So potent indeed is the power that it was
once opined that the power to tax involves the power to destroy.[15] Verily,
taxation is a destructive power which interferes with the personal and property
rights of the people and takes from them a portion of their property for the
support of the government. Accordingly, tax statutes must be construed strictly
against the government and liberally in favor of the taxpayer.[16] But since taxes
are what we pay for civilized society,[17] or are the lifeblood of the nation, the
law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi jurisagainst the taxpayer and
liberally in favor of the taxing authority.[18] A claim of exemption from tax
payments must be clearly shown and based on language in the law too plain
to be mistaken.[19] Elsewise stated, taxation is the rule, exemption therefrom is
the exception.[20] However, if the grantee of the exemption is a political
subdivision or instrumentality, the rigid rule of construction does not apply
because the practical effect of the exemption is merely to reduce the amount
of money that has to be handled by the government in the course of its
operations.[21]
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution. [22] Under the latter, the
exercise of the power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with the basic
policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the
petitioner is exempt from the payment of realty taxes imposed by the National
Government or any of its political subdivisions, agencies, and

instrumentalities. Nevertheless, since taxation is the rule and exemption

therefrom the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and is thus covered by the
non-impairment clause of the Constitution.[23]
The LGC, enacted pursuant to Section 3, Article X of the Constitution,
provides for the exercise by local government units of their power to tax, the
scope thereof or its limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing
powers of local government units as follows:
SEC. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa,
except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage
dues, and all other kinds of customs fees, charges and dues except wharfage on
wharves constructed and maintained by the local government unit concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdictions of local government units in the guise of
charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges
in any form whatsoever upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as pioneer
or non-pioneer for a period of six (6) and four (4) years, respectively from the date of
registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as
amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar

transactions on goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and persons engaged in
the transportation of passengers or freight by hire and common carriers by air, land
or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of
all kinds of licenses or permits for the driving thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported, except as
otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and
cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the
Cooperatives Code of the Philippines respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT,
ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT
UNITS. (emphasis supplied)

Needless to say, the last item (item o) is pertinent to this case. The taxes, fees
or charges referred to are of any kind; hence, they include all of these, unless
otherwise provided by the LGC. The term taxes is well understood so as to
need no further elaboration, especially in light of the above enumeration. The
term fees means charges fixed by law or ordinance for the regulation or
inspection of business or activity,[24] while charges are pecuniary liabilities such
as rents or fees against persons or property.[25]
Among the taxes enumerated in the LGC is real property tax, which is
governed by Section 232. It reads as follows:
SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvements not hereafter
specifically exempted.
Section 234 of the LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted to

natural and juridical persons, including government-owned and controlled

corporations, except as provided therein. It provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof had been granted, for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
power;
(d) All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and
(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership, character, and use of the
property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis
of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their
character are: (i) charitable institutions, (ii) houses and temples of prayer like
churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit
or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the actual,
direct and exclusive use to which they are devoted are: (i) all lands, buildings and
improvements which are actually directly and exclusively used for religious,

charitable or educational purposes; (ii) all machineries and equipment actually,

directly and exclusively used by local water districts or by government-owned or
controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery and equipment
used for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously granted to natural
or juridical persons including government-owned or controlled corporations are
withdrawn upon the effectivity of the Code.[26]
Section 193 of the LGC is the general provision on withdrawal of tax
exemption privileges. It provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax
exemption privileges. Thus, Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the limitations on the
taxing powers of local government units and the exceptions to such
limitations; and (b) the rule on tax exemptions and the exceptions thereto. The
use of exceptions or provisos in these sections, as shown by the following
clauses:
(1) unless otherwise provided herein in the opening paragraph of Section 133;
(2) Unless otherwise provided in this Code in Section 193;

(3) not hereafter specifically exempted in Section 232; and

(4) Except as provided herein in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded.
Instead of the clause unless otherwise provided herein, with the herein to
mean, of course, the section, it should have used the clause unless otherwise
provided in this Code. The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local government units
and, where exceptions were intended, the exceptions are explicitly indicated
in the next. For instance, in item (a) which excepts income taxes when levied
on banks and other financial institutions; item (d) which excepts wharfage on
wharves constructed and maintained by the local government unit concerned;
and item (1) which excepts taxes, fees and charges for the registration and
issuance of licenses or permits for the driving of tricycles. It may also be
observed that within the body itself of the section, there are exceptions which
can be found only in other parts of the LGC, but the section interchangeably
uses therein the clause except as otherwise provided herein as in items (c)
and (i), or the clause except as provided in this Code in item (j). These
clauses would be obviously unnecessary or mere surplusages if the opening
clause of the section were Unless otherwise provided in this Code instead of
Unless otherwise provided herein. In any event, even if the latter is used,
since under Section 232 local government units have the power to levy real
property tax, except those exempted therefrom under Section 234, then
Section 232 must be deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in Section 133, the taxing
powers of local government units cannot extend to the levy of, inter alia,
taxes, fees and charges of any kind on the National Government, its agencies
and instrumentalities, and local government units; however, pursuant to
Section 232, provinces, cities, and municipalities in the Metropolitan Manila
Area may impose the real property tax except on, inter alia, real property
owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person, as provided in item (a) of the first paragraph of
Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by

natural or juridical persons, including government-owned and controlled
corporations, Section 193 of the LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, and unless otherwise
provided in the LGC. The latter proviso could refer to Section 234 which
enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption
insofar as real property taxes are concerned by limiting the retention only to
those enumerated therein; all others not included in the enumeration lost the
privilege upon the effectivity of the LGC. Moreover, even as to real property
owned by the Republic of the Philippines or any of its political subdivisions
covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a taxable
person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes granted
to natural or juridical persons, including government-owned or controlled
corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958,
has been withdrawn. Any claim to the contrary can only be justified if the
petitioner can seek refuge under any of the exceptions provided in Section
234, but not under Section 133, as it now asserts, since, as shown above, the
said section is qualified by Sections 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133
that the taxing powers of the local government units cannot extend to the levy
of:
(o) taxes, fees or charges of any kind on the National Government, its agencies or
instrumentalities, and local government units.
It must show that the parcels of land in question, which are real property, are
any one of those enumerated in Section 234, either by virtue of ownership,
character, or use of the property. Most likely, it could only be the first, but not
under any explicit provision of the said section, for none exists. In light of the

petitioners theory that it is an instrumentality of the Government, it could only

be within the first item of the first paragraph of the section by expanding the
scope of the term Republic of the Philippines to embrace its instrumentalities
and agencies. For expediency, we quote:
(a) real property owned by the Republic of the Philippines, or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioners claim
that it is an instrumentality of the Government is based on Section 133(o),
which expressly mentions the word instrumentalities; and, in the second
place, it fails to consider the fact that the legislature used the phrase National
Government, its agencies and instrumentalities in Section 133(o), but only the
phrase Republic of the Philippines or any of its political subdivisions in Section
234(a).
The terms Republic of the Philippines and National Government are not
interchangeable. The former is broader and synonymous with Government of
the Republic of the Philippines which the Administrative Code of 1987 defines
as the corporate governmental entity through which the functions of
government are exercised throughout the Philippines, including, save as the
contrary appears from the context, the various arms through which political
authority is made affective in the Philippines, whether pertaining to the
autonomous regions, the provincial, city, municipal or barangay subdivisions
or other forms of local government. [27] These autonomous regions, provincial,
city, municipal or barangay subdivisions are the political subdivisions.[28]
On the other hand, National Government refers to the entire machinery of
the central government, as distinguished from the different forms of local
governments.[29] The National Government then is composed of the three great
departments: the executive, the legislative and the judicial.[30]
An agency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a
distinct unit therein;[31] while an instrumentality refers to any agency of the
National Government, not integrated within the department framework, vested
with special functions or jurisdiction by law, endowed with some if not all

corporate powers, administering special funds, and enjoying operational

autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled corporations.[32]
If Section 234(a) intended to extend the exception therein to the
withdrawal of the exemption from payment of real property taxes under the
last sentence of the said section to the agencies and instrumentalities of the
National Government mentioned in Section 133(o), then it should have
restated the wording of the latter. Yet, it did not. Moreover, that Congress did
not wish to expand the scope of the exemption in Section 234(a) to include
real property owned by other instrumentalities or agencies of the government
including government-owned and controlled corporations is further borne out
by the fact that the source of this exemption is Section 40(a) of P.D. No. 464,
otherwise known as The Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporation so exempt by its
charter: Provided, however, That this exemption shall not apply to real property of the
above-mentioned entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.
Note that as reproduced in Section 234(a), the phrase and any governmentowned or controlled corporation so exempt by its charter was excluded. The
justification for this restricted exemption in Section 234(a) seems obvious: to
limit further tax exemption privileges, especially in light of the general
provision on withdrawal of tax exemption privileges in Section 193 and the
special provision on withdrawal of exemption from payment of real property
taxes in the last paragraph of Section 234. These policy considerations are
consistent with the State policy to ensure autonomy to local
governments[33] and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development
as self-reliant communities and make them effective partners in the attainment
of national goals.[34] The power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of local government
units for the delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress, and prosperity of
the people. It may also be relevant to recall that the original reasons for the

withdrawal of tax exemption privileges granted to government-owned and

controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, and there was a need for these
entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.[35]
The crucial issues then to be addressed are: (a) whether the parcels of
land in question belong to the Republic of the Philippines whose beneficial
use has been granted to the petitioner, and (b) whether the petitioner is a
taxable person.
Section 15 of the petitioners Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works or air operations,
including all equipment which are necessary for the operations of air navigation,
aerodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided, however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication, the
approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the Authority. The
Authority may assist in the maintenance of the Air Transportation Office equipment.
The airports referred to are the Lahug Air Port in Cebu City and the
Mactan International Airport in the Province of Cebu,[36]which belonged to the
Republic of the Philippines, then under the Air Transportation Office (ATO).[37]
It may be reasonable to assume that the term lands refer to lands in Cebu
City then administered by the Lahug Air Port and includes the parcels of land
the respondent City of Cebu seeks to levy on for real property taxes. This
section involves a transfer of the lands, among other things, to the petitioner
and not just the transfer of the beneficial use thereof, with the ownership being
retained by the Republic of the Philippines.

This transfer is actually an absolute conveyance of the ownership thereof

because the petitioners authorized capital stock consists of, inter alia, the
value of such real estate owned and/or administered by the airports. [38] Hence,
the petitioner is now the owner of the land in question and the exception in
Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person
under its Charter. It was only exempted from the payment of real property
taxes. The grant of the privilege only in respect of this tax is conclusive proof
of the legislative intent to make it a taxable person subject to all taxes, except
real property tax.
Finally, even if the petitioner was originally not a taxable person for
purposes of real property tax, in light of the foregoing disquisitions, it had
already become, even if it be conceded to be an agency or instrumentality of
the Government, a taxable person for such purpose in view of the withdrawal
in the last paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance
on Basco vs. Philippine Amusement and Gaming Corporation[39] is unavailing
since it was decided before the effectivity of the LGC. Besides, nothing can
prevent Congress from decreeing that even instrumentalities or agencies of
the Government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national
policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision
and order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No.
CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to municipalities under the Local
Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and
27, series of 1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager
of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies
and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo
for every bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of
the total number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the
total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring

Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory
and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not
apply. Legislative powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the legislative power to
create political corporations for purposes of local self-government carries with it the power to confer on
such local governmental agencies the power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5,
Article XI provides: "Each local government unit shall have the power to create its sources of revenue and
to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section
2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in
local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the
constitutional injunction against deprivation of property without due process of law may be passed over
under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the
taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed;
(3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4)
in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private as distinguished from a
public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary
or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due
process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury
rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or
the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the

amount of the tax and the manner in which it shall be apportioned are generally not necessary to due
process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on
the theory of double taxation. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised. 13 The reason is
that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in
general, is not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where
one tax is imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is
not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and still pay the
same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28,
1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks
produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No.
27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter,
even without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are
only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact
that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiffappellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned admission
shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No.
27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with
the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or
a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which
are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance
is not within the exceptions and limitations in the law, the same comes within the ambit of the
general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax 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." For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null and
void for being outside the power of the municipality to enact. 20But, the imposition of "a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or
manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or

other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on
the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio between the volume of
sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel
oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft
drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1- centavos per case, 23 cannot be
considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax is
oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in determining
the reates of imposable taxes. 25 This is in line with the constutional policy of according the widest
possible autonomy to local governments in matters of local taxation, an aspect that is given expression in
the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not
deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further
strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality, 29 appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities are
empowered to impose, not only municipal license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.
G.R. No. L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and
as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioners.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of
Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas
and Jose Roxas, formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the lands in
Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which
they actually occupied. For its part, the Government, in consonance with the constitutional mandate
to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the
Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early
part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and
subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase price, and so a
special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y
Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be
sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for
the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay
its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale
of capital asset held for more than one year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate,
Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they
resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to
Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.
ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment
of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for
late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for
late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia.
received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the
Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of
P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities
against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of
securities.
In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas

1953
P7,010.00
7,281.00
6,323.00

1955
P5,813.00
5,828.00
5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported
50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the
tenants, and the disallowance of deductions from gross income of various business expenses and
contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia.
subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner
considered the partnership as engaged in the business of real estate, hence, 100% of the profits
derived therefrom was taxed.
The following deductions were disallowed:
ROXAS Y CIA.:
1953
Tickets for Banquet in honor of
S. Osmea
Gifts of San Miguel beer

P 40.00
28.00

Contributions to
Philippine Air Force Chapel

100.00

Manila Police Trust Fund

150.00

Philippines Herald's fund for Manila's

neediest families

100.00

1955
Contributions to Contribution to
Our Lady of Fatima Chapel,
FEU

50.00

ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund

25.00

Pasay City Police Dept. X'mas fund

50.00

1955
Contributions to
Baguio City Police Christmas fund

25.00

Pasay City Firemen Christmas fund

25.00

Pasay City Police Christmas fund

50.00

EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de Manresa

450.00

Philippines Herald's fund for Manila's

neediest families

100.00

Contributions to Philippines
Herald's fund for Manila's
neediest families

120.00

1955

JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families

120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they
instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal
and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the
payment of the fixed tax on dealer of securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners
Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the
respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and
P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5%
surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and
modified with respect to the partnership Roxas y Cia. in the sense that it should pay only
P150.00, as real estate dealer's tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of
Internal Revenue did not appeal.

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

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

. . . "Real estate dealer" includes any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding himself
out as a full or part-time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . .
. (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is
sustained.
1wph1.t

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and
Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00
and P49.00, respectively, computed as follows: *
ANTONIO ROXAS
Net income per return

P315,476.59

Add: 1/3 share, profits in Roxas y

Cia.

P 153,249.15

Less amount declared

146,135.46

Amount understated

P 7,113.69

Contributions disallowed

115.00
P 7,228.69

Less 1/3 share of contributions

amounting to P21,126.06 disallowed
from partnership but allowed to
partners

7,042.02

Net income per review

186.67
P315,663.26

Less: Exemptions

4,200.00

Net taxable income

P311,463.26

Tax due

154,169.00

Tax paid

154,060.00

Deficiency

P 109.00
==========
EDUARDO ROXAS
P
304,166.92

Net income per return

Add: 1/3 share, profits in Roxas y Cia

P 153,249.15

Less profits declared

146,052.58

Amount understated

P 7,196.57

Less 1/3 share in contributions

amounting to P21,126.06 disallowed
from partnership but allowed to
partners

7,042.02

155.55

Net income per review

P304,322.47

Less: Exemptions

4,800.00

Net taxable income

P299,592.47

Tax Due

P147,250.00

Tax paid

147,159.00

Deficiency

P91.00
===========
JOSE ROXAS

Net income per return

Add: 1/3 share, profits in Roxas y
Cia.
Less amount reported

P222,681.76
P153,429.15
146,135.46

Amount understated

7,113.69

Less 1/3 share of contributions

disallowed from partnership but
allowed as deductions to partners

7,042.02

Net income per review

P222,753.43

Less: Exemption

1,800.00

Net income subject to tax

P220,953.43

Tax due

P102,763.00

Tax paid

102,714.00

Deficiency

71.67

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

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

G.R. No. L-57767 January 31, 1984

ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS DEL
ROSARIO, VICENTE TAPUCOL, ANDRES SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI,
SOTERO L. TUMANG, in his capacity as Asst. Regional Director for Arbitration, Regional
Office No. 1, Ministry of Labor & Employment, and AMBROSIO B. SISON, in his capacity as
Acting Regional Sheriff, Regional Office No. 1, Ministry of Labor & Employment, respondents.
Yolanda Bustamante for petitioners.
The Solicitor General for respondent NLRC.
Benjamin F. Baterina for private respondents,

MELENCIO-HERRERA, J.:
In this special civil action for certiorari and Prohibition with Preliminary Injunction, petitioners Alberto
Sunio and Ilocos Commercial Corporation seek to set aside the Resolution of March 24, 1981 of the
National Labor Relations Commission (NLRC), which affirmed the Decision of the Assistant Regional
Director, dated November 5, 1979, in NLRC Case No. RB-1-1228-78, directing petitioners and
Cabugao Ice Plant Incorporated to reinstate private respondents to their former position without loss
of seniority and privileges and to pay them backwages from February 1, 1978 to the date of their
actual reinstatement.
The controversy arose from the following antecedents:
On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc.
(CIPI for short), sister corporations, sold an ice plant to Rizal Development and Finance Corporation
RDFC with a mortgage on the same properties constituted by the latter in favor of the former to
secure the payment of the balance of the purchase price. 1
By virtue of that sale, EMRACO-CIPI terminated the services of all their employees including private
respondents herein, and paid them their separation pay. RDFC hired its own own employees and
operated the plant.
On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC
headed by its President and General Manager, petitioner Alberto S. Sunio. Petitioners also hired
their own employees as private respondents were no longer in the plant. The sale was subject to the
mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to pay the balance of the purchase
price, as a consequence of which, EMRACO-CIPI instituted extrajudicial foreclosure proceedings.
The properties were sold at public auction on August 30, 1974, the highest bidders being EMRACO
CIPI. On the same date, said companies obtained an ex-parte Writ of Possession from the Court of
First Instance of Ilocos Sur in Civil Case No. 3026-V.
On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect to
the right of redemption of RDFC. Nilo Villanueva then re-hired private respondents.

On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva,
EMRACO-CIPI were unable to turn over possession to RDFC and/or petitioners, prompting the latter
to file a complaint for recovery of possession against EMRACO-CIPI with the then Court of First
Instance of Ilocos Sur (Civil Case No. 81-KC). Nilo Villanueva intervened
Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC in
possession of the ice plant. EMPRACO-CIPI and Villanueva appealed to the Court of Appeals (CAGR No. 05880- SP which upheld the questionee, Order. A Petition for certiorari with this Court (L46376) assailing that Resolution was denied for lack of merit or January 6, 1978.
On February 1, 1978, RDFC and petitioners finally obtains possession of the ice plant by virtue of
the Mandatory Injunction previously issued, which ordered defendant "particularly Nilo C. Villanueva
and his agents representatives, or any person found in the premises to vacate and surrender the
property in litigation." 2Petitioners did not re-employ private respondents.
Private respondents filed complaints against petitioners for illegal dismissal with the Regional Office,
Ministry of Labor & Employment, San Fernando, La Union.
On November 5, 1979, the Assistant Regional Director rendered a decision the decretal portion of
which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, respondents Cabugao Ice
Plant, Inc., Ilocos Commercial Corporation and/or Alberto Sunio, are hereby directed
to reinstate the complainants to their former positions without loss of seniority
privileges and to pay their backwages from February 1, 1978 to the date when they
are actually reinstated
Petitioners appealed to the NLRC, which affirmed the Regional Director's decision and dismissed the
appeal for lack of merit on March 24, 1981 reasoning that when RDFC took possession of the
property and private respondents were terminated in 1973, the latter already had a vested right to
their security of tenure, and when they were rehired those rights continued. 3
Petitioners are now before us assailing the Asst. Regional Director's Decision, dated November 5,
1979, the Resolution of the NLRC, Second Division, dated March 24, 1981, as well as the Writ of
Execution issued pursuant thereto dated July 14, 1981, for P156,720.80 representing backwages.
They raise as lone issue:
That respondent National Labor Relations Commission and/or Asst. Regional
Director Sotero Tumang acted in excess of jurisdiction and/or with grave abuse of
discretion amounting to lack of jurisdiction in rendering the decision and the
resolution in NLRC Case No. RB-1-1228-78, and in ordering the execution of said
decision
We issued a Temporary Restraining Order to maintain the status quo, resolved to give due course to
the Petition, and required the parties to submit their respective Briefs. Only petitioners have
complied.
Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in ordering the
reinstatement of private respondents and the payment of their backwages?

Petitioners deny any employer-employee relationship with private respondents arguing that no privity
of contract exists between them, the latter being the employees of Nilo Villanueva who re-hired them
when he took over the operation of the ice plant from CIPI; that private respondents should go after
Nilo Villanueva for whatever rights they may be entitled to, or the CIPI which is still existing, that no
succession of rights and obligations took place between Villanueva and petitioners as the transfer of
possession was a consequence of the exercise of the right of redemption; that the amount of
backwages was determined without petitioners being given a chance to be heard and that granting
that respondents are entitled to the reliefs adjudged, such award cannot be enforced against
petitioner Sunio, who was impleaded in the complaint as the General Manager of ICC.
Public respondent, in its Comment, countered that the sale of a business of 'a going concern does
not ipso factoterminate employer-employee relations when the successor-employer continues the
business operation of the predecessor-employer in an essentially unchanged manner. Private
respondents argue that the change of management or ownership of a business entity is not one of
the just causes for the termination of services of employees under Article 283 of the Labor Code, as
amended. Both respondents additionally claim that petitioner Sunio, as the General Manager of ICC
and owner of one half (1/2) of its interest, is personally liable for his malicious act of illegally
dismissing private respondents, for no ground exists to justify their termination.
We sustain petitioners.
It is true that the sale of a business of a going concern does not ipso facto terminate the employeremployee relations insofar as the successor-employer is concerned, and that change of ownership
or management of an establishment or company is not one of the just causes provided by law for
termination of employment. The situation here, however, was not one of simple change of
ownership. Of note is the fact that when, on July 30, 1973, EMRACO-CIPI sold the plant to RDFC,
CIPI had terminated the services of its employees, including herein private respondents, giving them
their separation pay which they had accepted. When RDFC took over ownership and management,
therefore, it hired its own employees, not the private respondents, who were no longer there. RDFC
subsequently sold the property to petitioners on November 28, 1973. But by reason of their failure to
pay the balance of the purchase price, EMRACO-CIPI foreclosed on the mortgage over the ice plant;
the property was sold at public auction to EMRACO-CIPI as the highest bidders, and they eventually
re-possessed the plant on August 30, 1974. During all the period that RDFC and petitioners were
operating the plant from July 30, 1973 to August 30, 1974, they had their own employees. CIPIEMRACO then sold the plant, also on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of
redemption. Nilo Villanueva then rehired private respondents as employees of the plant, also in
1974.
In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo
Villanueva resisted so that petitioners were compelled to sue for recovery of possession, obtaining it,
however, only in 1978.
Under those circumstances, it cannot be justifiably said that the plant together with its staff and
personnel moved from one ownership to another. No succession of employment rights and
obligations can be said to have taken place between EMRACO-CIPI-Nilo Villanueva, on the one
hand, and petitioners on the other. Petitioners eventually acquired possession by virtue of the
exercise of their right of redemption and of a Mandatory Injunction in their favor which ordered Nilo
Villanueva and "any person found in the premises" to vacate. What is more, when EMRACO-CIPI
sold the ice plant to RDFC in 1973, private respondents' employment was terminated by EMRACO-

CIPI and they were given their separation pay, which they accepted. During the thirteen months,
therefore, that RDFC and petitioners were in possession and operating the plant up to August, 1974,
they hired their own employees, not the private respondents. In fact, it may even be said that private
respondents had slept on their rights when they failed to contest such termination at the time of sale,
if they believed they had rights to protect. Further, Nilo Villanueva rehired private respondents in
August, 1974, subject to a resolutory condition. That condition having arisen, the rights of private
respondents who claim under him mast be deemed to have also ceased.
Private respondents can neither successfully invoke security of tenure in their favor. Their tenure
should not be reckoned from 1967 because they were already terminated in 1973. Private
respondents were only rehired in 1974 by Nilo Villanueva. Petitioners took over by judicial process in
1978 so that private respondents had actually only four years of rehired employment with Nilo
Villanueva, during all of which period, petitioners fought hard against Nilo Villanueva to recover
possession of the plant. Insofar as petitioners are concerned therefore, there was no tenurial
security to speak of that would entitle private respondents to reinstatement and backwages. We
come now to the personal liability of petitioner, Sunio, who was made jointly and severally
responsible with petitioner company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional Director's Decision failed to disclose
the reason why he was made personally liable. Respondents, however, alleged as grounds thereof,
his being the owner of one-half (1/2) interest of said corporation, and his alleged arbitrary dismissal
of private respondents. Petitioner Sunio was impleaded in the Complaint his capacity as General
Manager of petitioner corporation. where appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was
within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from those of
the persons composing it as well as from that of any other legal entity to which it may be
related. 4 Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. 5 Petitioner Sunio, therefore, should not have been made personally answerable for the
payment of private respondents' back salaries.
WHEREFORE, the assailed Decision and Resolution, dated November 5, 1979 and March 24, 1981,
respectively, and the consequent Writ of Execution are hereby SET ASIDE and the Temporary
Restraining Order heretofore issued by this Court hereby made permanent. Public respondents are
hereby ordered to return to petitioners the latter's levied properties in their possession. No costs.
SO ORDERED.

PLANTERS PRODUCTS, INC., G.R. No. 166006

Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and

REYES, JJ.
Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider
the constitutionality of statutes, executive orders, presidential decrees and other
issuances. The Constitution vests that power not only in the Supreme Court but in
all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the
Decision[1] of the Court of Appeals (CA) affirming with modification that of
the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under
Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations
incorporated under Philippine laws.[3] They are both engaged in the importation
and distribution of fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative
powers, issued LOI No. 1465 which provided, among others, for the imposition of
a capital recovery component (CRC) on the domestic sale of all grades of
fertilizers in the Philippines.[4] The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not
less than P10 per bag. This capital contribution shall be collected
until adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.[5] (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in
the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then
remitted the amount collected to the Far East Bank and Trust Company, the
depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8,
1985 to January 24, 1986.[6]
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of
the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund
of the amounts it paid under LOI No. 1465, but PPI refused to accede to the
demand.[7]
Fertiphil filed a complaint for collection and damages [8] against FPA and PPI
with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for
being unjust, unreasonable, oppressive, invalid and an unlawful imposition that
amounted to a denial of due process of law.[9] Fertiphil alleged that the LOI solely
favored PPI, a privately owned corporation, which used the proceeds to maintain
its monopoly of the fertilizer industry.
In its Answer,[10] FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of the State in
ensuring the stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the burden imposed by
the levy fell on the ultimate consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,
disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby

renders judgment in favor of the plaintiff and against the defendant
Planters Product, Inc., ordering the latter to pay the former:
1) the sum of P6,698,144.00 with interest at 12% from the
time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.[11]

Ruling that the imposition of the P10 CRC was an exercise of the States inherent
power of taxation, the RTC invalidated the levy for violating the basic principle
that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in
the country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the state is
plenary. Comprehensive and supreme, the principal check upon its abuse
resting in the responsibility of the members of the legislature to their
constituents. However, there are two kinds of limitations on the power of
taxation: the inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public
purposes:
The power to tax can be resorted to only for a
constitutionally valid public purpose. By the same token,
taxes may not be levied for purely private purposes, for
building up of private fortunes, or for the redress of private
wrongs. They cannot be levied for the improvement of
private property, or for the benefit, and promotion of
private enterprises, except where the aid is incident to the
public benefit. It is well-settled principle of constitutional
law that no general tax can be levied except for the purpose
of raising money which is to be expended for public
use. Funds cannot be exacted under the guise of taxation to

promote a purpose that is not of public interest. Without

such limitation, the power to tax could be exercised or
employed as an authority to destroy the economy of the
people. A tax, however, is not held void on the ground of
want of public interest unless the want of such interest is
clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer
sold imposition under LOI 1465 which, in turn, remitted the amount to
the defendant Planters Products, Inc. thru the latters depository bank, Far
East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff,
Fertiphil Corporation, which is a private domestic corporation, became
poorer by the amount of P6,698,144.00 and the defendant, Planters
Product, Inc., another private domestic corporation, became richer by the
amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the aforequoted jurisprudence, it is quite evident that LOI 1465 insofar as it
imposes the amount of P10 per fertilizer bag sold in the country and
orders that the said amount should go to the defendant Planters Product,
Inc. is unlawful because it violates the mandate that a tax can be levied
only for a public purpose and not to benefit, aid and promote a private
enterprise such as Planters Product, Inc. [12]

PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice
of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a
separate but related proceeding, this Court[14] allowed the appeal of PPI and
remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the followingfallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed
from is hereby AFFIRMED, subject to theMODIFICATION that the
award of attorneys fees is hereby DELETED.[15]

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise
its power to judicially determine the constitutionality of the subject
statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the
courts will not resolve the constitutionality of a law (Lim v. Pacquing,
240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable showing to the
contrary.
However, the courts are not precluded from exercising such power when
the following requisites are obtaining in a controversy before it: First,
there must be before the court an actual case calling for the exercise of
judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must
have standing to challenge. Fourth, the question of constitutionality must
have been raised at the earliest opportunity; and lastly, the issue of
constitutionality must be the very lis motaof the case (Integrated Bar of
the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals
that the instant action is founded on the claim that the levy imposed was
an unlawful and unconstitutional special assessment.Consequently, the
requisite that the constitutionality of the law in question be the very lis
mota of the case is present, making it proper for the trial court to rule on
the constitutionality of LOI 1465.[16]

The CA held that even on the assumption that LOI No. 1465 was issued under the
police power of the state, it is still unconstitutional because it did not promote
public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that
the levy imposed under the said law was an invalid exercise of the States
power of taxation inasmuch as it violated the inherent and constitutional
prescription that taxes be levied only for public purposes. It reasoned out

that the amount collected under the levy was remitted to the depository
bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage
was a valid exercise of police power. In addition, it disputes the court a
quos findings arguing that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created
by law to hold in trust for millions of farmers, the stock ownership of
PPI.
Of the three fundamental powers of the State, the exercise of police
power has been characterized as the most essential, insistent and the least
limitable of powers, extending as it does to all the great public needs. It
may be exercised as long as the activity or the property sought to be
regulated has some relevance to public welfare (Constitutional Law, by
Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set
by the Constitution, which requires the concurrence of a lawful subject
and a lawful method. Thus, our courts have laid down the test to
determine the validity of a police measure as follows: (1) the interests of
the public generally, as distinguished from those of a particular class,
requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v.
Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts
holding LOI 1465 unconstitutional. To be sure, ensuring the continued
supply and distribution of fertilizer in the country is an undertaking
imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the
public welfare. The governments commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes impartiality. There is
no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or
even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where
none is needed. When a statutes public purpose is spoiled by private
interest, the use of police power becomes a travesty which must be

struck down for being an arbitrary exercise of government power. To

rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes
or for the exclusive benefit of private individuals.[17]

The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was
for the benefit of Planters Foundation, Inc., a foundation created to hold in trust the
stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created
by law to hold in trust for millions of farmers, the stock ownership
of PFI on the strength of Letter of Undertaking (LOU) issued by then
Prime Minister Cesar Virata on April 18, 1985 and affirmed by the
Secretary of Justice in an Opinion dated October 12, 1987, to wit:
2. Upon the effective date of this Letter of Undertaking, the
Republic shall cause FPA to include in its fertilizer pricing
formula a capital recovery component, the proceeds of
which will be used initially for the purpose of funding the
unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc.
(Planters Foundation), which unpaid capital is estimated at
approximately P206 million (subject to validation by
Planters and Planters Foundation) (such unpaid portion of
the outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for
such capital increases as may be required for the continuing
viability of Planters.
The capital recovery component shall be in the minimum
amount of P10 per bag, which will be added to the price of
all domestic sales of fertilizer in the Philippines by any
importer and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges that the
advances by Planters to Planters Foundation which were
applied to the payment of the Planters shares now held in
trust by Planters Foundation, have been assigned to, among
others, the Creditors. Accordingly, the Republic, through
FPA, hereby agrees to deposit the proceeds of the capital
recovery component in the special trust account designated

in the notice dated April 2, 1985, addressed by counsel for

the Creditors to Planters Foundation. Such proceeds shall
be deposited by FPA on or before the 15 th day of each
month.

The capital recovery component shall continue to be

charged and collected until payment in full of (a) the
Unpaid Capital and/or (b) any shortfall in the payment of
the Subsidy Receivables, (c) any carrying cost accruing
from the date hereof on the amounts which may be
outstanding from time to time of the Unpaid Capital and/or
the Subsidy Receivables and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the carrying cost shall be at such rate
as will represent the full and reasonable cost to Planters of
servicing its debts, taking into account both its peso and
foreign currency-denominated obligations. (Records, pp.
42-43)
Appellants proposition is open to question, to say the least. The LOU
issued by then Prime Minister Virata taken together with the Justice
Secretarys Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient
evidence to establish its claims, this Court is constrained to rely on what
is explicitly provided in LOI 1465 that one of the primary aims in
imposing the levy is to support the successful rehabilitation and
continued viability of PPI.[18]

PPI moved for reconsideration but its motion was denied. [19] It then filed the
present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE

COLLATERALLY
ATTACKED AND BE
DECREED VIA A
DEFAULT
JUDGMENT
IN
A
CASE
FILED
FOR
COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY
PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY ANDDISTRIBUTION IN
THE COUNTRY, AND FOR BENEFITING A FOUNDATION
CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF
FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT
WAS
REMITTED
TO
THE
GOVERNMENT, AND BECAME
GOVERNMENT
FUNDS
PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW
WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY
VIRTUE OF THE PRINCIPLE OF OPERATIVE FACTPRIOR TO
ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE
ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT CASE.
[20]
(Underscoring supplied)

Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of
the RTC to resolve constitutional issues.
Fertiphil has locus standi because it
suffered direct injury; doctrine of standing
is a mere procedural technicality which
may be waived.

PPI argues that Fertiphil has no locus standi to question the constitutionality
of LOI No. 1465 because it does not have a personal and substantial interest in the
case or will sustain direct injury as a result of its enforcement. [21] It asserts that
Fertiphil did not suffer any damage from the CRC imposition because incidence of
the levy fell on the ultimate consumer or the farmers themselves, not on the seller
fertilizer company.[22]
We cannot agree. The doctrine of locus standi or the right of appearance in a
court of justice has been adequately discussed by this Court in a catena of
cases. Succinctly put, the doctrine requires a litigant to have a material interest in
the outcome of a case. In private suits, locus standi requires a litigant to be a real
party
in
interest,
which
is
defined
as the
party who stands to be benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit.[23]
In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general public
because of conflicting public policy issues. [24] On one end, there is the right of the
ordinary citizen to petition the courts to be freed from unlawful government
intrusion and illegal official action. At the other end, there is the public policy
precluding excessive judicial interference in official acts, which may unnecessarily
hinder the delivery of basic public services.
In this jurisdiction, We have adopted the direct injury test to determine locus
standi in public suits. In People v. Vera,[25] it was held that a person who impugns
the validity of a statute must have a personal and substantial interest in the case
such that he has sustained, or will sustain direct injury as a result. The direct injury
test in public suits is similar to the real party in interest rule for private suits under
Section 2, Rule 3 of the 1997 Rules of Civil Procedure.[26]
Recognizing that a strict application of the direct injury test may hamper
public interest, this Court relaxed the requirement in cases of transcendental
importance or with far reaching implications. Being a mere procedural technicality,
it has also been held that locus standi may be waived in the public interest.[27]

Whether or not the complaint for collection is characterized as a private or

public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury
from the enforcement of LOI No. 1465. It was required, and it did pay, the P10
levy imposed for every bag of fertilizer sold on the domestic market. It may be true
that Fertiphil has passed some or all of the levy to the ultimate consumer, but that
does not disqualify it from attacking the constitutionality of the LOI or from
seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced
the possibility of severe sanctions for failure to pay the levy. The fact of payment is
sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because
it was compelled to factor in its product the levy. The levy certainly rendered the
fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients because of
the increased price, but also in adopting alternative corporate strategies to meet the
demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have
shouldered all or part of the levy just to be competitive in the market. The harm
occasioned on the business of Fertiphil is sufficient injury for purposes of locus
standi.
Even assuming arguendo that there is no direct injury, We find that the
liberal policy consistently adopted by this Court on locus standi must apply. The
issues raised by Fertiphil are of paramount public importance. It involves not only
the constitutionality of a tax law but, more importantly, the use of taxes for public
purpose. Former President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text of the LOI. PPI
is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy
was made dependent and conditional upon PPI becoming financially viable. The
LOI provided that the capital contribution shall be collected until adequate capital
is raised to make PPI viable.
The constitutionality of the levy is already in doubt on a plain reading of the
statute. It is Our constitutional duty to squarely resolve the issue as the final arbiter

of all justiciable controversies. The doctrine of standing, being a mere procedural

technicality, should be waived, if at all, to adequately thresh out an important
constitutional issue.
RTC may resolve constitutional issues; the
constitutional issue was adequately raised
in the complaint; it is the lis mota of the
case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of
the LOI. It asserts that the constitutionality of the LOI cannot be collaterally
attacked in a complaint for collection.[28] Alternatively, the resolution of the
constitutional issue is not necessary for a determination of the complaint for
collection.[29]
Fertiphil counters that the constitutionality of the LOI was adequately
pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is the
very lis mota of the case because the trial court cannot determine its claim without
resolving the issue.[30]
It is settled that the RTC has jurisdiction to resolve the constitutionality of a
statute, presidential decree or an executive order. This is clear from Section 5,
Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx
(2) Review, revise, reverse, modify, or affirm on appeal
or certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity
of any treaty, international or executive agreement, law,

presidential decree, proclamation, order, instruction,

ordinance, or regulation is in question. (Underscoring
supplied)

In Mirasol v. Court of Appeals,[31] this Court recognized the power of

the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a statute,
presidential decree, or executive order. The Constitution vests the power
of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance,
or regulation not only in this Court, but in all Regional Trial Courts. [32]

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign

Affairs,[33] this Court reiterated:
There is no denying that regular courts have jurisdiction over
cases involving the validity or constitutionality of a rule or regulation
issued by administrative agencies. Such jurisdiction, however, is not
limited to the Court of Appeals or to this Court alone for even the
regional trial courts can take cognizance of actions assailing a specific
rule or set of rules promulgated by administrative bodies. Indeed, the
Constitution vests the power of judicial review or the power to declare a
law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the
regional trial courts.[34]

Judicial review of official acts on the ground of unconstitutionality may be

sought or availed of through any of the actions cognizable by courts of justice, not
necessarily in a suit for declaratory relief. Such review may be had in criminal
actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct
Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of
Deeds[36] involving the constitutionality of laws prohibiting aliens from acquiring
public lands. The constitutional issue, however, (a) must be properly raised
and presented in the case, and (b) its resolution is necessary to a determination of
the case, i.e., the issue of constitutionality must be the very lis mota presented.[37]

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly
and adequately raised in the complaint for collection filed with the RTC. The
pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic
sales of all grades of fertilizer in the Philippines, is unlawful, unjust,
uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation,
i.e., defendant PPPI, and imposed at the expense and
disadvantage of the other fertilizer importers/distributors
who were themselves in tight business situation and were
then exerting all efforts and maximizing management and
marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a
forced program through which the PPI, having been
presumptuously masqueraded as the fertilizer industry
itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special
assessment and its imposition is tantamount to illegal exaction
amounting to a denial of due process since the persons of entities which
had to bear the burden of paying the CRC derived no benefit therefrom;
that on the contrary it was used by PPI in trying to regain its former
despicable monopoly of the fertilizer industry to the detriment of other
distributors and importers.[38] (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the
complaint for collection. Fertiphil filed the complaint to compel PPI to refund the
levies paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal
effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be refunded under the
civil code principle against unjust enrichment. The refund is a mere consequence
of the law being declared unconstitutional.The RTC surely cannot order PPI to

refund Fertiphil if it does not declare the LOI unconstitutional. It is the

unconstitutionality of the LOI which triggers the refund. The issue of
constitutionality is the very lis mota of the complaint with the RTC.
The P10 levy under LOI No. 1465 is an
exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against
the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or
the power of taxation. It claims that the LOI was implemented for the purpose of
assuring the fertilizer supply and distribution in the country and for benefiting a
foundation created by law to hold in trust for millions of farmers their stock
ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to
give benefit to a private company. The levy was imposed to pay the corporate debt
of PPI. Fertiphil also argues that, even if the LOI is enacted under the police
power, it is still unconstitutional because it did not promote the general welfare of
the people or public interest.
Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for validity. Police power
is the power of the State to enact legislation that may interfere with personal liberty
or property in order to promote the general welfare, [39] while the power of taxation
is the power to levy taxes to be used for public purpose. The main purpose of
police power is the regulation of a behavior or conduct, while taxation is revenue
generation.The lawful subjects and lawful means tests are used to determine the
validity of a law enacted under the police power.[40] The power of taxation, on the
other hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by
the State of its taxation power. While it is true that the power of taxation can be
used as an implement of police power,[41] the primary purpose of the levy is
revenue generation. If the purpose is primarily revenue, or if revenue is, at least,

one of the real and substantial purposes, then the exaction is properly called a tax.
[42]

In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a

vehicle registration fee is not an exercise by the State of its police power, but of its
taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth
Act 123 and Section 61 of the Land Transportation and Traffic Code that
the legislative intent and purpose behind the law requiring owners of
vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree,
pay for the operating expenses of the administering agency. x x x Fees
may be properly regarded as taxes even though they also serve as an
instrument of regulation.
Taxation may be made the implement of the state's police power
(Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax. Such is the case of motor vehicle
registration fees. The same provision appears as Section 59(b) in the
Land Transportation Code. It is patent therefrom that the legislators had
in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a tax or fee. x
x x Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an additional
tax. Rep. Act 4136 also speaks of other fees such as the special permit
fees for certain types of motor vehicles (Sec. 10) and additional fees for
change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are
not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle
registration fee and chauffeurs license fee. Such fees are to go into the
expenditures of the Land Transportation Commission as provided for in
the last proviso of Sec. 61.[44] (Underscoring supplied)

The P10 levy under LOI No. 1465 is too

regulatory purpose. The levy, no doubt, was a big
ultimate consumer. It increased the price of a bag of
percent.[45] A plain reading of the LOI also supports

excessive to serve a mere

burden on the seller or the
fertilizer by as much as five
the conclusion that the levy

was for revenue generation. The LOI expressly provided that the levy was
imposed until adequate capital is raised to make PPI viable.
Taxes are exacted only for a public
purpose. The P10 levy is unconstitutional
because it was not for a public purpose.
The levy was imposed to give undue benefit
to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are
exacted only for a public purpose. They cannot be used for purely private purposes
or for the exclusive benefit of private persons.[46] The reason for this is simple.The
power to tax exists for the general welfare; hence, implicit in its power is the
limitation that it should be used only for a public purpose. It would be a robbery
for the State to tax its citizens and use the funds generated for a private purpose. As
an old United States case bluntly put it: To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow it upon
favored individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is called
taxation.[47]
The term public purpose is not defined. It is an elastic concept that can be
hammered to fit modern standards.Jurisprudence states that public purpose should
be given a broad interpretation. It does not only pertain to those purposes which are
traditionally viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes designed to
promote social justice. Thus, public money may now be used for the relocation of
illegal settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually
expanding in light of the expansion of government functions, the inherent
requirement that taxes can only be exacted for a public purpose still stands. Public
purpose is the heart of a tax law. When a tax law is only a mask to exact funds
from the public when its true intent is to give undue benefit and advantage to a
private enterprise, that law will not satisfy the requirement of public purpose.

The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTCand that CA that the levy imposed
under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its
fertilizer pricing formula a capital contribution component of not
less than P10 per bag. This capital contribution shall be collected
until adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.[48] (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be

given a literal meaning. In this case, the text of the LOI is plain that the levy was
imposed in order to raise capital for PPI. The framers of the LOI did not even hide
the insidious purpose of the law. They were cavalier enough to name PPI as the
ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive
that a tax law would expressly name a private company as the ultimate beneficiary
of the taxes to be levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was
conditional and dependent upon PPI becoming financially viable. This suggests
that the levy was actually imposed to benefit PPI. The LOI notably does not fix a
maximum amount when PPI is deemed financially viable. Worse, the liability of
Fertiphil and other domestic sellers of fertilizer to pay the levy is made
indefinite. They are required to continuously pay the levy until adequate capital is
raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were
directly remitted and deposited by FPA to Far East Bank and Trust Company, the
depositary bank of PPI.[49] This proves that PPI benefited from the LOI. It is also

proves that the main purpose of the law was to give undue benefit and advantage to
PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the
Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister
Cesar Virata reveals that PPI was in deep financial problem because of its huge
corporate debts. There were pending petitions for rehabilitation against PPI before
the Securities and Exchange Commission.The government guaranteed payment of
PPIs debts to its foreign creditors. To fund the payment, President Marcos issued
LOI No. 1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
This has reference to Planters which is the principal importer and
distributor of fertilizer, pesticides and agricultural chemicals in the
Philippines. As regards Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has outstanding obligations
in foreign currency and/or pesos, to the Creditors, (2) that Planters is
currently experiencing financial difficulties, and (3) that there are
presently pending with the Securities and Exchange Commission of the
Philippines a petition filed at Planters own behest for the suspension of
payment of all its obligations, and a separate petition filed by
Manufacturers Hanover Trust Company, Manila Offshore Branch for the
appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the
Republic) confirms that it considers and continues to consider Planters as

a major fertilizer distributor. Accordingly, for and in consideration of

your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and
unqualified support of the successful rehabilitation and continuing
viability of Planters, and to that end, hereby binds and obligates itself to
the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the
Republic shall cause FPA to include in its fertilizer pricing formula a
capital recovery component, the proceeds of which will be used initially
for the purpose of funding the unpaid portion of the outstanding capital
stock of Planters presently held in trust by Planters Foundation, Inc.
(Planters Foundation), which unpaid capital is estimated at
approximately P206 million (subject to validation by Planters and
Planters Foundation) such unpaid portion of the outstanding capital stock
of Planters being hereafter referred to as the Unpaid Capital), and
subsequently for such capital increases as may be required for the
continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b) any
shortfall in the payment of the Subsidy Receivables, (c) any carrying
cost accruing from the date hereof on the amounts which may be
outstanding from time to time of the Unpaid Capital and/or the Subsidy
Receivables, and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the carrying cost
shall be at such rate as will represent the full and reasonable cost to
Planters of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]

It is clear from the Letter of Understanding that the levy was imposed
precisely to pay the corporate debts of PPI. We cannot agree with PPI that the levy
was imposed to ensure the stability of the fertilizer industry in the country. The
letter of understanding and the plain text of the LOI clearly indicate that the levy
was exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed
under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply
with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if
enacted under the police power; it did not
promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it
would still be invalid for failing to comply with the test of lawful subjects and
lawful means. Jurisprudence states the test as follows: (1) the interest of the public
generally, as distinguished from those of particular class, requires its exercise; and
(2) the means employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not
promote public interest. The law was enacted to give undue advantage to a private
corporation. We quote with approval the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial
courts holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by which
LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The governments commitment to support the
successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statutes
impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or
even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where
none is needed. When a statutes public purpose is spoiled by private
interest, the use of police power becomes a travesty which must be

struck down for being an arbitrary exercise of government power. To

rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes
or for the exclusive benefit of private individuals. (Underscoring
supplied)

The
general
rule
is
that
an
unconstitutional law is void; the doctrine
of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is
declared unconstitutional. It banks on the doctrine of operative fact, which
provides that an unconstitutional law has an effect before being declared
unconstitutional.PPI wants to retain the levies paid under LOI No. 1465 even if it
is subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be
entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not
raise the applicability of the doctrine of operative fact with the RTC and the CA. It
cannot belatedly raise the issue with Us in order to extricate itself from the dire
effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords
no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it
has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All
levies paid should be refunded in accordance with the general civil code principle
against unjust enrichment. The general rule is supported by Article 7 of the Civil
Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their
violation or non-observance shall not be excused by disuse or custom or
practice to the contrary.
When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only

applies as a matter of equity and fair play.[55] It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased
by a new judicial declaration.[56]
The doctrine is applicable when a declaration of unconstitutionality will
impose an undue burden on those who have relied on the invalid law. Thus, it was
applied to a criminal case when a declaration of unconstitutionality would put the
accused in double jeopardy[57] or would put in limbo the acts done by a
municipality in reliance upon a law creating it.[58]
Here, We do not find anything iniquitous in ordering PPI to refund the
amounts paid by Fertiphil under LOI No. 1465.It unduly benefited from the levy. It
was proven during the trial that the levies paid were remitted and deposited to its
bank account. Quite the reverse, it would be inequitable and unjust not to order a
refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22
of the Civil Code explicitly provides that every person who, through an act of
performance by another comes into possession of something at the expense of the
latter without just or legal ground shall return the same to him. We cannot allow
PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must
refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.
SO ORDERED.
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public
auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an
area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent
to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section
73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the
amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer
Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00
as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN
NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS
ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO
SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE
THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that
his property was sold at public auction without notice to him and that the price paid for the property
was shockingly inadequate, amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the
facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as
of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to
wit:

(1) that each one of the obligors be bound principally and that he be at the same time
a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light of
public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes
levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and
party but grow out of duty to, and are the positive acts of the government to the
making and enforcing of which, the personal consent of individual taxpayers is not
required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he
has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of P4,116.00 paid by the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for Review,
Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by
proof and thegeneral rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular
Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings
are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction
sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his
testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown
by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As
long as there was substantial compliance with the requirements of the notice, the
validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho
Fernandez notified you that the property in question shall be sold at
public auction to the highest bidder on December 5, 1977 pursuant to
Sec. 74 of PD 464. Will you tell the Court whether you received the
original of this letter?

A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to court
assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy
of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de
Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not
material when the law gives the owner the right to redeem as when a sale is made at public auction,
upon the theory that the lesser the price, the easier it is for the owner to effect redemption."
In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold
are unconscionable considering the wide divergence between their assessed values
and the amounts for which they had been actually sold. However, while in ordinary
sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify
the courts to interfere, such does not follow when the law gives to the owner the right
to redeem, as when a sale is made at public auction, upon the theory that the lesser
the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price
obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is
stated as follows: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." This rule arises from necessity, for, if a fair price for
the land were essential to the sale, it would be useless to offer the property. Indeed,
it is notorious that the prices habitually paid by purchasers at tax sales are grossly
out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307,
73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P.
555):
Like most cases of this character there is here a certain element of hardship from
which we would be glad to relieve, but do so would unsettle long-established rules
and lead to uncertainty and difficulty in the collection of taxes which are the life blood
of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in
value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the
expropriation of adjoining areas, real estate values have gone up in the area. However, the price
quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no
strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14
years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale
without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for
the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on
November 3, 1978, during the period of redemption, regarding his tax delinquency. There is
furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez.
The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly
asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision
of the respondent court is affirmed.
SO ORDERED.

G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price,respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of
Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an

order in this Court directing the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January
30, 1960, this Court declared as final and executory the order for the payment by the estate of the
estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court
of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate
of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented
a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition
was, however, denied by the court which held that the execution is not justifiable as the Government
is indebted to the estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated
December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the
payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K.
Price, as directed in the above note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order
of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government
shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may
not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its
citizens-creditors before it can insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the Government draws interests
while the credit due to the present state does not accrue any interest. (Order of September
28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to
settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for
the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs.
Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of real property of the deceased
and all debts or expenses of administrator and with the written notice to all the heirs legatees

and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made, the regulations contained
in Rule 90, section 7, should be complied with.
1wph1.t

Execution may issue only where the devisees, legatees or heirs have entered into
possession of their respective portions in the estate prior to settlement and payment of the
debts and expenses of administration and it is later ascertained that there are such debts
and expenses to be paid, in which case "the court having jurisdiction of the estate may, by
order for that purpose, after hearing, settle the amount of their several liabilities, and order
how much and in what manner each person shall contribute, and mayissue execution if
circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle
the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of
the court and such jurisdiction continues until said properties have been distributed among the heirs
entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the
proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but
to ask the court for an order to require the administrator to pay the amount due from the estate and
required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code,
and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguished both debts to the concurrent amount,
eventhough the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against
the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
This question has been brought before this Court in the past. The parties are, in effect, asking for a
re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund
of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the
payment of taxes. The pertinent provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the National Government during the life of this franchise a tax of two per
cent of the gross revenue or gross earning derived by the grantee from its operations
under this franchise. Such tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the audit of the
accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is
shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring
all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner
Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil.

212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come
within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against
Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the
Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action.
In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They contended that while
Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on
the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by
the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL
and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at
bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed by Section 8
of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks
of "registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts
with a categorical statement "No fees shall be charged." (lbid., Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under the Back Pay Law,
It is not held liable for a tax but for a registration fee. It therefore cannot make use of
a backpay certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion should be
dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition
of additional tax on privately-owned passenger automobiles, motorcycles and
scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30,
1969.) A special science fund was thereby created and its title expressly sets forth
that a tax on privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which clearly specifies

the" Philippine tax."(Cooley to be paid as distinguished from the registration fee

under the Motor Vehicle Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier legislation could by
subdivision the point be susceptible of the interpretation that a tax rather than a fee
was levied. What is thus most apparent is that where the legislative body relies on its
authority to tax it expressly so states, and where it is enacting a regulatory measure,
it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand,
held:
The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they really are. For not the name
but the object of the charge determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for purposes of regulation and
inspection and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by statute for
the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)
From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portionabout 5 per centumof the total
collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides that
all such money shall accrue to the funds for the construction and maintenance of
public roads, streets and bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their express
object is to provide revenue with which the Government is to discharge one of its
principal functionsthe construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act
shall be imposed," thus implying that the charges therein imposedthough called
feesare of the category of taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of Republic Act 587, which
reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other

competent authority may exact and collect such reasonable and

equitable toll fees for the use of such bridges and ferries, within their
respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use
of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any toll
fee." be charged or collected until and unless the approved schedule
of tolls shall have been posted levied, in a conspicuous place at such
toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law
(Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.Twenty per centum of the money
collected under the provisions of this Act shall accrue to the road and bridge funds of
the different provinces and chartered cities in proportion to the centum shall during
the next previous year and the remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the construction and maintenance of
national and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and Communications
for projects recommended by the Director of Public Works in the different provinces
and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of
this Act shall be deposited in a special trust account in the National Treasury to
constitute the Highway Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved August 6,
1971).
It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. On the other hand, thePhilippine Rabbit case mentions a presumption arising
from the use of the term "fees," which appears to have been favored by the legislature to distinguish
fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.No original registration of motor

vehicles subject to payment of taxes, customs s duties or other charges shall be
accepted unless proof of payment of the taxes due thereon has been presented to
the Commission.
referring to taxes other than those imposed on the registration, operation or ownership of a motor
vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument of regulation,
As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of
taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees.
Isabela such case, the fees may properly be regarded as taxes even though they
also serve as an instrument of regulation. If the purpose is primarily revenue, or if
revenue is at least one of the real and substantial purposes, then the exaction is
properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta
98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs.
4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954,
which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in
Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law
refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or
fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to
impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an
"additional" tax," where the law could have referred to an original tax and not one in addition to the
tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition
in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as
the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of
registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal
to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for
rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular
traffic exploded in number and motor vehicles became absolute necessities without which modem
life as we know it would stand still, Congress found the registration of vehicles a very convenient
way of raising much needed revenues. Without changing the earlier deputy. of registration payments
as "fees," their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant
to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of
government even if one fifth or less of the amount collected is set aside for the operating expenses
of the agency administering the program.
May the respondent administrative agency be required to refund the amounts stated in the complaint
of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448
dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative
franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July
11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act
No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%)
of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature,
or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is hereby expressly
exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was repealed
by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:
"(d) The provisions of existing special or general laws to the contrary
notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this
section. All corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government Service
Insurance System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their taxable
net income as are imposed by this section upon associations or
corporations engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly that the
law intended all corporate taxpayers to pay income tax as provided by the statute.
There can be no doubt as to the power of Congress to repeal the earlier exemption it

granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of
the Constitution as amended in 1973 expressly provide that no franchise shall be
granted to any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when the public
interest so requires. There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is clear and unambiguous.
There is a listing of entities entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court Resolved to DENY the petition for
lack of merit. The decision of the respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:
In consideration of the franchise and rights hereby granted, the grantee shall pay to
the Philippine Government during the lifetime of this franchise whichever of
subsections (a) and (b) hereunder will result in a lower taxes.)
(a) The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the
Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues.
derived by the grantees from all specific. without distinction as to
transport or nontransport corporations; provided that with respect to
international airtransport service, only the gross passengers, mail,
and freight revenues. from its outgoing flights shall be subject to this
law.
The tax paid by the grantee under either of the above alternatives shall be in lieu of
all other taxes, duties, royalties, registration, license and other fees and charges of
any kind, nature or description imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or government, agency, now or
in the future, including but not limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license, acquisition, and
transfer of airtransport equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees
paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is

enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the
petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.
SO ORDERED.

G.R. No. 149110

April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March
12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable
to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act No.
120, as amended.4 It is tasked to undertake the "development of hydroelectric generations 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."5 Concomitant to its mandated duty, petitioner
has, among others, the power to construct, operate and maintain power plants, auxiliary plants,
power stations and substations for the purpose of developing hydraulic power and supplying such
power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of
1% of the latter's gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to
impose tax on government entities. Petitioner also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes, charges, duties or fees 11 in accordance with sec.
13 of Rep. Act No. 6395, as amended, viz:
"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 return 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 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."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that
petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and
2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has been
repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the
following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act
No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied
repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the
national government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating
therein repealing provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified by its number or
title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160
is an implied repealing clause because it fails to identify the act or acts that are intended to
be repealed. It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored. The presumption is against inconsistency and repugnancy for the
legislative is presumed to know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law
does not repeal a special law unless it clearly appears that the legislative has intended by
the latter general act to modify or repeal the earlier special law. Thus, despite the passage of
R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the
case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:
'Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stocks are owned by the National
Government. xxx Being an instrumentality of the government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing
power of the Local Government. Corollary to this, it should be noted here that in the NPC
Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the
Philippines through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are primary objectives
of the nations which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.' (underscoring supplied). To
allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal
of this government instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is
limited to that which is provided for in its charter or other statute. Any grant of taxing power is
to be construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the
plaintiff could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in
relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum
of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the
tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a
surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense. 19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision.
This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the
NPC Charter which is a special lawfinds the answer in Section 193 of the LGC to the effect
that '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 xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC
NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO
SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING
A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION
FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE
LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH
IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN
EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER
THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city
government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the

taxing power of the respondent city government to private entities that are engaged in trade or
occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest
which is conferred upon private persons or corporations, under such terms and conditions as the
government and its political subdivisions may impose in the interest of the public welfare, security
and safety." From the phraseology of this provision, the petitioner claims that the word "private"
modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise,"
petitioner submits that it should refer specifically to franchises granted to private natural persons and
to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of
imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its
operation; all these profits are required by law to be channeled for expansion and improvement of its
facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government, 25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26 where this Court held that local governments have no power
to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and actually
is exempt from local taxes. Otherwise, its operation might be burdened, impeded or
subjected to control by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local
governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the power
to tax as ' a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch
v. Maryland,supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its
charter cannot be amended or modified impliedly by the local government code which is a general
law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its
charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law.
Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the
enactment of a later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special statute, the
special statute should prevail since it evinces the legislative intent more clearly than the
general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should
prevail over the LGC. It alleges that the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the
least limitable and most demanding of all powers, including the power of taxation." 29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source from the
very existence of the state whose social contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the power to tax emanates from
necessity;32 without taxes, government cannot fulfill its mandate of promoting the general welfare and
well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges 34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the Local Governments."

This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local government
leaders."35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers, responsibilities, and resources, and
provide for the qualifications, election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to the organization and
operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, 36 also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the shackles of
dependence on the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of
income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over personnel of national line
agencies.41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when
specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government
Units.- Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering
the local government units to tax instrumentalities of the National Government was in effect.
However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax.46 In enacting the LGC,
Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit.
Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in section 133, the taxing power of local governments cannot
extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local government units'; however,
pursuant to section 232, provinces, cities and municipalities in the Metropolitan Manila Area
may impose the real property tax except on, inter alia, 'real property owned by the Republic
of the Philippines or any of its political subdivisions except when the beneficial use thereof
has been granted for consideration or otherwise, to a taxable person as provided in the item
(a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which does
not belong to citizens of the country generally as a matter of common right. 48 In its specific sense, a
franchise may refer to a general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the corporation. 49 The right under a
primary or general franchise is vested in the individuals who compose the corporation and not in the
corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an
existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect
poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state." 53 It is not levied on
the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise. 56 It is within this

context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise
tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter,
defining its composition, capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as
amended, vests the petitioner the following powers which are not available to ordinary
corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power in any part of
the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters
from lands of riparian owners and from persons owning or interested in waters which are or
may be necessary for said purposes, upon payment of just compensation therefor; to alter,
straighten, obstruct or increase the flow of water in streams or water channels intersecting or
connecting therewith or contiguous to its works or any part thereof: Provided, That just
compensation shall be paid to any person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose
of developing hydraulic power from any river, creek, lake, spring and waterfall in the
Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install,
maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers,
generators and machinery in plants and/or auxiliary plants for the production of electric
power; to establish, develop, operate, maintain and administer power and lighting systems
for the transmission and utilization of its power generation; to sell electric power in bulk to (1)
industrial enterprises, (2) city, municipal or provincial systems and other government
institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x
x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes
for which the Corporation was created: Provided, That in case a right of way is necessary for
its transmission lines, easement of right of way shall only be sought: Provided, however, That
in case the property itself shall be acquired by purchase, the cost thereof shall be the fair
market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume,
street, avenue, highway or railway of private and public ownership, as the location of said
works may require xxx;

(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided
by law for instituting condemnation proceedings by the national, provincial and municipal
governments;
x

(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs
of plants and/or projects constructed or proposed to be constructed by the Corporation.
Upon determination by the Corporation of the areas required for watersheds for a specific
project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands
shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the
Corporation of all areas embraced within the watersheds, subject to existing private rights,
the needs of waterworks systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures
to prevent environmental pollution and promote the conservation, development and
maximum utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and distribution of
electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40, 59 nationalizing
the electric power industry. Although Exec. Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity remains the monopoly of
the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city government's
territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because
its stocks are wholly owned by the National Government, and its charter characterized it as a "nonprofit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and be sued under its own
name,61 and can exercise all the powers of a corporation under the Corporation Code. 62
To be sure, the ownership by the National Government of its entire capital stock does not necessarily
imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 63 classifies
government-owned or controlled corporations (GOCCs) into those performing governmental
functions and those performing proprietary functions, viz:

"A government-owned or controlled corporation is a stock or a non-stock

corporation, whether performing governmental or proprietary functions, which is directly
chartered by special law or if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a parent corporation or subsidiary
corporation, to the extent of at least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such, are
treated as absolute obligation on the part of the state to perform while proprietary functions are those
that are undertaken only by way of advancing the general interest of society, and are merely optional
on the government.64 Included in the class of GOCCs performing proprietary functions are "businesslike" entities such as the National Steel Corporation (NSC), the National Development Corporation
(NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric 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."66 Pursuant to this mandate, petitioner generates power and
sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the
government. They are purely private and commercial undertakings, albeit imbued with public
interest. The public interest involved in its activities, however, does not distract from the true nature
of the petitioner as a commercial enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water supply and irrigation companies,
gas, coal or light companies, power plants, ice plant among others; all of which are declared by this
Court as ministrant or proprietary functions of government aimed at advancing the general interest of
society.67
A closer reading of its charter reveals that even the legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time, may
be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the
said purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its
electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for expansion" 70 while other
franchise holders have the option to distribute their profits to its stockholders by declaring dividends.
We do not see why this fact can be a source of difference in tax treatment. In both instances, the
taxable entity is the corporation, which exercises the franchise, and not the individual stockholders.

We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to
exist clearly and categorically, and supported by clear legal provisions. 71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "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." However, section 193 of
the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by
private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions from local taxes. 72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a nonstock and non-profit hospital or educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that
expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can
impose franchise tax "notwithstanding any exemption granted by any law or other special law." This
particular provision of the LGC does not admit any exception. In City Government of San Pablo,
Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an
issue before this Court. The same issue was involved in the subsequent case of Manila Electric
Company v. Province of Laguna.75 Ruling in favor of the local government in both instances, we ruled
that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under
special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC
to support their position that MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other special law' is all-encompassing
and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that
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 (1) local water districts, (2) cooperatives duly registered under
R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory construction that the express mention
of one person, thing, act, or consequence excludes all others as expressed in the familiar

maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to
the contrary, and we find no other provision in point, any existing tax exemption or incentive
enjoyed by MERALCO under existing law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the
local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the
gross annual receipts for the preceding calendar based on the incoming receipts realized
within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed
under existing law or charter is clearly manifested by the language used on (sic) Sections
137 and 193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to enumerate all
the existing statutes providing for special tax exemptions or privileges, the LGC provided for
an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs. 77 But in enacting section 37 of Ordinance No.
165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or
other special law," the respondent city government clearly did not intend to exempt the petitioner
from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the
people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises."78 With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance
On the other hand, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore necessary to reconcile the apparently

conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is
the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was
stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint
and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the
case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the
BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint
and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for
review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true
that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders
hopeless a request for reconsideration," 9being "tantamount to an outright denial thereof and makes the
said request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents
application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the warrant was premature and
could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the said protest and the warrant was finally
served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period
had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had
seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the

private respondent for actual services rendered. The payment was in the form of promotional fees.
These were collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees
to be personal holding company income 12 but later conformed to the decision of the respondent court
rejecting this assertion.13 In fact, as the said court found, the amount was earned through the joint efforts
of the persons among whom it was distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale,
Algue received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict business procedures were not applied and
immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to
be closed, each payee made an accounting of all of the fees received by him or her, to make up the total
of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit
from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions
(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his

succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.
SO ORDERED.

EMERLINDA S. TALENTO, G.R. No. 180884

in her capacity as the Provincial
Treasurer of the Province of Bataan,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Carpio Morales,*
Chico-Nazario, and
Reyes, JJ.
HON. REMIGIO M. ESCALADA, JR.,
Presiding Judge of the Regional Trial
Court of Bataan, Branch 3, and Promulgated:
PETRON CORPORATION,
Respondents. June 27, 2008
x ---------------------------------------------------------------------------------------- x

DECISION
YNARES-SANTIAGO, J.:

The instant petition for certiorari under Rule 65 of the Rules of Court assails the
November 5, 2007 Order[1] of the Regional Trial Court of Bataan, Branch 3, in
Civil Case No. 8801, granting the petition for the issuance of a writ of preliminary
injunction filed by private respondent Petron Corporation (Petron) thereby
enjoining petitioner Emerlinda S. Talento, Provincial Treasurer of Bataan, and her
representatives from proceeding with the public auction of Petrons machineries
and pieces of equipment during the pendency of the latters appeal from the revised
assessment of its properties.

The facts of the case are as follows:

On June 18, 2007, Petron received from the Provincial Assessors Office of
Bataan a notice of revised assessment over its machineries and pieces of equipment
in Lamao, Limay, Bataan. Petron was given a period of 60 days within which to
file an appeal with the Local Board of Assessment Appeals (LBAA). [2] Based on
said revised assessment, petitioner Provincial Treasurer of Bataan issued a notice
informing Petron that as of June 30, 2007, its total liability is P1,731,025,403.06,
[3]
representing deficiency real property tax due from 1994 up to the first and second
quarters of 2007.

On August 17, 2007, Petron filed a petition [4] with the LBAA (docketed as
LBAA Case No. 2007-01) contesting the revised assessment on the grounds that
the subject assessment pertained to properties that have been previously declared;
and that the assessment covered periods of more than 10 years which is not
allowed under the Local Government Code (LGC).According to Petron, the
possible valid assessment pursuant to Section 222 of the LGC could only be for the
years 1997 to 2006. Petron further contended that the fair market value or
replacement cost used by petitioner included items which should be properly
excluded; that prompt payment of discounts were not considered in determining
the fair market value; and that the subject assessment should take effect a year after

or on January 1, 2008. In the same petition, Petron sought the approval of a surety
bond in the amount of P1,286,057,899.54.[5]

On August 22, 2007, Petron received from petitioner a final notice of

delinquent real property tax with a warning that the subject properties would be
levied and auctioned should Petron fail to settle the revised assessment due.[6]

Consequently, Petron sent a letter[7] to petitioner stating that in view of the

pendency of its appeal[8] with the LBAA, any action by the Treasurers Office on the
subject properties would be premature. However, petitioner replied that only
Petrons payment under protest shall bar the collection of the realty taxes due,
[9]
pursuant to Sections 231 and 252 of the LGC.

With the issuance of a Warrant of Levy[10] against its machineries and pieces
of equipment, Petron filed on September 24, 2007, an urgent motion to lift the final
notice of delinquent real property tax and warrant of levy with the LBAA. It
argued that the issuance of the notice and warrant is premature because an appeal
has been filed with the LBAA, where it posted a surety bond in the amount of
P1,286,057,899.54.[11]

On October 3, 2007, Petron received a notice of sale of its properties

scheduled on October 17, 2007.[12] Consequently, on October 8, 2007, Petron
withdrew its motion to lift the final notice of delinquent real property tax and
warrant of levy with the LBAA.[13] On even date, Petron filed with the Regional
Trial Court of Bataan the instant case (docketed as Civil Case No. 8801) for
prohibition with prayer for the issuance of a temporary restraining order
(TRO) and preliminary injunction.[14]

On October 15, 2007, the trial court issued a TRO for 20 days enjoining petitioner
from proceeding with the public auction of Petrons properties. [15] Petitioner

thereafter filed an urgent motion for the immediate dissolution of the TRO,
followed by a motion to dismiss Petrons petition for prohibition.

On November 5, 2007, the trial court issued the assailed Order granting
Petrons petition for issuance of writ of preliminary injunction, subject to Petrons
posting of a P444,967,503.52 bond in addition to its previously posted surety bond
of P1,286,057,899.54, to complete the total amount equivalent to the revised
assessment of P1,731,025,403.06. The trial court held that in scheduling the sale of
the properties despite the pendency of Petrons appeal and posting of the surety
bond with the LBAA, petitioner deprived Petron of the right to appeal. The
dispositive portion thereof, reads:
WHEREFORE, the writ of preliminary injunction prayed for by
plaintiff is hereby GRANTED and ISSUED, enjoining defendant
Treasurer, her agents, representatives, or anybody acting in her behalf
from proceeding with the scheduled public auction of plaintiffs real
properties, or any disposition thereof, pending the determination of the
merits of the main action, to be effective upon posting by plaintiff to the
Court of an injunction bond in the amount of Four Hundred Forty Four
Million Nine Hundred Sixty Seven Thousand Five Hundred Three and
52/100 Pesos (P444,967,503.52) and the approval thereof by the Court.

Defendants Urgent Motion for the Immediate Dissolution of the

Temporary Restraining Order dated October 23, 2007 is hereby
DENIED.

SO ORDERED.[16]

From the said Order of the trial court, petitioner went directly to this Court
via the instant petition for certiorari under Rule 65 of the Rules of Court.

The question posed in this petition, i.e., whether the collection of taxes may
be suspended by reason of the filing of an appeal and posting of a surety bond, is

undoubtedly a pure question of law. Section 2(c) of Rule 41 of the Rules of Court
provides:
SEC. 2. Modes of Appeal.

(c) Appeal by certiorari. In all cases when only questions of law

are raised or involved, the appeal shall be to the Supreme Court
by petition for review on certiorari under Rule 45. (Emphasis
supplied)

Thus, petitioner resorted to the erroneous remedy when she filed a petition for
certiorari under Rule 65, when the proper mode should have been a petition for
review on certiorari under Rule 45. Moreover, under Section 2, Rule 45 of the
same Rules, the period to file a petition for review is 15 days from notice of the
order appealed from. In the instant case, petitioner received the questioned order of
the trial court on November 6, 2007, hence, she had only up to November 21,
2007 to file the petition.However, the same was filed only on January 4, 2008, or
43 days late. Consequently, petitioners failure to file an appeal within the
reglementary period rendered the order of the trial court final and executory.

The perfection of an appeal in the manner and within the period prescribed
by law is mandatory. Failure to conform to the rules regarding appeal will render
the judgment final and executory and beyond the power of the Courts
review.Jurisprudence mandates that when a decision becomes final and executory,
it becomes valid and binding upon the parties and their successors in interest. Such
decision or order can no longer be disturbed or reopened no matter how erroneous
it may have been.[17]

Petitioners resort to a petition under Rule 65 is obviously a play to make up for the
loss of the right to file an appeal via a petition under Rule 45. However, a special
civil action under Rule 65 can not cure petitioners failure to timely file a petition

for review on certiorari under Rule 45 of the Rules of Court. Rule 65 is an

independent action that cannot be availed of as a substitute for the lost remedy of
an ordinary appeal, including that under Rule 45, especially if such loss or lapse
was occasioned by ones own neglect or error in the choice of remedies.[18]

Moreover, even if we assume that a petition under Rule 65 is the proper

remedy, the petition is still dismissible.

We note that no motion for reconsideration of the November 5, 2007 order

of the trial court was filed prior to the filing of the instant petition. The settled rule
is that a motion for reconsideration is a sine qua non condition for the filing of a
petition for certiorari. The purpose is to grant the public respondent an
opportunity to correct any actual or perceived error attributed to it by the reexamination of the legal and factual circumstances of the case. Petitioners failure
to file a motion for reconsideration deprived the trial court of the opportunity to
rectify an error unwittingly committed or to vindicate itself of an act unfairly
imputed. Besides, a motion for reconsideration under the present circumstances is
the plain, speedy and adequate remedy to the adverse judgment of the trial court.[19]

Petitioner also blatantly disregarded the rule on hierarchy of

courts. Although the Supreme Court, Regional Trial Courts, and the Court of
Appeals have concurrent jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, habeas corpus and injunction, such concurrence does not
give the petitioner unrestricted freedom of choice of court forum. Recourse should
have been made first with the Court of Appeals and not directly to this Court.[20]

True, litigation is not a game of technicalities. It is equally true, however,

that every case must be presented in accordance with the prescribed procedure to
ensure an orderly and speedy administration of justice. [21] The failure therefore of
petitioner to comply with the settled procedural rules justifies the dismissal of the
present petition.

Finally, we find that the trial court correctly granted respondents petition for
issuance of a writ of preliminary injunction. Section 3, Rule 58, of the Rules of
Court, provides:
SEC. 3. Grounds for issuance of preliminary injunction. A
preliminary injunction may be granted by the court when it is
established:

(a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the commission or
continuance of the acts complained of, or in the performance of an act or
acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the

act or acts complained of during the litigation would probably work
injustice to the applicant; or

(c) That a party, court, or agency or a person is doing, threatening,

or attempting to do, or is procuring or suffering to be done, some act or
acts probably in violation of the rights of the applicant respecting the
subject of the action or proceeding, and tending to render the judgment
ineffectual.

The requisites for the issuance of a writ of preliminary injunction are: (1) the
existence of a clear and unmistakable right that must be protected; and (2) an
urgent and paramount necessity for the writ to prevent serious damage.[22]

The urgency and paramount necessity for the issuance of a writ of injunction
becomes relevant in the instant case considering that what is being enjoined is the
sale by public auction of the properties of Petron amounting to at least P1.7 billion

and which properties are vital to its business operations. If at all, the repercussions
and far-reaching implications of the sale of these properties on the operations of
Petron merit the issuance of a writ of preliminary injunction in its favor.
We are not unaware of the doctrine that taxes are the lifeblood of the
government, without which it can not properly perform its functions; and that
appeal shall not suspend the collection of realty taxes. However, there is an
exception to the foregoing rule, i.e., where the taxpayer has shown a clear and
unmistakable right to refuse or to hold in abeyance the payment of taxes. In the
instant case, we note that respondent contested the revised assessment on the
following grounds: that the subject assessment pertained to properties that have
been previously declared; that the assessment covered periods of more than 10
years which is not allowed under the LGC; that the fair market value or
replacement cost used by petitioner included items which should be properly
excluded; that prompt payment of discounts were not considered in determining
the fair market value; and that the subject assessment should take effect a year after
or on January 1, 2008. To our mind, the resolution of these issues would have a
direct bearing on the assessment made by petitioner. Hence, it is necessary that the
issues must first be passed upon before the properties of respondent is sold in
public auction.

In addition to the fact that the issues raised by the respondent would have a
direct impact on the validity of the assessment made by the petitioner, we also note
that respondent has posted a surety bond equivalent to the amount of the
assessment due. The Rules of Procedure of the LBAA, particularly Section 7, Rule
V thereof, provides:
Section 7. Effect of Appeal on Collection of Taxes. An appeal
shall not suspend the collection of the corresponding realty taxes on the
real property subject of the appeal as assessed by the Provincial, City or
Municipal Assessor, without prejudice to the subsequent adjustment
depending upon the outcome of the appeal. An appeal may be
entertained but the hearing thereof shall be deferred until the
corresponding taxes due on the real property subject of the appeal shall

have been paid under protest or the petitioner shall have given a surety
bond, subject to the following conditions:

(1) the amount of the bond must not be less than the total realty
taxes and penalties due as assessed by the assessor nor more than double
said amount;

(2) the bond must be accompanied by a certification from the

Insurance Commissioner (a) that the surety is duly authorized to issue
such bond; (a) that the surety bond is approved by and registered with
said Commission; and (c) that the amount covered by the surety bond is
within the writing capacity of the surety company; and

(3) the amount of the bond in excess of the surety companys

writing capacity, if any, must be covered by Reinsurance Binder, in
which case, a certification to this effect must likewise accompany the
surety bond.

Corollarily, Section 11 of Republic Act No. 9282,[23] which amended

Republic Act No. 1125 (The Law Creating the Court of Tax Appeals) provides:
Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; -

xxxx

No appeal taken to the Court of Appeals from the Collector of Internal

Revenue x x x shall suspend the payment, levy, distraint, and/or sale of

any property for the satisfaction of his tax liability as provided by

existing law. Provided, however, That when in the opinion of the
Court the collection by the aforementioned government agencies may
jeopardize the interest of the Government and/or the taxpayer the Court
at any stage of the processing may suspend the collection and require the
taxpayer either to deposit the amount claimed or to file a surety bond for
not more than double the amount with the Court.

WHEREFORE, in view of all the foregoing, the instant petition

is DISMISSED.

SO ORDERED.

G.R. No. L-22074

April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the Philippines
namely: Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp.,
Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union
Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on
insurance it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were
signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the
Philippines, except the contract with Swiss Reinsurance Company, which was signed by both parties
in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that
of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered,
and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance

premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The
foreign reinsurers further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance
contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .

P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . .

721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .

P768,580.00

Withholding tax due thereon at 24% . . . . . . . .

P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .

46,114.00

Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .

100.00

P230,673.00
==========
1954

Gross premium per investigation . . . . . . . . . .

P780.880.68

Withholding tax due thereon at 24% . . . . . . . .

P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .

P184,411.00

Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .

100.00

P234,364.00
==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc.

is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes
for the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs
against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to
the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers
commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under the original
insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the foreign resinsurers, localizing in the Philippines
the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the
foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of
doing insurance business in the Philippines were payable by the foreign reinsurers when the same
were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co.,
Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and
management by the latter of the affairs of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was
signed by both parties in Switzerland, the same specifically provided that its provision shall be
construed according to the laws of the Philippines, thereby manifesting a clear intention of the
parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within
the Philippines. The word "sources" has been interpreted as the activity, property or service giving
rise to the income.1 The reinsurance premiums were income created from the undertaking of the
foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss
under original insurances. Such undertaking, as explained above, took place in the Philippines.
These insurance premiums, therefore, came from sources within the Philippines and, hence, are
subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may consist
of only a single transaction. An activity may occur outside the place of business. Section 24 of the
Tax Code does not require a foreign corporation to engage in business in the Philippines in
subjecting its income to tax. It suffices that the activity creating the income is performed or done in
the Philippines. What is controlling, therefore, is not the place of business but the place ofactivity that
created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is

not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein
should be treated as income from sources within the Philippines but it does not require that other
kinds of income should not be considered likewise.
1wph1.t

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvement designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were afforded protection by the government
and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner
may free if from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents. 3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax
Code, suffice it to state that this question has already been answered in the affirmative in Alexander
Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit
any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted and withheld
at the source in the same manner and upon the same items as is provided in Section fiftythree a tax equal to twenty-four per centum thereof, and such tax shall be returned and paid
in the same manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships
(compaias colectivas), in what ever capacity acting, including lessees or mortgagors of real
or personal property, trustees acting in any trust capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, or other fixed or determinable annual or periodical gains,
profits, and income of any nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from such annual
or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in the case of

dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more
than eighty-five per centum of the gross income of such corporation for the three-year period
ending with the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence)was derived from sources
within the Philippines as determined under the provisions of section thirtyseven:Provided, further, That the Collector of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which are not
known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining
the amount to be withheld. According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00,
or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the
amount of P375,345.00 is not paid within 30 days from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum amount that may
be collected as interest shall not exceed the amount corresponding to a period of three (3) years.
With costs againsts petitioner.

G.R. No. L-26521

December 28, 1968

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 plaintiffs-appellees 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:
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

P20.00 per door p.a.

(b) Apartment house made of mixed materials

P10.00 per door p.a.

II Rooming house of strong materials

P10.00 per door p.a.

Rooming house of mixed materials

P5.00 per door p.a.

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.

P30.00 per door p.a.

IV. Tenement house partly or wholly engaged in or dedicated to

business in any other street

P12.00 per door p.a.

V. Tenement houses at the streets surrounding the super market

as soon as said place is declared commercial

P24.00 per door p.a.

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.9 The 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., L-12695, March 23, 1959,
adopted the definition of a tenement house18 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, water-closets, 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 wellsettled 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 nonpayment 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 L12695, 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 L-12695 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-20312 February 26, 1972

SAN MIGUEL BREWERY, INC., plaintiff-appellant,

vs.
THE CITY OF CEBU, defendant-appellee.
G.R. No. L-20496 February 26, 1972
CEBU PORTLAND CEMENT COMPANY, plaintiff-appellant,
vs.
MUNICIPALITY OF NAGA, CEBU and THE MUNICIPAL TREASURER, NAGA,
CEBU, defendants-appellees.
Picazo and Agcaoili for plaintiff-appellant San Miguel Brewery, Inc.
Government Corporate Counsel Tomas P. Matic, Jr. and Assistant Government Corporate Counsel
Lorenzo R. Mosqueda for plaintiff-appellant Cebu Portland Cement Company.
Eliseo Ynclino, Second Asst. City Fiscal and Quirico del Mar for defendant-appellee The City of
Cebu.
Ananias V. Maribao, 2nd Asst. Provincial Fiscal and Vicente Mendiola for defendants-appellees
Municipality of Naga, Cebu, etc.

CONCEPCION, C.J.:p
The above-entitled cases are jointly disposed of in this decision owing to the common issue therein
namely, the extent of the taxing power of municipal corporations under section 2 of Republic Act
No. 2264, otherwise known as the Local Autonomy Act.
In L-20312, plaintiff San Miguel Brewery, Inc. hereinafter referred to as SMB assails the validity
of Ordinance No. 298, as amended by Ordinance No. 300, both series of 1960, of the City of Cebu,
providing that "(t)here shall be collected on any sale or disposal of liquor or intoxicating beverages of
any form in the City of Cebu by manufacturers and wholesalers for purposes of a municipal tax the
following rates: .
(a) On sales or disposal per bottle or container not exceeding P.50, a tax of P.03;
(b) On sales or disposal per bottle or container over P.50, but not exceeding P1, a tax
of P.05;
(c) On sales or disposal per bottle or container over P1, but not exceeding P2, a tax
of P.15;
(d) On sales or disposal per bottle or container exceeding P2, the amount of tax
provided under schedule C, plus P.10 per P1, or a fraction thereof.

PROVIDED, however, that manufacturers, who are at the same time wholesalers of
their own product, shall pay only as manufacturers under the rates specified
hereinabove.
Pursuant to said ordinance, the SMB which is engaged in the manufacture, bottling, distribution and
sale of beer throughout the Philippines, including the defendant Cebu City, paid thereto, under
protest, on April 20, 1961, the sum of P29,874.69, the refund of which is prayed for in the complaint
herein, upon the ground that said ordinance is ultra vires, for imposing a sales tax, which is allegedly
beyond defendant's power to levy, apart from resulting in illegal double taxation, since SMB already
pays the defendant a business license tax of P600 per annum. The Court of First Instance of Manila
having rendered judgment dismissing the complaint, with costs, plaintiff seeks a review by record on
appeal.
In L-20496, the Cebu Portland Cement Company Cebu Portland for short seeks to annul
Ordinance No. 22, series of 1959, of the Municipality of Naga, Cebu, imposing upon "all cement
factories, corporations, or enterprises operating within" said municipality "an annual municipal
license tax, payable quarterly, graduated" according to the "maximum annual output capacity" of the
factory, as follows: P150 if the capacity is not more than 10,000 bags of cement; P300, if over
10,000 but not more than 20,000 bags; P450, if over 20,000 but not more than 30,000 bags; P600, if
over 30,000 but not more than 40,000 bags; P750, if over 40,000 but not more than 50,000 bags;
P900, if over 50,000 but not more than 60,000 bags; and P75 for every 5,000 bags or fraction
thereof in excess of 60,000 bags.
Having failed to pay said tax for the years 1960 and 1961, and the corresponding penalties therefor,
100,000 bags of cement of Cebu Portland were placed under distraint and levy by the municipal
treasurer of Naga. This triggered the filing by Cebu Portland of two (2) actions, namely: 1) one to
impugn the validity of the distraint and then the sale of said 100,000 bags of cement, both of which
were, in due course, upheld by the Court of First Instance of Manila, the decision of which was, on
appeal, affirmed by Us 1; and 2) the present case, to annul said ordinance and secure the refund of
P44,000, subsequently paid under protest by Cebu Portland, in partial satisfaction of its tax liability, which
said plaintiff contests as illegal upon the theory that it partakes of the nature of a specific tax and that it is
allegedly unjust, excessive, oppressive and confiscatory. The defendants having obtained a favorable
judgment in the Court of First Instance of Manila, Cebu Portland appealed by record on appeal.
Said section 2 of Republic Act No. 2264 reads as follows: .
"SEC. 2. Taxation. -- 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 licenses 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 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, inheritances, 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 on wharves owned by the national
government, tonnage, and all other kinds of customs fees, charges and dues;
(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." .
Referring to the above provision, this Court declared in Nin Bay Mining Co. vs. Municipality of
Roxas, Palawan, 2that "Republic Act No. 2264 confers upon all chartered cities, municipalities and
municipal districts the general power to levy, not only taxes, but, also, municipal license taxes, subject to
specified exceptions, as well as service fees." Subsequently, Luzon Surety Co., Inc. vs. City of
Bacolod 3 cited with approval the fact that this Court had consistently upheld the "doctrine that the grant of
the power to tax to chartered cities under section 2 of the Local Autonomy Act issufficiently plenary to
cover everything excepting those which are mentioned therein, subject only to the limitation that the tax
so levied is for public purposes, just and uniform." 4
Appellant in L-20312 questions the conclusions reached in the decision appealed from, to the effect
that the first proviso in the above-quoted provision, prohibiting "municipalities and municipal districts"
from imposing "any percentage tax on sales or other taxes in any form based thereon," implies
that cities, like appellee therein, are not subject to said restriction, and that the contested ordinance
is not invalid upon the ground of double taxation.

We find no merit in this pretense, for: (a) double taxation is not prohibited by the Constitution 5; (b)
there is double taxation when the same person is taxed by the same jurisdiction for the same
purpose, 6 which is not the case in L-20312, for the ordinance in question imposes a tax on the sale or
disposal of every "bottle or container" of "liquor intoxicating beverages," and, as such, is a typical tax or
revenue measure, whereas the sum of P600 it pays annually is for a "second-class wholesale liquor
license," which is a license to engage in the business of wholesale liquor in Cebu City, and, accordingly,
constitutes a regulatory measure, in the exercise of the police power; 7 and (c) the authority of cities under
the above -- quoted section 2 of Rep. Act No. 2264, to impose a sales tax has already been upheld in City
of Bacolod vs. Gruet8 and Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. City of Butuan, 9 and We find
no plausible reason to depart from said view.
Neither is there any merit in the contention of Cebu Portland in L-20496, to the effect that the tax
involved therein partakes of the nature of a percentage or sales tax or a specific tax, merely because
the amount of the tax is dependent upon the maximum annual capacity of the cement factory subject
thereto. Settled is the rule that a graduation of the tax based upon the taxpayer's volume of
business, when the same is considered solely for purposes of classification, and there is no set ratio
between said volume and the amount of the tax, does not render the latter invalid as a sales,
percentage or specific tax. Thus, in Northern Philippines Tobacco Corporation vs. Municipality of
Agoo, La Union, 10 We held: .
The circumstance that the rate of tax payable under the ordinance is made to some
extent dependent on the minimum and maximum quantity of tobacco redried per
quarter, does not transform said tax into a percentage or sales or income tax and
does not bring the case out of the council's authorized sphere of action. It may be
noted that, as framed in the ordinance, the volume of business is merely taken into
account in classifying the taxpayer's business according to its size or extent of
operations, for the purpose of imposing the fixed graduated tax it has to pay; and that
there is no set ratio between the tax and the amount of tobacco redried.
This criterion was, also, adhered to in Nin Bay Mining Co. vs. Municipality of Roxas, 11 Li Seng Giap
vs. Municipality of Daet, 12 Standard-Vacuum Oil Co. vs. Antigua, 13 Shell Co. of P.I. vs. Vano, 14 Syjuco vs.
Municipality of Paraaque,15 Marinduque Iron Mines Agents, Inc. vs. Municipal Council of
Hinabangan, 16 and Victorias Milling Co., Inc. vs. Municipality of Victorias. 17
For the rest, Cebu Portland has not introduced any evidence in support of its claim that the tax in
question is excessive, oppressive, and confiscatory. Hence, this objection cannot be sustained for: .
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus to the
discretion of municipal authorities. Courts will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive as to be prohibitive. A rule which
has gained acceptance is that factors relevant to such an inquiry are the municipal
conditions as a whole and the nature of the business made subject to imposition." 18
In Northern Philippines Tobacco Corporation vs. Municipality of Agoo, 19 a similar charge was disposed
of in the following language: .
We find nothing in the record, however, to supports such charge. Appellant has failed
to present proof of the existing municipal conditions and the nature of its business, as

well as other factors that would have been relevant to the issue of the arbitrariness or
unreasonableness of the questioned rates. An increase in the rate of tax alone would
not support the claim that it is oppressive, unjust and confiscatory; municipal
corporations are allowed much discretion in determining the rates of imposable
license fees, even in cases of purely police power-measures.
WHEREFORE, the decisions appealed from should be and are hereby affirmed, with costs against
plaintiffs-appellants San Miguel Brewery, Inc. and Cebu Portland Cement Company. It is so ordered.

[G.R. No. 149636. June 8, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF

COMMERCE, respondent.
DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision of the Court of

Appeals (CA) in CA-G.R. SP No. 52706, affirming the ruling of the Court of
Tax Appeals (CTA) in CTA Case No. 5415.
[1]

[2]

The facts of the case are undisputed.

In 1994 and 1995, the respondent Bank of Commerce derived passive
income in the form of interests or discounts from its investments in
government securities and private commercial papers. On several occasions
during the said period, it paid 5% gross receipts tax on its income, as reflected
in its quarterly percentage tax returns. Included therein were the respondent
banks passive income from the said investments amounting
to P85,384,254.51, which had already been subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia
Bank Corporation v. Commissioner of Internal Revenue,CTA Case No. 4720,
holding that the 20% final withholding tax on interest income from banks does
not form part of taxable gross receipts for Gross Receipts Tax (GRT)
purposes. The CTA relied on Section 4(e) of Revenue Regulations (Rev. Reg.)
No. 12-80.

Relying on the said decision, the respondent bank filed an administrative

claim for refund with the Commissioner of Internal Revenue on July 19, 1996.
It claimed that it had overpaid its gross receipts tax for 1994 to 1995
by P853,842.54, computed as follows:
Gross receipts subjected to
Final Tax Derived from Passive
Investment P85,384,254.51
x 20%
20% Final Tax Withheld 17,076,850.90
at Source x 5%
P 853,842.54
Before the Commissioner could resolve the claim, the respondent bank
filed a petition for review with the CTA, lest it be barred by the mandatory twoyear prescriptive period under Section 230 of the Tax Code (now Section 229
of the Tax Reform Act of 1997).
In his answer to the petition, the Commissioner interposed the following
special and affirmative defenses:
5. The alleged refundable/creditable gross receipts taxes were collected and paid
pursuant to law and pertinent BIR implementing rules and regulations; hence, the
same are not refundable. Petitioner must prove that the income from which the
refundable/creditable taxes were paid from, were declared and included in its gross
income during the taxable year under review;
6. Petitioners allegation that it erroneously and excessively paid its gross receipt tax
during the year under review does not ipso facto warrant the refund/credit. Petitioner
must prove that the exclusions claimed by it from its gross receipts must be an
allowable exclusion under the Tax Code and its pertinent implementing Rules and
Regulations. Moreover, it must be supported by evidence;

7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt
taxes were neither automatically applied as tax credit against its tax liability for the
succeeding quarter/s of the succeeding year nor included as creditable taxes declared
and applied to the succeeding taxable year/s;
8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer
as it partakes the nature of an exemption from tax and it is incumbent upon the
petitioner to prove that it is entitled thereto under the law. Failure on the part of the
petitioner to prove the same is fatal to its claim for tax refund/credit;
9. Furthermore, petitioner must prove that it has complied with the provision of
Section 230 (now Section 229) of the Tax Code, as amended.
[3]

The CTA summarized the issues to be resolved as follows: whether or not

the final income tax withheld should form part of the gross receipts of the
taxpayer for GRT purposes; and whether or not the respondent bank was
entitled to a refund of P853,842.54.
[4]

[5]

The respondent bank averred that for purposes of computing the 5% gross
receipts tax, the final withholding tax does not form part of gross receipts. On
the other hand, while the Commissioner conceded that the Court defined
gross receipts as all receipts of taxpayers excluding those which have been
especially earmarked by law or regulation for the government or some person
other than the taxpayer in CIR v. Manila Jockey Club, Inc., he claimed that
such definition was applicable only to a proprietor of an amusement place, not
a banking institution which is an entirely different entity altogether. As such,
according to the Commissioner, the ruling of the Court in Manila Jockey
Club was inapplicable.
[6]

[7]

In its Decision dated April 27, 1999, the CTA by a majority

decision partially granted the petition and ordered that the amount
ofP355,258.99 be refunded to the respondent bank. The fallo of the decision
reads:
[8]

WHEREFORE, in view of all the foregoing, respondent is

hereby ORDERED to REFUND in favor of petitioner Bank of Commerce the
amount of P355,258.99 representing validly proven erroneously withheld taxes from
interest income derived from its investments in government securities for the years
1994 and 1995.
[9]

In ruling for respondent bank, the CTA relied on the ruling of the Court
in Manila Jockey Club, and held that the term gross receipts excluded those
which had been especially earmarked by law or regulation for the government
or persons other than the taxpayer. The CTA also cited its rulings in China
Banking Corporation v. CIR and Equitable Banking Corporation v. CIR.
[10]

[11]

The CTA ratiocinated that the aforesaid amount of P355,258.99

represented the claim of the respondent bank, which was filed within the twoyear mandatory prescriptive period and was substantiated by material and
relevant evidence. The CTA applied Section 204(3) of the National Internal
Revenue Code (NIRC).
[12]

The Commissioner then filed a petition for review under Rule 43 of the
Rules of Court before the CA, alleging that:
(1) There is no provision of law which excludes the 20% final income tax
withheld under Section 50(a) of the Tax Code in the computation of the 5%
gross receipts tax.
(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue vs.
Manila Jockey Club (108 Phil. 821) in the resolution of the legal issues
involved in the instant case.
[13]

The Commissioner reiterated his stand that the ruling of this Court
in Manila Jockey Club, which was affirmed in Visayan Cebu Terminal Co., Inc.
v. Commissioner of Internal Revenue, is not decisive. He averred that the
factual milieu in the said case is different, involving as it did the wager fund.
The Commissioner further pointed out that in Manila Jockey Club, the Court
ruled that the race tracks commission did not form part of the gross receipts,
and as such were not subjected to the 20% amusement tax. On the other
hand, the issue in Visayan Cebu Terminal was whether or not the gross
receipts corresponding to 28% of the total gross income of the service
contractor delivered to the Bureau of Customs formed part of the gross
receipts was subject to 3% of contractors tax under Section 191 of the Tax
Code. It was further pointed out that the respondent bank, on the other hand,
was a banking institution and not a contractor. The petitioner insisted that the
term gross receipts is self-evident; it includes all items of income of the
respondent bank regardless of whether or not the same were allocated or
earmarked for a specific purpose, to distinguish it from net receipts.
[14]

On August 14, 2001, the CA rendered judgment dismissing the petition.

Citing Sections 51 and 58(A) of the NIRC, Section 4(e) of Rev. Reg. No. 1280 and the ruling of this Court in Manila Jockey Club, the CA held that
the P17,076,850.90 representing the final withholding tax derived from
passive investments subjected to final tax should not be construed as forming
part of the gross receipts of the respondent bank upon which the 5% gross
receipts tax should be imposed. The CA declared that the final withholding tax
in the amount of P17,768,509.00 was a trust fund for the government; hence,
does not form part of the respondents gross receipts. The legal ownership of
the amount had already been vested in the government. Moreover, the CA
declared, the respondent did not reap any benefit from the said amount. As
such, subjecting the said amount to the 5% gross receipts tax would result in
double taxation. The appellate court further cited CIR v. Tours Specialists,
Inc., and declared that the ruling of the Court in Manila Jockey Club was
decisive of the issue.
[15]

[16]

The Commissioner now assails the said decision before this Court,
contending that:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL
WITHHOLDING TAX ON BANKS INTEREST INCOME DOES NOT FORM
PART OF THE TAXABLE GROSS RECEIPTS IN COMPUTING THE 5% GROSS
RECEIPTS TAX (GRT, for brevity).
[17]

The petitioner avers that the reliance by the CTA and the CA on Section
4(e) of Rev. Reg. No. 12-80 is misplaced; the said provision merely authorizes
the determination of the amount of gross receipts based on the taxpayers
method of accounting under then Section 37 (now Section 43) of the Tax
Code. The petitioner asserts that the said provision ceased to exist as of
October 15, 1984, when Rev. Reg. No. 17-84 took effect. The petitioner
further points out that under paragraphs 7(a) and (c) of Rev. Reg. No. 17-84,
interest income of financial institutions (including banks) subject to withholding
tax are included as part of the gross receipts upon which the gross receipts
tax is to be imposed. Citing the ruling of the CA in Commissioner of Internal
Revenue v. Asianbank Corporation (which likewise cited Bank of America NT
& SA v. Court of Appeals, ) the petitioner posits that in computing the 5%
gross receipts tax, the income need not be actually received. For income to
form part of the taxable gross receipts, constructive receipt is enough. The
petitioner is, likewise, adamant in his claim that the final withholding tax from
[18]

[19]

the respondent banks income forms part of the taxable gross receipts for
purposes of computing the 5% of gross receipts tax. The petitioner posits that
the ruling of this Court in Manila Jockey Club is not decisive of the issue in this
case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court
in China Banking Corporation v. Court of Appeals, and CIR v. Solidbank
Corporation.
[20]

[21]

Section 27(D)(1) of the Tax Code reads:

(D) Rates of Tax on Certain Passive Incomes.
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent
(7%) of such interest income.
On the other hand, Section 57(A)(B) of the Tax Code authorizes the
withholding of final tax on certain income creditable at source:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations,
the Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees, the
tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)
(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified
items of income shall be withheld by payor-corporation and/or person and paid in the

same manner and subject to the same conditions as provided in Section 58 of this
Code.
(B) Withholding of Creditable Tax at Source. The Secretary of Finance may, upon
the recommendation of the Commissioner, require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the Philippines,
by payor-corporation/persons as provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the taxable year.
The tax deducted and withheld by withholding agents under the said
provision shall be held as a special fund in trust for the government until paid
to the collecting officer.
[22]

Section 121 (formerly Section 119) of the Tax Code provides that a tax on
gross receipts derived from sources within the Philippines by all banks and
non-bank financial intermediaries shall be computed in accordance with the
schedules therein:
(a) On interest, commissions and discounts from lending activities as well as income
from financial leasing, on the basis of remaining maturities of instruments from which
such receipts are derived:
Short-term maturity (not in excess of two (2) years) 5%
Medium-term maturity (over two (2) years but
not exceeding four (4) years) 3%
Long-term maturity
(1) Over four (4) years but not exceeding
seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal,

profits from exchange and all other items treated

as gross income under Section 32 of this Code 5%
Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pre-termination, then the maturity period shall be reckoned to end as
of the date of pre-termination for purposes of classifying the transaction as short,
medium or long-term and the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.
The Tax Code does not define gross receipts. Absent any statutory
definition, the Bureau of Internal Revenue has applied the term in its plain and
ordinary meaning.
[23]

In National City Bank v. CIR, the CTA held that gross receipts should be
interpreted as the whole amount received as interest, without deductions;
otherwise, if deductions were to be made from gross receipts, it would be
considered as net receipts. The CTA changed course, however, when it
promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg. No.
12-80 and the ruling of this Court in Manila Jockey Club, holding that the 20%
final withholding tax on the petitioner banks interest income should not form
part of its taxable gross receipts, since the final tax was not actually received
by the petitioner bank but went to the coffers of the government.
[24]

The Court agrees with the contention of the petitioner that the appellate
courts reliance on Rev. Reg. No. 12-80, the rulings of the CTA in Asia Bank,
and of this Court in Manila Jockey Club has no legal and factual bases.
Indeed, the Court ruled in China Banking Corporation v. Court of
Appeals that:
[25]

In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v.
Commissioner, both promulgated on 16 November 2001, the tax court ruled that the
final withholding tax forms part of the banks gross receipts in computing the gross
receipts tax. The tax court held that Section 4(e) of Revenue Regulations No. 12-80
did not prescribe the computation of the amount of gross receipts but merely
authorized the determination of the amount of gross receipts on the basis of the
method of accounting being used by the taxpayer.

The word gross must be used in its plain and ordinary meaning. It is
defined as whole, entire, total, without deduction. A common definition is
without deduction. Gross is also defined as taking in the whole; having no
deduction or abatement; whole, total as opposed to a sum consisting of
separate or specified parts. Gross is the antithesis of net. Indeed, in China
Banking Corporation v. Court of Appeals, the Court defined the term in this
wise:
[26]

[27]

[28]

[29]

As commonly understood, the term gross receipts means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania
v. Koppers Company, Inc., Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation.
However, this in no way should affect or control the normal usage of words in the
construction of our statutes; and we see nothing that would require us not to include
the proceeds here in question in the gross receipts allocation unless statutorily such
inclusion is prohibited. Under the ordinary basic methods of handling accounts, the
term gross receipts, in the absence of any statutory definition of the term, must be
taken to include the whole total gross receipts without any deductions, x x x. [Citations
omitted] (Emphasis supplied)
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:
The word gross appearing in the term gross receipts, as used in the ordinance, must
have been and was there used as the direct antithesis of the word net. In its usual and
ordinary meaning gross receipts of a business is the whole and entire amount of the
receipts without deduction, x x x. On the contrary, net receipts usually are the receipts
which remain after deductions are made from the gross amount thereof of the
expenses and cost of doing business, including fixed charges and depreciation. Gross
receipts become net receipts after certain proper deductions are made from the gross.
And in the use of the words gross receipts, the instant ordinance, of course, precluded
plaintiff from first deducting its costs and expenses of doing business, etc., in arriving
at the higher base figure upon which it must pay the 5% tax under this ordinance.
(Emphasis supplied)

Absent a statutory definition, the term gross receipts is understood in its plain and
ordinary meaning. Words in a statute are taken in their usual and familiar
signification, with due regard to their general and popular use. The Supreme Court of
Hawaii held in Bishop Trust Company v. Burns that xxx It is fundamental that in construing or interpreting a statute, in order to ascertain
the intent of the legislature, the language used therein is to be taken in the generally
accepted and usual sense. Courts will presume that the words in a statute were used to
express their meaning in common usage. This principle is equally applicable to a tax
statute. [Citations omitted] (Emphasis supplied)
The Court, likewise, declared that Section 121 of the Tax Code expressly
subjects interest income of banks to the gross receipts tax. Such express
inclusion of interest income in taxable gross receipts creates
a presumption that the entire amount of the interest income, without any
deduction, is subject to the gross receipts tax. Indeed, there is a presumption
that receipts of a person engaging in business are subject to the gross
receipts tax. Such presumption may only be overcome by pointing to a
specific provision of law allowing such deduction of the final withholding tax
from the taxable gross receipts, failing which, the claim of deduction has no
leg to stand on. Moreover, where such an exception is claimed, the statute is
construed strictly in favor of the taxing authority. The exemption must be
clearly and unambiguously expressed in the statute, and must be clearly
established by the taxpayer claiming the right thereto. Thus, taxation is the
rule and the claimant must show that his demand is within the letter as well as
the spirit of the law.
[30]

In this case, there is no law which allows the deduction of 20% final tax
from the respondent banks interest income for the computation of the 5%
gross receipts tax. On the other hand, Section 8(a)(c), Rev. Reg. No. 17-84
provides that interest earned on Philippine bank deposits and yield from
deposit substitutes are included as part of the tax base upon which the gross
receipts tax is imposed. Such earned interest refers to the gross interest
without deduction since the regulations do not provide for any such deduction.
The gross interest, without deduction, is the amount the borrower pays, and
the income the lender earns, for the use by the borrower of the lenders
money. The amount of the final tax plainly covers for the interest earned and is
consequently part of the taxable gross receipt of the lender.
[31]

The bare fact that the final withholding tax is a special trust fund belonging
to the government and that the respondent bank did not benefit from it while in
custody of the borrower does not justify its exclusion from the computation of
interest income. Such final withholding tax covers for the respondent banks
income and is the amount to be used to pay its tax liability to the government.
This tax, along with the creditable withholding tax, constitutes payment which
would extinguish the respondent banks obligation to the government. The
bank can only pay the money it owns, or the money it is authorized to pay.
[32]

In the same vein, the respondent banks reliance on Section 4(e) of Rev.
Reg. No. 12-80 and the ruling of the CTA in Asia Bank is misplaced. The
Courts discussion in China Banking Corporation is instructive on this score:
[33]

CBC also relies on the Tax Courts ruling in Asia Bank that Section 4(e) of Revenue
Regulations No. 12-80 authorizes the exclusion of the final tax from the banks taxable
gross receipts. Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing
companies, and other non-bank financial intermediaries not performing quasibanking functions. - The rates of taxes to be imposed on the gross receipts of such
financial institutions shall be based on all items of income actually received. Mere
accrual shall not be considered, but once payment is received on such accrual or in
cases of prepayment, then the amount actually received shall be included in the tax
base of such financial institutions, as provided hereunder: x x x. (Emphasis supplied
by Tax Court)
Section 4(e) states that the gross receipts shall be based on all items of income
actually received. The tax court in Asia Bank concluded that it is but logical to infer
that the final tax, not having been received by petitioner but instead went to the
coffers of the government, should no longer form part of its gross receipts for the
purpose of computing the GRT.
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No.
12-80. Income may be taxable either at the time of its actual receipt or its accrual,
depending on the accounting method of the taxpayer. Section 4(e) merely provides for
an exception to the rule, making interest income taxable for gross receipts tax
purposes only upon actual receipt. Interest is accrued, and not actually received, when

the interest is due and demandable but the borrower has not actually paid and remitted
the interest, whether physically or constructively. Section 4(e) does not exclude
accrued interest income from gross receipts but merely postpones its inclusion until
actual payment of the interest to the lending bank. This is clear when Section 4(e)
states that [m]ere accrual shall not be considered, but once payment is received on
such accrual or in case of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions x x x.
Actual receipt of interest income is not limited to physical receipt. Actual receipt may
either be physical receipt or constructive receipt. When the depository bank withholds
the final tax to pay the tax liability of the lending bank, there is prior to the
withholding a constructive receipt by the lending bank of the amount withheld. From
the amount constructively received by the lending bank, the depository bank deducts
the final withholding tax and remits it to the government for the account of the
lending bank. Thus, the interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that
the amount of the tax withheld comes from the income earned by the taxpayer. Since
the amount of the tax withheld constitutes income earned by the taxpayer, then that
amount manifestly forms part of the taxpayers gross receipts. Because the amount
withheld belongs to the taxpayer, he can transfer its ownership to the government in
payment of his tax liability. The amount withheld indubitably comes from income of
the taxpayer, and thus forms part of his gross receipts.
The Court went on to explain in that case that far from supporting the
petitioners contention, its ruling in Manila Jockey Club, in fact even buttressed
the contention of the Commissioner. Thus:
CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the
final withholding tax on interest income does not form part of a banks gross receipts
because the final tax is earmarked by regulation for the government. CBCs reliance on
the Manila Jockey Club is misplaced. In this case, the Court stated that Republic Act
No. 309 and Executive Order No. 320 apportioned the total amount of the bets in
horse races as follows:
87 % as dividends to holders of winning tickets, 12 % as commission of the Manila
Jockey Club, of which % was assigned to the Board of Races and 5% was distributed
as prizes for owners of winning horses and authorized bonuses for jockeys.

A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by
ordering the distribution of the bets as follows:
Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the sale
of pari-mutuel tickets shall be apportioned as follows:eighty-seven and one-half per
centum shall be distributed in the form of dividends among the holders of win, place
and show horses, as the case may be, in the regular races; six and one-half per centum
shall be set aside as the commission of the person, racetrack, racing club, or any
other entity conducting the races; five and one-half per centum shall be set aside for
the payment of stakes or prizes for win, place and show horses and authorized
bonuses for jockeys; and one-half per centum shall be paid to a special fund to be used
by the Games and Amusements Board to cover its expenses and such other purposes
authorized under this Act. xxx. (Emphasis supplied)
Under the distribution of receipts expressly mandated in Section 19 of RA No. 1933,
the gross receipts apportioned to Manila Jockey Club referred only to its own 6 %
commission. There is no dispute that the 5 % share of the horse-owners and jockeys,
and the % share of the Games and Amusements Board, do not form part of Manila
Jockey Clubs gross receipts. RA No. 1933 took effect on 22 June 1957, three years
before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 %
commission. Manila Jockey Club owned, and could keep and use, only 7% of the total
bets. Manila Jockey Club merely held in trust the balance of 5 % for the benefit of the
Board of Races and the winning horse-owners and jockeys, the real owners of the 5
1/2 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the
Secretary of Justice made prior to RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the
bets registered by the Totalizer. This portion represents its share or commission in the
total amount of money it handles and goes to the funds thereof as its own property
which it may legally disburse for its own purposes. The 5% [sic] does not belong to
the club. It is merely held in trust for distribution as prizes to the owners of winning
horses. It is destined for no other object than the payment of prizes and the club
cannot otherwise appropriate this portion without incurring liability to the owners of
winning horses. It can not be considered as an item of expense because the sum used

for the payment of prizes is not taken from the funds of the club but from a certain
portion of the total bets especially earmarked for that purpose. (Emphasis supplied)
Consequently, the Court ruled that the 5 % balance of the commission, not being
owned by Manila Jockey Club, did not form part of its gross receipts for purposes of
the amusement tax. Manila Jockey Club correctly paid the amusement tax based only
on its own 7% commission under RA No. 309 and Executive Order No. 320.
Manila Jockey Club does not support CBCs contention but rather the Commissioners
position. The Court ruled in Manila Jockey Club that receipts not owned by the
Manila Jockey Club but merely held by it in trust did not form part of Manila Jockey
Clubs gross receipts. Conversely, receipts owned by the Manila Jockey Club would
form part of its gross receipts.
[34]

We reverse the ruling of the CA that subjecting the Final Withholding Tax
(FWT) to the 5% of gross receipts tax would result in double taxation. In CIR
v. Solidbank Corporation, we ruled, thus:
[35]

We have repeatedly said that the two taxes, subject of this litigation, are different from
each other. The basis of their imposition may be the same, but their natures are
different, thus leading us to a final point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only
once; that is, xxx taxing the same person twice by the same jurisdiction for the same
thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once.
Otherwise described as direct duplicate taxation, the two taxes must be imposed on
the same subject matter, for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and they must be of the same kind or
character.
First, the taxes herein are imposed on two different subject matters. The subject
matter of the FWT is the passive income generated in the form of interest on deposits
and yield on deposit substitutes, while the subject matter of the GRT is the privilege of
engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we
have already held that one can be taxed for engaging in business and further taxed

differently for the income derived therefrom. Akin to our ruling in Velilla v.
Posadas, these two taxes are entirely distinct and are assessed under different
provisions.
Second, although both taxes are national in scope because they are imposed by the
same taxing authority the national government under the Tax Code and operate within
the same Philippine jurisdiction for the same purpose of raising revenues, the taxing
periods they affect are different. The FWT is deducted and withheld as soon as the
income is earned, and is paid after every calendar quarter in which it is earned. On the
other hand, the GRT is neither deducted nor withheld, but is paid only after every
taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same
taxing authority, within the same jurisdiction, for the same purpose, in different taxing
periods, some of the property in the territory. Subjecting interest income to a 20%
FWT and including it in the computation of the 5% GRT is clearly not double
taxation.
IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision
of the Court of Appeals in CA-G.R. SP No. 52706 and that of the Court of Tax
Appeals in CTA Case No. 5415 are SET ASIDE and REVERSED. The CTA is
hereby ORDERED to DISMISS the petition of respondent Bank of Commerce.
No costs.
SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF
TAX APPEALS,respondents.
T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal
Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other
things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended
by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not
thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed
a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No.
2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund
or grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the
CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper
party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax
Code that allows a credit against the US tax due from P&G-USA of
taxes deemed to have been paid in the Philippines equivalent to
twenty percent (20%) which represents the difference between the
regular tax of thirty-five percent (35%) on corporations and the tax of
fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions
necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the
preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need to be examined. This question was raised for the
first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the

Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before
this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the refund instead of
transmitting such refund or tax credit to its parent and sole stockholder. It is commonplace that in the
absence of explicit statutory provisions to the contrary, the government must follow the same rules of
procedure which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of filing fees from which the
Republic of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions which had not been litigated either in the lower
court or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at
the administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure
and produce such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions
as well which, as will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of
Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or
illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner of Internal Revenue; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum
has been paid under protest or duress. In any case, no such suit or proceeding shall
be begun after the expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after payment: . . .
(Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to
Refund Taxes.The Commissioner may:
xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of

taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of
the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil.
a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as
referring to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus becomes important
to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally
liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil.,
is directly and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The withholding
agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be
finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard,
such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a
withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:

The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of
the tax, he is the Government's agent. In regard to the filing of the necessary income
tax return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally liable for the tax he is
duty bound to withhold; whereas the Commissioner and his deputies are not made
liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial
owner of the dividends with respect to the filing of the necessary income tax return and with respect
to actual payment of the tax to the government, such authority may reasonably be held to include the
authority to file a claim for refund and to bring an action for recovery of such claim. This implied
authority is especially warranted where, is in the instant case, the withholding agent is the wholly
owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show
some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or
tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate.
What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is

directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a
written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign
government should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as
a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim
for refund and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend
remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the
following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in
trade and business in the Philippines, . . ., shall pay a tax equal to
35% of the gross income receipt during its taxable year from all
sources within the Philippines, as . . . dividends . . .Provided, still
further, that on dividends received from a domestic corporation liable
to tax under this Chapter, the tax shall be 15% of the dividends, which
shall be collected and paid as provided in Section 53 (d) of this Code,
subject to the condition that the country in which the non-resident
foreign corporation, is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation, taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax
(15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country
of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit
for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. In other words, in the instant case, the reduced
fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit
for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC
specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach
an amount equivalent to twenty (20) percentage points which represents the difference between the
regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend
tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a
"deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in
making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC
does not require that the US tax law deem the parent-corporation to have paid the twenty (20)
percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US

"shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions
of the US Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the
benefits of this subpart,the tax imposed by this chapter shall, subject
to the applicable limitation of section 904, be credited with the
amounts provided in the applicable paragraph of subsection (b) plus,
in the case of a corporation, the taxes deemed to have been paid
under sections 902 and 960. Such choice for any taxable year may
be made or changed at any time before the expiration of the period
prescribed for making a claim for credit or refund of the tax imposed
by this chapter for such taxable year. The credit shall not be allowed
against the tax imposed by section 531 (relating to the tax on
accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or
under section 1351 (relating to recoveries of foreign expropriation
losses), or against the personal holding company tax imposed by
section 541.
(b) Amount allowed. Subject to the applicable limitation of section
904, the following amounts shall be allowed as the credit under
subsection (a):
(a) Citizens and domestic corporations. In the case
of a citizen of the United States and of a domestic
corporation, the amount of any income,war profits,
and excess profits taxes paid or accrued during the
taxable year to any foreign country or to any
possession of the United States; and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes
of this subject, a domestic corporation which owns at least 10 percent
of the voting stock of a foreign corporation from which it receives
dividends in any taxable year shall
xxx xxx xxx
(2) to the extent such dividends are paid by such
foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for which

such foreign corporation is a less developed country

corporation, be deemed to have paid the same
proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such
foreign corporation to any foreign country or to any
possession of the United States on or with respect to
such accumulated profits, which the amount of such
dividends bears to the amount of such accumulated
profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section, the
term "accumulated profits" means with respect to any foreign
corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the
amount of its gains, profits, or income computed
without reduction by the amount of the income, war
profits, and excess profits taxes imposed on or with
respect to such profits or income by any foreign
country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the
amount of its gains, profits, or income in excess of the
income, war profits, and excess profitstaxes
imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from
the accumulated profits of what year or years such dividends were
paid, treating dividends paid in the first 20 days of any year as having
been paid from the accumulated profits of the preceding year or
years (unless to his satisfaction shows otherwise), and in other
respects treating dividends as having been paid from the most
recently accumulated gains, profits, or earning. . . . (Emphasis
supplied)
Close examination of the above quoted provisions of the US Tax Code

7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for
the amount of the dividend tax actually paid (i.e., withheld) from the
dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a
"deemed paid' tax credit 8for a proportionate part of the corporate income tax actually
paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate
income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&GUSA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate
income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the
amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the
economic cost of carrying on business operations in the Philippines through the medium of P&GPhil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom
taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very
real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed
paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of
P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce
double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the
reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:
a. to determine the amount of the 20 percentage points dividend tax
waived by the Philippine government under Section 24 (b) (1), NIRC,
and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US
tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit
allowed by US law is at least equal to the amount of the dividend tax
waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
determined in the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine

corporate income tax.
P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24

 (b) (1), NIRC

P22.75 Regular dividend tax
P65.00 Dividends remittable to P&G-USA
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine

===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil.
Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if
P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1),
NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under
Section 902, Tax Code, may be computed arithmetically as follows:
P65.00 Dividends remittable to P&G-USA
- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&GPhil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for
Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned
subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code
is identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with

the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the
BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting
Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant
portion of which stated:
However, after a restudy of the decision in the American Chicle Company case and
the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find
merit in your contention that our computation of the credit which the U.S. tax law
allows in such cases is erroneous as the amount of tax "deemed paid" to the
Philippine government for purposes of credit against the U.S. tax by the recipient of
dividends includes a portion of the amount of income tax paid by the corporation
declaring the dividend in addition to the tax withheld from the dividend remitted. In
other words, the U.S. government will allow a credit to the U.S. corporation or
recipient of the dividend, in addition to the amount of tax actually withheld, a portion
of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine
corporation wholly owned by a U.S. corporation has a net income of P100,000, it will
pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the
Tax Code. The net income, after income tax, which is P75,000, will then be declared
as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld
therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code,
U.S. corporation receiving the dividend can utilize as credit against its U.S. tax
payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the
dividend arrived at as follows:
P75,000 x P25,000 = P18,750

100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250

P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly
more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00
the dividends to be remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is
hereby amended in the sense that the dividends to be remitted by your client to its
parent company shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent
provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will reduce the percentage of tax

deemed paid and creditable against the U.S. tax on dividends remitted by a foreign
corporation to a U.S. corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and
Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as
the case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in
Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and
which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the
United States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net
income, there shall be allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries.
If the taxpayer signifies in his return his desire to
have the benefits of this paragraphs, the tax imposed
by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. In the case
of a citizen of the Philippines and of domestic
corporation, the amount of net income, war profits or
excess profits, taxes paid or accrued during the
taxable year to any foreign country. (Emphasis
supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation
for taxes actually paid by it to the US governmente.g., for taxes collected by the US government
on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of
Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides
as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the
same proportion of any income, war-profits, or excess-profits taxes paid by such
foreign corporation to any foreign country, upon or with respect to the accumulated
profits of such foreign corporation from which such dividends were paid, which the

amount of such dividends bears to the amount of such accumulated

profits: Provided, That the amount of tax deemed to have been paid under this
subsection shall in no case exceed the same proportion of the tax against which
credit is taken which the amount of such dividends bears to the amount of the entire
net income of the domestic corporation in which such dividends are included.The
term "accumulated profits" when used in this subsection reference to a foreign
corporation, means the amount of its gains, profits, or income in excess of the
income, war-profits, and excess-profits taxes imposed upon or with respect
to such profits or income; and the Commissioner of Internal Revenue shall have full
power to determine from the accumulated profits of what year or years such
dividends were paid; treating dividends paid in the first sixty days of any year as
having been paid from the accumulated profits of the preceding year or years (unless
to his satisfaction shown otherwise), and in other respects treating dividends as
having been paid from the most recently accumulated gains, profits, or earnings. In
the case of a foreign corporation, the income, war-profits, and excess-profits taxes of
which are determined on the basis of an accounting period of less than one year, the
word "year" as used in this subsection shall be construed to mean such accounting
period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a
Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the
US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or
corporate stockholder is "deemed" under our NIRCto have paid a proportionate part of the
US corporate income tax paid by its US subsidiary, although such US tax was actually paid
by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US
law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine
corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid"
tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the
"deemed paid" tax credit granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant
case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent
(15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by
the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court
from questions of administrative implementation arising after the legal question has been answered.
The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case:
the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of
whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the
required amount, relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax
credit shall have actually been granted before the applicable dividend tax rate goes down from thirtyfive percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC,

merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither
statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual
grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the
preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does
not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the reduced dividend tax
rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax
credit cannot be given by the US tax authorities unless dividends have actually been remitted to the
US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed
and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of
particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section
24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to
withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the
determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent
the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine
corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit
actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for
the taxable year involved. Since the US tax laws can and do change, such implementing regulations
could also provide that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage points
differential. The task of this Court is to settle which tax rate is applicable, considering the state of US
law at a given time. We should leave details relating to administrative implementation where they
properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of the statute. There are many tax statutes or
provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve
longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect
to the legislative design and objectives as they are written into the statute even if, as in the case at
bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirtyfive percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of
P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a
developing economy foremost of which is the financing of economic development
programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are
taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an

appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment
in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double
taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income
to subject to its own taxing power) by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit
at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA

without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901

tax credit.
P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.

===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

- 0 - US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset
the US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine,
could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the
dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine
Government, this should encourage additional investment or re-investment in the Philippines by
P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to
Taxes on Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty
percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. Dividends

xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on
dividends derived from sources within that Contracting State by a
resident of the other Contracting State shall not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross
amount of the dividend ifduring the part of the paying corporation's
taxable year which precedes the date of payment of the dividend and
during the whole of its prior taxable year (if any), at least 10 percent
of the outstanding shares of the voting stock of the paying
corporation was owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United
States that it "shall allow" to a US parent corporation receiving dividends from its Philippine
subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary] .16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code,
discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of
twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of
US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it
seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the
Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.

[G.R. No. 127105. June 25, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C.

JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
DECISION
GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the Philippine

laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board
of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of
Registration No. 8064 (Exh. A).
For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and subjected the
same to 25% withholding tax on royalty payments which [respondent] paid for the
period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. B
to L and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing
that, the antecedent facts attending [respondents] case fall squarely within the same
circumstances under which saidMacGeorge and Gillete rulings were issued. Since the
agreement was approved by the Technology Transfer Board, the preferential tax rate
of 10% should apply to the [respondent]. We therefore submit that royalties paid by
the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax
pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2)
(b)] (Petition for Review [filed with the Court of Appeals], par. 12). [Respondents]
claim for the refund ofP963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
______ _______ __________ __________ ______
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
P6,421,770 P1,605,443 P642,177 P963,266[1]

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

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &
Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA)
where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid
withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson
and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount
of P963,266.00 representing overpaid withholding tax on royalty payments beginning July, 1992
to May, 1993.[2]
The Commissioner of Internal Revenue thus filed a petition for review with the Court of
Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no
merit in the petition and affirming in toto the CTA ruling.[3]
This petition for review was filed by the Commissioner of Internal Revenue raising the
following issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON,

USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON
ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO
THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is
known as the most favored nation clause, the lowest rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of the United States from sources within the
Philippines only if the circumstances of the resident of the United States are similar to those of
the resident of West Germany. Since the RP-US Tax Treaty contains no matching credit provision
as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under
the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Even assuming that the phrase paid under similar circumstances refers to
the payment of royalties, and not taxes, as held by the Court of Appeals, still, the most favored
nation clause cannot be invoked for the reason that when a tax treaty contemplates circumstances
attendant to the payment of a tax, or royalty remittances for that matter, these must necessarily
refer to circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnsons
invocation of the most favored nation clause is in the nature of a claim for exemption from the
application of the regular tax rate of 25% for royalties, the provisions of the treaty must be
construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be
denied (1) because it contains a defective certification against forum shopping as required under
SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by
her counsel; and (2) that the most favored nation clause under the RP-US Tax Treaty refers to
royalties paid under similar circumstances as those royalties subject to tax in other treaties; that
the phrase paid under similar circumstances does not refer to payment of the tax but to the
subject matter of the tax, that is, royalties, because the most favored nation clause is intended to
allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty

wherein the country of residence of such taxpayer is also a party thereto, subject to the basic
condition that the subject matter of taxation in that other tax treaty is the same as that in the
original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of
royalties of the same kind paid under similar circumstances. S.C. Johnson also contends that the
Commissioner is estopped from insisting on her interpretation that the phrase paid under similar
circumstances refers to the manner in which the tax is paid, for the reason that said interpretation
is embodied in Revenue Memorandum Circular (RMC) 39-92 which was already abandoned by
the Commissioners predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95
which stated that royalties paid to an American licensor are subject only to 10% withholding tax
pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax
Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer
pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was
signed by petitioners counsel is not a fatal defect as to warrant the dismissal of this petition since
Circular No. 28-91 applies only to original actions and not to appeals, as in the instant
case.Moreover, the requirement that the certification should be signed by petitioner and not by
counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory
counsel. Petitioner reiterates that even if the phrase paid under similar circumstances embodied
in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and
not taxes, still the presence or absence of a matching credit provision in the said RP-US Tax
Treaty would constitute a material circumstance to such payment and would be determinative of
the said clauses application.
We address first the objection raised by private respondent that the certification against
forum shopping was not executed by the petitioner herself but by her counsel, the Office of the
Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE

SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM
SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO : xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts, tribunals or agencies have
to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court
of Appeals, the petitioner aside from complying with pertinent provisions of the Rules
of Court and existing circulars, must certify under oath to all of the following facts or
undertakings: (a) he has not theretofore commenced any other action or proceeding

involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal
or agency; xxx
(2) Any violation of this revised Circular will entail the following sanctions: (a) it
shall be a cause for the summary dismissal of the multiple petitions or complaints; xxx
The circular expressly requires that a certificate of non-forum shopping should be attached
to petitions filed before this Court and the Court of Appeals. Petitioners allegation that Circular
No. 28-91 applies only to original actions and not to appeals as in the instant case is not
supported by the text nor by the obvious intent of the Circular which is to prevent multiple
petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals or
any other tribunal or agency, we are inclined to accept petitioners submission that since the OSG
is the only lawyer for the petitioner, which is a government agency mandated under Section 35,
Chapter 12, title III, Book IV of the 1987 Administrative Code [4] to be represented only by the
Solicitor General, the certification executed by the OSG in this case constitutes substantial
compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the
interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-resident foreign corporation. The
provision states insofar as pertinent that1) Royalties derived by a resident of one of the Contracting States from sources within the other
Contracting State may be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.

a) In the case of the United States, 15 percent of the gross amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third State.
xxx xxx xxx

(italics supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is
entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the
RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State in which they arise, and
according to the law of that State, but the tax so charged shall not exceed:

xxx
b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any
patent, trademark, design or model, plan, secret formula or process, or from the use of or the
right to use, industrial, commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under b) shall, in the case of royalties arising
in the Republic of the Philippines, only apply if the contract giving rise to such
royalties has been approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent
of the gross amount of such royalties against German income and corporation tax for the taxes
payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent
under such treaty. Article 24 of the RP-Germany Tax Treaty states1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as
follows:

xxxxxxxxx

b) Subject to the provisions of German tax law regarding credit for foreign tax, there
shall be allowed as a credit against German income and corporation tax payable in
respect of the following items of income arising in the Republic of the Philippines, the
tax paid under the laws of the Philippines in accordance with this Agreement on:
xxxxxxxxx

dd) royalties, as defined in paragraph 3 of Article 12;

xxxxxxxxx

c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be
deemed to be
xxxxxxxxx

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according
to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.

xxxxxxxxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid
under circumstances similar to those in the RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in the former convention and private respondent
cannot invoke the concessional tax rate on the strength of the most favored nation clause in the
RP-US Tax Treaty. Petitioners position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax
paid on income from sources within the Philippines is allowed as a credit against
German income and corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of
the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a German resident from sources within the
Philippines arising from the use of, or the right to use, any patent, trade mark, design
or model, plan, secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is allowed in favor of the German
resident. That means the rate of 10% is granted to the German taxpayer if he is
similarly granted a credit against the income and corporation tax of West
Germany. The clear intent of the matching credit is to soften the impact of double
taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar matching credit as that provided under the
RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Therefore, the most favored nation clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US
Tax Treaty.[5]
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the
Court of Appeals, that the phrase paid under similar circumstances in Article 13 (2) (b), (iii) of
the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the
payment of the tax, for the reason that the phrase paid under similar circumstances is followed by
the phrase to a resident of a third state. The respondent court held that Words are to be
understood in the context in which they are used, and since what is paid to a resident of a third
state is not a tax but a royalty logic instructs that the treaty provision in question should refer to
royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take
into account the purpose animating the treaty provisions in point. To begin with, we are not
aware of any law or rule pertinent to the payment of royalties, and none has been brought to our
attention, which provides for the payment of royalties under dissimilar circumstances. The tax

rates on royalties and the circumstances of payment thereof are the same for all the recipients of
such royalties and there is no disparity based on nationality in the circumstances of such
payment.[6]On the other hand, a cursory reading of the various tax treaties will show that there is
no similarity in the provisions on relief from or avoidance of double taxation[7] as this is a matter
of negotiation between the contracting parties.[8] As will be shown later, this dissimilarity is true
particularly in the treaties between the Philippines and the United States and between the
Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has
entered into for the avoidance of double taxation.[9] The purpose of these international agreements
is to reconcile the national fiscal legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different jurisdictions. [10] More precisely, the tax
conventions are drafted with a view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical periods. [11], citing the
Committee on Fiscal Affairs of the Organization for Economic Co-operation and Development (OECD).11 The
apparent rationale for doing away with double taxation is to encourage the free flow of goods
and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies.[12]Foreign investments will only thrive in
a fairly predictable and reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate.[13]
Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states impose tax on
that income or capital. In order to eliminate double taxation, a tax treaty resorts to several
methods.First, it sets out the respective rights to tax of the state of source or situs and of the state
of residence with regard to certain classes of income or capital. In some cases, an exclusive right
to tax is conferred on one of the contracting states; however, for other items of income or capital,
both states are given the right to tax, although the amount of tax that may be imposed by the state
of source is limited.[14]
The second method for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of residence. In this case, the
treaties make it incumbent upon the state of residence to allow relief in order to avoid double
taxation.There are two methods of relief- the exemption method and the credit method. In the
exemption method, the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayers remaining income or capital. On the other
hand, in the credit method, although the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is credited against the tax levied
in the latter. The basic difference between the two methods is that in the exemption method, the
focus is on the income or capital itself, whereas the credit method focuses upon the tax.[15]
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country.[16] Thus the petitioner correctly opined that
the phrase royalties paid under similar circumstances in the most favored nation clause of the
US-RP Tax Treaty necessarily contemplated circumstances that are tax-related.

In the case at bar, the state of source is the Philippines because the royalties are paid for the
right to use property or rights, i.e. trademarks, patents and technology, located within the
Philippines.[17] The United States is the state of residence since the taxpayer, S. C. Johnson and
Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of
source are both permitted to tax the royalties, with a restraint on the tax that may be collected by
the state of source.[18] Furthermore, the method employed to give relief from double taxation is
the allowance of a tax credit to citizens or residents of the United States (in an appropriate
amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but
such amount shall not exceed the limitations provided by United States law for the taxable year.
[19]
Under Article 13 thereof, the Philippines may impose one of three rates- 25 percent of the
gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered
with the Philippine Board of Investments and engaged in preferred areas of activities; or the
lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under
similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation
clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty
should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RPGermany Tax Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount of royalties paid under the law
of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:

Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of the United
States (as it may be amended from time to time without changing the general principle
thereof), the United States shall allow to a citizen or resident of the United States as a credit
against the United States tax the appropriate amount of taxes paid or accrued to the
Philippines and, in the case of a United States corporation owning at least 10 percent of the
voting stock of a Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines
by the Philippine corporation paying such dividends with respect to the profits out of which
such dividends are paid. Such appropriate amount shall be based upon the amount of tax
paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the
purpose of limiting the credit to the United States tax on income from sources within the

Philippines or on income from sources outside the United States) provided by United States
law for the taxable year. xxx.

The reason for construing the phrase paid under similar circumstances as used in Article 13
(2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of
the text in the light of the fundamental purpose of such treaty which is to grant an incentive to
the foreign investor by lowering the tax and at the same time crediting against the domestic tax
abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but
have ends to be achieved and that the general purpose is a more important aid to the meaning of
a law than any rule which grammar may lay down. [20] It is the duty of the courts to look to the
object to be accomplished, the evils to be remedied, or the purpose to be subserved, and should
give the law a reasonable or liberal construction which will best effectuate its purpose. [21] The
Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and
in the light of its object and purpose.[22]
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign
investors to invest in the Philippines - a crucial economic goal for developing countries. [23] The
goal of double taxation conventions would be thwarted if such treaties did not provide for
effective measures to minimize, if not completely eliminate, the tax burden laid upon the income
or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case,
by the Philippines, there should be a concomitant commitment on the part of the state of
residence to grant some form of tax relief, whether this be in the form of a tax credit or
exemption.[24] Otherwise, the tax which could have been collected by the Philippine government
will simply be collected by another state, defeating the object of the tax treaty since the tax
burden imposed upon the investor would remain unrelieved. If the state of residence does not
grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e.,
increased investment resulting from a favorable tax regime, should it impose a lower tax rate on
the royalty earnings of the investor, and it would be better to impose the regular rate rather than
lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on relief from double
taxation in the two tax treaties in question should be considered in light of the purpose behind the
most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not
less favorable than that which has been or may be granted to the most favored among other
countries.[25] The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to those of the most favored nation. [26] The essence
of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is also a party provided that
the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty
under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2)
(b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of
trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the
absence of a matching credit (20% for royalties) would derogate from the design behind the most

favored nation clause to grant equality of international treatment since the tax burden laid upon
the income of the investor is not the same in the two countries. The similarity in the
circumstances of payment of taxes is a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a
matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed
under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there is no payment of taxes on
royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded
as in derogation of sovereign authority and to be construed strictissimi juris against the person or
entity claiming the exemption.[27] The burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant of organic or statute law.
[28]
Private respondent is claiming for a refund of the alleged overpayment of tax on royalties;
however, there is nothing on record to support a claim that the tax on royalties under the RP-US
Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated
May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court
of Appeals are hereby SET ASIDE.
SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private
respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which
is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components

International Inc. the same property and providing that during the existence or after
the term of this lease the lessor should he decide to sell the property leased shall first
offer the same to the lessee and the letter has the priority to buy under similar
conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its
rights and obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back
of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property (TCT No.T-4240) together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No.
4273) for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso
in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion
of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the
plaintiffs preferential right to acquire the subject property (right of first refusal) and
ordering the defendants and all persons deriving rights therefrom to convey the said
property to plaintiff who may offer to acquire the same at the rate of P14.00 per
square meter, more or less, for Lot 1095 whose area is 27,169 square meters only.
Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate
court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution
denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from
petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for
only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no
"sale" or transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests,
private respondent will acquire the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as provided in the same
contractual provision invoked by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which
had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased
property was transferred to the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of
stock which are equivalent to a 55% majority in the corporation because the other owners only
owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of
Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to
this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership
of the subject parcel of land since the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation
remained in the hands of the original co-owners, there was no transfer of actual ownership interests
over the land when the same was transferred to petitioner corporation in exchange for the latter's
shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In
reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in
effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no
sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such
transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter
or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp.
254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate
entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco,
having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a
party who may allege that this separate corporate existence should be disregarded. It maintains that
there was actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing
stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson,
47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their
properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the
Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation
by subscription "The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition,
p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest
in the capital stock measured by value, but only an aliquot part of the whole number
of such shares of the issuing corporation. The holder of no-par shares may see from
the certificate itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a false appearance
of a given sum in money, as in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set forth by a stated amount of
money, but instead is expressed to be divided into a stated number of shares, such
as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention
of persons interested in the financial condition of a corporation is focused upon the
value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land
valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a
square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have
control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who
also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did
was to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take control of their properties and at
the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to
the spouses Hernandez and Pacheco in connection with their
execution of a deed of exchange on the properties for no par value
shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in
the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to
the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and
other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the point of
view of taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for
tax free exchange of property, they were able to execute the deed of
exchange free from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under
par. C-sub-par. (2) Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a person exchanges his
property for stock in a 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."
Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?
A Yes, sir

Q You also, testified during the last hearing that the decision to have
no par value share in the defendant corporation was for the purpose
of flexibility. Can you explain flexibility in connection with the
ownership of the property in question?
A There is flexibility in using no par value shares as the value is
determined by the board of directors in increasing capitalization. The
board can fix the value of the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to
the property indefinitely for a period of at least 50 years. On the other
hand, if the property is held by the spouse the property will be tied up
in succession proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a
particular person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the
corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme
resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be
doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot
be considered a contract of sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed their ownership from one form to
another. The ownership remained in the same hands. Hence, the private respondent has no basis
for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of
the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in
Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No 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 Coadministrators
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 Decision of the Court of Appeals
of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000
Decision of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 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
ofP79,099,999.22 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.
[1]

[2]

[3]

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 16-storey 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 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
of P254,497.00, it paid P26,341,207 for its net taxable income
of P75,987,725.
[7]

[8]

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.
Three and a half years later, or on 16 January 1994, Toda died.
[9]

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an

assessment notice and demand letter to the CIC for deficiency income tax
for the year 1989 in the amount of P79,099,999.22.
[10]

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 co-administrators Lorna Kapunan and Mario Luza Bautista, received a
Notice of Assessment 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:
[12]

Income Tax 1989

Net Income per return P75,987,725.00
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with

individual capital gains

(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.

[13]

In the letter dated 19 October 1995, 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
[14]

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 review 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.
[15]

In his Answer and Amended Answer, 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.
[16]

[17]

In its decision 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
[18]

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, 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 denied the motion for reconsideration, prompting the Commissioner to
file a petition for review with the Court of Appeals.
[19]

[20]

[21]

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, and
not from Altonaga. That P40 million was debited by RMI and reflected in its
trial balance 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.
[25]

[26]

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. 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 letterrequest for investigation of Altonaga was unserved, 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:
[27]

[28]

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%.
[Underscoring supplied].
[29]

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.
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. 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.
[32]

[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. The two
sale transactions should be treated as a single direct sale by CIC to RMI.
[34]

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 (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.
[35]

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. 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.
[36]

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. 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.
[37]

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. [Underscoring Supplied].
[39]

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-29987 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner,
vs.
MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, respondent.
G.R. No. L-23847 October 22, 1975
MANILA ELECTRIC COMPANY, petitioner,
vs.
BENJAMIN. TABIOS, as Commissioner of Internal Revenue, respondent.
Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner.
Office of the Solicitor General for respondents.

MUOZ PALMA, J.:

Manila Electric Company, petitioner in these two cases, poses a single before Us: is Manila Electric
Company (MERALCO for short) exempt from payment of a compensating tax on poles, wires,
transformers, and insulators imported by it for use in the operation of its electric light, heat, and
power system? MERALCO answers the query in the affirmative while the Commissioner of Internal
Revenue asserts the contrary.
MERALCO is the holder of a franchise to construct, maintain, and operate an electric light, heat, and
power system in the City of Manila and its suburbs. 1
In 1962, MERALCO imported and received from abroad on various dates copper wires,
transformers, and insulators for use in the operation of its business on which, the Collector of
Customs, as Deputy of Commissioner of Internal Revenue, levied and collected a compensating tax
amounting to a total of P62,335.00. A claim for refund of said amount was presented by MERALCO
and because no action was taken by the Commissioner of Internal Revenue on its claim, it appealed
to the Court of Tax Appeals by filing a petition for review on February 25, 1964 (CTA Case No. 1495).

On November 28, 1968, the Court of Tax Appeals denied MERALCO claim, forthwith, the case was
elevated to the Court on appeal (L-29987).
Again in 1963, MERALCO imported certain quantities of copper wires, transformers and insulators
also to be used in its business and again a compensating tax of P6,587.00 on said purchases was
collected. Its claim for refund of the amount having been denied by the Commissioner of Internal
Revenue on January 23, 1964, MERALCO riled with the Court of Tax Appeals CTA Case No. 1493.
On September 23, 1964 the Court of Tax Appeals decided against petitioner, and the latter filed with
this Court the corresponding Petition for Review of said decision docketed herein as G.R. No. L23847.
Inasmuch as the two appeals raise the same issue, they are consolidated in this Decision.
The law under which the Commissioner of Internal Revenue, respondent in these two cases,
assessed and collected the corresponding compensating taxes in 1962 and 1963 was found in
Section 190 of the National Internal Revenue Code(Commonwealth Act No. 466, as amended) the
pertinent provision of which read at the time as follows:
Sec. 190. Compensating Tax. All persons residing or doing business in the
Philippines, who purchase or receive from without the Philippines any commodities,
goods, wares, or merchandise, excepting those subject to specific taxes under Title
IV of this Code, shall pay on the total value thereof at the time they are received by
such persons, including freight, postage, insurance, commission and all similar
charges, a compensating tax equivalent to the percentage taxes imposed under this
Title on original transactions effected by merchants, importers, or manufacturers,
such tax to be paid before the withdrawal or removal of said commodities, goods,
wares, or merchandise from the customhouse or the post office: ... 2
In deciding against petitioner, the Court of Tax Appeals held that following the ruling of the Supreme
Court in the case of Panay Electric Co. vs. Collector of Internal Revenue, G.R. No. L-6753, July 30,
1955,Manila Gas Corp. vs. Collector of Internal Revenue, G.R. No. L-11784, October 24, 1958,
and Borja vs. Collector of Internal Revenue, G.R. No. L-12134, November 30,1961, MERALCO
is not exempt from paying the compensating tax provided for in Section 190 of the National Internal
Revenue Code, the purpose of which is to "place casual importers, who are not merchants on equal
putting with established merchants who pay sales tax on articles imported by them." The court
further stated that MERALCO's claim for exemption from the payment of the compensating tax is not
clear or expressed, contrary to the cardinal rule in taxation that "exemptions from taxation are highly
disfavored in law, and he who claims exemption must be able to justify his claim by the clearest
grant of organic or statute law. (pp. 10-11, L-23847, rollo)
Petitioner, on the other hand, bases its claim for exemption from the compensating tax on poles,
wires, transformers and insulators purchased by it from abroad on paragraph 9 of its franchise which
We quote from its brief:
PARAGRAPH 9. The grantee shall be liable to pay the same taxes upon its real
estate, buildings, plant (not including poles, wires, transformers, and insulators),
machinery, and personal property as other persons are or may be hereafter by law to
pay. Inconsideration of Part Two of the franchise herein granted, to wit, the right to
build and maintain in the City of Manila and its suburbs a plant for the conveying and

furnishing of electric current for light, heat, and power, and to charge for the same,
the grantee shall pay to the City of Manila a five per centum of the gross earnings
received form its business under this franchise in the City and its suburbs:
PROVIDED, That two and one-half per centum of the gross earnings received from
the business of the line to Malabon shall be paid to the Province of Rizal. Said
percentage shall be due and payable at the times stated in paragraph nineteen of
Part One hereof, and after an audit, like that provided in paragraph twenty of Part
One hereof, and shall be in lieu of all taxes and assessments of whatsoever nature,
and by whatsoever authority upon the privileges, earnings, income, franchise, and
poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted. (Petitioner's brief, p. 4, G.R.
No. L-29987; see also pp. 3-4, petitioner's brief, L-23847)
Petitioner argues that the abovequoted provision in plain and unambiguous terms makes two
references to the exemption of the articles in question from all taxes except the franchise tax. Thus,
after prescribing in the opening sentence that "the grantee shall be liable to pay the said taxes upon
its real estate buildings, plant (not including poles, wires, transformers and insulators), machinery
and personal property as other persons are or may be hereinafter required by law to pay," par. 9,
specifically provides that the percentage tax payable by petitioner as fixed therein "shall be in lieu of
all taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges,
earnings, income, franchise, and poles, wires, transformers and insulators of the grantee from which
taxes and assessments the grantee is hereby expressly exempted." Petitioner further states that
while par. 9 does not specifically mention the compensating tax for the obvious reason that
petitioner's original franchise was an earlier enactment, the words "in lieu of all taxes and
assessments of whatsoever nature and by whatsoever authority" are broad and sweeping enough to
include the compensating tax. (p. 5, petitioner's brief, L-29987; pp, 4-5, ibid, L-23847)
Petitioner also contends that the ruling of this Court in the cases of Panay Electric Co., Manila Gas
Corporation, and Borja (supra) are not applicable to its situation.
We find no merit in petitioner's cause.
1. One who claims to be exempt from the payment of a particular tax must do so under clear and
unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer,
they being highly disfavored and may almost be said "to be odious to the law." He who claims an
exemption must be able to print to some positive provision of law creating the right; it cannot be
allowed to exist upon a mere vague implication or inference. 3 The right of taxation will not beheld to
have been surrendered unless the intention to surrender is manifested by words too plain to be mistaken
(Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the state cannot strip itself of the most
essential power of taxation by doubtful words; it cannot, by ambiguous language, be deprived of this
highest attribute of sovereignty (Erie Railway Co. vs. Commonwealth of Pennsylvania, 21 Wallace 492,
499). So, when exemption is claimed, it must be shown indubitably to exist, for every presumption is
against it, and a well-founded doubt is fatal to the claim (Farrington vs. Tennessee & County of Shelby, 95
U.S. 679, 686). 4
2. Petitioner's submission that its right to exemption is supported by the "plain and unambiguous"
term of paragraph 9 of its franchise is positively without basis.
First, the Court cannot overlook the tax court's finding that, and We quote:

At the outset it should be noted that the franchise by the Municipal Board of the City
of Manila to Mr. Charles M. Swift and later assumed and taken over by petitioner
(see Rep. Act No. 150, CTA rec. p. 84), is a municipal franchise and not a legal
franchise. While it is true that Section 1 of Act No. 484 of the Philippine Commission
of 1902 authorizes the Municipal Board of the City of Manila to grant a franchise to
the person making the most favorable bid for the construction and maintenance of an
electric street railway and the construction, maintenance, and operation of an electric
light, heat, and power system in Manila and its suburbs, Section 2 of the same Act
authorize the said Municipal Board to make necessary amendments to be fixed by
the terms of the successful bid; otherwise, the form of the franchise to be granted
shall be in the words and figures appearing in Act No. 484 of the Philippine
Commission, which includes Par. 9. Part Two, thereof, supra.
This Court is not aware whether or not the tax exemption provisions contained in Par.
9, Part Two of Act No. 484 of the Philippine Commission of 1902 was incorporated in
the municipal franchise granted to Mr. Charles M. Swift by the Municipal Board of the
City of Manila and later assumed and taken over by petitioner because no admissible
copy of Ordinance No. 44 of the said Board was ever presented in evidence by the
herein petitioner. Neither is this Court aware of any amendment to the terms of this
franchise granted by the aforesaid Municipal Board to the successful bidder in the
absence of Ordinance No. 44 and the amendment thereto, if any. In the
circumstances, we are at a Las to interpret and apply the tax exemption provisions
relied upon by petitioner. (pp. 11-13, rollo, L-29987)
Second, and this is the controlling reason for the denial of petitioner's claim in these cases, We do
not see in paragraph 9 of its petitioner's franchise, on the assumption that it does exist as worded,
what may be considered as "plain and unambiguous terms" declaring petitioner MERALCO exempt
from paying a compensating tax on its imports of poles, wires, transformers, and insulators. What
MERALCO really wants Us to do, but which We cannot under the principles enumerated earlier, is
to infer and imply that there is such an exemption from the following phrase: "... the grantee shall pay
to the City of Manila five per centum of the gross earnings received from its business ... and shall be
in lieu of all taxes and assessments of whatsoever nature, and by whatsoever authority upon the
privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee,
from which taxes and assessments the grantee is hereby expressly exempted."
Note that what the above provision exempts petitioner from, is the payment of property, tax on its
poles, wires, transformers, and insulators; it does not exempt it from payment of taxes like the one in
question which, by mere necessity or consequence alone, fall upon property. The first sentence of
paragraph 9 of petitioner's franchise expressly states that the grantee like any other taxpayer shall
pay taxes upon its real estate, buildings, plant (not including poles, wires, transformers, and
insulators),machinery, and personal property. These are direct taxes imposed upon the thing or
property itself. Thus, while the grantee is to pay tax on its plant, its poles, wires, transformers, and
insulators as forming part of the plant or installation(significantly the enumeration is in parenthesis
and follows the word "plant") are exempt and as such are not to be included in the assessment of
the property tax to be paid.
The ending clause of paragraph 9 providing in effect that the percentage tax imposed upon petitioner
shall be in lieu of "all taxes and assessments of what and by whatsoever authority" cannot be said to
have granted it exemption from payment of compensating tax. The phrase "all taxes and

assessments of whatsoever nature and by whatsoever authority" is not so broad and sweeping, as
petitioner would have Us think, as to include the tax in question because there is an immediately
succeeding phrase which limits the scope of exemption to taxes and assessments "upon the
privileges earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee."
The last clause of paragraph 9 merely reaffirms, with regards to poles, wires, transformers, and
insulators, what has been expressed in the that first sentence of the same paragraph
namely, exemption of petitioner from payment of property tax. It is a principle of statutory
construction that general terms may be restricted by specific words, with the result that the general
language will be limited by the specific language which indicates the statute's object and purpose.
(Statutory Construction by Crawford, 1940 ed. p. 324-325)
3. It is a well-settled rule or principle in taxation that a compensating tax is not a property tax but is
an excise tax. 5 Generally stated, an excise tax is one that is imposed on the performance of an act, the
engaging in an occupation, or the enjoyment of a privilege. 6 A tax upon property because of its
ownership its a direct tax, whereas one levied upon property because of its use is an excise duty.
(Manufacturer's Trust Co. vs. United States, Ct. Cl., 32 F. Supp. 289, 296) Thus, where a tax which is not
on the property as such, is upon certain kinds of property, having reference to their origin and
their intended use, that is an excise tax. (State v. Wynne, 133 S.W. 2d 951, 956,957, 133 Tex. 622)
The compensating tax being imposed upon petitioner herein, MERALCO, is an impost on its use of
imported articles and is not in the nature of a direct tax on the articles themselves, the latter tax
falling within the exemption. Thus, in International Business Machine Corp. vs. Collector of Internal
Revenue, 1956, 98 Phil. Reports 595, 593, which involved the collection of a compensating tax from
the plaintiff-petitioner on business machines imported by it, this Court stated in unequivocal terms
that "it is not the act of importation that is taxed under section 190, but the use of imported goods not
subjected to sales tax" because "the compensating tax was expressly designed as a substitute to
make up or compensate for the revenue lost to the government through the avoidance of sales taxes
by means of direct purchases abroad. ..."
It is true that upon the collection of a compensating tax on petitioner's poles, wires, transformers,
and insulators purchased from abroad, the tax falls on the goods themselves; this fact leads
petitioner to claim that what is being imposed upon it is a property tax. But petitioner loses sight of
the principle that "every excise necessarily must finally fall upon and be paid by property, and so
may be indirectly a tax upon property; but if it is really imposed upon the performance of an act,
the enjoyment of a privilege, or the engaging in an occupation, it will be considered an excise." (51
Am. Jur. 1d, Taxation, Sec. 34, emphasis supplied) And so, to reiterate, what is being taxed here is
the use of goods purchased from out of the country, and the imposition is in the nature of an excise
tax.
4. There is no valid reason for Us not to apply to petitioner the ruling of the Court in Panay Electric
Co. and Borja, supra, for MERALCO is similarly situated.
Panay Electric Co. sought exemption from payment of a compensating tax on equipments
purchased abroad for use in its electric plant. A provision in its franchise reads:
Sec 8. ... Said percentage shall be due and payable quarterly and shall be lieu of all
taxes of any kind levied, established, or collected by any authority whatsoever, now
or in the future, on its poles, wires, insulators, switches, transformers and other
structures, installations, conductors, and accessories, placed in and over the public

streets, avenues, roads, thoroughfares, squares, bridges, and other places on its
franchise, from which taxes the grantee is hereby expressly exempted. (113 Phil.
570)
This Court rejected the exemption sought by Panay Electric and held that the cited provision in its
franchise exempts from taxation those rights and privileges which are not enjoyed by the public in
general but only by the grantee of a franchise, but do not include the common right or privileges of
every citizen to make purchases anywhere; and that we must bear in mind the purpose for the
imposition of compensating tax which as explained in the report of the Tax Commission is as follows:
The purpose of this proposal is to place persons purchasing goods from dealers
doing business in the Philippines on an equal footing, for tax purposes, with those
who purchase goods directly from without the Philippines. Under the present tax law,
the former bear the burden of the local sales tax because it is shifted to them as part
of the selling price demanded by the local merchants, while the latter do not. The
proposed tax will do away with this inequality and render justice to merchants and
firms of all nationalities who are in legitimate business here, paying taxes and giving
employment to a large number of people. (113 Phil. 571)
In Borja, petitioner Consuelo P. Borja, a grantee of a legislative franchise, also claimed to be free
from paying the compensating tax imposed on the materials and equipment such as wires,
insulators, transformers, conductors, etc. imported from Japan, on the basis of Sec. 10 of Act No.
3636 (Model Electric Light and Power Franchise Act) which has been incorporated by reference in
franchise under Act No. 3810. Section 10 provides:
The grantee shall pay the same taxes as are now or may "hereafter be required by
law from other individuals, co-partnerships, private, public or quasi-public
associations, corporations, or joint-stock companies, on his (its) real estate,
buildings, plants, machinery; and other personal property, except property section. In
consideration of the franchise and rights hereby granted, the grantee shall pay into
the municipal treasury of the (of each) municipality in which it is supplying electric
current to the public under this franchise, a tax equal to two per centum of the gross
earnings from electric current sold or supplied under this franchise in said (each)
municipality. Said tax shall be due and payable quarterly and shall be in lieu of any
and all taxes of any kind, nature or description levied, established, or collected by
any authority whatsoever, municipal, provincial or insular, now or in the future, on its
poles, wires, insulators, switches; transformers and structures, installations,
conductors, and accessories, placed in and over and under all public property,
including public streets and highways, provincial roads, bridges and public squares,
and on its franchise, rights, privileges, receipts, revenues and profits, from which
taxes the grantee is hereby expressly exempted. (113 Phil. 569-570)
The Court applying the ruling in Panay Electric denied the exemption with the added statement that
Considering, therefore, the fact that section 190 of the Tax Code is a sort of an
equalizer, to place casual importers, who are not merchants on equal footing with
established merchants who pay sales tax on articles imported by them ... We may
conclude that it was not the intention of the law to exempt the payment of
compensating tax on the personal properties in question. The principle and legal

philosophy underlying the imposition of compensating tax, as enunciated in the

above case (referring to Borja), are fundamentally correct, and no plausible reason is
advanced for their non-application to the case at bar. (p. 572, ibid.)
Petitioner claims that there exists a difference between paragraph 9 of its franchise and the
corresponding provisions of the franchise of Panay Electric and Borja in that in the latter, unlike in
the former, there is no statement that the grantee is exempt from "all taxes of whatsoever nature and
whatsoever authority." In addition, petitioner points out, the franchise of Panay
Electric and Borjacontains a qualifying phrase, to wit: "placed in and over the public streets,
avenues, roads, thoroughfares, etc."
A comparison of the pertinent provisions mentioned by petitioner and which are quoted in the
preceding pages reveals no substantial or fundamental distinction as to remove petitioner
MERALCO from the ambit of the Panay Electric and Borja ruling. There may be differences in the
phraseology used, but the intent to exempt the grantee from the payment only of property tax on its
poles, wires, transformers, and insulators is evidently common to the three; withal, in all the
franchises in question there is no specific mention of exemption of the grantee from the payment of
compensating tax.
Petitioner disputes, however, the applicability of the stare decisis principle to its case claiming that
this Court should not blindly follow the doctrine of Panay Electric and Borja, and that in Philippine
Trust Co. et al. vs. Mitchell, 59 Phil. 30, 36, the Court had occasion to state: ,the rule of stare
decisis is entitled to respect. Stability in the law, particularly in the business field, is desirable. But
idolatrous reverence for precedent, simply as precedent, no longer rules. More important than
anything else is that the court should be right." (pp. 18-19, petitioner's brief, L-29987)
But what possible ground can there be for deviating from the decisions of this Court in these two
cases? A doctrine buttressed by the law, reason, and logic is not to be simply brushed aside to suit
the convenience of a particular party or interest or to avoid hardship to one. As We view this legal
problem, no justification can be found for giving petitioner herein preferential treatment by reading
into its franchise an exemption from a particular kind of tax which is not there. If it had been the
legislative intent to exempt MERALCO from paying a tax on the use of imported equipments, the
legislative body could have easily done so by expanding the provision of paragraph 9 and adding to
the exemption such words as "compensating tax" or "purchases from abroad for use in its business,"
and the like. We cannot ignore the principle that express mention in a statute of one exemption
precludes reading others into it. (Hoard vs. Sears, Roebuck & Co., 122 Conn. 185, 193, 188 A. 269)
On this point, the Government correctly argues that the provision in petitioner's franchise that the
payment of the percentage tax on the gross earnings shall be "in lieu of all taxes and assessments
of whatsoever nature, and whatsoever authority" is not to be given a literal meaning as to preclude
the imposition of the compensating tax in this particular case, and cites for its authority the Opinion
of the Supreme Court of Connecticut rendered in Connecticut Light & Power Co., et al. vs. Walsh,
1948, which involved the construction of a statute imposing a sales and use tax, and which inter
alia held:
The broad statement that the tax upon the gross earning of telephone companies
shall be "in lieu of all other taxation" upon them is not necessarily to be given a literal
meaning. "In construing the act it is our duty to seek the real intent of the legislature,
even though by so doing we may limit the literal meaning of the broad language

used." Greenwich Trust Co. v. Tyson, 129 Conn. 211, 222, 27 A. 2d 166, 172. It is not
reasonable to assume that the General Assembly intended by the provisions we
have quoted that the tax on gross earnings should take the place of taxes of a kind
not then anywhere imposed and entire outside its knowledge. ... ." (57 A.R., 2d S, pp.
129, 133-134, emphasis supplied)
In 1902 when Act 484 of the Philippine Commission was enacted, "compensating tax' was certainly
not generally known or in use, hence, to paraphrase the above-mentioned Connecticut decision, the
Court cannot assume that the Philippine Commission in providing that the gross earnings taxes
imposed on the grantee of the electric light franchise shall be in lieu of all taxes and assessments,
meant to include impositions in the nature of a compensating tax which came into use in this country
only upon the enactment of Commonwealth Act 466 in 1939.
5. One last argument of petitioner to support its cause is that just as a new and necessary industry
was held to be exempt from paying a compensating tax on its imports under the tax exemption
provision of Republic Act 901, so should MERALCO be exempt from such a tax under the general
clause in its franchise, to wit: "... in lieu of all taxes and assessments of whatsoever nature and
whatsoever authority upon poles, wires, etc."
We agree with the court below that there can be no analogy between MERALCO and what is
considered as a new and necessary industry under Republic Act 35 now superseded by Republic
Act 901.
The rationale of Republic Act 901 is "to encourage the establishment or exploitation of new and
necessary industries to promote the economic growth of the country," and because "an entrepreneur
engaging in a new and necessary industry faces uncertainty and assumes a risk bigger than one
engaging in a venture already known and developed ... the law grants him tax exemption to
lighten onerous financial burdens and reduce losses." (Marcelo Steel Corporation vs. Collector of
Internal Revenue, 109 Phil. 921, 926) This intendment of the legislature in enacting Republic Act 901
is not the motivation behind the tax exemption clause found in petitioner MERALCO's franchise;
consequently, there can be no analogy between the two.
IN VIEW OF THE FOREGOING, We find no merit in these Petitions for Review and We hereby
AFFIRM the decision of the Court of Tax Appeals in these two cases, with costs against petitioner in
both instances.
So Ordered.

G.R. No. L-23041

July 31, 1969

E. RODRIGUEZ, INC., petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Tolentino and Garcia and D. R. Cruz for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney
Salvador D. David for respondents.

BARREDO, J.:
This is a petition for review of the decision of the Court of Tax Appeals in its CTA Case No. 849,
affirming the decision of the respondent Collector (now Commissioner) of Internal Revenue holding
petitioner E. Rodriguez, Inc. liable for deficiency income tax in the sum of P63,880.00 for the year
1950.
The records of the case show that on July 17, 1948, Congress enacted Republic Act No. 333, 1
pursuant to which the Republic of the Philippines sued the petitioner, among four other defendants,
in Civil Case No. Q-54 of the Court of First Instance of Quezon City, for the expropriation of about
1,360,000 square meters of land owned by it and situated within the area delimited for the new
capital city site. After due trial, the said court rendered a decision in the case, dated February 21,
1950, with the following dispositive portion:
WHEREFORE, judgment is hereby rendered, declaring plaintiff entitled to retain and
appropriate the property involved in this proceeding, as site for the development and
establishment of the new capital city of the Philippines in accordance with our condemnation
order dated September 19, 1949; and ordering plaintiff to pay defendants, as just
compensation for the lands to be taken from them, the following amounts, to wit: to
defendant Eulogio Rodriguez, Sr., the sum of THIRTY-NINE THOUSAND SEVEN
HUNDRED SEVENTY-SIX PESOS (P39,776.00); to defendant E. Rodriguez, Inc., the sum
of ONE MILLION FOUR HUNDRED EIGHTEEN THOUSAND SIX HUNDRED FOUR
(P1,418,604.00) PESOS; to defendant Luzon Investment & Development Co., the sum of
FIVE THOUSAND TWO HUNDRED EIGHTY (P5,280.00) PESOS; and to defendants
Enrique Manaloto and Canuto G. Manuel, the sum of SIXTEEN THOUSAND SEVEN
HUNDRED TWENTY (P16,720.00) PESOS, with interest at the rate of 6% per annum on the
said amounts from September 19, 1949, the date the plaintiff entered upon the possession of
the lands in question until payment, plus the costs.
Following the issuance of the above-mentioned decision, however, a series of negotiations were had
between petitioner and the Government, represented by the Capital City Planning Commission, after
which, the said parties entered into a compromise agreement under date of May 11, 1950,
providing, inter alia, as follows:
(1) That the parties will accept the decision laid down in said case by the Court of First
Instance of Rizal (Quezon City Branch) with the following stipulations:
a. That the defendants mentioned above hereby waive all interest due on the
adjudged value of the expropriated properties;
b. That the defendants above-named hereby donate 207,006 square meters out of
Lots Nos. 41-C-3 and 39, object of expropriation in Civil Case No. Q-54;
c. That defendant Eulogio Rodriguez, Inc. obligates itself to donate as it hereby
donates the land object of expropriation in Civil Case No. Q-90, in favor of the
Republic of the Philippines, containing an area of 15,200 square meters, which is a
portion of Lot No. 41-C-3 as indicated in the plan attached to the complaint therein;
said defendant Eulogio Rodriguez, Inc. binding itself to execute the necessary deed
of donation thereof;
d. That defendants named above agree to the payment of the price awarded by the
Court subject to the foregoing stipulations in the total sum of ONE MILLION TWO

HUNDRED FIFTY THOUSAND SIX HUNDRED THIRTY-ONE PESOS and EIGHTY

CENTAVOS (P1,250,631.80) payable in the following manner:
1) SIX HUNDRED TWENTY-FIVE THOUSAND THREE HUNDRED FIFTEEN
PESOS AND NINETY CENTAVOS (P625,315.90) in government bonds in
favor of Eulogio Rodriguez, Sr. and E. Rodriguez, Inc., payable within five (5)
years at not less than three percent (3%) per annum;
2) THREE HUNDRED THOUSAND PESOS (P300,000.00) to be given to the
Philippine National Bank in payment of the mortgage indebtedness of
defendants E. Rodriguez, Sr. and E. Rodriguez, Inc.; and
3) the balance of THREE HUNDRED TWENTY-FIVE THOUSAND TWO
HUNDRED FIFTEEN PESOS AND NINETY CENTAVOS (P325,215.90) in
cash to be paid to all defendants abovenamed, through Eulogio Rodriguez,
Sr., within a reasonable time.
(2) That after approval of this compromise by the Court, the parties herein agree not to
interpose an approval from the judgment of the Court of First Instance of Rizal (Quezon City
Branch) which shall be considered final and executory under the Rules of Court;
(3) And, finally, that the said parties will submit this compromise agreement to the Court for
its approval and/or its consideration in the decision rendered in this case.
This compromise agreement was duly approved by the Court of First Instance of Rizal (Quezon City
Branch) on May 12, 1950, and pursuant to the terms thereof, the Government paid to petitioner the
sum of P1,238,204.00, of which P625,315.90 were in Government Bonds.
On March 1, 1951, petitioner filed its income tax return for the year 1950, showing on the face
thereof a loss of P17,982.06. In said return, petitioner did not include the sum of P625,315.90
received by it from the government in the form of bonds in payment of its expropriated properties, in
the belief that the said amount was free or exempt from taxation. When this return was later
examined by an agent of the Bureau of Internal Revenue, the Collector of said bureau assessed
against petitioner a deficiency income tax of P63,880.00, computed as follows:
Net income per return
P17,982.06
(loss) ..................................
Amount received for
P1,238,204.0
property .....
0
Less: Cost of
827,279.82
Land ...................
Gain ....................................
P410,924.18
..........
Undeclared
P410,924.18
gain ..............................................
Accounts receivable charged off as bad
debts but not forming part of gross income
..........................
1,860.00
Miscellaneous expenses not connected
4,450.00
with the
business ....................................................

..............
Net
Income ....................................................... P399,252.12
.......
Tax due on
P399,262.12 .........................................

P63,980.00
=========
=

A series of communications between petitioner and respondent Collector of Internal Revenue

followed the foregoing assessment, with the former protesting against and requesting the
cancellation of the deficiency income tax assessed against it, and the latter maintaining its accuracy
and demanding payment thereof. As petitioner, did not past, on July 6, 1959, the Collector of Internal
Revenue sought the collection of said deficiency income tax of P63,880.00, plus 5% surcharge and
1% monthly interest thereon from, March 11, 1956, by means of an action in the Court of First
Instance of Manila.
On June 8,k 1960, petitioner offered by way of compromise to pay the amount of P30,676.25 in full
settlement of its disputed deficiency income tax liability for 1950. This offer was rejected by the
Collector of Internal Revenue; whereupon, under date of June 24, 1960, petitioner filed a petition for
review of the assessment in question before the respondent Court of Tax Appeals which, after trial
on the merits, rendered its decision affirming the assessment in question. Hence, this appeal by
petitioner thru the instant petition for review of the said decision of respondent of Court of Tax
Appeals, with the following assigned errors:
I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE EXEMPTION
CONTEMPLATED BY THE BONDS IN QUESTION APPLIES ONLY TO DOCUMENTARY
STAMP TAX AND TAX ON INTEREST DERIVED FROM SUCH BONDS, AND THAT SUCH
EXEMPTION CONSTITUTES SUFFICIENT INDUCEMENT FOR PETITIONER TO ACCEPT
SAID BONDS.
II. THE RESPONDENT COURT ERRED IN AFFIRMING THE ORDER OF THE
RESPONDENT COLLECTOR HOLDING PETITIONER LIABLE FOR INCOME TAX ON THE
EXCHANGE OF ITS PROPERTIES FOR GOVERNMENT TAX-EXEMPT BONDS UNDER
REPUBLIC ACT NO. 333.
As petitioner correctly puts it, the only question to decide here is whether or not in determining the
profit realized from the payment of the purchase price of its (petitioner's) expropriated property, for
income tax purposes portion of the purchase price paid in the form of tax-exempt bonds issued
under Republic Act No. 333 should be included.
The pertinent provisions of law involved are found in Section 9 of the Act abovementioned which
reads as follows:
1wph1.t

SEC. 9. The President of the Philippines is authorized to issue, in the name and behalf of the
Republic of the Philippines, bonds in an amount of twenty million pesos, the proceeds of
which shall be used as a revolving fund for the acquisition of private estates, the subdivision
of the area, and the construction of streets, bridges, waterworks, sewerage and other
municipal improvements in the Capital City of the Philippines.

The bonds so authorized to be issued shall bear such date and in such form as the President
of the Philippines may determine and shall bear such rate of interest and run for such length
of time as may be determined by the President. Both principal and interest shall be payable
in Philippine currency or its equivalent in the United States currency, in the discretion of the
Secretary of Finance, at the Treasury of the Philippines, and the interest shall be payable at
such periods as the President of the Philippines may determine.
Said bonds shall be exempt from taxation by the Government of the Republic of the
Philippines or by any political or municipal subdivisions thereof, which fact shall be stated
upon their face, in accordance with this Act, under which the said bonds are issued.
[Emphasis supplied]
Petitioner maintains that the portion (paid in tax-exempt Government Bonds) of the profit it derived
from the expropriation of its property should not be made subject to income tax, for the reasons that:
(1) the Republic of the Philippines gave no concession to petitioner in the compromise agreement
involved in this case except that, as testified to by the lawyer who represented petitioner in the
negotiations which led to the compromise agreement in question, it was understood between the
parties, and it was precisely the only inducement, according to the witness, that made petitioner
accept payment of P625,315.90 in Government Bonds instead of cash, that said bonds would be
"tax-free"; now, it is argued that by "tax-free" is meant that by acceptance of the bonds rather than
cash, petitioner would not also have to pay income tax on the exchange gain from said bonds; 2 (2)
that the third paragraph of Section 9 of the Act granting tax exemption on bonds issued thereunder
was inserted in the law as a further inducement to private land owners within the new capital site to
part away with their properties in favor of the Government other than for cash, which legislative
history of the law allegedly sustains the position of petitioner; and (3) Congress must have really
intended such income tax exemption under Republic Act No. 333, since, similar provisions in
Republic Act No. 1400, 3 likewise involving the expropriation of private estates, expressly declare that
the price paid by the Government for the lands acquired for resale to tenants under the authority of
said Act (Republic Act No. 1400) shall not be considered as income of the landowner for purposes of
the income tax. This reasoning was brushed aside by the respondent Court of Tax Appeals in its
decision under review, on the following rationale:
Petitioner contends that since the Government bonds which it received as part payment of
the price of its lot were exempt from taxation, the deficiency assessment made by
respondent against it is not in order. On the other hand, respondent claims that the
exemption of Government bonds refers only the documentary stamps on the bonds and
does not include income tax on the income derived by petitioner which was paid to him in the
form of bonds.
The pertinent portion of Section 9 of Republic Act No. 333, which is the sole basis of
petitioner's claim for exemption, provides:
1wph1.t

Said bonds shall be exempt from taxation by the Government of the Republic of the
Philippines or by any political or municipal subdivision thereof, which fact shall be
stated upon their face, in accordance with this Act, under which the said bonds are
issued.
There can be no question that petitioner is taxable on its income derived from the sale of its
property to the Government. The fact that a portion of the purchase price of the property was
paid by the Government in the form of tax exempt bonds does not operate to exempt said
income from income tax. The income from the sale of the land in question and the bond are

two different and distinct taxable items so that the exemption of one does not operate to
exempt the other, unless the law expressly so provides.
It is alleged that to deny exemption from income tax on the amount represented by the said
bonds would be to nullify the purpose of the law in granting exemption. The question has
been asked: If income or gain derived from the acceptance of such bonds in exchange for
private estates would be taxed, what inducement did such provision of Republic Act No. 333
give to landowners to accept payment in bonds for their properties in the proposed site of the
Capital City? To our mind, there is sufficient inducement, and that is, the exemption not only
of the bonds from documentary stamp tax but also of the interest derived from such bonds.
Section 29(b) (4) of the National Internal Revenue Code exempts interest derived from such
bonds from income tax to the extent provided in the law authorizing the issue thereof.
Counsel for petitioner also alleged that the prevailing rule obtaining in the United States
before removal of exemptions of government obligations was to exempt such bonds from
income tax both as to principal and interest. To quote from the memorandum of counsel:
... Actually, most of the Federal Treasury Bonds issued by the U.S. Government from
1921 to 1941, or before the Public Debt Acts of 1941 and 1942, that removed tax
exemptions on obligations issued by the United States and its agencies and its
instrumentalities, were
'exempt, both as to principal and interest, from all taxation now or hereafter imposed
by the United States, any States, or any of the possessions of the United States, or
by any local taxing authority, except (a) estate or inheritance taxes, and (b)
graduated additional income taxes, known as surtaxes and excess profits and war
profits taxes, now or hereafter imposed by the United States, upon the income or
profits of individuals, partnerships, associations, or corporations. (I Mertens, Law of
Federal Income Taxation, pp. 297-313).' [See page 12, Memorandum of counsel for
petitioner, March 20, 1963.]
Apparently the import of the ruling quoted above from the book of Mertens has not been
clearly understood. We think that the exemption referred to therein of both principal and
interest has reference to the exemption from income tax of the income derived from the sale
or exchange of the bonds and the interest paid by the U.S. Government on such bonds. The
opinion quoted from Mertens is inapplicable to the instant case because it does not refer to
any income derived by petitioner from the sale or exchange of bonds received by petitioner
from the Government under Republic Act No. 333. The tax here involved is on the income
derived from the sale of petitioner's property to the Government, not the income derived from
the sale or exchange of the bonds.
Mention has been made of Republic Act No. 1400, Section 22 of which provides that 'the
purchase price paid by the Government for any agricultural land acquired for resale to
tenants under the authority of this Act, whether by negotiation or expropriation, shall not be
considered as income of the landowner concerned for purposes of the income tax.' It is
argued that since Republic Acts Nos. 333 and 1400 are in pari materia both should be
construed together, and since Republic Act No. 1400 exempts income derived from the sale
of property to the Government under said Act, the same exemption should also apply to
income derived from the sale of property to the Government under Republic Act No. 333. It is
precisely because Republic Act No. 1400 contains an express exemption from income tax of
the income derived by property owners from the sale of their lands under said Act and the
absence of a similarly provision in Republic Act No. 333 which indicates plainly that

Congress intended not to grant such exemption to landowners under Republic Act No. 333. If
Congress had intended to grant exemption from income tax with respect to income derived
by a person from the sale of his property under Republic Act No. 333, it should have
expressly made an express provision to that effect as it did in Republic Act No. 1400; that it
did not, is a clear indication that its purpose was to withhold such exemption.
We find no cogent reasons to disturb the above holding of the Court of Tax Appeals. It has been the
constant and uniform holding of this Court that exemption from taxation is not favored and is never
presumed; in fact, if it is granted, the grant must be strictly construed against the
taxpayer. 4 Affirmatively put, the law requires courts to frown on alleged exemptions from taxation,
hence, an exempting provision in a legislative enactment should be construed in strictissimi
juris 5 against the taxpayer and liberally in favor of the taxing authority. 6 This Court has been most
consistent in this holding. In Asiatic Petroleum Co. vs. Llanes, 7 it was explained beyond any
possibility of miscomprehension that: .
... Exemptions from taxation are highly disfavored, so much so that they may almost be said
to be odious to the law. He who claims an exemption must be able to point to some positive
provision of law creating the right. It cannot be allowed to exist upon a vague implication ...
The books are full of very strong expressions on this point. As was said by the Supreme
Court of Tennessee in Memphis vs. U & P. Bank (91 Tenn. 546, 550), 'The right of taxation is
inherent in the State. It is a prerogative essential to the perpetuity of the government; and he
who claims an exemption from the common burden, must justify his claim by the clearest
grant of organic or statute law.' Other utterances equally or more emphatic come readily to
hand from the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard 416), it
was said by Chief Justice Taney, that the right of taxation will not be held to have been
surrendered, 'unless the intention to surrender is manifested by words too plain to be
mistaken.' In the case of the Delaware Railroad Tax (18 Wallace 206, 226), the Supreme
Court of the United States said that the surrender, when claimed, must be shown by clear,
unambiguous language, which will admit of no reasonable construction consistent with the
reservation of the power. If a doubt arises as to the intent of the legislature, that doubt must
be resolved in favor of the State. In Erie Railway Company vs. Commonwealth of
Pennsylvania (21 Wallace 492, 499), Mr. Justice Hunt, speaking of exemptions, observed
that the State cannot strip itself of the most essential power of taxation by doubtful words. 'It
cannot by ambiguous language, be deprived of this highest attribute of sovereignty.'
In Tennessee vs. Whitworth (117 U.S. 129, 136), it was said: 'In all cases of this kind the
question is as to the intent of the legislature, the presumption always being against any
surrender of the taxing power.' In Farrington vs. Tennessee and County of Shelby (95 U.S.
679, 686), Mr. Justice Swayne said: '... When exemption is claimed it must be shown
indubitably to exist. At the outset every presumption is against it. A well-founded doubt is fatal
to the claim. It is only when the terms of the concession are too explicit to admit fairly of any
other construction that the proposition can be supported.'
The above rules should be applied to the case at bar where the law invoked (Section 9 of Republic
Act No. 333) does not make any reference whatsoever to exemption of income derived from sale of
expropriated property thereunder unlike under Republic Act No. 1400 where relative to the price paid
by the Government for any agricultural land acquired for resale to tenants there is an express
declaration that the same "shall not be considered as income of the landowner concerned for
purposes of the income tax." Nor are We convinced by the argument that the particular provision of
Republic Act No. 333 relied upon which grants exemption on bonds issued thereunder for purposes
of inducement to private landowners within the new capital site to part away with their properties in
favor of the Government other than for cash should be taken to mean that said property owners
need not pay income tax on their income derived from the sale of such properties. The pertinent
Congressional Record of the proceedings held during the consideration of the bill which later

became Republic Act No. 333, 8does not show that Congress had intended to exempt said property
owners from the payment of income tax on the proceeds of the sale of their properties when the
same is paid in government bonds issued under the said law. Likewise even were We to assume for
the sake of argument, that the Capital City Planning Commission and other officials of the
government did make some assurance or promise to herein petitioner that the portion of the price of
its expropriated property paid in tax-exempt government bonds would not be made subject to
income tax payment, such assurance or promise, made without statutory sanction, cannot bind the
Government. The same amounts to a surrender of the State's power to require payment of income
tax, which in this case is not explicitly granted by Republic Act No. 333. It is a well-known rule that
erroneous application and enforcement of the law by public officers do not block subsequent correct
application of the statute, 9 and that the Government is never estopped by mistake or error on the
part of its agents. 10 In the present circumstances, the Collector of Internal Revenue is right in
assessing against petitioner the deficiency income tax in question, consonant with the proposition
that income from expropriation proceedings is income from sales or exchange and therefore
taxable.11
FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals under review
is affirmed, with costs against herein petitioner.
1wph1.t

COMMISSIONER OF INTERNAL G.R. No. 140230

REVENUE,
Petitioner, Present :
PANGANIBAN, J., Chairman,
- versus - SANDOVAL-GUTIERREZ,
CORONA,
CARPIO MORALES and
GARCIA, JJ.
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY,
Respondent. Promulgated:
December 15, 2005
x-----------------------------------------x

DECISION
GARCIA, J.:
In this petition for review on certiorari, the Commissioner of
Internal Revenue (Commissioner) seeks the review and reversal of
the September 17, 1999 Decision [1] of the Court of Appeals (CA)

in CA-G.R. No. SP 47895, affirming, in effect, the February 18,

1998 decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case
No. 5178, a claim for tax refund/credit instituted by respondent
Philippine Long Distance Company (PLDT) against petitioner for
taxes it paid to the Bureau of Internal Revenue (BIR) in connection
with its importation in 1992 to 1994 of equipment, machineries
and spare parts.
The facts:
PLDT is a grantee of a franchise under Republic Act (R.A.) No.
7082 to install, operate and maintain a telecommunications
system throughout the Philippines.
For equipment, machineries and spare parts it imported for
its business on different dates from October 1, 1992 to May 31,
1994, PLDT paid the BIR the amount of P164,510,953.00, broken
down as follows: (a) compensating tax of P126,713,037.00;
advance sales tax of P12,460,219.00 and other internal revenue
taxes ofP25,337,697.00. For similar importations made between
March 1994 to May 31, 1994, PLDT paid P116,041,333.00 valueadded tax (VAT).
On March 15, 1994, PLDT addressed a letter to the BIR
seeking a confirmatory ruling on its tax exemption privilege under
Section 12 of R.A. 7082, which reads:
Sec. 12. The grantee shall be liable to pay the same taxes on their
real estate, buildings, and personal property, exclusive of this franchise,
as other persons or corporations are now or hereafter may be required by
law to pay. In addition thereto, the grantee, shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the telephone or
other telecommunications businesses transacted under this franchise by
the grantee, its successors or assigns, and the said percentage shall be
in lieu of all taxes on this franchise or earnings thereof: Provided,
That the grantee shall continue to be liable for income taxes payable
under Title II of the National Internal Revenue Code pursuant to Sec. 2
of Executive Order No. 72 unless the latter enactment is amended or

repealed, in which case the amendment or repeal shall be applicable

thereto. (Emphasis supplied).

Responding, the BIR issued on April 19, 1994 Ruling No. UN-14094,[3] pertinently reading, as follows:
PLDT shall be subject only to the following taxes, to wit:
xxx xxx xxx
7. The 3% franchise tax on gross receipts which shall be in lieu of
all taxes on its franchise or earnings thereof.
xxx xxx xxx
The in lieu of all taxes provision under Section 12 of RA 7082
clearly exempts PLDT from all taxes including the 10% value-added tax
(VAT) prescribed by Section 101 (a) of the same Code on its
importations of equipment, machineries and spare parts necessary in the
conduct of its business covered by the franchise, except the
aforementioned enumerated taxes for which PLDT is expressly made
liable.
xxx xxx xxx
In view thereof, this Office hereby holds that PLDT, is exempt from VAT
on its importation of equipment, machineries and spare parts needed in
its franchise operations.

Armed with the foregoing BIR ruling, PLDT filed on December

2, 1994 a claim[4] for tax credit/refund of the VAT, compensating
taxes, advance sales taxes and other taxes it had been paying in
connection with its importation of various equipment,
machineries and spare parts needed for its operations. With its
claim not having been acted upon by the BIR, and obviously to
forestall the running of the prescriptive period therefor, PLDT filed
with the CTA a petition for review, [5] therein seeking a refund of, or
the issuance of a tax credit certificate in, the amount
ofP280,552,286.00, representing compensating taxes, advance

sales taxes, VAT and other internal revenue taxes alleged to have
been erroneously paid on its importations from October 1992 to
May 1994. The petition was docketed in said court as CTA Case
No. 5178.
On
February
18,
1998,
the
CTA
rendered
a
[6]
decision granting PLDTs petition, pertinently saying:
This Court has noted that petitioner has included in its claim
receipts covering the period prior to December 16, 1992, thus, prescribed
and barred from recovery. In conclusion, We find that the petitioner is
entitled to the reduced amount of P223,265,276.00 after excluding from
the final computation those taxes that were paid prior to December 16,
1992 as they fall outside the two-year prescriptive period for claiming
for a refund as provided by law. The computation of the refundable
amount is summarized as follows:
COMPENSATING TAX
Total amount claimed P126,713.037.00
Less:
a)

Amount already prescribed: xxx

Total P 38,015,132.00

b)

Waived by petitioner
(Exh. B-216) P 1,440,874.00 P39,456,006.00

Amount refundable P87,257,031.00

ADVANCE SALES TAX
Total amount claimed P12,460.219.00
Less amount already prescribed: P5,043,828.00
Amount refundable P7,416,391.00
OTHER BIR TAXES

Total amount claimed P25,337,697.00

Less amount already prescribed: 11,187,740.00
Amount refundable P14,149,957.00

VALUE ADDED TAX

Total amount claimed P116.041,333.00
Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00

Amount refundable P114,441,897.00

TOTAL AMOUNT REFUNDABLE P223,265,276.00,
============

(Breakdown omitted)

and accordingly disposed, as follows:

WHEREFORE, in view of all the foregoing, this Court finds the
instant petition meritorious and in accordance with law. Accordingly,
respondent is hereby ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the reduced amount
of P223,265,276.00 representing erroneously paid value-added taxes,
compensating taxes, advance sales taxes and other BIR taxes on its
importation of equipments (sic), machineries and spare parts for the
period covering the taxable years 1992 to 1994.

Noticeably, the CTA decision, penned by then Associate Justice

Ramon O. de Veyra, with then CTA Presiding Judge Ernesto D.
Acosta, concurring, is punctuated by a dissenting opinion [7] of
Associate Judge Amancio Q. Saga who maintained that the
phrase in lieu of all taxes found in Section 12 of R.A. No.
7082, supra, refers to exemption from direct taxes only and does
not cover indirect taxes, such as VAT, compensating tax and
advance sales tax.

In time, the BIR Commissioner moved for a reconsideration but

the CTA, in its Resolution[8] of May 7, 1998, denied the motion,
with Judge Amancio Q. Saga reiterating his dissent. [9]
Unable to accept the CTA decision, the BIR Commissioner
elevated the matter to the Court of Appeals (CA) by way of
petition for review, thereat docketed as CA-G.R. No. 47895.
As stated at the outset hereof, the appellate court, in the
herein challenged Decision[10] dated September 17, 1999,
dismissed the BIRs petition, thereby effectively affirming the CTAs
judgment.
Relying on its ruling in an earlier case between the same parties
and involving the same issue CA-G.R. SP No. 40811, decided 16
February 1998 the appellate court partly wrote in its assailed
decision:
This Court has already spoken on the issue of what taxes are referred to
in the phrase in lieu of all taxes found in Section 12 of R.A. 7082. There
are no reasons to deviate from the ruling and the same must be followed
pursuant to the doctrine of stare decisis. xxx.Stare decisis et non quieta
movere. Stand by the decision and disturb not what is settled.

Hence, this recourse by the BIR Commissioner on the lone

assigned error that:
THE COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT IS EXEMPT FROM THE PAYMENT OF VALUEADDED TAXES, COMPENSATING TAXES, ADVANCE SALES
TAXES AND OTHER BIR TAXES ON ITS IMPORTATIONS, BY
VIRTUE OF THE PROVISION IN ITS FRANCHISE THAT THE 3%
FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BE IN LIEU
OF ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF.
There is no doubt that, insofar as the Court of Appeals is
concerned, the issue petitioner presently raises had been
resolved
by
that
court
in
CA-G.R.
SP
No.
40811,
entitled Commissioner of Internal Revenue vs. Philippine Long
Distance Company. There, the Sixteenth Division of the appellate

court declared that under the express provision of Section 12 of

R.A. 7082, supra, the payment [by PLDT] of the 3% franchise tax
of [its] gross receipts shall be in lieu of all taxes exempts PLDT
from payment of compensating tax, advance sales tax, VAT and
other internal revenue taxes on its importation of various
equipment, machinery and spare parts for the use of its
telecommunications system.
Dissatisfied with the CA decision in that case, the BIR
Commissioner initially filed with this Court a motion for time to file
a petition for review, docketed in this Court as G.R. No. 134386.
However, on the last day for the filing of the intended petition, the
then BIR Commissioner had a change of heart and instead
manifested[11] that he will no longer pursue G.R. No. 134386, there
being no compelling grounds to disagree with the Court of
Appeals decision in CA-G.R. 40811. Consequently, on September
28, 1998, the Court issued a Resolution [12] in G.R. No. 134386
notifying the parties that no petition was filed in said case and
that the CA judgment sought to be reviewed therein has now
become final and executory. Pursuant to said Resolution, an Entry
of Judgment[13] was issued by the Court of Appeals in CA-G.R. SP
No. 40811. Hence, the CAs dismissal of CA-G.R. No. 47895 on the
additional ground of stare decisis.
Under the doctrine of stare decisis et non quieta movere, a
point of law already established will, generally, be followed by the
same determining court and by all courts of lower rank in
subsequent cases where the same legal issue is raised. [14] For
reasons needing no belaboring, however, the Court is not at all
concluded by the ruling of the Court of Appeals in its earlier CAG.R. SP No. 47895.
The Court has time and again stated that the rule on stare
decisis promotes stability in the law and should, therefore, be
accorded respect. However, blind adherence to precedents,
simply as precedent, no longer rules. More important than

anything else is that the court is right, [15] thus its duty to abandon
any doctrine found to be in violation of the law in force. [16]
As it were, the former BIR Commissioners decision not to
pursue his petition in G.R. No. 134386 denied the BIR, at least as
early as in that case, the opportunity to obtain from the Court an
authoritative interpretation of Section 12 of R.A. 7082. All is,
however, not lost. For, the government is not estopped by acts or
errors of its agents, particularly on matters involving taxes.
Corollarily, the erroneous application of tax laws by public officers
does not preclude the subsequent correct application thereof.
[17]
Withal, the errors of certain administrative officers, if that be
the case, should never be allowed to jeopardize the governments
financial position.[18]
Hence, the need to address the main issue tendered herein.
According to the Court of Appeals, the in lieu of all
taxes clause found in Section 12 of PLDTs franchise (R.A. 7082)
covers all taxes, whether direct or indirect; and that said section
states, in no uncertain terms, that PLDTs payment of the 3%
franchise tax on all its gross receipts from businesses transacted
by it under its franchise is in lieu of all taxes on the franchise or
earnings thereof. In fine, the appellate court, agreeing with PLDT,
posits the view that the word all encompasses any and all taxes
collectible under the National Internal Revenue Code (NIRC), save
those specifically mentioned in PLDTs franchise, such as income
and real property taxes.
The BIR Commissioner excepts. He submits that the
exempting in lieu of all taxes clause covers direct taxes only,
adding that for indirect taxes to be included in the exemption, the
intention to include must be specific and unmistakable. He thus
faults the Court of Appeals for erroneously declaring PLDT exempt
from payment of VAT and other indirect taxes on its importations.
To the Commissioner, PLDTs claimed entitlement to tax
refund/credit is without basis inasmuch as the 3% franchise tax

being imposed on PLDT is not a substitute for or in lieu of indirect

taxes.
The sole issue at hand is whether or not PLDT, given the tax
component of its franchise, is exempt from paying
VAT, compensating taxes, advance sales taxes and internal
revenue taxes on its importations.
Based on the possibility of shifting the incidence of taxation, or as
to who shall bear the burden of taxation, taxes may be classified
into either direct tax or indirect tax.
In context, direct taxes are those that are exacted from the
very person who, it is intended or desired, should pay them;
[19]
they are impositions for which a taxpayer is directly liable on
the transaction or business he is engaged in. [20]
On the other hand, indirect taxes are those that are
demanded, in the first instance, from, or are paid by, one person
in the expectation and intention that he can shift the burden to
someone else.[21] Stated elsewise, indirect taxes are taxes wherein
the liability for the payment of the tax falls on one person but the
burden thereof can be shifted or passed on to another person,
such as when the tax is imposed upon goods before reaching the
consumer who ultimately pays for it. When the seller passes on
the tax to his buyer, he, in effect, shifts the tax burden, not the
liability to pay it, to the purchaser as part of the price of goods
sold or services rendered.
To put the situation in graphic terms, by tacking the VAT due
to the selling price, the seller remains the person primarily and
legally liable for the payment of the tax. What is shifted only to
the intermediate buyer and ultimately to the final purchaser is the
burden of the tax.[22] Stated differently, a seller who is directly and
legally liable for payment of an indirect tax, such as the VAT on

goods or services, is not necessarily the person who ultimately

bears the burden of the same tax. It is the final purchaser or enduser of such goods or services who, although not directly and
legally liable for the payment thereof, ultimately bears the burden
of the tax.[23]
There can be no serious argument that PLDT, vis--vis its payment
of internal revenue taxes on its importations in question, is
effectively claiming exemption from taxes not falling under the
category of direct taxes. The claim covers VAT, advance sales tax
and compensating tax.
The NIRC classifies VAT as an indirect tax the amount of
[which] may be shifted or passed on to the buyer, transferee or
lessee of the goods.[24] As aptly pointed out by Judge Amancio Q.
Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on
importation of goods partakes of an excise tax levied on the
privilege of importing articles. It is not a tax on the franchise of a
business enterprise or on its earnings. It is imposed on all
taxpayers who import goods (unless such importation falls under
the category of an exempt transaction under Sec. 109 of the
Revenue Code) whether or not the goods will eventually be sold,
bartered, exchanged or utilized for personal consumption. The
VAT on importation replaces the advance sales tax payable by
regular importers who import articles for sale or as raw materials
in the manufacture of finished articles for sale. [25]
Advance sales tax has the attributes of an indirect tax
because the tax-paying importer of goods for sale or of raw
materials to be processed into merchandise can shift the tax or,
to borrow from Philippine Acetylene Co, Inc. vs. Commissioner of
Internal Revenue,[26] lay the economic burden of the tax, on the
purchaser, by subsequently adding the tax to the selling price of
the imported article or finished product.

Compensating tax also partakes of the nature of an excise

tax payable by all persons who import articles, whether in the
course of business or not. [27] The rationale for compensating tax is
to place, for tax purposes, persons purchasing from merchants in
the Philippines on a more or less equal basis with those who buy
directly from foreign countries.[28]
It bears to stress that the liability for the payment of the
indirect taxes lies only with the seller of the goods or services, not
in the buyer thereof. Thus, one cannot invoke ones exemption
privilege to avoid the passing on or the shifting of the VAT to him
by the manufacturers/suppliers of the goods he purchased.
[29]
Hence, it is important to determine if the tax exemption
granted to a taxpayer specifically includes the indirect tax which
is shifted to him as part of the purchase price, otherwise it is
presumed that the tax exemption embraces only those taxes for
which the buyer is directly liable.[30]
Time and again, the Court has stated that taxation is the
rule, exemption is the exception. Accordingly, statutes granting
tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. [31] To him,
therefore, who claims a refund or exemption from tax payments
rests the burden of justifying the exemption by words too plain to
be mistaken and too categorical to be misinterpreted. [32]
As may be noted, the clause in lieu of all taxes in Section 12
of RA 7082 is immediately followed by the limiting or qualifying
clause on this franchise or earnings thereof, suggesting that the
exemption is limited to taxes imposed directly on PLDT since
taxes pertaining to PLDTs franchise or earnings are its direct
liability. Accordingly, indirect taxes, not being taxes on PLDTs
franchise or earnings, are outside the purview of the in
lieu provision.

If we were to adhere to the appellate courts interpretation of

the law that the in lieu of all taxes clauseencompasses the totality
of all taxes collectible under the Revenue Code, then, the
immediately following limiting clause on this franchise and its
earnings would be nothing more than a pure jargon bereft of
effect and meaning whatsoever. Needless to stress, this kind of
interpretation cannot be accorded a governing sway following the
familiar legal maxim redendo singula singulis meaning, take the
words distributively and apply the reference. Under this principle,
each word or phrase must be given its proper connection in order
to give it proper force and effect, rendering none of them useless
or superfluous. [33]
Significantly, in Manila Electric Company [Meralco] vs. Vera, [34] the
Court declared the relatively broader exempting clause shall be in
lieu of all taxes and assessments of whatsoever nature upon the
privileges earnings, income franchise ... of the grantee written in
par. # 9 of Meralcos franchise as not so all encompassing as to
embrace indirect tax, like compensating tax. There, the Court
said:
It is a well-settled rule or principle in taxation that a compensating
tax is an excise tax one that is imposed on the performance of an act, the
engaging in an occupation, or the enjoyment of a privilege. A tax levied
upon property because of its ownership is a direct tax, whereas one
levied upon property because of its use is an excise duty. .
The compensating tax being imposed upon MERALCO, is an impost on
its use of imported articles and is not in the nature of a direct tax on the
articles themselves, the latter tax falling within the exemption. Thus,
in International Business Machine Corporation vs. Collector of Internal
Revenue, which involved the collection of a compensating tax from the
plaintiff-petitioner on business machines imported by it, this Court stated
in unequivocal terms that it is not the act of importation that is taxed
under section 190 but the uses of imported goods not subjected to a sales
tax because the compensating tax was expressly designated as a
substitute to make up or compensate for the revenue lost to the
government through the avoidance of sales taxes by means of direct
purchases abroad.

xxx xxx xxx

xxx If it had been the legislative intent to exempt MERALCO from
paying a tax on the use of imported equipments, the legislative body
could have easily done so by expanding the provision of paragraph 9 and
adding to the exemption such words as compensating tax or purchases
from abroad for use in its business, and the like.

It may be so that in Maceda vs. Macaraig, Jr.[35] the Court held that
an exemption from all taxes granted to the National Power
Corporation (NPC) under its charter [36] includes both direct and
indirect taxes. But far from providing PLDT comfort, Maceda in
fact supports the case of herein petitioner, the correct lesson
of Maceda being that an exemption from all taxes excludes
indirect taxes, unless the exempting statute, like NPCs charter, is
so couched as to include indirect tax from the exemption. Wrote
the Court:
xxx However, the amendment under Republic Act No. 6395 enumerated
the details covered by the exemption. Subsequently, P.D. 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 [NPCs amended charter)
amended the tax exemption by simplifying the same law in general
terms. It succinctly exempts NPC from all forms of taxes, duties fees .
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. .
xxx xxx xxx
It is evident from the provisions 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 under R.A. No. 6395 and P.D. 380 if it is to
attain its goals. (Italics in the original; words in bracket added)

Of similar import is what we said in Borja vs. Collector of Internal

Revenue.[37] There, the Court upheld the decision of the CTA
denying a claim for refund of the compensating taxes paid on the
importation of materials and equipment by a grantee of a heat

and power legislative franchise containing an in lieu provision,

rationalizing as follows:
xxx Moreover, the petitioners alleged exemption from the payment of
compensating tax in the present case is not clear or expressed; unlike the
exemption from the payment of income tax which was clear and
expressed in the Carcar case. Unless it appears clearly and manifestly
that an exemption is intended, the provision is to be construed strictly
against the party claiming exemption. xxx.

Jurisprudence thus teaches that imparting the in lieu of all

taxes clause a literal meaning, as did the Court of Appeals and
the CTA before it, is fallacious. It is basic that in construing a
statute, it is the duty of courts to seek the real intent of the
legislature, even if, by so doing, they may limit the literal
meaning of the broad language.[38]
It cannot be over-emphasized that tax exemption represents
a loss of revenue to the government and must, therefore, not rest
on vague inference. When claimed, it must be strictly construed
against the taxpayer who must prove that he falls under the
exception. And, if an exemption is found to exist, it must not be
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 extended beyond dispute in
ordinary cases.[39]
All told, we fail to see how Section 12 of RA 7082 operates as
granting PLDT blanket exemption from payment of indirect taxes,
which, in the ultimate analysis, are not taxes on its franchise or
earnings. PLDT has not shown its eligibility for the desired
exemption. None should be granted.
As a final consideration, the Court takes particular stock, as the
CTA earlier did, of PLDTs allegation that the Bureau of Customs
assessed the company for advance sales tax and compensating
tax for importations entered between October 1, 1992 and May

31, 1994 when the value-added tax system already replaced, if

not totally eliminated, advance sales and compensating taxes.
[40]
Indeed, pursuant to Executive Order No. 273 [41] which took
effect on January 1, 1988, a multi-stage value-added tax was put
into place to replace the tax on original and subsequent sales tax.
[42]
It stands to reason then, as urged by PLDT, that compensating
tax and advance sales tax were no longer collectible internal
revenue taxes under the NILRC when the Bureau of Customs
made the assessments in question and collected the
corresponding tax. Stated a bit differently, PLDT was no longer
under legal obligation to pay compensating tax and advance sales
tax on its importation from 1992 to 1994.
Parenthetically, petitioner has not made an issue about PLDTs
allegations concerning the abolition of the provisions of the Tax
Code imposing the payment of compensating and advance sales
tax on importations and the non-existence of these taxes during
the period under review. On the contrary, petitioner admits that
the VAT on importation of goods has replace[d] the compensating
tax and advance sales tax under the old Tax Code.[43]
Given the above perspective, the amount PLDT paid in the
concept of advance sales tax and compensating tax on the 1992
to 1994 importations were, in context, erroneous tax payments
and would theoretically be refundable. It should be emphasized,
however, that, such importations were, when made, already
subject to VAT.
Factoring in the fact that a portion of the claim was barred by
prescription, the CTA had determined that PLDT is entitled to a
total refundable amount of P94,673,422.00 (P87,257,031.00 of
compensating
tax
+ P7,416,391.00
=P94,673,422.00).
Accordingly, it behooves the BIR to grant a refund of the advance
sales tax and compensating tax in the total amount
of P94,673,422.00, subject to the condition that PLDT present
proof of payment of the corresponding VAT on said transactions.

WHEREFORE, the petition is partially GRANTED. The

Decision of the Court of Appeals in CA-G.R. No. 47895 dated
September 17, 1999 is MODIFIED. The Commissioner of Internal
Revenue is ORDERED to issue a Tax Credit Certificate or to refund
to PLDT only the of P94,673,422.00 advance sales tax and
compensating tax erroneously collected by the Bureau of Customs
from October 1, 1992 to May 31, 1994, less the VAT which may
have been due on the importations in question, but have
otherwise remained uncollected.
SO ORDERED.

G.R. No. L-45355 January 12, 1990

THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL
TREASURER, petitioner,
vs.
CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO), respondent.
Jaime A. Chaves for petitioner.
Quiason, Makalintal, Barot & Torres for respondent.

GRIO-AQUINO, J.:
The issue in this case is a legal one: whether or not a corporation whose franchise expressly
provides that the payment of the "franchise tax of three per centum of the gross earnings shall be in
lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise,
and poles, wires, transformers, and insulators of the grantee." (p. 20, Rollo), is exempt from paying a
provincial franchise tax.
Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a franchise on
June 17, 1961 under Republic Act No. 3247 to install, operate and maintain an electric light, heat
and power system in the City of Cagayan de Oro and its suburbs. Said franchise was amended on
June 21, 1963 by R.A. No. 3570 which added the municipalities of Tagoloan and Opol to
CEPALCO's sphere of operation, and was further amended on August 4, 1969 by R.A. No. 6020
which extended its field of operation to the municipalities of Villanueva and Jasaan.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:

Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall
pay a franchise tax equal to three per centum of the gross earnings for electric
current sold under this franchise, of which two per centum goes into the National
Treasury and one per centum goes into the treasury of the Municipalities of
Tagoloan, Opol, Villanueva and Jasaan and Cagayan de Oro City, as the case may
be: Provided, That the said franchise tax of three per centum of the gross
earnings shall be in lieu of all taxes and assessments of whatever authority upon
privileges earnings, income, franchise,and poles, wires, transformers, and insulators
of the grantee from which taxes and assessments the grantee is hereby expressly
exempted. (Emphasis supplied.)
On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which provides:
Sec. 9. Franchise Tax.Any provision of special laws to the contrary
notwithstanding, the province may impose a tax on businesses enjoying franchise,
based on the gross receipts realized within its territorial jurisdiction, at the rate of not
exceeding one-half of one per cent of the gross annual receipts for the preceding
calendar year.
In the case of newly started business, the rate shall not exceed three thousand
pesos per year. Sixty per cent of the proceeds of the tax shall accrue to the general
fund of the province and forty per cent to the general fund of the municipalities
serviced by the business on the basis of the gross annual receipts derived therefrom
by the franchise holder. In the case of a newly started business, forty per cent of the
proceeds of the tax shall be divided equally among the municipalities serviced by the
business. (Emphasis supplied.)
Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial Revenue
Ordinance No. 19, whose Section 12 reads:
Sec. 12. Franchise Tax.There shall be levied, collected and paid on businesses
enjoying franchise tax of one-half of one per cent of their gross annual receipts for
the preceding calendar year realized within the territorial jurisdiction of the province
of Misamis Oriental. (p. 27, Rollo.)
The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise tax from
CEPALCO. The company refused to pay, alleging that it is exempt from all taxes except the
franchise tax required by R.A. No. 6020. Nevertheless, in view of the opinion rendered by the
Provincial Fiscal, upon CEPALCO's request, upholding the legality of the Revenue Ordinance,
CEPALCO paid under protest on May 27, 1974 the sum of P 4,276.28 and appealed the fiscal's
ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO.
On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting entirely
the opinion of the Secretary of Justice.
On February 16, 1976, the Province filed in the Court of First Instance of Misamis Oriental a
complaint for declaratory relief praying, among others, that the Court exercise its power to construe
P.D. No. 231 in relation to the franchise of CEPALCO (R.A. No. 6020), and to declare the franchise

as having been amended by P.D. No. 231. The Court dismissed the complaint and ordered the
Province to return to CEPALCO the sum of P4,276.28 paid under protest.
The Province has appealed to this Court, alleging that the lower court erred in holding that:
1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not amended or
repealed by P.D. No. 231;
2) the imposition of the provincial franchise tax on CEPALCO would subvert the purpose of P.D. No.
231;
3) CEPALCO is exempt from paying the provincial franchise tax; and
4) petitioner should refund CEPALCO's tax payment of P4,276.28.
We find no merit in the petition for review.
There is no provision in P.D. No. 231 expressly or impliedly amending or repealing Section 3 of R.A.
No. 6020. The perceived repugnancy between the two statutes should be very clear before the Court
may hold that the prior one has been repealed by the later, since there is no express provision to
that effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The rule is that a special and local statute
applicable to a particular case is not repealed by a later statute which is general in its terms,
provisions and application even if the terms of the general act are broad enough to include the cases
in the special law (id.) unless there is manifest intent to repeal or alter the special law.
Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO, while P.D.
No. 231 is a general tax law. The presumption is that the special statutes are exceptions to the
general law (P.D. No. 231) because they pertain to a special charter granted to meet a particular set
of conditions and circumstances.
The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of whatever
authority" except the three per centum (3%) tax on its gross earnings.
In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or
collected by any authority" found in the franchise of the Visayan Electric Company was held to
exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of
the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385).
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the
franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila
Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432
and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497)
justified the exemption of the Philippine Railway Company from payment of the tax on its corporate
franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine
Railway Co. vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant
Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato
(Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was
required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as
amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No.
4] 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of
the franchise and the rendition of public service by the grantee. As a charter is in the nature of a
private contract, the imposition of another franchise tax on the corporation by the local authority
would constitute an impairment of the contract between the government and the corporation.
Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf Electric Power
Company which provided that the company shall pay:
tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and all
taxes . . . now or in the future . . . from which taxes . . . the grantee is hereby
expressly exempted and . . . no other tax . . . other than the franchise tax of 2% on
the gross receipts as provided for in the original franchise shall be collected.
exempts the company from paying the franchise tax under Section 259 of the National
Internal Revenue Code (Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power
Co., Inc., G.R. No. 23771, August 4, 1988).
On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc., Guagua
Electric Company, Inc. were subjected to the 5% tax on corporate franchise under Section 259 of the
Internal Revenue Code, as amended, because Act No. 667 of the Philippine Commission and the
ordinance or resolutions granting their respective franchises did not contain the "in-lieu-of-all-taxes"
clause (Balanga Power Plant Co. vs. Commissioner of Internal Revenue, G.R. No. L-20499, June
30, 1965; Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967; Guagua
Electric Light vs. Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967).
Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has made it
crystal clear that the franchise tax provided in the Local Tax Code (P.D. No. 231, Sec. 9) may only be
imposed on companies with franchises that do not contain the exempting clause. Thus it provides:
The franchise tax imposed under local tax ordinance pursuant to Section 9 of the
Local Tax Code, as amended, shall be collected from businesses holding franchise
but not from business establishments whose franchise contain the "in-lieu-of-alltaxes-proviso".
Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not applicable here
because what the Government sought to impose on Meralco in that case was not a franchise tax but
a compensating tax on the poles, wires, transformers and insulators which it imported for its use.
WHEREFORE, the petition for review is denied, and the decision of the Court of First Instance is
hereby affirmedin toto. No costs.
SO ORDERED.

ATTY. GIL A. VALERA, CPA-LCB, G.R. No. 167278

Deputy Commissioner,
Revenue Collection Monitoring Group,
Bureau of Customs,
Petitioner,
Present:
- versus PUNO, C.J., Chairperson,
OFFICE OF THE OMBUDSMAN, SANDOVAL-GUTIERREZ,
rep. by Hon. ORLANDO C. CASIMIRO, CORONA,
Deputy Ombudsman for the Military and AZCUNA, and
Other Law Enforcement Offices (MOLEO), LEONARDO-DE CASTRO, JJ.
in his capacity as Acting Ombudsman;
PNP-CIDG, rep. by Director General
Eduardo S. Matillano (public complainant);
ATTY. ADOLFO CASARENO (private
complainant); Hon. CESAR V. PURISIMA,
Secretary of Finance, Department of
Finance; Hon. ALBERTO D. LINA,
Commissioner of Customs, Bureau of
Customs; Hon. ROBERTO D. GEOTINA, Promulgated:
Deputy Commissioner for Internal
Administration Group, Bureau of Customs;
and HONORABLE COURT OF APPEALS
(Fourth Division), February 27, 2008
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION
PUNO, C.J.:
Public office is a public trust.[1] Public officers and employees must at all
times be accountable to the people, serve them with utmost responsibility, integrity,
loyalty and efficiency, and act with patriotism and justice, and lead modest lives.
[2]
With the numerous ills and negative perception surrounding the revenue
collection agencies of the government, this mandate of our fundamental law

becomes all the more relevant to the present petition. Petitioner, a Deputy
Commissioner of the Bureau of Customs, seeks to reverse and set aside the
Decision[3] rendered by the Court of Appeals which affirmed the Decision [4] of the
Office of the Deputy Ombudsman for the Military and other Law Enforcement
Offices (OMB-MOLEO) finding him guilty of grave misconduct, and decreeing
his dismissal from the service with all the accessory penalties appertaining thereto.
The records show that petitioner Gil A. Valera was appointed by President
Gloria Macapagal Arroyo as Deputy Commissioner of Customs in charge of the
Revenue Collection Monitoring Group on July 13, 2001. He took his oath of office
on August 3, 2001, and assumed his post on August 7 of the same year.
On December 21, 2001, he filed in the Regional Trial Court (RTC) of
Manila, for and on behalf of the Bureau of Customs, a collection case with prayer
for the issuance of a writ of preliminary attachment for the collection
ofP37,195,859.00 in unpaid duties and taxes against Steel Asia Manufacturing
Corporation (SAMC), which utilized fraudulent tax credit certificates in the
payment of its duties. The case, docketed as Civil Case No. 01-102504, was raffled
off to Branch 39 of the RTC of Manila.
On January 16, 2002, a writ of preliminary attachment was issued against
SAMC in the aforementioned case. The writ was duly implemented and the raw
materials, finished products and plant equipment of SAMC were subsequently
attached.Petitioner and SAMC entered into a compromise agreement wherein the
latter offered to pay on a staggered basis through thirty (30) monthly equal
installments the P37,195,859.00 duties and taxes sought to be collected in the civil
case.
On August 20, 2003, the Director of the Criminal Investigation and
Detention Group of the Philippine National Police, Eduardo Matillano, filed a
letter-complaint against petitioner with the Ombudsman, which reads:
Investigation conducted disclosed that Atty. Gil A. Valera was appointed
as Deputy Commissioner, Bureau of Customs by the President on July
13, 2001, took his oath on August 03, 2001 and assumed his post
on August 07, 2001.

On January 30, 2002, while in the performance of his official functions,

Atty. Gil A. Valera had compromised the case against the Steel Asia
Manufacturing Corporation in Civil Case No. 01-102504 before Branch
39, RTC Manila without proper authority from the Commissioner of the
Bureau of Customs in violation of Section 2316 TCCP (Authority of the
Commission to make Compromise) and without the approval of the
President, in violation of Executive Order No. 156 and Executive Order
No. 38. Such illegal acts of Atty. Gil A. Valera indeed caused undue
injury to the government by having deprived the government of its right
to
collect
the legal
interest,
surcharges,
litigation
expenses and damages and gave the Steel Asia unwarranted benefits in
the total uncollected amount of FOURTEEN MILLION SEVEN
HUNDRED SIXTY TWO THOUSAND FOUR HUNDRED SIXTY
SEVEN PESOS AND SEVENTY CENTAVOS (P14,762,467.70),
which is violative of Sections 3(e) and (g) respectively of RA 3019.
Further investigation disclosed that Atty. Gil A. Valera while being a
Bureau of Customs official directly and indirectly had financial or
pecuniary interest in the CACTUS CARGOES SYSTEMS a brokerage
whose line of business or transaction, in connection with which, he
intervenes or takes part in his official capacity by way of causing the
employment of his brother-in-law, Ariel Manongdo, thus, violating 3(h)
of RA 3019 and RA 6713 and Section 4, RA 3019 as against Ariel
Manongdo.
Finally, investigation also disclosed that on April 21, 2002 Atty. Gil A.
Valera traveled to Hongkong with his family without proper authority
from the office of the President in violation of Executive Order No. 298
(foreign travel of government personnel) dated May 19, 1995, thus, he
committed an administrative offense of Grave Misconduct. [5]

The administrative aspect of the complaint was docketed as OMB-C-A-030379-J. On November 12, 2003, then Ombudsman Simeon V. Marcelo issued a
Memorandum[6] to Special Prosecutor Dennis M. Villa-Ignacio, inhibiting himself
from the cases against the petitioner, and directing the latter to act in his stead and
place. Acting pursuant to this authority, Special Prosecutor Villa-Ignacio made the
finding that by entering into the compromise agreement, petitioner may have made
concessions that may be deemed highly prejudicial to the government, i.e., waiver
of the legal interest and the penalty charges imposed by law, as well as the virtual

exoneration of SAMC of its fraudulent act of using spurious tax credit

certificates. He issued an Order[7] placing petitioner on preventive suspension for
six (6) months without pay pending administrative investigation on the matter.
On March 19, 2004, the petitioner filed his motion for reconsideration of the
preventive suspension order. Upon the lapse of the period[8] within which the
Special Prosecutor, as acting Ombudsman, should have resolved the motion for
reconsideration, petitioner filed a Petition for Certiorari and Prohibition before the
Court of Appeals on March 29, 2004, docketed as CA-G.R. SP No. 83091 and
raffled off to the Special First Division.
On June 14, 2004, Special Prosecutor Villa-Ignacio inhibited himself from
the cases of herein petitioner in view of a complaint filed by the latter against
him. OMB-C-A-03-0379-J was next assigned to the OMB-MOLEO, represented
by respondent Orlando C. Casimiro.
On June 25, 2004, the Special First Division of the Court of Appeals
rendered a Decision[9] setting aside the preventive suspension order of Special
Prosecutor Villa-Ignacio and directing him to desist from taking any further action
in OMB-C-A-03-0379-J. In so ruling, the appellate court held mainly that Special
Prosecutor Villa-Ignacio was not authorized by law to sign and issue preventive
suspension orders.
The OMB-MOLEO perfected an appeal from this decision on July 16,
2004. The appeal, docketed as G.R. No. 164250, was raffled off to the Second
Division of this Court, and was eventually elevated motu proprio to the Court En
Banc.
In the meantime, the adjudication of OMB-C-A-03-0379-J continued and the
respondent Deputy Ombudsman issued a Decision[10] finding the petitioner
administratively liable for grave misconduct and decreeing his dismissal from the
service, with all the accessory penalties appertaining thereto. It was found that
petitioner committed grave misconduct based on the following charges:
(i)
compromising the case against SAMC in Civil Case No. 01102504 before Branch 39, RTC Manila, without proper authority from

the Commissioner of the Bureau of Customs in violation of Section

2316[11] of the Tariff and Customs Code, and without the approval of
the President in violation of Section 4(d) of Executive Order (E.O.)
No. 156 as amended by E.O. No. 38;[12]
(ii)
causing the employment of his brother-in-law with the Cactus
Cargoes Systems, Inc. whose principal business involves transactions
with the Bureau of Customs in violation of Section 3(d) of Republic
Act (R.A.) No. 3019;[13] and
(iii)
traveling to Hongkong without conforming with the guidelines
on the application to travel abroad for private purposes of public
officials.[14]
The petitioner questioned this decision before the Court of Appeals, via a
petition for review, and the case was raffled off to the 4 th Division and docketed as
CA G.R. SP. No. 86281.
The 4th Division of the Court of Appeals refrained from ruling on the first
charge against the petitioner in deference to this Court in G.R. No. 164250. It
however found enough evidence to substantiate the second and third charges and
issued and promulgated its assailed decision affirming the decision of respondent
Deputy Ombudsman finding petitioner guilty of grave misconduct. It held as
follows:
After careful consideration of the matter, this Court finds it more prudent
to defer from deciding the matters raised in connection with the first
ground raised by petitioner in deference to the Supreme Court which is
now tackling the very same issues.Respondents themselves argued that:
Needless to state, the Office of the Ombudsman lost no time in bringing the
foregoing matters to the attention of the Honorable Supreme Court in a petition
for review (G.R. No. 164250). Since then, the Supreme Court has motu
proprio elevated the case from the Second Division to the Court En Banc,
apparently because of the serious nature of the issues raised against the
honorable Special First Division. (Rollo, p. 292)

It should also be considered that a ruling of the Supreme Court on

the applicability of Section 2316 of the TCC is determinative of the
existence of a basis to the charges made against petitioner.

Coming now to the second ground raised, petitioner asserted that

the respondents erred in finding him liable for the employment of his
brother-in-law Ariel N. Manongdo with CCSI, claiming that there is no
evidence that he had any participation in the employment of said brotherin-law, to wit:
But, nothing is contained in the decision under review, particularly under the
heading evidence for the complainant, which shows that petitioner did anything
or performed any act or participated in any way, directly or indirectly, in the
employment of his brother-in-law, Ariel N. Manongdo, with CCSI. Simply put,
the finding of fact is also a conclusion of law with no fact or iota of evidence to
support the discussion and conclusion in the decision under review. (Rollo, p.
48)

Respondents countered that petitioner not only used his official

ascendancy (Rollo, p. 348) to cause the employment of his brother-inlaw with CCSI, but they further claimed that the joint-affidavit (Rollo,
pp. 88-93) of the elements of the Criminal Investigation Detection Group
(CIDG) showed that petitioner was a co-owner of CCSI as shown by the
fact that he invited his close friends and relatives to the blessing of the
brokerage firm. The relevant portion of said joint-affidavit stated that:
12. Further, during the conduct of our surveillance on the lifestyle of Atty.
Valera, we received information that he has sent text messages to his close
friends and relatives for the blessing of his brokerage. The text of the message is
as follows ON WED, INVITE KO KAYO SA BLESSING NG BROKERAGE
KO. ROOM 604, GLC Bldg., TM KALAW cor MABINI 6 TO 8 PM.
13. Atty. Gil A. Valeras visitors were mostly his classmates
from Ramon Magsaysay Cubao High School. He gave our asset his professional
card (Annex 35);
14. Our investigation disclosed that the GLC Bldg. is owned by a certain Mr.
GERARDO L. CONTRERAS. According to Ms. JENNIE ESGUERRA, the
building administrator, party on the 6 th Floor was the inauguration of the
CACTUS CARGOES SYSTEMS represented by its Marketing Coordinator, Mr.
ARIEL MONONGDO (sic). Our information was that Monongdo is the brotherin-law of Atty. Valera.Attached are the SEC Registration of Cactus Cargo Inc.,
(Annex 36) and the Contract of Lease signed by Mr. Ariel Monongdo the
Marketing Manager of Cactus with the building administrator (Annex 37).
(Rollo, pp. 91-92)

Respondents also asserted that CCSI is a customs brokerage firm

which necessarily deals on a regular basis with petitioners office, more
particularly:
The Code of Conduct and Ethical Standards (R.A. No. 6713), under Section 7,
subpar. (b)(3) thereof, is very specific in criminalizing the act of
(r)ecommend(ing) any person to any position in a private enterprise which has a
regular or pending official transaction with their office.On the other hand,
Section 3 (d) of the Anti Graft and Corrupt Practices Act (sic) (R.A. No. 3019)
punishes as criminal offense a public officers act of (a)ccepting or having any
member of his family accept employment in a private enterprise which has

pending official business with him during the pendency thereof or within one
year after its termination. (Rollo, pp. 349-350)

Parenthetically, petitioner also argued that this charge was also

held by the Special First Division to be too trivial. However, the Court
considers that statement to have been made in relation to the question of
whether or not the deputy ombudsman had the power to order petitioners
preventive suspension. That is, that statement should not be read to be a
disposition of the question on the merits.
Now, to dispose of the matter, it should be noted that the findings
of the respondent Deputy Ombudsman regarding the second charge was
based on two (2) grounds: first, the alleged act of using petitioners
influence to obtain employment for his brother-in-law and, second, the
mere fact of employment of his brother-in-law in a company which has
regular business with petitioners office.
While the evidence regarding the alleged use of influence by the
petitioner to cause the employment of his brother-in-law maybe a little
tenuous, the Court finds basis to the second ground. The Court notes that
petitioner did not deny that CCSI has regular transactions with his
office. Neither did he deny that Ariel Monongdo is his brother-inlaw. Under Section 3(d) of R.A. No. 3019, as amended, mere acceptance
by a member of his family of employment with a private enterprise
which has pending official business with the official involved is
considered a corrupt practice. It is clear, therefore, that mere acceptance
by Ariel Manongdo, a family member, of the employment with CCSI
rendered petitioner liable under the law. The Court, therefore, agrees
with respondent Deputy Ombudsman when he held that:
Moreover, the Anti-Graft and Corrupt Practices Act (R.A. 3019) prohibits the
public officers act of accepting or having any member of his family accept
employment in a private enterprise which has pending official business with him
during the pendency thereof or within one year after its termination. Ariel N.
Manongdo, as brother-in-law of respondent Valera falls squarely within the
definition of family under Section 4 of the same law. (Rollo, p. 70)

Coming now to the matter of his travel to Hongkong which is the

subject matter of the third objection raised by petitioner, he first argued
that his constitutional right to be informed of the charges against him had
been violated. He asserted that while the Matillano Complaint charged
him with violating E.O. No. 278, the questioned Decision was based on
E.O. No. 39.

The Court does not agree with this assertion. It should be

remembered that the present case is an administrative case while Section
14 of Art. 3 of the 1987 Constitution refers strictly to criminal
prosecution. Said Constitutional provision reads:
SECTION 14. (1) No person shall be held to answer for a criminal offense
without due process of law. (2) In all criminal prosecutions, the accused shall be
presumed innocent until the contrary is proved, and shall enjoy the right to be
heard by himself and counsel, to be informed of the nature and cause of the
accusation against him, to have a speedy, impartial, and public trial, to meet the
witnesses face to face, and to have compulsory process to secure the attendance
of witnesses and the production of evidence in his behalf. However, after
arraignment, trial may proceed notwithstanding the absence of the accused
provided that he has been duly notified and his failure to appear is unjustifiable.

It is well-settled that in an administrative case, due process is

served when the respondent was given an opportunity to be heard (Utto
v. Comelec, 375 SCRA 523 [2002]). In the instant case, petitioner cannot
deny that he was given all the opportunity to present his side of the
story. Thus, the Court agrees with respondents when they argued:
It is, thus, unfortunate that instead of demonstrating that he either complied with
the requirement of presidential authority to travel that petitioner, as a lawyer,
presumably knows to have existed (sic), or that he was legitimately exempted
therefrom, petitioner instead resorted to the unavailing technicality that the
complaint did not properly identify by the correct number [the] EO in
point. Petitioner invokes the right to be informed of charges against an accused
which, needless to state, has specific application to criminal charges. Needlessly,
however, even in criminal cases, what matters is not the title of the law violated
but rather the allegations of acts constituting a crime. In his case, the allegation
in the complaint was simply that petitioner did not comply with the requirement
for presidential authority to travel abroad. It certainly fully informed him of his
infraction. After the issue was joined on such factual allegation, identifying and
enforcing the applicable law by the public respondent simply followed as part
and parcel of its quasi-judicial function. (Rollo, p. 35)

Turning now to his defense that his foreign travel should not be
taken against him because at the time he made the travel with his family,
he was a private citizen because he was prevented by a temporary
restraining order issued by this Court in CA-G.R. SP No. 69855 (in the
case entitled Rosqueta versus Hon. Judge Juan Nabong) from assuming
office and from dispossessing then Deputy Commissioner Rosqueta of
the position of Deputy Commissioner.
The Court cannot subscribe to this argument. Under the theory
proposed by petitioner, there was in effect an interegnum as to his
government service during the effectivity of the TRO. But it cannot be

denied that once CA-G.R. SP No. 69855 was decided and petitioner was
allowed to assume his position, the effectivity of his appointment
retroacted to the original date of appointment.While the temporary
restraining order was in effect, he nevertheless continued to assert on his
right to the office. The Court also notes that petitioner did not even
present any evidence to show that he had dissociated himself from the
office at the time in question. As pointed out by the respondents
Comment:
For that matter, petitioner cannot claim that he suffered a gap in his public
service during the period covered by the so-called TRO. He certainly was not
dissociated from office during such period. He continued to be a public officer,
notwithstanding, such that the application on him of the presidential authority to
travel can not be deemed to have been then suspended. (Rollo, p. 356)

xxx
In fine, while the Court refrained from tackling the first charge
against petitioner, the Court finds that as to the second and third charges,
respondent Deputy Ombudsman did not err in finding petitioner guilty of
grave misconduct.[15]

On September 30, 2005, without going into the issue of petitioners guilt, the
Court En Banc rendered a decision in G.R. No. 164250 ruling that the power to
place a public officer or employee under preventive suspension pending an
investigation is lodged only with the Ombudsman or the Deputy Ombudsmen and
affirmed the nullification and setting aside by the appellate court of the preventive
suspension order of the Special Prosecutor.
Petitioner now comes before us praying that he be absolved of the charges
against him and that the decision of the 4thDivision of the Court of Appeals which
effectively affirmed the decision of the OMB-MOLEO be annulled and set aside.
We shall now put a finis to this controversy that has raged bitterly for the
past several months and shun further delay so as to ensure that this case would
really attain finality and resolve whether petitioner is guilty of grave misconduct in
connection with administrative case OMB-C-A-03-0379-J.
First, we discuss the definition of grave misconduct as established by
jurisprudence:

Misconduct is a transgression of some established and definite rule of action,

more particularly, unlawful behavior or gross negligence by a public officer.[16] The
misconduct is grave if it involves any of the additional elements of corruption,
willful intent to violate the law or disregard of established rules, which must be
proved by substantial evidence.[17]
At the onset, the Court would like to point out that in an administrative
proceeding, the quantum of proof required for a finding of guilt is only substantial
evidence, that amount of relevant evidence which a reasonable mind might accept
as adequate to justify a conclusion.[18] We reiterate the well-settled rule that, when
supported by substantial evidence and absent any clear showing of abuse,
arbitrariness or capriciousness, findings of fact of administrative agencies,
especially when affirmed by the Court of Appeals, are binding and conclusive upon
this Court.[19] After a thorough examination of the evidence on record, we find no
reason to depart from this rule.
With respect to the second and third charges against the petitioner, the
4 Division of the Court of Appeals agreed with the findings of the OMBMOLEO. The petitioner utterly failed to show that the factual findings of the
respondent, affirmed by the appellate court, were attended with arbitrariness or
abuse. The Matillano letter-complaint as well as its supporting affidavits made
clear allegations under oath that petitioner recommended his brother-in-law, Ariel
Manongdo, for employment with Cactus Cargoes Systems, Inc. (CCSI), a customs
brokerage firm which necessarily deals on a regular basis with petitioners
office. Further, the Matillano letter-complaint also categorically asserted that
petitioner traveled to Hongkong without obtaining the proper clearance. These
allegations under oath constitute substantial evidence required in administrative
proceedings.
th

On the other hand, petitioner did not deny that Ariel Manongdo is his
brother-in-law or that CCSI has regular transactions with his office. Neither did he
deny that he failed to comply with the requirement of presidential authority to
travel abroad. It is thus unfortunate that instead of demonstrating that he is
innocent of the charges, the petitioner instead resorted to unavailing technicalities
to disprove the allegations. The Supreme Court cannot weigh once more the

evidence submitted not only before the Office of the Ombudsman but also before
the Court of Appeals. All told, we are convinced that there is substantial evidence
to hold petitioner liable for the second and third charges against him.
Be that as it may, petitioner raises some legal issues regarding these charges
which we shall settle.
Anent the second charge, petitioner contends that under Section 3(d) of R.A.
No. 3019,[20] a brother-in-law is not included within the scope of the word family
and therefore, he cannot be found liable under the said law. In arguing so,
petitioner refers to the definition of the word family found under Section 3(g) of
R.A. No. 6713, which states:
SEC. 3. Definition of Terms. As used in this Act, the term:
xxx
(g) "Family of public officials or employees" means their spouses and unmarried
children under eighteen (18) years of age.

This contention deserves scant consideration.

Section 3 of R.A. No. 6713 is unequivocal in that its definition of terms is
limited to as used in the Act. Under R.A. No. 6713, the term family was used only
once under Section 4, par. (h),[21] which implores public officials and employees
and their families to observe simple living. The restrictive definition accorded to
the word family under the law is logical since children of public officials and
employees who are above eighteen and already emancipated by law and freed from
parental authority should not be bound by this standard where their emancipation
may lead them to an otherwise private lifestyle or one which is not beholden to the
public trust.
This otherwise perfect logic would result in irrationality if we follow the
contention of petitioner that the definition of family under R.A. No. 6713 should
also apply to R.A. No. 3019. It makes no rhyme nor reason to suppose that public
officials and employees are prohibited from having their children under eighteen
years accept employment in a private enterprise having pending official business

before their office, and yet are allowed to have their children over eighteen years,
which is the employable age, to do so.
What petitioner fails to mention is that R.A. No. 6713 itself prohibits the act
of public officials and employees during their incumbency to recommend any
person to any position in a private enterprise which has a regular or pending
official transaction with their office.[22] Certainly, the definition of the word family
under said law would unduly limit and render meaningless Section 3(d) of R.A.
No. 3019 if applied to the latter. In fact, family relation is defined under Section 4
of R.A. No. 3019[23] which, according to the said section, shall include the spouse
or relatives by consanguinity or affinity in the third civil degree. Thus, we need not
look beyond the provisions of R.A. No. 3019 to hold that a brother-in-law falls
within the definition of family under Section 3(d) thereof.
Proceeding now to the legal issue with respect to the third charge, it is
advanced by petitioner that a public official reverts to his quo ante status as a
private citizen upon being subjected to a temporary restraining order directing him
to refrain from holding his office. Hence, he need not comply with the
requirements for traveling abroad during said period.
We are not persuaded.
We agree with the appellate court that petitioner suffered no gap in his
public service while the temporary restraining order was in effect. The nature of a
temporary restraining order which would have the effect of preventing a public
officer from discharging his office is provisional until a preliminary injunction is
issued by the court hearing the case. Because of its temporary character, it would
not have the effect of divesting such officer of the public character of his office.
It cannot be denied that once CA-G.R. SP No. 69855 was decided and
petitioner was allowed to re-assume his office, the effectivity of his appointment
retroacted to the original date of his appointment. He certainly remained as a
public officer during such period and it was incumbent upon him, especially since
he was continuously asserting his right to the office, to comply with the guidelines
on the application to travel abroad for private purposes[24] of public officials.

We now come to the pivotal first charge facing petitioner that was left
unresolved by the Court of Appeals in deference to this Court that of
compromising the case against SAMC without prior authorization from the
Commissioner of Customs in violation of Section 2316[25] of the Tariff and
Customs Code, and without prior approval of the President as required by Section
4(d)[26] of E.O. No. 156 as amended by E.O. No. 38.
Prefatorily, we emphasize that violations or disregard of regulations
governing the collection of government funds are administratively
sanctionable. Intended to raise revenue for government operations, these
regulations must be followed strictly.
On the first provision of the special law alleged to have been violated by
petitioner, Title VI Book II of the Tariff and Customs Code entitled
ADMINISTRATIVE AND JUDICIAL PROCEEDINGS is divided as follows:
1.
Part 1 Search, Seizure and Arrest,
2.
Part 2 Administrative Proceedings,
3.
Part 3 Judicial Proceedings,
4.
Part 4 Surcharges, Fines and Forfeitures,
5.
Part 5 Disposition of Property in Customs Custody, and
6.
Part 7 Fees and Charges. (Note: No Part 6)
According to petitioner, Sections 2301 up to 2316 are provisions found
under Part 2 and pertain to administrative proceedings, while Sections 2401 and
2402 are provisions found under Part 3 and pertain to judicial proceedings. Section
2316 provides:
Section 2316. Authority of Commissioner to make Compromise.Subject to
the approval of the Secretary of Finance, the Commissioner of Customs may
compromise any case arising under this Code or other laws or part of laws
enforced by the Bureau of Customs involving the imposition of fines, surcharges
and forfeitures unless otherwise specified by law.

While Section 2401 as amended, which was made by petitioner as basis for his
entering into the compromise agreement, provides:

Section 2401. Supervision and Control over Criminal and Civil

Proceedings.Civil and criminal actions and proceedings instituted in
behalf of the government under the authority of this Code or other law
enforced by the Bureau shall be brought in the name of the government
of the Philippines and shall be conducted by customs officers but no
civil or criminal action for the recovery of duties or the enforcement of
any fine, penalty or forfeiture under this Code shall be filed in court
without the approval of the Commissioner.

Thus, for petitioner, since the case wherein the compromise agreement was entered
into was already pending before a regular court, the requirement of prior authority
of the Commissioner of Customs to enter into a compromise is not necessary.
This contention must fail.
Basic is the maxim in statutory construction that a statute must be read or
construed as a whole or in its entirety. All parts, provisions, or sections, must be
read, considered or construed together, and each must be considered with respect to
all others, and in harmony with the whole.[27]
A reading of the provisions cited by the petitioner will show that there is
really no conflict between them. Section 2401 covers the matter of the institution
and filing of civil and criminal actions by customs officers, which is subject to the
approval of the Commissioner if filed for the recovery of duties or the enforcement
of any fine, penalty or forfeiture under the Code. It does not cover the compromise
of such civil or criminal actions, while Section 2316 is the provision that deals with
such a situation. In fact, the latter is categorical in providing an encompassing
scope for the strict conditions for any compromise. Its coverage includes any case
arising under this code or other laws or part of laws enforced by the Bureau of
Customs involving the imposition of fines, surcharges and forfeitures unless
otherwise specified by law. Doubtless, civil cases for collection of customs taxes
and duties, including the one in the case at bar, would fall under this coverage.
To be sure, the adoption of petitioners interpretation of these provisions
would result in absurdity that could not have been intended by
Congress. Following his logic, the Commissioner of Customs has to actively
participate and seek the approval of the Secretary of Finance in compromising

administrative collection cases; whereas, customs officers without even seeking

authority from the Commissioner or approval from the Secretary of Finance can
proceed to bargain off much larger collection cases in courts. Clearly, the Court
cannot countenance the abuse and corruption engendered by this misreading of the
law.
Petitioner next claims that there was no violation of Section 4(d) [28] of E.O.
No. 156 as amended by E.O. No. 38, when he entered into the compromise
agreement without the express approval of the President.
E.O. No. 156, as amended by E.O. No. 38, created a Special Task Force to
investigate and prosecute the irregularities relative to the "tax credit scam"
committed at the center of the Department of Finance and to recover and collect
revenues lost by the government through the "scam." Section 4(d) thereof provides:
Section 4. Powers, Duties and Functions. The Task Force shall have the
following powers, duties and functions:
xxx
d) To recommend the settlement of cases for approval of the
President, subject to appropriate rules on the settlement of claims by the
government;

In the case at bar, and during the time relevant to this case, [29] specifically on
May 10, 2002, the then Chairman of the Task Force, Department of Finance
Undersecretary Cornelio Gison, reported to the then Department of Finance
Secretary Jose Isidro Camacho the successful collection by petitioner
of P37,195,859.00 in the SAMC case. On October 3, 2002, in his Memorandum,
[30]
Department of Finance Undersecretary Innocencio P. Ferrer, Jr., who succeeded
Undersecretary Gison, also congratulated petitioner for his accomplishment in the
said case.
Petitioner invokes the principle of qualified political agency wherein these
acts of the Special Task Force Chairmen who both approved the compromise
agreement and lauded him for his accomplishment in the recovery efforts against
the original grantees and buyers of fraudulently secured tax credit certificates
should be considered as approval by the President herself, especially since she did
not disapprove of nor reprobate their acts.

This argument is likewise unavailing.

E.O. No. 156, as amended by E.O. No. 38, is clear in its requirement that in
cases involving tax credit scams the favorable recommendation for approval
by the Special Task Force and the approval by the President of the Republic
are both required. The approval by the Chairmen of the Special Task Force is still
subject to approval of the President. Prior presidential approval is the highest form
of check and balance within the Executive branch of government and cannot be
satisfied by mere failure of the President to reverse or reprobate the acts of
subordinates. To sanction otherwise would be to ask the Court to reward passivity
and render nugatory the fundamental safeguard required under the law.
The Court notes that in Civil Case No. 01-102504, SAMC defrauded the
government of the amount of P37,195,859.00 in unpaid duties and taxes with the
use of fraudulent tax credit certificates that were directly and originally procured
by its officials on the basis of inexistent supporting documents. The legal interest,
surcharges, litigation expenses and damages of this principal amount totaled a
staggering P14,762,467.70, which petitioner effectively waived through his
entering into a compromise agreement with SAMC. We find lamentable the utter
disregard of the legal requirements for entering into a compromise displayed by
petitioner which is further aggravated by the fact that there were already sufficient
properties of SAMC that were attached in the said case to satisfy not only the
principal amount owed but also the penalties, surcharges and interests.
No amount of reasoning can infuse an empty plea to justify this bloodletting.
Fundamental it is in law that taxes being the lifeblood of the government, [31] such
must be continuously replenished and carefully preservedand no public official
should maintain a standard lower than utmost diligence in keeping our revenue
system flowing. It is not for any government official to deem it within his complete
control to let precious blood flow to the private sphere where it would have been
rightfully and lawfully collected by the public through the government.
Persons appointed to the revenue collection agencies of the government, like
petitioner, ought to live up to the strictest standards of honesty and integrity in the

public service and must at all times be above suspicion. Because of the nature of
their office, the officials and employees of the Bureau of Customs should serve as
the primary role models in the faithful observance of the constitutional canon that
public office is a public trust. Petitioner, being a Deputy Commissioner of the
Revenue Collection Monitoring Group, should know that his actuations reflect
adversely on the integrity and efficiency of his office and erode the faith and
confidence of our people in its daily administration. We find that the totality of
petitioners acts constitutes flagrant disregard of established rules constitutive of
grave misconduct.
One final note. It appears that petitioner is no longer a Deputy
Commissioner of Customs.[32] This fact, however, does not render this petition
moot and academic. As held in Gallo v. Cordero:
. . . [T]he jurisdiction that was ours at the time of the filing of the
administrative complaint was not lost by the mere fact that the
respondent public official had ceased to be in office during the pendency
of his case. The Court retains its jurisdiction either to pronounce the
respondent official innocent of the charges or declare him guilty thereof.
A contrary rule would be fraught with injustices and pregnant with
dreadful and dangerous implications. For what remedy would the people
have against a judge or any other public official who resorts to wrongful
and illegal conduct during his last days in office? xxx If innocent,
respondent official merits vindication of his name and integrity as he
leaves the government which he has served well and faithfully; if guilty,
he deserves to receive the corresponding censure and a penalty proper
and imposable under the situation.[33]

WHEREFORE, premises considered, the petition is DENIED. The assailed

Decision dated February 28, 2005 of the Court of Appeals in CA G.R. SP. No.
86281 is hereby AFFIRMED.
SO ORDERED.

[G.R. No. 137377. December 18, 2001]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI

CORPORATION, respondent.
DECISION
PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered
the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income,
branch profit remittance and contractors taxes from Marubeni Corporation after finding the latter
to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the
laws of Japan. It is engaged in general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the Philippines and maintains a
branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter
of authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts in the Philippines, both of
which were completed in 1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation of a wharf/port complex at
the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The
other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioners revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractors and commercial brokers taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX

FY ended March 31, 1985
Undeclared gross income (Philphos and

and NDC construction projects). . . . . . . . . . . . P 967,269,811.14

Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57
Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57
Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
20% int. p.a. fr. 7-15-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Undeclared net income from
Philphos and NDC construction projects . . . . . P 483,634,905.57
Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57
Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50
20% int. p.a. fr. 4-26-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16
III. DEFICIENCY CONTRACTORS TAX
FY ended March 31, 1985

Undeclared gross receipts/ gross income from

Philphos and NDC construction projects . . . . P 967,269,811.14
Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00
Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00
25% surcharge for late payment . . . . . . . . . 9,672,698.00
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00
Add: 20% int. p.a. fr. 4-21-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKERS TAX
FY ended March 31, 1985
Undeclared share from commission income
(denominated as subsidy from Home
Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00
Add: 50% surcharge for non-declaration. . . . . . . 814,284.50
25% surcharge for late payment . . . . . . . . . 407,142.25
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75
Add: 20% int. p.a. fr. 4-21-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68

The 50% surcharge was imposed for your clients failure to report for tax purposes the
aforesaid taxable revenues while the 25% surcharge wasimposed because of your
clients failure to pay on time the above deficiency percentage taxes.
x x x x x x x x x. [1]
Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the
gross income from the two projects amounted toP967,269,811.14. Each contract was for a piece
of work and since the projects called for the construction and installation of facilities in the
Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the same was
petitioners final decision and that if respondent disagreed with it, respondent may file an appeal
with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractors tax assessments in petitioners assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 [2] declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer
who wished to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a
sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true copy of
his statement declaring his net worth as of December 31, 1980 on record with the Bureau of
Internal Revenue (BIR), or if no such record exists, file a statement of said net worth subject to
verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the
increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth
as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3,
1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net
worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years
1981 to 1985, E.O. No. 64[3] included estate and donors taxes under Title III and the tax on
business under Chapter II, Title V of the National Internal Revenue Code, also covering the years
1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41
were extended to the foregoing tax liabilities, and the period within which the taxpayer could

avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed
their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits,
immunities and privileges under the new E.O. by filing an amended return and paying an
additional 5% on the increase in net worth to cover business, estate and donors tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the
benefit of E.O. No. 64 and paid a further amount ofP1,445,637.00 to the BIR equivalent to five
percent (5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly
availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
follows:

WHEREFORE, the respondent Commissioner of Internal Revenue is hereby

ORDERED to DESIST from collecting the 1985 deficiency taxes it had assessed
against petitioner and the same are deemed considered [sic] CANCELLED and
WITHDRAWN by reason of the proper availment by petitioner of the amnesty under
Executive Order No. 41, as amended.[4]
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the
Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision
of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:

(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court
of Tax Appeals which ruled that herein respondents deficiency tax liabilities were
extinguished upon respondents availment of tax amnesty under Executive Orders Nos.
41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance,
and contractors taxes assessed by petitioner.[5]
The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income tax,

branch profit remittance tax and contractors tax. These taxes are covered by the amnesties
granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O.
No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty
herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as
of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions)
and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code,
as amended.

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986,
CTA Case No. 4109 had already been filed and was pending before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers with income tax cases already
filed in court as of the effectivity hereof. The point of reference is the date of effectivity of E.O.
No. 41. The filing of income tax cases in court must have been made before and as of the date of
effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there
must have been no income tax cases filed in court against him when E.O. No. 41 took effect.
This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files
it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractors tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became
effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent
corporation did not fall under the said exception in Section 4 (b), hence, respondent was not
disqualified from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III
of the National Internal Revenue Code.[6] In the tax code, this tax falls under Title II on Income
Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4 (b)
when it filed for amnesty of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractors tax assessment and respondents
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41
by including estate and donors taxes and tax on business. Estate and donors taxes fall under Title
III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The
contractors tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on business.[7]
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donors taxes. Instead, Section 8 of E.O. No.
64 provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary
to or inconsistent with this amendatory Executive Order shall remain in full force and
effect.
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or
inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No.
41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4
(b) in particular, this provision excepts from tax amnesty coverage a taxpayer who
has income tax cases already filed in court as of the effectivity hereof. As to what Executive
Order the exception refers to, respondent argues that because of the words income and hereof,
they refer to Executive Order No. 41.[8]
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to
refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.[9] While an amendment is generally construed as becoming a part of the original
act as if it had always been contained therein, [10] it may not be given a retroactive effect unless it
is so provided expressly or by necessary implication and no vested right or obligations of
contract are thereby impaired.[11]

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity
of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or
any of its provisions should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements
the original act by adding other taxes not covered in the first.[12] It has been held that where a
statute amending a tax law is silent as to whether it operates retroactively, the amendment will
not be given a retroactive effect so as to subject to tax past transactions not subject to tax under
the original act.[13] In an amendatory act, every case of doubt must be resolved against its
retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon
or intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law.[15] It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give tax evaders who wish
to relent a chance to start with a clean slate.[16] A tax amnesty, much like a tax exemption, is never
favored nor presumed in law.[17] If granted, the terms of the amnesty, like that of a tax exemption,
must be construed strictly against the taxpayer and liberally in favor of the taxing authority.
[18]
For the right of taxation is inherent in government. The State cannot strip itself of the most
essential power of taxation by doubtful words. He who claims an exemption (or an amnesty)
from the common burden must justify his claim by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the
legislature, that doubt must be resolved in favor of the state.[19]
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term income tax cases should be read as
to refer to estate and donors taxes and taxes on business while the word hereof, to E.O. No. 64.
Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the
taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No.
41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect
on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already
fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from
availing of the business tax amnesty granted therein.
It is respondents other argument that assuming it did not validly avail of the amnesty under
the two Executive Orders, it is still not liable for the deficiency contractors tax because the
income from the projects came from the Offshore Portion of the contracts. The two contracts
were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the Offshore Portion were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

Before going into respondents arguments, it is necessary to discuss the background of the
two contracts, examine their pertinent provisions andimplementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos to engage in
the large-scale manufacture of phosphatic fertilizer for the local and foreign markets.[20] The
Philphos plant complex which was envisioned to be the largest phosphatic fertilizer operation in
Asia, and among the largest in the world, covered an area of 180 hectares within the 435-hectare
Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development Estate.
The wharf/ port complex was intended to be one of the major facilities for the industrial plants at
the Leyte Industrial Development Estate. It was to be specifically adapted to the site for the
handling of phosphate rock, bagged or bulk fertilizer products, liquid materials and other
products of Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar),
[21]
and other industrial plants within the Estate. The bidding was participated in by Marubeni
Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into
an agreement entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation. [22] The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities,
harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities. [23] The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and
know-how,[24] and:

x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Wharf/Port Complex through the Owner, with the design and construction of other
facilities around the site. The scope of works shall also include any activity, work and
supply necessary for, incidental to or appropriate under present international industrial
port practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I. [25]
The contract price for the wharf/ port complex was Y12,790,389,000.00
and P44,327,940.00. In the contract, the price in Japanese currency was broken down into two
portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in

Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I
and II were financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by suppliers credit in favor of Marubeni from the ExportImport Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by
the Japanese government as assistance to foreign governments to promote economic
development.[26] The OECF extended to the Philippine Government a loan of Y7,560,000,000.00
for the Leyte Industrial Estate Port Development Project and authorized the NDC to implement
the same.[27] The other type of financing is an indirect type where the supplier, i.e., Marubeni,
obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-contractors.
[28]

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment and
services rendered on the project. The price breakdown and the corresponding materials,
equipment and services were contained in a list attached as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened for public bidding a
project to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it
was Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2,
1982, Philphos and respondent corporation entered into an agreement entitled Turn-Key Contract
for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation.[30] The object of the contract was to establish and place in operating
condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia[31]and for the delivery of ammonia to
an integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. [32] The
storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading
system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts,
and other related facilities.[33] The scope of the works required for the completion of the ammonia
storage complex covered the supply, including grants of licenses and transfer of technology and
know-how,[34] and:

x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Ammonia Storage Complex through the Owner with the design and construction
of other facilities at and around the Site. The scope of works shall also include any
activity, work and supply necessary for, incidental to or appropriate under present
international industrial practice, for the timely and successful implementation of the
object of this Contract, whether or not expressly referred to in the abovementioned
Annex I.[35]

The contract price for the project was Y3,255,751,000.00 and P17,406,000.00. Like the
NDC contract, the price was divided into three portions. The price in Japanese currency was
broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in
Philippine currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I
and II were financed by suppliers credit from the Export-Import Bank of Japan. The price stated
in the three portions were further broken down into the corresponding materials, equipment and
services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III.[36]
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the contracts were
classifiedthe Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the
Japanese Yen Portion I corresponds to the Foreign Offshore Portion. [37] Japanese Yen Portion II
and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.[38]
Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractors tax on the income from the two projects. In fact respondent claims, which petitioner
has not denied, that the income it derived from the Onshore Portion of the two projects had been
declared for tax purposes and the taxes thereon already paid to the Philippine government. [39] It is
with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the
liabilities involved in the assessments subject of this case arose. Petitioner argues that since the
two agreements are turn-key,[40] they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is
in the Philippines, and the materials provided and services rendered were all done and completed
within the territorial jurisdiction of the Philippines. [41] Accordingly, respondents entire receipts
from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected
to contractors tax in accordance with the ruling in Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:

Sec. 205. Contractors, proprietors or operators of dockyards, and others.A

contractors tax of four percent of the gross receipts is hereby imposed on proprietors
or operators of the following business establishments and/or persons engaged in the
business of selling or rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined
in Republic Act No. 4566;
xxxxxxxxx

(q) Other independent contractors. The term independent contractors includes

persons (juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under 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. It does 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 Asia-Pacific Region.
x x x x x x x x x.[43]
Under the afore-quoted provision, an independent contractor is a person 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 word contractor refers to a person who, in the pursuit of
independent business, undertakes to do a specific job or piece of work for other persons, using
his own means and methods without submitting himself to control as to the petty details.[44]
A contractors tax is a tax imposed upon the privilege of engaging in business. [45] It is
generally in the nature of an excise tax on the exercise of a privilege of selling services or labor
rather than a sale on products;[46] and is directly collectible from the person exercising the
privilege.[47]Being an excise tax, it can be levied by the taxing authority only when the acts,
privileges or business are done or performed within the jurisdiction of said authority.[48] Like
property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.[49]
In the case at bar, it is undisputed that respondent was an independent contractor under the
terms of the two subject contracts. Respondent, however, argues that the work therein were not
all performed in the Philippines because some of them were completed in Japan in accordance
with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to
be made and the works and services to be performed by respondent are indeed classified into
two. The first part, entitled Breakdown of Japanese Yen Portion I provides:

Japanese Yen Portion I of the Contract Price has been subdivided according to
discrete portions of materials and equipment which will be shipped to Leyte as
units and lots. This subdivision of price is to be used by owner to verify invoice for

Progress Payments under Article 19.2.1 of the Contract. The agreed subdivision of
Japanese Yen Portion I is as follows:
x x x x x x x x x. [50]
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan. [51]The machines and equipment
were designed, engineered and fabricated by Japanese firms sub-contracted by Marubeni from
the list of sub-contractors in the technical appendices to each contract. [52] Marubeni subcontracted a majority of the equipment and supplies to Kawasaki Steel Corporation which did the
design, fabrication, engineering and manufacture thereof;[53] Yashima & Co. Ltd. which
manufactured the mobile equipment; Bridgestone which provided the rubber fenders of the
mobile equipment;[54] and B.S. Japan for the supply of radio equipment. [55] The engineering and
design works made by Kawasaki Steel Corporation included the lay-out of the plant facility and
calculation of the design in accordance with the specifications given by respondent. [56] All subcontractors and manufacturers are Japanese corporations and are based in Japan and all
engineering and design works were performed in that country.[57]
The materials and equipment under Portion I of the NDC Port Project is primarily composed
of two (2) sets of ship unloader and loader; several boats and mobile equipment.[58] The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top of each
is a large crane and a compartment for operation of the crane. Two sets of these equipment were
completely manufactured in Japan according to the specifications of the project. After
manufacture, they were rolled on to a barge and transported to Isabel, Leyte. [59] Upon reaching
Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where
they were installed.[60] Their installation simply consisted of bolting them onto the pier.[61]
Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment,
consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also
manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded at
the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once unloaded
at the port, they were ready to be driven and perform what they were designed to do.[62]
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex
III to the NDC contract. These other items consist of supplies and materials for five (5) berths,

two (2) roads, a causeway, a warehouse, a transit shed, an administration building and a security
building. Most of the materials consist of steel sheets, steel pipes, channels and beams and other
steel structures, navigational and communication as well as electrical equipment. [63]
In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units. [64] The steel plates for the
tank were manufactured and cut in Japan according to drawings and specifications and then
shipped to Isabel. Once there, respondents employees put the steel plates together to form the
storage tank. As to the refrigeration units, they were completed and assembled in Japan and
thereafter shipped to Isabel. The units were simply installed there. [65] Annex III to the Philphos
contract lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material
and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts. [66] The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests on the
machines and equipment[67]while Philphos sent a representative to Japan to inspect the storage
equipment.[68]
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all
paid by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa,
formerly the Assistant General Manager and Manager of the Steel Plant Marketing Department,
Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment
and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid
by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese
and English.[69]Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.[70]
Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of
respondent through the Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondents
submission of pertinent documents, released the amount in the letters of credit in favor of
respondent and credited the amount therein to respondents account within the same bank.[71]
Clearly, the service of design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination[72]of the two projects involved two taxing jurisdictions. These acts occurred in two
countries Japan and the Philippines. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats

and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units
were made and completed in Japan. They were already finished products when shipped to the
Philippines. The other construction supplies listed under the Offshore Portion such as the steel
sheets, pipes and structures, electrical and instrumental apparatus, these were not finished
products when shipped to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal Revenue v. Engineering
Equipment & Supply Co[73]is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported some
items for the system it designed and installed. [74] The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.
SO ORDERED.

[G.R. No. 112024. January 28, 1999]

PHILIPPINE
BANK
OF
COMMUNICATIONS, petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondents.
DECISION
QUISUMBING, J.:

This petition for review assails the Resolution[1] of the Court of Appeals dated September 22,
1993, affirming the Decision[2] and Resolution[3] of the Court of Tax Appeals which denied the
claims of the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due
course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for
1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond
the reglementary period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood automatically credited
the same to the succeeding year. The petition for review is dismissed for lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking
corporation duly organized under Philippine laws, filed its quarterly income tax returns for the
first and second quarters of 1985, reported profits, and paid the total income tax
of P5,016,954.00. The taxes due were settled by applying PBComs tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and
0747-85 for P3,401,701.00 and P1, 615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax
Returns for the year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby
showing no income tax liability. For the succeeding year, ending December 31, 1986, the
petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for
the year.
But during these two years, PBCom earned rental income from leased properties. The
lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985
and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among
others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and
second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld
by their lessees from property rentals in 1985 forP282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals

(CTA). The petition was docketed as CTA Case No. 4309 entitled: Philippine Bank of
Communications vs. Commissioner of Internal Revenue.
The losses petitioner incurred as per the summary of petitioners claims for refund and tax
credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:
1985

1986

Net Income
(Loss)

(P25,317,228.00)

(P14,129,602.00)

Tax Due

NIL

NIL

5,016,954.00

---

282,795.50

234,077.69

P5,299,749.50*==========
====

P234,077.69==========
====

Quarterly
tax
Payments
Made
Tax
Withheld at
Source
Excess
Tax
Payments

*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five

centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the
request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground
that it was filed beyond the two-year reglementary period provided for by law. The petitioners
claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that
it was automatically credited by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but
the same was denied due course for lack of merit.[6]
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA
with the Court of Appeals. However on September 22, 1993, the Court of Appeals
affirmed in toto the CTAs resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of
BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for
review asking for the refund/tax credit of its 1985-86 excess quarterly income tax
payments -- can be prejudiced by the subsequent BIR rejection, applied retroactively,
of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax
credit of excess quarterly income tax payments is not two years but ten (10).[7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which
denied PBComs claim for the refund ofP234,077.69 income tax overpaid in 1986 on
the mere speculation, without proof, that there were taxes due in 1987 and that
PBCom availed of tax-crediting that year.[8]
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying
the plea for tax refund or tax credits on the ground of prescription, despite petitioners reliance on
RMC No. 7-85, changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1,
1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive
period under the tax Code and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil
Code. The pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS
CORPORATE INCOME TAX RESULTING FROM THE
FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos.

10-77 which provide:
xxxxxxxxx

It has been observed, however, that because of the excess tax payments, corporations
file claims for recovery of overpaid income tax with the Court of Tax Appeals within
the two-year period from the date of payment, in accordance with Sections 292 and
295 of the National Internal Revenue Code. It is obvious that the filing of the case in

court is to preserve the judicial right of the corporation to claim the refund or tax
credit.
It should be noted, however, that this is not a case of erroneously or illegally paid tax
under the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund
of the overpaid income tax or claim for automatic tax credit.To insure prompt action
on corporate annual income tax returns showing refundable amounts arising from
overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum
Order No. 32-76 dated June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-audited which consist
mainly of checking mathematical accuracy of the figures of the return. After which,
the refund or tax credit is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court
of Tax Appeals in order to preserve the right to claim refund or tax credit within
the two-year period. As already stated, actions hereon by the Bureau are immediate
after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess income tax paid under the
provisions of Section 86 of the Tax Code within 10 years from the date of payment
considering that it is an obligation created by law (Article 1144 of the Civil Code).
[9]

(Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS-CBN Broadcasting
Corporation vs. Court of Tax Appeals[10] petitioner claims that rulings or circulars promulgated by
the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to
taxpayers. In ABS-CBN case, the Court held that the government is precluded from adopting a
position inconsistent with one previously taken where injustice would result therefrom or where
there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides
for this rule as follows:

Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of

any of the rules and regulations promulgated in accordance with the preceding section
or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification, or reversal will be prejudicial
to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return or
in any document required of him by the Bureau of Internal Revenue;

b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that
the two-year prescriptive period for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is
generally done on April 15 following the close of the calendar year. As precedents, respondent
Commissioner cited cases which adhered to this principle, to wit: ACCRA Investments Corp. vs.
Court of Appeals, et al.,[11] and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al..
[12]
Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the
petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had
only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses
that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed
beyond the time fixed by law, and such failure is fatal to petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that,
contrary to the petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not
warranted as it disregards the two-year prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the common
weal.[13] Due process of law under the Constitution does not require judicial proceedings in tax
cases.This must necessarily be so because it is upon taxation that the government chiefly relies to
obtain the means to carry on its operations and it is of utmost importance that the modes adopted
to enforce the collection of taxes levied should be summary and interfered with as little as
possible.[14]
From the same perspective, claims for refund or tax credit should be exercised within the
time fixed by law because the BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of
1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of any sum alleged to
have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment; Provided however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner
of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this
Court explained the application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the
refund is ascertained, which can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984, and two years from this date would
be April 16, 1986. x x x As we have earlier said in the TMX Sales case, Sections 68,[16] 69,[17] and
70[18] on Quarterly Corporate Income Tax Payment and Section 321 should be considered in
conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so
doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will
be ignored if judicially found to be erroneous.[20] Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony with, the law they seek
to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and provisions of the
latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No. 37-1 fixed no
period, that is to say, it establishes an absolute ban for all time. This discrepancy

between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part
of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy,
the basic Act prevails, for the reason that the regulation or rule issued to implement a
law cannot go beyond the terms and provisions of the latter.x x x In this connection,
the attention of the technical men in the offices of Department Heads who draft rules
and regulation is called to the importance and necessity of closely following the terms
and provisions of the law which they intended to implement, this to avoid any
possible misunderstanding or confusion as in the present case. [23]
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents.[24] As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:

It is likewise argued that the Commissioner of Internal Revenue, after promulgating

RMC No. 7-85, is estopped by the principle of non-retroactivity of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that a taxpayer may recover the
excess income tax paid within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a
claim for a refund or tax credit and the corresponding petition for review within the
two-year prescription period, and that the lengthening of the period of limitation on
refund from two to ten years would be adverse to public policy and run counter to the
positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals.Estoppel has no application in the case at bar because it was not
the Commissioner of Internal Revenue who denied petitioners claim of refund or tax
credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim
and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal
Revenue is an administrative interpretation which is out of harmony with or contrary
to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be
given weight for to do so would in effect amend the statute. [25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes
as part of the legal system of the country. But administrative decisions do not enjoy that level of
recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with a
shield against judicial action. For there are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same. [27] Moreover, the nonretroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case
because the nullity of RMC No. 7-85 was declared by respondent courts and not by the

Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in
affirming CTAs decision denying its claim for refund ofP 234,077.69 (tax overpaid in 1986),
based on mere speculation, without proof, that PBCom availed of the automatic tax credit in
1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the
option box provided in the BIR form) its intention, whether to request for a refund or claim for
an automatic tax credit for the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to apply for automatic tax
credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax
return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the succeeding
year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and
tax credit are alternative.[30]
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977
NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we
must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as
evidence to controvert said fact. Thus, we are bound by the findings of fact by respondent courts,
there being no showing of gross error or abuse on their part to disturb our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals
appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.

COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,

- versus -

PETRON CORPORATION,
Respondent.

G. R. No. 185568
Present:
CARPIO, J., Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.
Promulgated:
March 21, 2012

x--------------------------------------------------x
DECISION
SERENO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure filed by the Commissioner of Internal Revenue (CIR) assailing the
Decision[1] dated 03 December 2008 of the Court of Tax Appeals En Banc (CTA En
Banc) in CTA EB No. 311. The assailed Decision reversed and set aside the
Decision[2] dated 04 May 2007 of the Court of Tax Appeals Second Division (CTA
Second Division) in CTA Case No. 6423, which ordered respondent Petron
Corporation (Petron) to pay deficiency excise taxes for the taxable years 1995 to
1998, together with surcharges and delinquency interests imposed thereon.
Respondent Petron is a corporation engaged in the production of petroleum
products and is a Board of Investment (BOI) registered enterprise in accordance
with the provisions of the Omnibus Investments Code of 1987 (E.O. 226) under
Certificate of Registration Nos. 89-1037 and D95-136.[3]

The Facts
The CTA En Banc in CTA EB Case No. 311 adopted the findings of fact by the
CTA Second Division in CTA Case No. 6423. Considering that there are no factual
issues in this case, we likewise adopt the findings of fact by the CTA En Banc, as
follows:
As culled from the records and as agreed upon by the parties in their Joint
Stipulation of Facts and Issues, these are the facts of the case.
During the period covering the taxable years 1995 to 1998, petitioner
(herein respondent Petron) had been an assignee of several Tax Credit Certificates
(TCCs) from various BOI-registered entities for which petitioner utilized in the
payment of its excise tax liabilities for the taxable years 1995 to 1998. The
transfers and assignments of the said TCCs were approved by the Department of
Finances One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center
(DOF Center), composed of representatives from the appropriate government
agencies, namely, the Department of Finance (DOF), the Board of Investments
(BOI), the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR).
Taking ground on a BOI letter issued on 15 May 1998 which states that hydraulic
oil, penetrating oil, diesel fuels and industrial gases are classified as supplies and
considered the suppliers thereof as qualified transferees of tax credit, petitioner
acknowledged and accepted the transfers of the TCCs from the various BOIregistered entities.
Petitioners acceptance and use of the TCCs as payment of its excise tax liabilities
for the taxable years 1995 to 1998, had been continuously approved by the DOF
as well as the BIRs Collection Program Division through its surrender and
subsequent issuance by the Assistant Commissioner of the Collection Service of
the BIR of the Tax Debit Memos (TDMs).
On January 30, 2002, respondent [herein petitioner CIR] issued the assailed
Assessment against petitioner for deficiency excise taxes for the taxable years
1995 to 1998, in the total amount of 739,003,036.32, inclusive of surcharges and
interests, based on the ground that the TCCs utilized by petitioner in its payment
of excise taxes have been cancelled by the DOF for having been fraudulently
issued and transferred, pursuant to its EXCOM Resolution No. 03-05-99. Thus,
petitioner, through letters dated August 31, 1999 and September 1, 1999, was
required by the DOF Center to submit copies of its sales invoices and delivery
receipts showing the consummation of the sale transaction to certain TCC
transferors.

Instead of submitting the documents required by the respondent, on February 27,

2002, petitioner filed its protest letter to the Assessment on the grounds, among
others, that:
a.
The BIR did not comply with the requirements of Revenue
Regulations 12-99 in issuing the assessment letter dated January 30,
2002, hence, the assessment made against it is void;
b.
The assignment/transfer of the TCCs to petitioner by the
TCC holders was submitted to, examined and approved by the
concerned government agencies which processed the assignment in
accordance with law and revenue regulations;
c.
There is no basis for the imposition of the 50% surcharge
in the amount of 159,460,900.00 and interest penalties in the
amount of 260,620,335.32 against it;
d.
Some of the items included in the assessment are already
pending litigation and are subject of the case entitled Commissioner
of Internal Revenue vs. Petron Corporation, C.A. GR SP No. 55330
(CTA Case No. 5657) and hence, should no longer be included in the
assessment; and
e.
The assessment and collection of alleged excise tax
deficiencies sought to be collected by the BIR against petitioner
through the January 30, 2002 letter are already barred by prescription
under Section 203 of the National Internal Revenue Code.
On 27 March 2002, respondent, through Assistant Commissioner Edwin R.
Abella served a Warrant of Distraint and/or Levy on petitioner to enforce payment
of the 739,003,036.32 tax deficiencies.
Respondent allegedly served the Warrant of Distraint and/or Levy against
petitioner without first acting on its letter-protest. Thus, construing the Warrant of
Distraint and/or Levy as the final adverse decision of the BIR on its protest of the
assessment, petitioner filed the instant petition before this Honorable Court
[referring to the CTA Second Division] on April 2, 2002.
On April 30, 2002, respondent filed his Answer, raising the following as his
Special Affirmative Defenses:
6. In a post-audit conducted by the One-Stop Inter-Agency Tax
Credit and Duty Drawback Center (Center) of the Department of
Finance (DOF), pursuant to the Centers Excom Resolution No. 0305-99, it was found that TCCs issued to Alliance Thread Co., Inc.,
Allstar Spinning, Inc., Diamond Knitting Corp., Fiber Technology

Corp., Filstar Textile Industrial Corp., FLB International Fiber Corp.,

Jantex Philippines, Inc., Jibtex Industrial Corp., Master Colour
System Corp. and Spintex International, Inc. were fraudulently
obtained and were fraudulently transferred to petitioner. As a result
of said findings, the TCCs and the Tax Debit Memos (TDMs) issued
by the Center to petitioner against said TCCs were cancelled by the
DOF;
7. Prior to the cancellation of the aforesaid TCCs and TDMs,
petitioner had utilized the same in the payment of its excise tax
liabilities. With such cancellation, the TCCs and TDMs have no
value in money or moneys worth and, therefore, the excise taxes for
which they were used as payment are now deemed unpaid;
8. The cancellation by the DOF of the aforesaid TCCs and TDMs
has the presumption of regularity upon which respondent may
validly rely;
9. Petitioner was informed by the DOF of the post-audit
conducted on the TCCs and was given the opportunity to submit
documents showing that the TCCs were transferred to it in payment
of petroleum products allegedly delivered by it to the TCC
transferors upon which the TCC transfers were approved, with the
admonition that failure to submit the required documents would
result in the cancellation of the transfers. Petitioner was also
informed of the cancellation of the TCCs and TDMs and the reason
for their cancellation;
10. Since petitioner is deemed not to have paid its excise tax
liabilities, a pre-assessment notice is not required under Section 228
of the Tax Code;
11. The letter dated January 20, 2002 (should be January 30,
2002), demanding payment of petitioners excise tax liabilities
explicitly states the basis for said demand, i.e., the cancellation of the
TCCs and TDMs;
12. The government is never estopped from collecting legitimate
taxes due to the error committed by its agents (Visayas Cebu
Terminal Inc., vs. Commissioner of Internal Revenue, 13 SCRA 257;
Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, 102 SCRA 246). The acceptance
by the Bureau of Internal Revenue of the TCCs fraudulently obtained
and fraudulently transferred to petitioner as payment of its excise tax
liabilities turned out to be a mistake after the post-audit was

conducted. Hence, said payments were void and the excise taxes
may be validly collected from petitioner.
13. As found in the post-audit, petitioner and the TCC transferors
committed fraud in the transfer of the TCCs when they made appear
(sic) that the transfers were in consideration for the delivery of
petroleum products by petitioner to the TCCs transferors, for which
reason said transfers were approved by the Center, when in fact there
were no such deliveries;
14. Petitioner used the TCCs fraudulently obtained and
fraudulently transferred in the payment of excise taxes declared in its
excise tax returns with intent to evade tax to the extent of the value
represented by the TCCs, thereby rendering the returns fraudulent;
15. Since petitioner wilfully filed fraudulent returns, it is liable
for the 50% surcharge and 20% annual interest imposed under
Sections 248 and 249 of the Tax Code;
16. Since petitioner wilfully filed fraudulent returns with intent
to evade tax, the prescriptive period to collect the tax is ten (10)
years from the discovery of the fraud pursuant to Section 222 of the
Tax Code; and
17. The case pending in the Court of Appeals (CA-G.R. Sp. No.
55330 [CTA Case No. 5657]), and the case at bar have distinct
causes of action. The former involves the invalid transfers of the
TCCs to petitioner on the theory that it is not a qualified transferee
thereof, while the latter involves the fraudulent procurement of said
TCCs and the fraudulent transfers thereof to petitioner.
However, on November 12, 2002, respondent filed a Manifestation informing
this Court that on May 29, 2002, it had reduced the amount of deficiency excise
taxes to 720,923,224.74 as a result of its verification that some of the TCCs
which formed part of the original Assessment were already included in a case
previously filed with this Court. In effect, the amount of deficiency excise taxes is
recomputed as follows:
Transferor
Alliance Thread Co. Inc.
Allstar Spinning, Inc.
Diamond Knitting
Corporation
Fiber Technology Corp.
Filstar Textile Corp.
FLB International Fiber Corp.
Jantex Philippines, Inc.
Jibtex Industrial Corp.

Basic Tax

Surcharge

Interest

Total

12,078,823.00
37,265,310.00
36,764,587.00

6,039,411.50
18,632,655.00
18,382,293.50

16,147,293.21
49,781,486.95
49,264,758.35

34,265,527.21
105,679,451.95
104,411,638.85

25,300,911.00
40,767,783.00
25,934,695.00
12,036,192.00
15,506,302.00

12,650,455.50
20,383,891.50
12,967,347.50
6,018,096.00
7,753,151.00

34,295,655.90
54,802,550.16
34,977,257.14
15,812,547.24
20,610,319.52

72,247,022.40
115,954,224.66
73,879,299.64
33,866,835.24
43,869,772.52

Master Colour system Corp.

Spintex International Inc.
Total

33,333,536.00
14,912,408.00
253,900,547.00

16,666,768.00
7,456,204.00
126,950,273.50

44,822,167.06
19,558,368.71
340,072,404.24

94,822,471.06
41,926,980.71
720,923,224.74

During the pendency of the case, but after respondent had already submitted his
Formal Offer of Evidence for this Courts consideration, he filed an Urgent Motion
to Reopen Case on August 24, 2004 on the ground that additional evidence
consisting of documents presented to the Center in support of the TCC transferors
claims for tax credit as well as document supporting the applications for approval
of the transfer of the TCCs to petitioner, must be presented to prove the fraudulent
issuance and transfer of the subject TCCs. Respondent submits that it is
imperative on his part to do so considering that, without necessarily admitting that
the evidence presented in the case of Pilipinas Shell Petroleum Corporation vs.
Commissioner of Internal Revenue, to prove fraud is not clear and convincing, he
may suffer the same fate that had befallen upon therein respondent when this
Court held, among others, that there is no clear and convincing evidence that the
Tax Credit Certificates (TCCs) transferred to Shell (for brevity) and used by it in
the payment of excise taxes, were fraudulently issued to the TCC transferors and
were fraudulently transferred to Shell.
An Opposition to Urgent Motion to Reopen Case was filed by petitioner on
September 3, 2004 contending that to sustain respondents motion would smack of
procedural disorder and spawn a reversion of the proceedings. While litigation is
not a game of technicalities, it is a truism that every case must be presented in
accordance with the prescribed procedure to insure an orderly administration of
justice.
On October 4, 2004, this Court resolved to grant respondents Motion and allowed
respondent to present additional evidence in support of his arguments, but
deferred the resolution of respondents original Formal Offer of Evidence until
after the respondent has terminated his presentation of evidence. Subsequent to
this Courts Resolution, respondent then filed on October 20, 2004, a Request for
the Issuance of Subpoena Duces Tecum to the Executive Director of the Center or
his duly authorized representative, and on October 21, 2004, a Subpoena Ad
Testificandum to Ms. Elizabeth R. Cruz, also of the Center.
Petitioner filed a Motion for Reconsideration (Re: Resolution dated October 4,
2004) on October 27, 2004, with respondent filing his Opposition on November 4,
2004, and petitioner subsequently filing its Reply to Opposition on December 20,
2004. Petitioners motion was denied by this Court in a Resolution dated February
28, 2005 for lack of merit.
On March 18, 2005, petitioner filed an Urgent Motion to Revert Case to the First
Division with respondents Manifestation filed on April 6, 2005 stating that the
question of which Division of this Honorable Court shall hear the instant case is
an internal matter which is better left to the sound discretion of this Honorable
Court without interference by a party litigant. On April 28, 2005, this Court
denied the Motion of petitioner for lack of merit.

On November 7, 2005, the Court finally resolved respondents Formal Offer of

Evidence filed on May 7, 2004 and Supplemental Formal Offer of Evidence filed
on August 25, 2005. On November 22, 2005, respondent filed a Motion for Partial
Reconsideration of the Courts Resolution to admit Exhibits 31 and 31-A on the
ground that he already submitted and offered certified true copies of said exhibits,
which the Court granted in its Resolution on January 19, 2006.
However, on February 10, 2006, respondent filed a Motion to Amend Formal
Offer of Evidence praying that he be allowed to amend his formal offer since
some exhibits although attached thereto were inadvertently not mentioned in the
Formal Offer of Evidence. Petitioners Opposition was filed on March 14, 2006.
This Court granted respondents motion in the Resolution dated April 24, 2006 and
considering that the parties already filed their respective Memoranda, this case
was then considered submitted for decision.
On May 16, 2006, however, respondent filed an Omnibus Motion praying that this
Court take judicial notice of the fact that the TCCs issued by the Center, including
the TCCs in this instant case, contained the standard Liability Clause and that the
case be consolidated with CTA Case No. 6136, on the ground that both cases
involve the same parties and common questions of law or fact. An
Opposition/Comment on Omnibus Motion was filed by petitioner on June 26,
2006, and Reply to Opposition/Comment was filed by respondent on July 17,
2006.
In a Resolution promulgated on September 1, 2006, this Court granted
respondents motion only insofar as taking judicial notice of the fact that each of
the dorsal side of the TCCs contains the subject liability clause, but denied
respondents motion to consolidate considering that C.T.A. Case No. 6136 was
already submitted for decision on April 24, 2006.[4]

The Ruling of the Court of Tax AppealsSecond Division

(CTA Case No. 6423)

On 04 May 2007, the CTA Second Division promulgated a Decision in CTA Case
No. 6423, the dispositive portion of which reads:
WHEREFORE, premises considered, the instant Petition for Review is
hereby DENIED for lack of merit. Accordingly, petitioner is ORDERED TO
PAY the respondent the reduced amount of SIX HUNDRED MILLION SEVEN
HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE

AND 95/100 PESOS (P600,769,353.95), representing petitioners deficiency

excise taxes for the taxable years 1995 to 1998, recomputed as follows:
Transferor
Alliance Thread Co. Inc.
Allstar Spinning, Inc.
Diamond Knitting
Corporation
Fiber Technology Corp.
Filstar Textile Corp.
FLB International Fiber Corp.
Jantex Philippines, Inc.
Jibtex Industrial Corp.
Master Colour system Corp.
Spintex International Inc.
Total

Basic Tax

25% Surcharge

20% Interest

Total

12,078,823.00
37,265,310.00
36,764,587.00

3,019,705.75
9,316,327.50
9,191,146.75

13,456,077.68
41,484,572.46
41,053,965.29

28,554,606.43
88,066,209.96
87,009,699.04

25,300,911.00
40,767,783.00
25,934,695.00
12,036,192.00
15,506,302.00
33,333,536.00
14,912,408.00
253,900,547.00

6,325,227.75
10,191,945.75
6,483,673.75
3,009,048.00
3,876,575.50
8,333,384.00
3,728,102.00
63,475,136.75

28,579,713.25
45,668,791.80
29,147,714.28
13,177,122.70
17,175,266.27
37,351,805.88
16,298,640.59
283,393,670.20

60,205,852.00
96,628,520.55
61,566,083.03
28,222,362.70
36,558,143.77
79,018,725.88
34,939,150.59
600,769,353.95

In addition, petitioner is ORDERED TO PAY the respondent TWENTY

FIVE PERCENT (25%) LATE PAYMENT SURCHARGE AND TWENTY
PERCENT (20%) DELIQUENCY INTEREST per annum on the amount
of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINE
THOUSAND THREE HUNDRED FIFTY THREE & 95/100 PESOS
(600,769,353.95), computed from June 27, 2002 until the amount is fully paid.
SO ORDERED.[5]

The CTA Second Division held Petron liable for deficiency excise taxes on the
ground that the cancellation by the DOF of the TCCs previously issued to and
utilized by respondent to settle its tax liabilities had the effect of nonpayment of the
latters excise taxes. These taxes corresponded to the value of the TCCs Petron used
for payment. The CTA Second Division ruled that payment can only occur if the
instrument used to discharge an obligation represents its stated value. [6] It further
ruled that Petrons acceptance of the TCCs was considered a contract entered into
by respondent with the CIR and subject to post-audit, [7] which was considered a
suspensive condition governed by Article 1181 of the Civil Code.[8]
Further, the CTA Second Division found that the circumstances pertaining to
the issuance of the subject TCCs and their transfer to Petron brim with fraud.
[9]
Hence, the said court concluded that since the TCCs used by Petron were found
to be spurious, respondent was deemed to have not paid its excise taxes and ought

to be liable to the CIR in the amount of 600,769,353.95 plus 25% interests and
20% surcharges.[10]
Petron filed a Motion for Reconsideration[11] of the Decision of the CTA
Second Division, which denied the motion in a Resolution dated 14 August 2007.
[12]
The court reiterated its conclusion that the TCCs utilized by Petron to pay the
latters excise tax liabilities did not result in payment after these TCCs were found
to be fraudulent in the post-audit by the DOF. The CTA Second Division also
affirmed its ruling that Petron was liable for a 25% late payment surcharge and
20% surcharges under Section 248[13] of the National Internal Revenue Code
(NIRC) of 1997.[14]
Aggrieved, Petron appealed the Decision to the CTA En Banc through a
Petition for Review, which was docketed as CTA EB No. 311. In its Petition,
Petron alleged that the Second Division erred in holding respondent liable to pay
the amount of 600,769,353.95 in deficiency excise taxes with penalties and
interests covering the taxable years 1995-1998. Petron prayed that the said
Decision be reversed and set aside, and that CIR be enjoined from collecting the
contested excise tax deficiency assessment.[15]
The CTA En Banc summed up into one issue the grounds relied upon by
Petron in its Petition for Review, as follows:
Whether or not the Second Division erred in holding petitioner liable for
the amount of 600,769,353.95 as deficiency excise taxes for the years 19951998, including surcharges and interest, plus 25% surcharge and 20% delinquency
interest per annum from June 27, 2002 until the amount is fully paid.[16]

The Ruling of the Court of Tax Appeals En Banc

(CTA EB Case No. 311)

On 03 December 2008, the CTA En Banc promulgated a Decision, which

reversed and set aside the CTA Second Division on 04 May 2007. The former
absolved Petron from any deficiency excise tax liability for taxable years 1995 to
1998. Its ruling in favor of Petron was anchored on this Courts pronouncements
in Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue (Shell),
[17]
which found that the factual background and legal issues therein were similar to
those in the present case.
In resolving the issues, the CTA En Banc adopted the main points in Shell,
which it quoted at length as basis for deciding the appeal in favor of Petron. The
gist of the main points of Shell cited by the said court is as follows:
a) The issued TCCs are immediately valid and effective and are not
subject to a post-audit as a suspensive condition[18]
b) A TCC is subject only to the following conditions:
i) Post-audit in the event of a computational discrepancy
ii) A reduction for any outstanding account with the BIR
and/or BOC
iii) A revalidation of the TCC if not utilized within one year
from issuance or date of utilization[19]
c) A transferee of a TCC should only be a BOI-registered firm under the
Implementing Rules and Regulations of Executive Order (E.O.) No.
226.[20]
d) The liability clause in the TCCs provides only for the solidary
liability of the transferee relative to its transfer in the event it is a party
to the fraud.[21]
e) A transferee can rely on the Centers approval of the TCCs transfer
and subsequent acceptance as payment of the transferees excise tax
liability.[22]

f) A TCC cannot be cancelled by the Center, as it was already cancelled

after the transferee had applied it as payment for the latters excise tax
liabilities.[23]
The CTA En Banc also found that Petron had no participation in or knowledge
of the fraudulent issuance and transfer of the subject TCCs. In fact, the parties
made a joint stipulation on this matter in CTA Case No. 6423 before the CTA
Second Division.[24]
In resolving the issue of whether the government is estopped from collecting
taxes due to the fault of its agents, the CTA En Banc quoted Shell as follows:
While we agree with respondent that the State in the performance of
government function is not estopped by the neglect or omission of its agents, and
nowhere is this truer than in the field of taxation, yet this principle cannot be
applied to work injustice against an innocent party.[25] (Emphasis supplied.)

Finally, the CTA En Banc ruled that Petron was considered an innocent transferee
of the subject TCCs and may not be prejudiced by a re-assessment of excise tax
liabilities that respondent has already settled, when due, with the use of the TCCs.
[26]
Petron is thus considered to have not fraudulently filed its excise tax returns.
Consequently, the assessment issued by the CIR against it had no legal basis.
[27]
The dispositive portion of the assailed 03 December 2008 Decision of the CTA
En Banc reads:
WHEREFORE, the instant petition for Review is hereby GRANTED.
Accordingly, the May 4, 2007 Decision and August 14, 2007 Resolution of the
CTA Second Division in CTA Case No. 6423 entitled, Petron Corporation,
petitioner vs. Commissioner of Internal Revenue, respondent, are
hereby REVERSED and SET ASIDE. In addition, the demand and collection of
the deficiency excise taxes of PETRON in the amount of 600,769,353.95
excluding penalties and interest covering the taxable years 1995 to 1998 are
hereby CANCELLED and SET ASIDE, and respondent-Commissioner of
Internal Revenue is hereby ENJOINED from collecting the said amount
from PETRON.
SO ORDERED.[28]

The CIR moved for the reconsideration of the CTA En Banc Decision, but the
motion was denied in a Resolution dated 14 August 2007.[29]
The Issues

The CIR appealed the Decision of the CTA En Banc by filing a Petition for Review
on Certiorari under Rule 45 of the Rules of Court. [30] Petitioner assails the Decision
by raising the following issues:
THE COURT OF TAX APPEALS COMMITTED REVERSIBLE ERROR
IN HOLDING THAT RESPONDENT PETRON IS NOT LIABLE FOR
ITS EXCISE TAX LIABILITIES FROM 1995 TO 1998.

ARGUMENTS
I
THE CTA EN BANC ERRED IN FINDING THAT RESPONDENT
PETRON WAS NOT SHOWN TO HAVE PARTICIPATED IN THE
FRAUDULENT ACTS. THE FINDING OF THE CTA SECOND
DIVISION THAT THE TAX CREDIT CERTIFICATES WERE
FRAUDULENTLY TRANSFERRED BY THE TRANSFERORCOMPANIES TO RESPONDENT IS SUPPORTED BY SUBSTANTIAL
EVIDENCE.
RESPONDENT
WAS
INVOLVED
IN
THE
PERPETRATION OF FRAUD IN THE TCCS TRANSFER AND
UTILIZATION.
II
RESPONDENT CANNOT VALIDLY CLAIM THE RIGHT OF
INNOCENT
TRANSFEREE
FOR
VALUE.
AS
ASSIGNEE/TRANSFEREE OF THE TCCS, RESPONDENT MERELY
SUCCEEDED
TO
THE
RIGHTS
OF
THE
TCC
ASSIGNORS/TRANSFERORS. ACCORDINGLY, IF THE TCCS
ASSIGNED TO RESPONDENT WERE VOID, IT DID NOT ACQUIRE
ANY VALID TITLE OVER THE TCCS.
III

THE GOVERNMENT IS NOT ESTOPPED FROM COLLECTING

TAXES DUE TO THE MISTAKES OF ITS AGENTS.
IV
RESPONDENT IS LIABLE FOR 25% SURCHARGE AND 20%
INTEREST PER ANNUM PURSUANT TO THE PROVISIONS OF
SECTIONS 248 AND 249 OF THE NIRC. MOREOVER, SINCE
RESPONDENTS RETURNS WERE FALSE, THE ASSESSMENT
PRESCRIBES IN TEN (10) YEARS FROM THE DISCOVERY OF THE
FALSITY THEREOF PURSUANT TO SECTION 22 OF THE SAME
CODE.[31]

The Courts Ruling

We DENY the CIRs Petition for lack of merit.
Article 21 of E.O. 226 defines a tax credit as follows:
ARTICLE 21. Tax credit shall mean any of the credits against taxes and/or duties
equal to those actually paid or would have been paid to evidence which a tax
credit certificate shall be issued by the Secretary of Finance or his representative,
or the Board, if so delegated by the Secretary of Finance. The tax credit
certificates including those issued by the Board pursuant to laws repealed by this
Code but without in any way diminishing the scope of negotiability under their
laws of issue are transferable under such conditions as may be determined by the
Board after consultation with the Department of Finance. The tax credit certificate
shall be used to pay taxes, duties, charges and fees due to the National
Government; Provided, That the tax credits issued under this Code shall not form
part of the gross income of the grantee/transferee for income tax purposes under
Section 29 of the National Internal Revenue Code and are therefore not taxable:
Provided, further, That such tax credits shall be valid only for a period of ten (10)
years from date of issuance.

Under Article 39 (j) of the Omnibus Investment Code of 1987, [32] tax credits are
granted to entities registered with the Bureau of Investment (BOI) and are given
for taxes and duties paid on raw materials used for the manufacture of their export
products.

A TCC is defined under Section 1 of Revenue Regulation (RR) No. 5-2000, issued
by the BIR on 15 August 2000, as follows:
B. Tax Credit Certificate means a certification, duly issued to the
taxpayer named therein, by the Commissioner or his duly authorized
representative, reduced in a BIR Accountable Form in accordance with
the prescribed formalities, acknowledging that the grantee-taxpayer
named therein is legally entitled a tax credit, the money value of which
may be used in payment or in satisfaction of any of his internal revenue
tax liability (except those excluded), or may be converted as a cash
refund, or may otherwise be disposed of in the manner and in accordance
with the limitations, if any, as may be prescribed by the provisions of
these Regulations.

RR 5-2000 prescribes the regulations governing the manner of issuance

of TCCs and the conditions for their use, revalidation and transfer. Under the said
regulation, a TCC may be used by the grantee or its assignee in the payment of its
direct internal revenue tax liability.[33] It may be transferred in favor of an assignee
subject to the following conditions: 1) the TCC transfer must be with prior
approval of the Commissioner or the duly authorized representative; 2) the transfer
of a TCC should be limited to one transfer only; and 3) the transferee shall strictly
use the TCC for the payment of the assignees direct internal revenue tax liability
and shall not be convertible to cash. [34] A TCC is valid only for 10 years subject to
the following rules: (1) it must be utilized within five (5) years from the date of
issue; and (2) it must be revalidated thereafter or be otherwise considered invalid.
[35]

The processing of a TCC is entrusted to a specialized agency called the OneStop-Shop Inter-Agency Tax Credit and Duty Drawback Center (Center), created
on 07 February 1992 under Administrative Order (A.O.) No. 226. Its purpose is to
expedite the processing and approval of tax credits and duty drawbacks. [36] The
Center is composed of a representative from the DOF as its chairperson; and the
members thereof are representatives of the Bureau of Investment (BOI), Bureau of
Customs (BOC) and Bureau of Internal Revenue (BIR), who are tasked to process
the TCC and approve its application as payment of an assignees tax liability.[37]

A TCC may be assigned through a Deed of Assignment, which the assignee

submits to the Center for its approval. Upon approval of the deed, the Center will
issue a DOF Tax Debit Memo (DOF-TDM), [38] which will be utilized by the
assignee to pay the latters tax liabilities for a specified period. Upon surrender of
the TCC and the DOF-TDM, the corresponding Authority to Accept Payment of
Excise Taxes (ATAPET) will be issued by the BIR Collection Program Division
and will be submitted to the issuing office of the BIR for acceptance by the
Assistant Commissioner of Collection Service. This act of the BIR signifies its
acceptance of the TCC as payment of the assignees excise taxes.
Thus, it is apparent that a TCC undergoes a stringent process of verification
by various specialized government agencies before it is accepted as payment of an
assignees tax liability.
In the case at bar, the CIR disputes the ruling of the CTA En Banc, which
found Petron to have had no participation in the fraudulent procurement and
transfer of the TCCs. Petitioner believes that there was substantial evidence to
support its allegation of a fraudulent transfer of the TCCs to Petron. [39] The CIR
further contends that respondent was not a qualified transferee of the TCCs,
because the latter did not supply petroleum products to the companies that were the
assignors of the subject TCCs.[40]
The CIR bases its contentions on the DOFs post-audit findings stating that,
for the periods covering 1995 to 1998, Petron did not deliver fuel and other
petroleum products to the companies (the transferor companies) that had assigned
the subject TCCs to respondent. Petitioner further alleges that the findings indicate
that the transferor companies could not have had such a high volume of export
sales declared to the Center and made the basis for the issuance of the TCCs
assigned to Petron.[41] Thus, the CIR impugns the CTA En Banc ruling that
respondent was a transferee in good faith and for value of the subject TCCs.[42]
Not finding merit in the CIRs contention, we affirm the ruling of the CTA En
Banc finding that Petron is a transferee in good faith and for value of the subject
TCCs.

From the records, we observe that the CIR had no allegation that there was a
deviation from the process for the approval of the TCCs, which Petron used as
payment to settle its excise tax liabilities for the years 1995 to 1998.
The CIR quotes the CTA Second Division and urges us to affirm the latters
Decision, which found Petron to have participated in the fraudulent issuance and
transfer of the TCCs. However, any merit in the position of petitioner on this issue
is negated by the Joint Stipulation it entered into with Petron in the proceedings
before the said Division. As correctly noted by the CTA En Banc, herein parties
jointly stipulated before the Second Division in CTA Case No. 6423 as follows:
13. That petitioner (Petron) did not participate in the
procurement and issuance of the TCCs, which TCCs were
transferred to Petron and later utilized by Petron in payment of its
excise taxes.[43]

This stipulation of fact by the CIR amounts to an admission and, having

been made by the parties in a stipulation of facts at pretrial, is treated as a judicial
admission. Under Section 4, Rule 129 of the Rules of Court, a judicial admission
requires no proof.[44] The Court cannot lightly set it aside, especially when the
opposing party relies upon it and accordingly dispenses with further proof of the
fact already admitted. The exception provided in Rule 129, Section 4 is that an
admission may be contradicted only by a showing that it was made through a
palpable mistake, or that no such admission was made. In this case, however,
exception to the rule does not exist.
We agree with the pronouncement of the CTA En Banc that Petron has not
been shown or proven to have participated in the alleged fraudulent acts involved
in the transfer and utilization of the subject TCCs. Petron had the right to rely on
the joint stipulation that absolved it from any participation in the alleged fraud
pertaining to the issuance and procurement of the subject TCCs. The joint
stipulation made by the parties consequently obviated the opportunity of the CIR to
present evidence on this matter, as no proof is required for an admission made by a
party in the course of the proceedings.[45] Thus, the CIR cannot now be allowed to
change its stand and renege on that admission.

Moreover, a close examination of the arguments proffered by the CIR in

their Petition calls for a reevaluation of the sufficiency of evidence in the case. The
CIR seeks to persuade this Court to believe that there is substantial evidence to
prove that Petron committed a misrepresentation, because the petroleum products
were delivered not to the transferor but to other companies. [46] Thus, the TCCs
assigned by the transferor companies to Petron were fraudulent. Clearly, a
recalibration of the sufficiency of evidence presented by the CIR is needed for a
different conclusion to be reached.
The fundamental rule is that the scope of our judicial review under Rule 45
of the Rules of Court is confined only to errors of law and does not extend to
questions of fact.[47] It is basic that where it is the sufficiency of evidence that is
being questioned, there is a question of fact. [48] Evidently, the CIR does not point
out any specific provision of law that was wrongly interpreted by the CTA En Banc
in the latters assailed Decision. Petitioner anchors it contention on the alleged
existence of the sufficiency of evidence it had proffered to prove that Petron was
involved in the perpetration of fraud in the transfer and utilization of the subject
TCCs, an allegation that the CTA En Banc failed to consider. We have consistently
held that it is not the function of this Court to analyze or weigh the evidence all
over again, unless there is a showing that the findings of the lower court are totally
devoid of support or are glaringly erroneous as to constitute palpable error or grave
abuse of discretion.[49] Such an exception does not obtain in the circumstances of
this case.
The CIR claims that Petron was not an innocent transferee for value, because
the TCCs assigned to respondent were void. Petitioner based its allegations on the
post-audit report of the DOF, which declared that the subject TCCs were obtained
through fraud and, thus, had no monetary value. [50] The CIR adds that the TCCs
were subject to a post-audit by the Center to complete the payment of the excise
tax liability to which they were applied. Petitioner further contends that the
Liability Clause of the TCCs makes the transferee or assignee solidarily liable with
the original grantee for any fraudulent act pertinent to their procurement and
transfer. The CIR assails the contrary ruling of the CTA En Banc, which confined
the solidary liability only to the original grantee of the TCCs. Thus, petitioner
believes that the correct interpretation of the Liability Clause in the TCCs makes
Petron and the transferor companies or the original grantee solidarily liable for any

fraudulent act or violation of the pertinent laws relating to the transfers of the
TCCs. [51]
We are not persuaded by the CIRs position on this matter.
The Liability Clause of the TCCs reads:
Both the TRANSFEROR and the TRANSFEREE shall be jointly
and severally liable for any fraudulent act or violation of the pertinent
laws, rules and regulations relating to the transfer of this TAX CREDIT
CERTIFICATE.

The scope of this solidary liability, as stated in the TCCs, was clarified by
this Court in Shell, as follows:
The above clause to our mind clearly provides only for the
solidary liability relative to the transfer of the TCCs from the original
grantee to a transferee. There is nothing in the above clause that provides
for the liability of the transferee in the event that the validity of the TCC
issued to the original grantee by the Center is impugned or where the
TCC is declared to have been fraudulently procured by the said original
grantee. Thus, the solidary liability, if any, applies only to the sale of
the TCC to the transferee by the original grantee. Any fraud or
breach of law or rule relating to the issuance of the TCC by the Center to
the transferor or the original grantee is the latter's responsibility and
liability. The transferee in good faith and for value may not be unjustly
prejudiced by the fraud committed by the claimant or transferor in the
procurement or issuance of the TCC from the Center. It is not only unjust
but well-nigh violative of the constitutional right not to be deprived of
one's property without due process of law. Thus, a re-assessment of tax
liabilities previously paid through TCCs by a transferee in good faith and
for value is utterly confiscatory, more so when surcharges and interests
are likewise assessed.
A transferee in good faith and for value of a TCC who has relied
on the Center's representation of the genuineness and validity of the TCC
transferred to it may not be legally required to pay again the tax covered
by the TCC which has been belatedly declared null and void, that is,
after the TCCs have been fully utilized through settlement of internal
revenue tax liabilities. Conversely, when the transferee is party to the
fraud as when it did not obtain the TCC for value or was a party to or has

knowledge of its fraudulent issuance, said transferee is liable for the

taxes and for the fraud committed as provided for by law. [52] (Emphasis
supplied.)

We also find that the post-audit report, on which the CIR based its
allegations, does not have the effect of a suspensive condition that would
determine the validity of the TCCs.
We held in Petron v. CIR (Petron),[53] which is on all fours with the instant
case, that TCCs are valid and effective from their issuance and are not subject to a
post-audit as a suspensive condition for their validity. Our ruling in Petron finds
guidance from our earlier ruling in Shell, which categorically states that a TCC is
valid and effective upon its issuance and is not subject to a post-audit. The
implication on the instant case of the said earlier ruling is that Petron has the right
to rely on the validity and effectivity of the TCCs that were assigned to it. In
finally determining their effectivity in the settlement of respondents excise tax
liabilities, the validity of those TCCs should not depend on the results of the DOFs
post-audit findings. We held thus in Petron:
As correctly pointed out by Petron, however, the issue about the
immediate validity of TCCs and the use thereof in payment of tax liabilities
and duties are not matters of first impression for this Court. Taking into
consideration the definition and nature of tax credits and TCCs, this Court's
Second Division definitively ruled in the aforesaid Pilipinas Shell case that
the post audit is not a suspensive condition for the validity of TCCs, thus:
Art. 1181 tells us that the condition is suspensive when the
acquisition of rights or demandability of the obligation must await the
occurrence of the condition. However, Art. 1181 does not apply to the
present case since the parties did NOT agree to a suspensive
condition. Rather, specific laws, rules, and regulations govern the
subject TCCs, not the general provisions of the Civil Code. Among
the applicable laws that cover the TCCs are EO 226 or the Omnibus
Investments Code, Letter of Instructions No. 1355, EO 765, RP-US
Military Agreement, Sec. 106 (c) of the Tariff and Customs Code,
Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others.
Nowhere in the aforementioned laws does the post-audit become
necessary for the validity or effectivity of the TCCs. Nowhere in the
aforementioned laws is it provided that a TCC is issued subject to a
suspensive condition.

xxx xxx xxx

. . . (T)he TCCs are immediately valid and effective
after their issuance. As aptly pointed out in the dissent of
Justice Lovell Bautista in CTA EB No. 64, this is clear from
the Guidelines and instructions found at the back of each TCC,
which provide:
1. This Tax Credit Certificate (TCC) shall entitle the
grantee to apply the tax credit against taxes and duties until the
amount is fully utilized, in accordance with the pertinent tax
and customs laws, rules and regulations.
xxx xxx xxx
4. To acknowledge application of payment, the OneStop-Shop Tax Credit Center shall issue the corresponding Tax
Debit Memo (TDM) to the grantee.
The authorized Revenue Officer/Customs Collector to
which payment/utilization was made shall accomplish the
Application of Tax Credit at the back of the certificate and
affix his signature on the column provided."
The foregoing guidelines cannot be clearer on the validity and effectivity
of the TCC to pay or settle tax liabilities of the grantee or transferee, as they
do not make the effectivity and validity of the TCC dependent on the
outcome of a post-audit. In fact, if we are to sustain the appellate tax court,
it would be absurd to make the effectivity of the payment of a TCC
dependent on a post-audit since there is no contemplation of the situation
wherein there is no post-audit. Does the payment made become effective if
no post-audit is conducted? Or does the so-called suspensive condition still
apply as no law, rule, or regulation specifies a period when a post-audit
should or could be conducted with a prescriptive period? Clearly, a tax
payment through a TCC cannot be both effective when made and dependent
on a future event for its effectivity. Our system of laws and procedures
abhors ambiguity.
Moreover, if the TCCs are considered to be subject to post-audit as a
suspensive condition, the very purpose of the TCC would be defeated as
there would be no guarantee that the TCC would be honored by the
government as payment for taxes. No investor would take the risk of
utilizing TCCs if these were subject to a post-audit that may invalidate
them, without prescribed grounds or limits as to the exercise of said postaudit.

The inescapable conclusion is that the TCCs are not subject to postaudit as a suspensive condition, and are thus valid and effective from their
issuance.[54]

In addition, Shell and Petron recognized an exception that holds the

transferee/assignee liable if proven to have been a party to the fraud or to have had
knowledge of the fraudulent issuance of the subject TCCs. As earlier mentioned,
the parties entered into a joint stipulation of facts stating that Petron did not
participate in the procurement or issuance of those TCCs. Thus, we affirm the CTA
En Bancs ruling that respondent was an innocent transferee for value thereof.
On the issue of estoppel, petitioner contends that the TCCs, which the Center had
continually approved as payment for respondents excise tax liabilities, were
subsequently found to be void. Thus, the CIR insists that the government is not
estopped from collecting from Petron the excise tax liabilities that had accrued to
the latter as a result of the voidance of these TCCs. Petitioner argues that the State
should not be prejudiced by the neglect or omission of government employees
entrusted with the collection of taxes.[55]
We are not persuaded by the CIRs argument.
We recognize the well-entrenched principle that estoppel does not apply to
the government, especially on matters of taxation. Taxes are the nations lifeblood
through which government agencies continue to operate and with which the State
discharges its functions for the welfare of its constituents. [56] As an exception,
however, this general rule cannot be applied if it would work injustice against an
innocent party.[57]
Petron, in this case, was not proven to have had any participation in or
knowledge of the CIRs allegation of the fraudulent transfer and utilization of the
subject TCCs. Respondents status as a transferee in good faith and for value of
these TCCs has been established and even stipulated upon by petitioner.
[58]
Respondent was thereby provided ample protection from the adverse findings
subsequently made by the Center.[59] Given the circumstances, the CIRs invocation
of the non-applicability of estoppel in this case is misplaced.
On the final issue it raised, the CIR contends that a 25% surcharge and a
20% interest per annum must be imposed upon Petron for respondents excise tax

liabilities as mandated under Sections 248 and 249 of the National Internal
Revenue Code (NIRC).[60] Petitioner considers the tax returns filed by respondent
for the years 1995 to 1998 as fraudulent on the basis of the post-audit finding that
the TCCs were void. It argues that the prescriptive period within which to lawfully
assess Petron for its tax liabilities has not prescribed under Section 222 (a) [61] of the
Tax Code. The CIR explains that respondents assessment on 30 January 2002 of
respondents deficiency excise tax for the years 1995 to 1998 was well within the
ten-year prescription period.[62]
In the light of the main ruling in this case, we affirm the CTA En Banc
Decision finding Petron to be an innocent transferee for value of the subject TCCs.
Consequently, the Tax Returns it filed for the years 1995 to 1998 are not
considered fraudulent. Hence, the CIR had no legal basis to assess the excise taxes
or any penalty surcharge or interest thereon, as respondent had already paid the
appropriate excise taxes using the subject TCCs.
WHEREFORE, the CIRs Petition is DENIED for lack of merit. The CTA
En Banc Decision dated 03 December 2008 in CTA EB No. 311 is
hereby AFFIRMED in toto. No pronouncement as to costs.

G.R. No. L-41631 December 17, 1976

HON. RAMON D. BAGATSING, as Mayor of the City of Manila; ROMAN G. GARGANTIEL, as
Secretary to the Mayor; THE MARKET ADMINISTRATOR; and THE MUNICIPAL BOARD OF
MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the Court of First Instance of
Manila, Branch XXX and the FEDERATION OF MANILA MARKET VENDORS, INC., respondents.
Santiago F. Alidio and Restituto R. Villanueva for petitioners.
Antonio H. Abad, Jr. for private respondent.
Federico A. Blay for petitioner for intervention.

MARTIN, J.:

The chief question to be decided in this case is what law shall govern the publication of a tax
ordinance enacted by the Municipal Board of Manila, the Revised City Charter (R.A. 409, as
amended), which requires publication of the ordinance before its enactment and after its approval, or
the Local Tax Code (P.D. No. 231), which only demands publication after approval.
On June 12, 1974, the Municipal Board of Manila enacted Ordinance No. 7522, "AN ORDINANCE
REGULATING THE OPERATION OF PUBLIC MARKETS AND PRESCRIBING FEES FOR THE
RENTALS OF STALLS AND PROVIDING PENALTIES FOR VIOLATION THEREOF AND FOR
OTHER PURPOSES." The petitioner City Mayor, Ramon D. Bagatsing, approved the ordinance on
June 15, 1974.
On February 17, 1975, respondent Federation of Manila Market Vendors, Inc. commenced Civil
Case 96787 before the Court of First Instance of Manila presided over by respondent Judge,
seeking the declaration of nullity of Ordinance No. 7522 for the reason that (a) the publication
requirement under the Revised Charter of the City of Manila has not been complied with; (b) the
Market Committee was not given any participation in the enactment of the ordinance, as envisioned
by Republic Act 6039; (c) Section 3 (e) of the Anti-Graft and Corrupt Practices Act has been violated;
and (d) the ordinance would violate Presidential Decree No. 7 of September 30, 1972 prescribing the
collection of fees and charges on livestock and animal products.
Resolving the accompanying prayer for the issuance of a writ of preliminary injunction, respondent
Judge issued an order on March 11, 1975, denying the plea for failure of the respondent Federation
of Manila Market Vendors, Inc. to exhaust the administrative remedies outlined in the Local Tax
Code.
After due hearing on the merits, respondent Judge rendered its decision on August 29, 1975,
declaring the nullity of Ordinance No. 7522 of the City of Manila on the primary ground of noncompliance with the requirement of publication under the Revised City Charter. Respondent Judge
ruled:
There is, therefore, no question that the ordinance in question was not published at
all in two daily newspapers of general circulation in the City of Manila before its
enactment. Neither was it published in the same manner after approval, although it
was posted in the legislative hall and in all city public markets and city public
libraries. There being no compliance with the mandatory requirement of publication
before and after approval, the ordinance in question is invalid and, therefore, null and
void.
Petitioners moved for reconsideration of the adverse decision, stressing that (a) only a postpublication is required by the Local Tax Code; and (b) private respondent failed to exhaust all
administrative remedies before instituting an action in court.
On September 26, 1975, respondent Judge denied the motion.
Forthwith, petitioners brought the matter to Us through the present petition for review on certiorari.
We find the petition impressed with merits.

1. The nexus of the present controversy is the apparent conflict between the Revised Charter of the
City of Manila and the Local Tax Code on the manner of publishing a tax ordinance enacted by the
Municipal Board of Manila. For, while Section 17 of the Revised Charter provides:
Each proposed ordinance shall be published in two daily newspapers of general
circulation in the city, and shall not be discussed or enacted by the Board until after
the third day following such publication. * * * Each approved ordinance * * * shall be
published in two daily newspapers of general circulation in the city, within ten days
after its approval; and shall take effect and be in force on and after the twentieth day
following its publication, if no date is fixed in the ordinance.
Section 43 of the Local Tax Code directs:
Within ten days after their approval, certified true copies of all provincial, city,
municipal and barrioordinances levying or imposing taxes, fees or other
charges shall be published for three consecutive days in a newspaper or publication
widely circulated within the jurisdiction of the local government, or posted in the local
legislative hall or premises and in two other conspicuous places within the territorial
jurisdiction of the local government. In either case, copies of all provincial, city,
municipal and barrio ordinances shall be furnished the treasurers of the respective
component and mother units of a local government for dissemination.
In other words, while the Revised Charter of the City of Manila requires publication before the
enactment of the ordinance and after the approval thereof in two daily newspapers of general
circulation in the city, the Local Tax Code only prescribes for publication after the approval of
"ordinances levying or imposing taxes, fees or other charges" either in a newspaper or publication
widely circulated within the jurisdiction of the local government or by posting the ordinance in the
local legislative hall or premises and in two other conspicuous places within the territorial jurisdiction
of the local government. Petitioners' compliance with the Local Tax Code rather than with the
Revised Charter of the City spawned this litigation.
There is no question that the Revised Charter of the City of Manila is a special act since it relates
only to the City of Manila, whereas the Local Tax Code is a general law because it applies
universally to all local governments. Blackstone defines general law as a universal rule affecting the
entire community and special law as one relating to particular persons or things of a class. 1 And the
rule commonly said is that a prior special law is not ordinarily repealed by a subsequent general law. The
fact that one is special and the other general creates a presumption that the special is to be considered
as remaining an exception of the general, one as a general law of the land, the other as the law of a
particular case. 2 However, the rule readily yields to a situation where the special statute refers to a
subject in general, which the general statute treats in particular. The exactly is the circumstance obtaining
in the case at bar. Section 17 of the Revised Charter of the City of Manila speaks of "ordinance" in
general, i.e., irrespective of the nature and scope thereof,whereas, Section 43 of the Local Tax Code
relates to "ordinances levying or imposing taxes, fees or other charges" in particular. In regard, therefore,
to ordinances in general, the Revised Charter of the City of Manila is doubtless dominant, but, that
dominant force loses its continuity when it approaches the realm of "ordinances levying or imposing
taxes, fees or other charges" in particular. There, the Local Tax Code controls. Here, as always, a general
provision must give way to a particular provision. 3 Special provision governs. 4 This is especially true
where the law containing the particular provision was enacted later than the one containing the general
provision. The City Charter of Manila was promulgated on June 18, 1949 as against the Local Tax Code
which was decreed on June 1, 1973. The law-making power cannot be said to have intended the

establishment of conflicting and hostile systems upon the same subject, or to leave in force provisions of
a prior law by which the new will of the legislating power may be thwarted and overthrown. Such a result
would render legislation a useless and Idle ceremony, and subject the law to the reproach of uncertainty
and unintelligibility. 5

The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico sued the City of Manila for
damages arising from the injuries he suffered when he fell inside an uncovered and unlighted catchbasin
or manhole on P. Burgos Avenue. The City of Manila denied liability on the basis of the City Charter (R.A.
409) exempting the City of Manila from any liability for damages or injury to persons or property arising
from the failure of the city officers to enforce the provisions of the charter or any other law or ordinance, or
from negligence of the City Mayor, Municipal Board, or other officers while enforcing or attempting to
enforce the provisions of the charter or of any other law or ordinance. Upon the other hand, Article 2189
of the Civil Code makes cities liable for damages for the death of, or injury suffered by any persons by
reason of the defective condition of roads, streets, bridges, public buildings, and other public works under
their control or supervision. On review, the Court held the Civil Code controlling. It is true that, insofar as
its territorial application is concerned, the Revised City Charter is a special law and the subject matter of
the two laws, the Revised City Charter establishes a general rule of liability arising from negligence in
general, regardless of the object thereof, whereas the Civil Code constitutes a particularprescription for
liability due to defective streets in particular. In the same manner, the Revised Charter of the City
prescribes a rule for the publication of "ordinance" in general, while the Local Tax Code establishes a rule
for the publication of "ordinance levying or imposing taxes fees or other charges in particular.
In fact, there is no rule which prohibits the repeal even by implication of a special or specific act by a
general or broad one. 7 A charter provision may be impliedly modified or superseded by a later statute,
and where a statute is controlling, it must be read into the charter notwithstanding any particular charter
provision. 8 A subsequent general law similarly applicable to all cities prevails over any conflicting charter
provision, for the reason that a charter must not be inconsistent with the general laws and public policy of
the state. 9 A chartered city is not an independent sovereignty. The state remains supreme in all matters
not purely local. Otherwise stated, a charter must yield to the constitution and general laws of the state, it
is to have read into it that general law which governs the municipal corporation and which the corporation
cannot set aside but to which it must yield. When a city adopts a charter, it in effect adopts as part of its
charter general law of such character. 10
2. The principle of exhaustion of administrative remedies is strongly asserted by petitioners as
having been violated by private respondent in bringing a direct suit in court. This is because Section
47 of the Local Tax Code provides that any question or issue raised against the legality of any tax
ordinance, or portion thereof, shall be referred for opinion to the city fiscal in the case of tax
ordinance of a city. The opinion of the city fiscal is appealable to the Secretary of Justice, whose
decision shall be final and executory unless contested before a competent court within thirty (30)
days. But, the petition below plainly shows that the controversy between the parties is deeply rooted
in a pure question of law: whether it is the Revised Charter of the City of Manila or the Local Tax
Code that should govern the publication of the tax ordinance. In other words, the dispute is sharply
focused on the applicability of the Revised City Charter or the Local Tax Code on the point at issue,
and not on the legality of the imposition of the tax. Exhaustion of administrative remedies before
resort to judicial bodies is not an absolute rule. It admits of exceptions. Where the question litigated
upon is purely a legal one, the rule does not apply. 11 The principle may also be disregarded when it
does not provide a plain, speedy and adequate remedy. It may and should be relaxed when its application
may cause great and irreparable damage. 12

3. It is maintained by private respondent that the subject ordinance is not a "tax ordinance," because
the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenueraising function, so that the procedure for publication under the Local Tax Code finds no application.
The pretense bears its own marks of fallacy. Precisely, the raising of revenues is the principal object
of taxation. Under Section 5, Article XI of the New Constitution, "Each local government unit shall
have the power to create its own sources of revenue and to levy taxes, subject to such provisions as
may be provided by law." 13 And one of those sources of revenue is what the Local Tax Code points to in
particular: "Local governments may collect fees or rentals for the occupancy or use of public markets and
premises * * *." 14 They can provide for and regulate market stands, stalls and privileges, and, also, the
sale, lease or occupancy thereof. They can license, or permit the use of, lease, sell or otherwise dispose
of stands, stalls or marketing privileges. 15
It is a feeble attempt to argue that the ordinance violates Presidential Decree No. 7, dated
September 30, 1972, insofar as it affects livestock and animal products, because the said decree
prescribes the collection of other fees and charges thereon "with the exception of ante-mortem and
post-mortem inspection fees, as well as the delivery, stockyard and slaughter fees as may be
authorized by the Secretary of Agriculture and Natural Resources." 16Clearly, even the exception
clause of the decree itself permits the collection of the proper fees for livestock. And the Local Tax Code
(P.D. 231, July 1, 1973) authorizes in its Section 31: "Local governments may collect fees for the
slaughter of animals and the use of corrals * * * "
4. The non-participation of the Market Committee in the enactment of Ordinance No. 7522
supposedly in accordance with Republic Act No. 6039, an amendment to the City Charter of Manila,
providing that "the market committee shall formulate, recommend and adopt, subject to the
ratification of the municipal board, and approval of the mayor, policies and rules or regulation
repealing or maneding existing provisions of the market code" does not infect the ordinance with any
germ of invalidity. 17 The function of the committee is purely recommendatory as the underscored phrase
suggests, its recommendation is without binding effect on the Municipal Board and the City Mayor. Its
prior acquiescence of an intended or proposed city ordinance is not a condition sine qua non before the
Municipal Board could enact such ordinance. The native power of the Municipal Board to legislate
remains undisturbed even in the slightest degree. It can move in its own initiative and the Market
Committee cannot demur. At most, the Market Committee may serve as a legislative aide of the Municipal
Board in the enactment of city ordinances affecting the city markets or, in plain words, in the gathering of
the necessary data, studies and the collection of consensus for the proposal of ordinances regarding city
markets. Much less could it be said that Republic Act 6039 intended to delegate to the Market Committee
the adoption of regulatory measures for the operation and administration of the city markets. Potestas
delegata non delegare potest.
5. Private respondent bewails that the market stall fees imposed in the disputed ordinance are
diverted to the exclusive private use of the Asiatic Integrated Corporation since the collection of said
fees had been let by the City of Manila to the said corporation in a "Management and Operating
Contract." The assumption is of course saddled on erroneous premise. The fees collected do not go
direct to the private coffers of the corporation. Ordinance No. 7522 was not made for the corporation
but for the purpose of raising revenues for the city. That is the object it serves. The entrusting of the
collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is
public, it does not matter whether the agency through which the money is dispensed is public or
private. The right to tax depends upon the ultimate use, purpose and object for which the fund is
raised. It is not dependent on the nature or character of the person or corporation whose
intermediate agency is to be used in applying it. The people may be taxed for a public purpose,
although it be under the direction of an individual or private corporation. 18

Nor can the ordinance be stricken down as violative of Section 3(e) of the Anti-Graft and Corrupt
Practices Act because the increased rates of market stall fees as levied by the ordinance will
necessarily inure to the unwarranted benefit and advantage of the corporation. 19 We are concerned
only with the issue whether the ordinance in question is intra vires. Once determined in the affirmative,
the measure may not be invalidated because of consequences that may arise from its enforcement. 20
ACCORDINGLY, the decision of the court below is hereby reversed and set aside. Ordinance No.
7522 of the City of Manila, dated June 15, 1975, is hereby held to have been validly enacted. No.
costs.
SO ORDERED.
G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR VILLANUEVA, JOSE
ABELLO, REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI, MANUEL LACSON, JAVIER
LACSON, TITO TAGARAO, EDUARDO SUATENGCO, AUGUSTO LLAMAS, RODOLFO SIASON,
PACIFICO MAGHARI, JR., JOSE JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR COMMISSION, and SUGAR REGULATORY
ADMINISTRATION, respondents, ANGEL H. SEVERINO, JR., GLICERIO JAVELLANA, GLORIA
P. DE LA PAZ, JOEY P. DE LA PAZ, ET AL., and NATIONAL FEDERATION OF SUGARCANE
PLANTERS, intervenors.

MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers, who have come to this Court in
their individual capacities and in representation of other sugar producers, planters and millers, said
to be so numerous that it is impracticable to bring them all before the Court although the subject
matter of the present controversy is of common interest to all sugar producers, whether parties in
this action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the government
office tasked with the function of regulating and supervising the sugar industry until it was
superseded by its co-respondent Sugar Regulatory Administration (SRA, for brevity) under Executive
Order No. 18 on May 28, 1986. Although said Executive Order abolished the PHILSUCOM, its
existence as a juridical entity was mandated to continue for three (3) more years "for the purpose of
prosecuting and defending suits by or against it and enables it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets."
Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting and milling their sugarcane in
different mill districts of Negros Occidental, were allowed to intervene by the Court, since they have
common cause with petitioners and respondents having interposed no objection to their intervention.
Subsequently, on January 14,1988, the National Federation of Sugar Planters (NFSP) also moved to
intervene, which the Court allowed on February 16,1988.

Petitioners and Intervenors have come to this Court praying for a Writ of mandamus commanding
respondents:
TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC
PLANTERS BANK BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF
STOCK IN THE SAID BANK; NOW HELD BY AND STILL CARRIED IN THE NAME
OF THE PHILIPPINE SUGAR COMMISSION, TO THE SUGAR PRODUCERS,
PLANTERS AND MILLERS, WHO ARE THE TRUE BENEFICIAL OWNERS OF THE
761,416 COMMON SHARES VALUED AT P36,548.000.00, AND 53,005,045
PREFERRED SHARES (A, B & C) WITH A TOTAL PAR VALUE OF
P254,424,224.72, OR A TOTAL INVESTMENT OF P290,972,224.72, THE SAID
INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF Pl.00 PER
PICUL FROM SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING
THE YEAR 1978-79 UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT
TO P.D. # 388.
Respondent Bank does not take issue with either petitioners or its correspondents as it has no
beneficial or equitable interest that may be affected by the ruling in this Petition, but welcomes the
filing of the Petition since it will settle finally the issue of legal ownership of the questioned shares of
stock.
Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing that no
trust results from Section 7 of P.D. No. 388; that the stabilization fees collected are considered
government funds under the Government Auditing Code; that the transfer of shares of stock from
PHILSUCOM to the sugar producers would be irregular, if not illegal; and that this suit is barred by
laches.
The Solicitor General aptly summarizes the basic issues thus: (1) whether the stabilization fees
collected from sugar planters and millers pursuant to Section 7 of P.D. No. 388 are funds in trust for
them, or public funds; and (2) whether shares of stock in respondent Bank paid for with said
stabilization fees belong to the PHILSUCOM or to the different sugar planters and millers from whom
the fees were collected or levied.
P. D. No. 388, promulgated on February 2,1974, which created the PHILSUCOM, provided for the
collection of a Stabilization Fund as follows:
SEC. 7. Capitalization, Special Fund of the Commission, Development and
Stabilization Fund. There is hereby established a fund for the commission for the
purpose of financing the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign market to
be administered in trust by the Commission and deposited in the Philippine National
Bank derived in the manner herein below cited from the following sources:
a. Stabilization fund shall be collected as provided for in the various provisions of this
Decree.
b. Stabilization fees shall be collected from planters and millers in the amount of Two
(P2.00) Pesos for every picul produced and milled for a period of five years from the

approval of this Decree and One (Pl.00) Peso for every picul produced and milled
every year thereafter.
Provided: That fifty (P0.50) centavos per picul of the amount levied on planters,
millers and traders under Section 4(c) of this Decree will be used for the payment of
salaries and wages of personnel, fringe benefits and allowances of officers and
employees for the purpose of accomplishing and employees for the purpose of
accomplishing the efficient performance of the duties of the Commission.
Provided, further: That said amount shall constitute a lien on the sugar quedan
and/or warehouse receipts and shall be paid immediately by the planters and mill
companies, sugar centrals and refineries to the Commission. (paragraphing and bold
supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be administered in
trust by the Commission." However, while the element of an intent to create a trust is present, a
resulting trust in favor of the sugar producers, millers and planters cannot be said to have ensued
because the presumptive intention of the parties is not reasonably ascertainable from the language
of the statute itself.
The doctrine of resulting trusts is founded on the presumed intention of the parties;
and as a general rule, it arises where, and only where such may be reasonably
presumed to be the intention of the parties, as determined from the facts and
circumstances existing at the time of the transaction out of which it is sought to be
established (89 C.J.S. 947).
No implied trust in favor of the sugar producers either can be deduced from the imposition of the
levy. "The essential Idea of an implied trust involves a certain antagonism between the cestui que
trust and the trustee even when the trust has not arisen out of fraud nor out of any transaction of a
fraudulent or immoral character (65 CJ 222). It is not clearly shown from the statute itself that the
PHILSUCOM imposed on itself the obligation of holding the stabilization fund for the benefit of the
sugar producers. It must be categorically demonstrated that the very administrative agency which is
the source of such regulation would place a burden on itself (Batchelder v. Central Bank of the
Philippines, L-25071, July 29,1972,46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640 [1954]).
Neither can petitioners place reliance on the history of respondents Bank. They recite that at the
beginning, the Bank was owned by the Roman-Rojas Group. Because it underwent difficulties early
in the year 1978, Mr. Roberto S. Benedicto, then Chairman of the PHILSUCOM, submitted a
proposal to the Central Bank for the rehabilitation of the Bank. The Central Bank acted favorably on
the proposal at the meeting of the Monetary Board on March 31, 1978 subject to the infusion of fresh
capital by the Benedicto Group. Petitioners maintain that this infusion of fresh capital was
accomplished, not by any capital investment by Mr. Benedicto, but by PHILSUCOM, which set aside
the proceeds of the P1.00 per picul stabilization fund to pay for its subscription in shares of stock of
respondent Bank. It is petitioners' submission that all shares were placed in PHILSUCOM's name
only out of convenience and necessity and that they are the true and beneficial owners thereof.
In point of fact, we cannot see our way clear to upholding petitioners' position that the investment of
the proceeds from the stabilization fund in subscriptions to the capital stock of the Bank were being
made for and on their behalf. That could have been clarified by the Trust Agreement, dated May 28,

1986, entered into between PHILSUCOM, as "Trustor" acting through Mr. Fred J. Elizalde as Officerin-Charge, and respondent RPB- Trust Department' as "Trustee," acknowledging that PHILSUCOM
holds said shares for and in behalf of the sugar producers," the latter "being the true and beneficial
owners thereof." The Agreement, however, did not get off the ground because it failed to receive the
approval of the PHILSUCOM Board of Commissioners as required in the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the Agreement because of the adverse
opinion of the SRA, Resident Auditor, dated June 25,1986, which was aimed by the Chairman of the
Commission on Audit, on January 26,1987.
On February 19, 1987, the SRA, resolved to revoke the Trust Agreement "in the light of the ruling of
the Commission on Audit that the aforementioned Agreement is of doubtful validity."
From the legal standpoint, we find basis for the opinion of the Commission on Audit reading:
That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory
Administration, in particular, owns and stocks. While it is true that the collected
stabilization fees were set aside by PHILSUCOM to pay its subscription to RPB, it did
not collect said fees for the account of the sugar producers. That stabilization fees
are charges/levies on sugar produced and milled which accrued to PHILSUCOM
under PD 338, as amended. ...
The stabilization fees collected are in the nature of a tax, which is within the power of the State to
impose for the promotion of the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar
liens (Sec. 7[b], P.D. No. 388). The collections made accrue to a "Special Fund," a "Development
and Stabilization Fund," almost Identical to the "Sugar Adjustment and Stabilization Fund" created
under Section 6 of Commonwealth Act 567. 1 The tax collected is not in a pure exercise of the taxing
power. It is levied with a regulatory purpose, to provide means for the stabilization of the sugar industry.
The levy is primarily in the exercise of the police power of the State (Lutz vs. Araneta, supra.).
The protection of a large industry constituting one of the great sources of the state's
wealth and therefore directly or indirectly affecting the welfare of so great a portion of
the population of the State is affected to such an extent by public interests as to be
within the police power of the sovereign. (Johnson vs. State ex rel. Marey, 128 So.
857, cited in Lutz vs. Araneta, supra).
The stabilization fees in question are levied by the State upon sugar millers, planters and producers
for a special purpose that of "financing the growth and development of the sugar industry and all
its components, stabilization of the domestic market including the foreign market the fact that the
State has taken possession of moneys pursuant to law is sufficient to constitute them state funds,
even though they are held for a special purpose (Lawrence vs. American Surety Co., 263 Mich 586,
249 ALR 535, cited in 42 Am. Jur. Sec. 2, p. 718). Having been levied for a special purpose, the
revenues collected are to be treated as a special fund, to be, in the language of the statute,
"administered in trust' for the purpose intended. Once the purpose has been fulfilled or abandoned,
the balance, if any, is to be transferred to the general funds of the Government. That is the essence
of the trust intended (See 1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935 Constitution,
Article VI, Sec. 23(l]). 2

The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds
are deposited in the Philippine National Bank and not in the Philippine Treasury, moneys from which
may be paid out only in pursuance of an appropriation made by law (1987) Constitution, Article VI,
Sec. 29[1],1973 Constitution, Article VIII, Sec. 18[l]).
That the fees were collected from sugar producers, planters and millers, and that the funds were
channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a
trust fired for their benefit nor make them the beneficial owners of the shares so purchased. It is but
rational that the fees be collected from them since it is also they who are to be benefited from the
expenditure of the funds derived from it. The investment in shares of respondent Bank is not alien to
the purpose intended because of the Bank's character as a commodity bank for sugar conceived for
the industry's growth and development. Furthermore, of note is the fact that one-half, (1/2) or PO.50
per picul, of the amount levied under P.D. No. 388 is to be utilized for the "payment of salaries and
wages of personnel, fringe benefits and allowances of officers and employees of PHILSUCOM"
thereby immediately negating the claim that the entire amount levied is in trust for sugar, producers,
planters and millers.
To rule in petitioners' favor would contravene the general principle that revenues derived from taxes
cannot be used for purely private purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the entire sugar industry, "and all its components,
stabilization of the domestic market," including the foreign market the industry being of vital
importance to the country's economy and to national interest.
WHEREFORE, the Writ of mandamus is denied and the Petition hereby dismissed. No costs.
This Decision is immediately executory.
SO ORDERED.

G.R. No. 158540

July 8, 2004

SOUTHERN CROSS CEMENT CORPORATION, petitioner,

vs.
THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE SECRETARY OF THE
DEPARTMENT OF TRADE & INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF
FINANCE, and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, respondents.

DECISION

TINGA, J.:

"Good fences make good neighbors," so observed Robert Frost, the archetype of traditional New
England detachment. The Frost ethos has been heeded by nations adjusting to the effects of the
liberalized global market.1 The Philippines, for one, enacted Republic Act (Rep. Act) No. 8751 (on the
imposition of countervailing duties), Rep. Act No. 8752 (on the imposition of anti-dumping duties)
and, finally, Rep. Act No. 8800, also known as the Safeguard Measures Act ("SMA") 2 soon after it
joined the General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO)
Agreement.3
The SMA provides the structure and mechanics for the imposition of emergency measures, including
tariffs, to protect domestic industries and producers from increased imports which inflict or could
inflict serious injury on them.4 The wisdom of the policies behind the SMA, however, is not put into
question by the petition at bar. The questions submitted to the Court relate to the means and the
procedures ordained in the law to ensure that the determination of the imposition or non-imposition
of a safeguard measure is proper.
Antecedent Facts
Petitioner Southern Cross Cement Corporation ("Southern Cross") is a domestic corporation
engaged in the business of cement manufacturing, production, importation and exportation. Its
principal stockholders are Taiheiyo Cement Corporation and Tokuyama Corporation, purportedly the
largest cement manufacturers in Japan.5
Private respondent Philippine Cement Manufacturers Corporation 6 ("Philcemcor") is an association
of domestic cement manufacturers. It has eighteen (18) members,7 per Record. While Philcemcor
heralds itself to be an association of domestic cement manufacturers, it appears that considerable
equity holdings, if not controlling interests in at least twelve (12) of its member-corporations, were
acquired by the three largest cement manufacturers in the world, namely Financiere Lafarge S.A. of
France, Cemex S.A. de C.V. of Mexico, and Holcim Ltd. of Switzerland (formerly Holderbank
Financiere Glaris, Ltd., then Holderfin B.V.).8
On 22 May 2001, respondent Department of Trade and Industry ("DTI") accepted an application from
Philcemcor, alleging that the importation of gray Portland cement9 in increased quantities has caused
declines in domestic production, capacity utilization, market share, sales and employment; as well as
caused depressed local prices. Accordingly, Philcemcor sought the imposition at first of provisional,
then later, definitive safeguard measures on the import of cement pursuant to the SMA. Philcemcor
filed the application in behalf of twelve (12) of its member-companies. 10
After preliminary investigation, the Bureau of Import Services of the DTI, determined that critical
circumstances existed justifying the imposition of provisional measures.11 On 7 November 2001, the
DTI issued an Order,imposing a provisional measure equivalent to Twenty Pesos and Sixty
Centavos (P20.60) per forty (40) kilogram bag on all importations of gray Portland cement for a
period not exceeding two hundred (200) days from the date of issuance by the Bureau of Customs
(BOC) of the implementing Customs Memorandum Order.12 The corresponding Customs
Memorandum Order was issued on 10 December 2001, to take effect that same day and to remain
in force for two hundred (200) days.13
In the meantime, the Tariff Commission, on 19 November 2001, received a request from the DTI for
a formal investigation to determine whether or not to impose a definitive safeguard measure on
imports of gray Portland cement, pursuant to Section 9 of the SMA and its Implementing Rules and
Regulations. A notice of commencement of formal investigation was published in the newspapers on
21 November 2001. Individual notices were likewise sent to concerned parties, such as Philcemcor,
various importers and exporters, the Embassies of Indonesia, Japan and Taiwan,

contractors/builders associations, industry associations, cement workers' groups, consumer groups,

non-government organizations and concerned government agencies.14 A preliminary conference was
held on 27 November 2001, attended by several concerned parties, including Southern
Cross.15 Subsequently, the Tariff Commission received several position papers both in support and
against Philcemcor's application.16 The Tariff Commission also visited the corporate offices and
manufacturing facilities of each of the applicant companies, as well as that of Southern Cross and
two other cement importers.17
On 13 March 2002, the Tariff Commission issued its Formal Investigation Report ("Report"). Among
the factors studied by the Tariff Commission in its Report were the market share of the domestic
industry,18 production and sales,19 capacity utilization,20 financial performance and profitability,21 and
return on sales.22 The Tariff Commission arrived at the following conclusions:
1. The circumstances provided in Article XIX of GATT 1994 need not be demonstrated since
the product under consideration (gray Portland cement) is not the subject of any Philippine
obligation or tariff concession under the WTO Agreement. Nonetheless, such inquiry is
governed by the national legislation (R.A. 8800) and the terms and conditions of the
Agreement on Safeguards.
2. The collective output of the twelve (12) applicant companies constitutes a major proportion
of the total domestic production of gray Portland cement and blended Portland cement.
3. Locally produced gray Portland cement and blended Portland cement (Pozzolan) are "like"
to imported gray Portland cement.
4. Gray Portland cement is being imported into the Philippines in increased quantities, both
in absolute terms and relative to domestic production, starting in 2000. The increase in
volume of imports is recent, sudden, sharp and significant.
5. The industry has not suffered and is not suffering significant overall impairment in its
condition, i.e., serious injury.
6. There is no threat of serious injury that is imminent from imports of gray Portland cement.
7. Causation has become moot and academic in view of the negative determination of the
elements of serious injury and imminent threat of serious injury.23
Accordingly, the Tariff Commission made the following recommendation, to wit:
The elements of serious injury and imminent threat of serious injury not having been
established, it is hereby recommended that no definitive general safeguard measure be
imposed on the importation of gray Portland cement. 24
The DTI received the Report on 14 March 2002. After reviewing the report, then DTI Secretary
Manuel Roxas II ("DTI Secretary") disagreed with the conclusion of the Tariff Commission that there
was no serious injury to the local cement industry caused by the surge of imports. 25 In view of this
disagreement, the DTI requested an opinion from the Department of Justice ("DOJ") on the DTI
Secretary's scope of options in acting on the Commission's recommendations. Subsequently, then
DOJ Secretary Hernando Perez rendered an opinion stating that Section 13 of the SMA precluded a
review by the DTI Secretary of the Tariff Commission's negative finding, or finding that a definitive
safeguard measure should not be imposed.26

On 5 April 2002, the DTI Secretary promulgated a Decision. After quoting the conclusions of the
Tariff Commission, the DTI Secretary noted the DTI's disagreement with the conclusions. However,
he also cited the DOJ Opinion advising the DTI that it was bound by the negative finding of the Tariff
Commission. Thus, he ruled as follows:
The DTI has no alternative but to abide by the [Tariff] Commission's recommendations.
IN VIEW OF THE FOREGOING, and in accordance with Section 13 of RA 8800 which
states:
"In the event of a negative final determination; or if the cash bond is in excess
of the definitive safeguard duty assessed, the Secretary shall immediately
issue, through the Secretary of Finance, a written instruction to the
Commissioner of Customs, authorizing the return of the cash bond or the
remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final decision
has been made; Provided, that the government shall not be liable for any
interest on the amount to be returned. The Secretary shall not accept for
consideration another petition from the same industry, with respect to the
same imports of the product under consideration within one (1) year after the
date of rendering such a decision."
The DTI hereby issues the following:
The application for safeguard measures against the importation of gray Portland cement filed
by PHILCEMCOR (Case No. 02-2001) is hereby denied.27 (Emphasis in the original)
Philcemcor received a copy of the DTI Decision on 12 April 2002. Ten days later, it filed with the
Court of Appeals a Petition for Certiorari, Prohibition and Mandamus28 seeking to set aside the
DTI Decision, as well as the Tariff Commission's Report. Philcemcor likewise applied for
a Temporary Restraining Order/Injunction to enjoin the DTI and the BOC from implementing the
questioned Decision and Report. It prayed that the Court of Appeals direct the DTI Secretary to
disregard the Report and to render judgment independently of the Report. Philcemcor argued that
the DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the
recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a
flawed framework, inconsistent inferences and erroneous methodology.29
On 10 June 2002, Southern Cross filed its Comment.30 It argued that the Court of Appeals had no
jurisdiction over Philcemcor's Petition, for it is on the Court of Tax Appeals ("CTA") that the SMA
conferred jurisdiction to review rulings of the Secretary in connection with the imposition of a
safeguard measure. It likewise argued that Philcemcor's resort to the special civil action of certiorari
is improper, considering that what Philcemcor sought to rectify is an error of judgment and not an
error of jurisdiction or grave abuse of discretion, and that a petition for review with the CTA was
available as a plain, speedy and adequate remedy. Finally, Southern Cross echoed the DOJ Opinion
that Section 13 of the SMA precludes a review by the DTI Secretary of a negative finding of the Tariff
Commission.
After conducting a hearing on 19 June 2002 on Philcemcor's application for preliminary injunction,
the Court of Appeals' Twelfth Division31 granted the writ sought in its Resolution dated 21 June
2002.32 Seven days later, on 28 June 2002, the two-hundred (200)-day period for the imposition of
the provisional measure expired. Despite the lapse of the period, the BOC continued to impose the
provisional measure on all importations of Portland cement made by Southern Cross. The

uninterrupted assessment of the tariff, according to Southern Cross, worked to its detriment to the
point that the continued imposition would eventually lead to its closure. 33
Southern Cross timely filed a Motion for Reconsideration of the Resolution on 9 September 2002.
Alleging that Philcemcor was not entitled to provisional relief, Southern Cross likewise sought a
clarificatory order as to whether the grant of the writ of preliminary injunction could extend the earlier
imposition of the provisional measure beyond the two hundred (200)-day limit imposed by law. The
appeals' court failed to take immediate action on Southern Cross's motion despite the four (4)
motions for early resolution the latter filed between September of 2002 and February of 2003. After
six (6) months, on 19 February 2003, the Court of Appeals directed Philcemcor to comment on
Southern Cross's Motion for Reconsideration.34 After Philcemcor filed its Opposition35 on 13 March
2003, Southern Cross filed another set of four (4) motions for early resolution.
Despite the efforts of Southern Cross, the Court of Appeals failed to directly resolve the Motion for
Reconsideration. Instead, on 5 June 2003, it rendered a Decision,36 granting in part Philcemcor's
petition. The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged
grave abuse of discretion. It refused to annul the findings of the Tariff Commission, citing the rule that
factual findings of administrative agencies are binding upon the courts and its corollary, that courts
should not interfere in matters addressed to the sound discretion and coming under the special
technical knowledge and training of such agencies.37 Nevertheless, it held that the DTI Secretary is
not bound by the factual findings of the Tariff Commission since such findings are merely
recommendatory and they fall within the ambit of the Secretary's discretionary review. It determined
that the legislative intent is to grant the DTI Secretary the power to make a final decision on the Tariff
Commission's recommendation.38 The dispositive portion of the Decision reads:
WHEREFORE, based on the foregoing premises, petitioner's prayer to set aside the findings
of the Tariff Commission in its assailed Report dated March 13, 2002 is DENIED. On the
other hand, the assailed April 5, 2002 Decision of the Secretary of the Department of Trade
and Industry is hereby SET ASIDE. Consequently, the case is REMANDED to the public
respondent Secretary of Department of Trade and Industry for a final decision in accordance
with RA 8800 and its Implementing Rules and Regulations.
SO ORDERED.39
On 23 June 2003, Southern Cross filed the present petition, assailing the appellate
court's Decision for departing from the accepted and usual course of judicial proceedings, and not
deciding the substantial questions in accordance with law and jurisprudence. The petition argues in
the main that the Court of Appeals has no jurisdiction over Philcemcor's petition, the proper remedy
being a petition for review with the CTA conformably with the SMA, and; that the factual findings of
the Tariff Commission on the existence or non-existence conditions warranting the imposition of
general safeguard measures are binding upon the DTI Secretary.
The timely filing of Southern Cross's petition before this Court necessarily prevented the Court of
AppealsDecision from becoming final.40 Yet on 25 June 2003, the DTI Secretary issued a
new Decision, ruling this time that that in light of the appellate court's Decision there was no longer
any legal impediment to his deciding Philcemcor's application for definitive safeguard measures. 41 He
made a determination that, contrary to the findings of the Tariff Commission, the local cement
industry had suffered serious injury as a result of the import surges.42 Accordingly, he imposed a
definitive safeguard measure on the importation of gray Portland cement, in the form of a definitive
safeguard duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland
Cement.43

On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary
Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the
DTI Secretary from enforcing hisDecision of 25 June 2003 in view of the pending petition before this
Court. Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA
that has jurisdiction over the application under the law.
On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI
Secretary's 25 June 2003 Decision which imposed the definite safeguard measure. Prescinding from
this action, Philcemcor filed with this Court a Manifestation and Motion to Dismiss in regard to
Southern Cross's petition, alleging that it deliberately and willfully resorted to forum-shopping. It
points out that Southern Cross's TRO Application seeks to enjoin the DTI Secretary's second
decision, while its Petition before the CTA prays for the annulment of the same decision. 44
Reiterating its Comment on Southern Cross's Petition for Review, Philcemcor also argues that the
CTA, being a special court of limited jurisdiction, could only review the ruling of the DTI Secretary
when a safeguard measure is imposed, and that the factual findings of the Tariff Commission are not
binding on the DTI Secretary.45
After giving due course to Southern Cross's Petition, the Court called the case for oral argument on
18 February 2004.46 At the oral argument, attended by the counsel for Philcemcor and Southern
Cross and the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether
the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming that
the Court of Appeals has jurisdiction, whether itsDecision is in accordance with law; and, (iii) whether
a Temporary Restraining Order is warranted.47
During the oral arguments, counsel for Southern Cross manifested that due to the imposition of the
general safeguard measures, Southern Cross was forced to cease operations in the Philippines in
November of 2003.48
Propriety of the Temporary Restraining Order
Before the merits of the Petition, a brief comment on Southern Cross's application for provisional
relief. It sought to enjoin the DTI Secretary from enforcing the definitive safeguard measure he
imposed in his 25 June 2003Decision. The Court did not grant the provisional relief for it would be
tantamount to enjoining the collection of taxes, a peremptory judicial act which is traditionally
frowned upon,49 unless there is a clear statutory basis for it.50 In that regard, Section 218 of the Tax
Reform Act of 1997 prohibits any court from granting an injunction to restrain the collection of any
national internal revenue tax, fee or charge imposed by the internal revenue code. 51A similar
philosophy is expressed by Section 29 of the SMA, which states that the filing of a petition for review
before the CTA does not stop, suspend, or otherwise toll the imposition or collection of the
appropriate tariff duties or the adoption of other appropriate safeguard measures. 52 This evinces a
clear legislative intent that the imposition of safeguard measures, despite the availability of judicial
review, should not be enjoined notwithstanding any timely appeal of the imposition.
The Forum-Shopping Issue
In the same breath, we are not convinced that the allegation of forum-shopping has been duly
proven, or that sanction should befall upon Southern Cross and its counsel. The standard by Section
5, Rule 7 of the 1997 Rules of Civil Procedure in order that sanction may be had is that "the acts of
the party or his counsel clearly constitute willful and deliberate forum shopping." 53 The standard
implies a malicious intent to subvert procedural rules, and such state of mind is not evident in this
case.

The Jurisdictional Issue

On to the merits of the present petition.
In its assailed Decision, the Court of Appeals, after asserting only in brief that it had jurisdiction over
Philcemcor'sPetition, discussed the issue of whether or not the DTI Secretary is bound to adopt the
negative recommendation of the Tariff Commission on the application for safeguard measure. The
Court of Appeals maintained that it had jurisdiction over the petition, as it alleged grave abuse of
discretion on the part of the DTI Secretary, thus:
A perusal of the instant petition reveals allegations of grave abuse of discretion on the part of
the DTI Secretary in rendering the assailed April 5, 2002 Decision wherein it was ruled that
he had no alternative but to abide by the findings of the Commission on the matter of
safeguard measures for the local cement industry. Abuse of discretion is admittedly within
the ambit of certiorari.
Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction. It is alleged that, in the assailed Decision, the DTI Secretary
gravely abused his discretion in wantonly evading to discharge his duty to render an
independent determination or decision in imposing a definitive safeguard measure. 54
We do not doubt that the Court of Appeals' certiorari powers extend to correcting grave abuse of
discretion on the part of an officer exercising judicial or quasi-judicial functions. 55 However, the
special civil action of certiorari is available only when there is no plain, speedy and adequate remedy
in the ordinary course of law.56 Southern Cross relies on this limitation, stressing that Section 29 of
the SMA is a plain, speedy and adequate remedy in the ordinary course of law which Philcemcor did
not avail of. The Section reads:
Section 29. Judicial Review. Any interested party who is adversely affected by the ruling of
the Secretary in connection with the imposition of a safeguard measure may file with
the CTA, a petition for review of such ruling within thirty (30) days from receipt thereof.
Provided, however, that the filing of such petition for review shall not in any way stop,
suspend or otherwise toll the imposition or collection of the appropriate tariff duties or the
adoption of other appropriate safeguard measures, as the case may be.
The petition for review shall comply with the same requirements and shall follow the same
rules of procedure and shall be subject to the same disposition as in appeals in connection
with adverse rulings on tax matters to the Court of Appeals.57 (Emphasis supplied)
It is not difficult to divine why the legislature singled out the CTA as the court with jurisdiction to
review the ruling of the DTI Secretary in connection with the imposition of a safeguard measure. The
Court has long recognized the legislative determination to vest sole and exclusive jurisdiction on
matters involving internal revenue and customs duties to such a specialized court. 58 By the very
nature of its function, the CTA is dedicated exclusively to the study and consideration of tax problems
and has necessarily developed an expertise on the subject.59
At the same time, since the CTA is a court of limited jurisdiction, its jurisdiction to take cognizance of
a case should be clearly conferred and should not be deemed to exist on mere
implication.60 Concededly, Rep. Act No. 1125, the statute creating the CTA, does not extend to it the
power to review decisions of the DTI Secretary in connection with the imposition of safeguard
measures.61 Of course, at that time which was before the advent of trade liberalization the notion of
safeguard measures or safety nets was not yet in vogue.

Undeniably, however, the SMA expanded the jurisdiction of the CTA by including review of the rulings
of the DTI Secretary in connection with the imposition of safeguard measures. However, Philcemcor
and the public respondents agree that the CTA has appellate jurisdiction over a decision of the DTI
Secretary imposing a safeguard measure, but not when his ruling is not to impose such measure.
In a related development, Rep. Act No. 9282, enacted on 30 March 2004, expressly vests unto the
CTA jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural
product, commodity or article xxx involving xxx safeguard measures under Republic Act No.
8800, where either party may appeal the decision to impose or not to impose said
duties."62 Had Rep. Act No. 9282 already been in force at the beginning of the incidents subject of
this case, there would have been no need to make any deeper inquiry as to the extent of the CTA's
jurisdiction. But as Rep. Act No. 9282 cannot be applied retroactively to the present case, the
question of whether such jurisdiction extends to a decision not to impose a safeguard measure will
have to be settled principally on the basis of the SMA.
Under Section 29 of the SMA, there are three requisites to enable the CTA to acquire jurisdiction
over the petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii)
the petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling
must be in connection with the imposition of a safeguard measure. The first two requisites are clearly
present. The third requisite deserves closer scrutiny.
Contrary to the stance of the public respondents and Philcemcor, in this case where the DTI
Secretary decides not to impose a safeguard measure, it is the CTA which has jurisdiction to review
his decision. The reasons are as follows:
First. Split jurisdiction is abhorred.
Essentially, respondents' position is that judicial review of the DTI Secretary's ruling is exercised by
two different courts, depending on whether or not it imposes a safeguard measure, and in either
case the court exercising jurisdiction does so to the exclusion of the other. Thus, if the DTI decision
involves the imposition of a safeguard measure it is the CTA which has appellate jurisdiction;
otherwise, it is the Court of Appeals. Such setup is as novel and unusual as it is cumbersome and
unwise. Essentially, respondents advocate that Section 29 of the SMA has established split appellate
jurisdiction over rulings of the DTI Secretary on the imposition of safeguard measure.
This interpretation cannot be favored, as the Court has consistently refused to sanction split
jurisdiction.63 The power of the DTI Secretary to adopt or withhold a safeguard measure emanates
from the same statutory source, and it boggles the mind why the appeal modality would be such that
one appellate court is qualified if what is to be reviewed is a positive determination, and it is not if
what is appealed is a negative determination. In deciding whether or not to impose a safeguard
measure, provisional or general, the DTI Secretary would be evaluating only one body of facts and
applying them to one set of laws. The reviewing tribunal will be called upon to examine the same
facts and the same laws, whether or not the determination is positive or negative.
In short, if we were to rule for respondents we would be confirming the exercise by two judicial
bodies of jurisdiction over basically the same subject matterprecisely the split-jurisdiction situation
which is anathema to the orderly administration of justice.64 The Court cannot accept that such was
the legislative motive especially considering that the law expressly confers on the CTA, the tribunal
with the specialized competence over tax and tariff matters, the role of judicial review without
mention of any other court that may exercise corollary or ancillary jurisdiction in relation to the SMA.
The provision refers to the Court of Appeals but only in regard to procedural rules and dispositions of
appeals from the CTA to the Court of Appeals.65

The principle enunciated in Tejada v. Homestead Property Corporation66 is applicable to the case at
bar:
The Court agrees with the observation of the [that] when an administrative agency or body is
conferred quasi-judicial functions, all controversies relating to the subject matter
pertaining to its specialization are deemed to be included within the jurisdiction of
said administrative agency or body. Split jurisdiction is not favored.67
Second. The interpretation of the provisions of the SMA favors vesting untrammeled appellate
jurisdiction on the CTA.
A plain reading of Section 29 of the SMA reveals that Congress did not expressly bar the CTA from
reviewing a negative determination by the DTI Secretary nor conferred on the Court of Appeals such
review authority. Respondents note, on the other hand, that neither did the law expressly grant to the
CTA the power to review a negative determination. However, under the clear text of the law, the CTA
is vested with jurisdiction to review the ruling of the DTI Secretary "in connection with the
imposition of a safeguard measure." Had the law been couched instead to incorporate the phrase
"the ruling imposing a safeguard measure," then respondent's claim would have indisputable merit.
Undoubtedly, the phrase "in connection with" not only qualifies but clarifies the succeeding phrase
"imposition of a safeguard measure." As expounded later, the phrase also encompasses the
opposite or converse ruling which is the non-imposition of a safeguard measure.
In the American case of Shaw v. Delta Air Lines, Inc.,68 the United States Supreme Court, in
interpreting a key provision of the Employee Retirement Security Act of 1974, construed the phrase
"relates to" in its normal sense which is the same as "if it has connection with or reference
to."69 There is no serious dispute that the phrase "in connection with" is synonymous to "relates to" or
"reference to," and that all three phrases are broadly expansive. This is affirmed not just by
jurisprudential fiat, but also the acquired connotative meaning of "in connection with" in common
parlance. Consequently, with the use of the phrase "in connection with," Section 29 allows the CTA
to review not only the ruling imposing a safeguard measure, but all other rulings related or have
reference to the application for such measure.
Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in
Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the US Supreme
Court in New York State Blue Cross Plans v. Travelers Ins.70 conceded that the phrases "relate to" or
"in connection with" may be extended to the farthest stretch of indeterminacy for, universally,
relations or connections are infinite and stop nowhere. 71 Thus, in the case the US High Court,
examining the same phrase of the same provision of law involved in Shaw, resorted to looking at the
statute and its objectives as the alternative to an "uncritical literalism."72 A similar inquiry into the
other provisions of the SMA is in order to determine the scope of review accorded therein to the
CTA.73
The authority to decide on the safeguard measure is vested in the DTI Secretary in the case of nonagricultural products, and in the Secretary of the Department of Agriculture in the case of agricultural
products.74 Section 29 is likewise explicit that only the rulings of the DTI Secretary or the Agriculture
Secretary may be reviewed by the CTA.75 Thus, the acts of other bodies that were granted some
powers by the SMA, such as the Tariff Commission, are not subject to direct review by the CTA.
Under the SMA, the Department Secretary concerned is authorized to decide on several matters.
Within thirty (30) days from receipt of a petition seeking the imposition of a safeguard measure, or
from the date he mademotu proprio initiation, the Secretary shall make a preliminary determination
on whether the increased imports of the product under consideration substantially cause or threaten

to cause serious injury to the domestic industry.76Such ruling is crucial since only upon the
Secretary's positive preliminary determination that a threat to the domestic industry exists shall the
matter be referred to the Tariff Commission for formal investigation, this time, to determine whether
the general safeguard measure should be imposed or not. 77 Pursuant to a positive preliminary
determination, the Secretary may also decide that the imposition of a provisional safeguard measure
would be warranted under Section 8 of the SMA.78 The Secretary is also authorized to decide, after
receipt of the report of the Tariff Commission, whether or not to impose the general safeguard
measure, and if in the affirmative, what general safeguard measures should be applied. 79 Even after
the general safeguard measure is imposed, the Secretary is empowered to extend the safeguard
measure,80 or terminate, reduce or modify his previous rulings on the general safeguard measure. 81
With the explicit grant of certain powers involving safeguard measures by the SMA on the DTI
Secretary, it follows that he is empowered to rule on several issues. These are the issues which
arise in connection with, or in relation to, the imposition of a safeguard measure. They may arise at
different stages the preliminary investigation stage, the post-formal investigation stage, or the postsafeguard measure stage yet all these issues do become ripe for resolution because an initiatory
action has been taken seeking the imposition of a safeguard measure. It is the initiatory action for
the imposition of a safeguard measure that sets the wheels in motion, allowing the Secretary to
make successive rulings, beginning with the preliminary determination.
Clearly, therefore, the scope and reach of the phrase "in connection with," as intended by Congress,
pertain to all rulings of the DTI Secretary or Agriculture Secretary which arise from the time an
application or motu proprioinitiation for the imposition of a safeguard measure is taken. Indeed, the
incidents which require resolution come to the fore only because there is an initial application or
action seeking the imposition of a safeguard measure. From the legislative standpoint, it was a
matter of sense and practicality to lump up the questions related to the initiatory application or action
for safeguard measure and to assign only one court and; that is the CTA to initially review all the
rulings related to such initiatory application or action. Both directions Congress put in place by
employing the phrase "in connection with" in the law.
Given the relative expanse of decisions subject to judicial review by the CTA under Section 29, we
do not doubt that a negative ruling refusing to impose a safeguard measure falls within the scope of
its jurisdiction. On a literal level, such negative ruling is "a ruling of the Secretary in connection with
the imposition of a safeguard measure," as it is one of the possible outcomes that may result from
the initial application or action for a safeguard measure. On a more critical level, the rulings of the
DTI Secretary in connection with a safeguard measure, however diverse the outcome may be, arise
from the same grant of jurisdiction on the DTI Secretary by the SMA. 82 The refusal by the DTI
Secretary to grant a safeguard measure involves the same grant of authority, the same statutory
prescriptions, and the same degree of discretion as the imposition by the DTI Secretary of a
safeguard measure.
The position of the respondents is one of "uncritical literalism"83 incongruent with the animus of the
law. Moreover, a fundamentalist approach to Section 29 is not warranted, considering the absurdity
of the consequences.
Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur Inconveniens Et Absurdum.84
Even assuming arguendo that Section 29 has not expressly granted the CTA jurisdiction to review a
negative ruling of the DTI Secretary, the Court is precluded from favoring an interpretation that would
cause inconvenience and absurdity.85 Adopting the respondents' position favoring the CTA's minimal
jurisdiction would unnecessarily lead to illogical and onerous results.

Indeed, it is illiberal to assume that Congress had intended to provide appellate relief to rulings
imposing a safeguard measure but not to those declining to impose the measure. Respondents
might argue that the right to relief from a negative ruling is not lost since the applicant could, as
Philcemcor did, question such ruling through a special civil action for certiorari under Rule 65 of the
1997 Rules of Civil Procedure, in lieu of an appeal to the CTA. Yet these two reliefs are of differing
natures and gravamen. While an appeal may be predicated on errors of fact or errors of law, a
special civil action for certiorari is grounded on grave abuse of discretion or lack of or excess of
jurisdiction on the part of the decider. For a special civil action for certiorari to succeed, it is not
enough that the questioned act of the respondent is wrong. As the Court clarified in Sempio v. Court
of Appeals:
A tribunal, board or officer acts without jurisdiction if it/he does not have the legal power to
determine the case. There is excess of jurisdiction where, being clothed with the power to
determine the case, the tribunal, board or officer oversteps its/his authority as determined by
law. And there is grave abuse of discretion where the tribunal, board or officer acts in a
capricious, whimsical, arbitrary or despotic manner in the exercise of his judgment as to be
said to be equivalent to lack of jurisdiction. Certiorari is often resorted to in order to correct
errors of jurisdiction. Where the error is one of law or of fact, which is a mistake of judgment,
appeal is the remedy.86
It is very conceivable that the DTI Secretary, after deliberate thought and careful evaluation of the
evidence, may either make a negative preliminary determination as he is so empowered under
Section 7 of the SMA, or refuse to adopt the definitive safeguard measure under Section 13 of the
same law. Adopting the respondents' theory, this negative ruling is susceptible to reversal only
through a special civil action for certiorari, thus depriving the affected party the chance to elevate the
ruling on appeal on the rudimentary grounds of errors in fact or in law. Instead, and despite whatever
indications that the DTI Secretary acted with measure and within the bounds of his jurisdiction are,
the aggrieved party will be forced to resort to a gymnastic exercise, contorting the straight and
narrow in an effort to discombobulate the courts into believing that what was within was actually
beyond and what was studied and deliberate actually whimsical and capricious. What then would be
the remedy of the party aggrieved by a negative ruling that simply erred in interpreting the facts or
the law? It certainly cannot be the special civil action for certiorari, for as the Court held in Silverio v.
Court of Appeals: "Certiorari is a remedy narrow in its scope and inflexible in its character. It is not a
general utility tool in the legal workshop."87
Fortunately, this theoretical quandary need not come to pass. Section 29 of the SMA is worded in
such a way that it places under the CTA's judicial review all rulings of the DTI Secretary, which are
connected with the imposition of a safeguard measure. This is sound and proper in light of the
specialized jurisdiction of the CTA over tax matters. In the same way that a question of whether to
tax or not to tax is properly a tax matter, so is the question of whether to impose or not to impose a
definitive safeguard measure.
On another note, the second paragraph of Section 29 similarly reveals the legislative intent that
rulings of the DTI Secretary over safeguard measures should first be reviewed by the CTA and not
the Court of Appeals. It reads:
The petition for review shall comply with the same requirements and shall follow the same
rules of procedure and shall be subject to the same disposition as in appeals in connection
with adverse rulings on tax matters to the Court of Appeals.
This is the only passage in the SMA in which the Court of Appeals is mentioned. The express wish of
Congress is that the petition conform to the requirements and procedure under Rule 43 of the Rules

of Civil Procedure. Since Congress mandated that the form and procedure adopted be analogous to
a review of a CTA ruling by the Court of Appeals, the legislative contemplation could not have been
that the appeal be directly taken to the Court of Appeals.
Issue of Binding Effect of Tariff
Commission's Factual Determination
on DTI Secretary.
The next issue for resolution is whether the factual determination made by the Tariff Commission
under the SMA is binding on the DTI Secretary. Otherwise stated, the question is whether the DTI
Secretary may impose general safeguard measures in the absence of a positive final determination
by the Tariff Commission.
The Court of Appeals relied upon Section 13 of the SMA in ruling that the findings of the Tariff
Commission do not necessarily constitute a final decision. Section 13 details the procedure for the
adoption of a safeguard measure, as well as the steps to be taken in case there is a negative final
determination. The implication of the Court of Appeals' holding is that the DTI Secretary may adopt a
definitive safeguard measure, notwithstanding a negative determination made by the Tariff
Commission.
Undoubtedly, Section 13 prescribes certain limitations and restrictions before general safeguard
measures may be imposed. However, the most fundamental restriction on the DTI Secretary's
power in that respect is contained in Section 5 of the SMAthat there should first be a
positive final determination of the Tariff Commissionwhich the Court of Appeals curiously all
but ignored. Section 5 reads:
Sec. 5. Conditions for the Application of General Safeguard Measures. The Secretary shall
apply a general safeguard measure upon a positive final determination of the [Tariff]
Commission that a product is being imported into the country in increased quantities,
whether absolute or relative to the domestic production, as to be a substantial cause of
serious injury or threat thereof to the domestic industry; however, in the case of nonagricultural products, the Secretary shall first establish that the application of such safeguard
measures will be in the public interest. (emphasis supplied)
The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to make a
"positive final determination." This power lodged in the Tariff Commission, must be distinguished
from the power to impose the general safeguard measure which is properly vested on the DTI
Secretary.88
All in all, there are two condition precedents that must be satisfied before the DTI Secretary may
impose a general safeguard measure on grey Portland cement. First, there must be a positive final
determination by the Tariff Commission that a product is being imported into the country in increased
quantities (whether absolute or relative to domestic production), as to be a substantial cause of
serious injury or threat to the domestic industry. Second, in the case of non-agricultural products the
Secretary must establish that the application of such safeguard measures is in the public
interest.89 As Southern Cross argues, Section 5 is quite clear-cut, and it is impossible to finagle a
different conclusion even through overarching methods of statutory construction. There is no safer
nor better settled canon of interpretation that when language is clear and unambiguous it must be
held to mean what it plainly expresses:90 In the quotable words of an illustrious member of this Court,
thus:

[I]f a statute is clear, plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation. The verba legis or plain meaning rule rests on the
valid presumption that the words employed by the legislature in a statute correctly express
its intent or will and preclude the court from construing it differently. The legislature is
presumed to know the meaning of the words, to have used words advisedly, and to have
expressed its intent by the use of such words as are found in the statute. 91
Moreover, Rule 5 of the Implementing Rules and Regulations of the SMA, 92 which interprets Section
5 of the law, likewise requires a positive final determination on the part of the Tariff Commission
before the application of the general safeguard measure.
The SMA establishes a distinct allocation of functions between the Tariff Commission and the DTI
Secretary. The plain meaning of Section 5 shows that it is the Tariff Commission that has the power
to make a "positive final determination." This power, which belongs to the Tariff Commission, must
be distinguished from the power to impose general safeguard measure properly vested on the DTI
Secretary. The distinction is vital, as a "positive final determination" clearly antecedes, as a condition
precedent, the imposition of a general safeguard measure. At the same time, a positive final
determination does not necessarily result in the imposition of a general safeguard measure. Under
Section 5, notwithstanding the positive final determination of the Tariff Commission, the DTI
Secretary is tasked to decide whether or not that the application of the safeguard measures is in the
public interest.
It is also clear from Section 5 of the SMA that the positive final determination to be undertaken by the
Tariff Commission does not entail a mere gathering of statistical data. In order to arrive at such
determination, it has to establish causal linkages from the statistics that it compiles and evaluates:
after finding there is an importation in increased quantities of the product in question, that such
importation is a substantial cause of serious threat or injury to the domestic industry.
The Court of Appeals relies heavily on the legislative record of a congressional debate during
deliberations on the SMA to assert a purported legislative intent that the findings of the Tariff
Commission do not bind the DTI Secretary.93 Yet as explained earlier, the plain meaning of Section 5
emphasizes that only if the Tariff Commission renders a positive determination could the DTI
Secretary impose a safeguard measure. Resort to the congressional records to ascertain legislative
intent is not warranted if a statute is clear, plain and free from ambiguity. The legislature is presumed
to know the meaning of the words, to have used words advisedly, and to have expressed its intent
by the use of such words as are found in the statute. 94
Indeed, the legislative record, if at all to be availed of, should be approached with extreme caution,
as legislative debates and proceedings are powerless to vary the terms of the statute when the
meaning is clear.95 Our holding in Civil Liberties Union v. Executive Secretary96 on the resort to
deliberations of the constitutional convention to interpret the Constitution is likewise appropriate in
ascertaining statutory intent:
While it is permissible in this jurisdiction to consult the debates and proceedings of the
constitutional convention in order to arrive at the reason and purpose of the resulting
Constitution, resort thereto may be had only when other guides fail as said proceedings are
powerless to vary the terms of the Constitution when the meaning is clear. Debates in the
constitutional convention "are of value as showing the views of the individual members, and
as indicating the reasons for their votes, but they give us no light as to the views of the large
majority who did not talk xxx. We think it safer to construe the constitution from what appears
upon its face."97

Moreover, it is easy to selectively cite passages, sometimes out of their proper context, in order to
assert a misleading interpretation. The effect can be dangerous. Minority or solitary views, anecdotal
ruminations, or even the occasional crude witticisms, may improperly acquire the mantle of
legislative intent by the sole virtue of their publication in the authoritative congressional record.
Hence, resort to legislative deliberations is allowable when the statute is crafted in such a manner as
to leave room for doubt on the real intent of the legislature.
Section 5 plainly evinces legislative intent to restrict the DTI Secretary's power to impose a general
safeguard measure by preconditioning such imposition on a positive determination by the Tariff
Commission. Such legislative intent should be given full force and effect, as the executive power to
impose definitive safeguard measures is but a delegated powerthe power of taxation, by nature
and by command of the fundamental law, being a preserve of the legislature. 98 Section 28(2), Article
VI of the 1987 Constitution confirms the delegation of legislative power, yet ensures that the
prerogative of Congress to impose limitations and restrictions on the executive exercise of this
power:
The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government.99
The safeguard measures which the DTI Secretary may impose under the SMA may take the
following variations, to wit: (a) an increase in, or imposition of any duty on the imported product; (b) a
decrease in or the imposition of a tariff-rate quota on the product; (c) a modification or imposition of
any quantitative restriction on the importation of the product into the Philippines; (d) one or more
appropriate adjustment measures, including the provision of trade adjustment assistance; and (e)
any combination of the above-described actions. Except for the provision of trade adjustment
assistance, the measures enumerated by the SMA are essentially imposts, which precisely are the
subject of delegation under Section 28(2), Article VI of the 1987 Constitution. 100
This delegation of the taxation power by the legislative to the executive is authorized by the
Constitution itself.101At the same time, the Constitution also grants the delegating authority
(Congress) the right to impose restrictions and limitations on the taxation power delegated to the
President.102 The restrictions and limitations imposed by Congress take on the mantle of a
constitutional command, which the executive branch is obliged to observe.
The SMA empowered the DTI Secretary, as alter ego of the President,103 to impose definitive general
safeguard measures, which basically are tariff imposts of the type spoken of in the Constitution.
However, the law did not grant him full, uninhibited discretion to impose such measures. The DTI
Secretary authority is derived from the SMA; it does not flow from any inherent executive power.
Thus, the limitations imposed by Section 5 are absolute, warranted as they are by a constitutional
fiat.104
Philcemcor cites our 1912 ruling in Lamb v. Phipps105 to assert that the DTI Secretary, having the
final decision on the safeguard measure, has the power to evaluate the findings of the Tariff
Commission and make an independent judgment thereon. Given the constitutional and statutory
limitations governing the present case, the citation is misplaced. Lamb pertained to the discretion of
the Insular Auditor of the Philippine Islands, whom, as the Court recognized, "[t]he statutes of the
United States require[d] xxx to exercise his judgment upon the legality xxx [of] provisions of law and
resolutions of Congress providing for the payment of money, the means of procuring testimony upon
which he may act."106

Thus in Lamb, while the Court recognized the wide latitude of discretion that may have been vested
on the Insular Auditor, it also recognized that such latitude flowed from, and is consequently limited
by, statutory grant. However, in this case, the provision of the Constitution in point expressly
recognizes the authority of Congress to prescribe limitations in the case of tariffs, export/import
quotas and other such safeguard measures. Thus, the broad discretion granted to the Insular Auditor
of the Philippine Islands cannot be analogous to the discretion of the DTI Secretary which is
circumscribed by Section 5 of the SMA.
For that matter, Cario v. Commissioner on Human Rights,107 likewise cited by Philcemcor, is also
inapplicable owing to the different statutory regimes prevailing over that case and the present
petition. In Cario, the Court ruled that the constitutional power of the Commission on Human Rights
(CHR) to investigate human rights' violations did not extend to adjudicating claims on the
merits.108 Philcemcor claims that the functions of the Tariff Commission being "only investigatory," it
could neither decide nor adjudicate.109
The applicable law governing the issue in Cario is Section 18, Article XIII of the Constitution, which
delineates the powers and functions of the CHR. The provision does not vest on the CHR the power
to adjudicate cases, but only to investigate all forms of human rights violations. 110 Yet, without
modifying the thorough disquisition of the Court in Cario on the general limitations on the
investigatory power, the precedent is inapplicable because of the difference in the involved statutory
frameworks. The Constitution does not repose binding effect on the results of the CHR's
investigation.111 On the other hand, through Section 5 of the SMA and under the authority of Section
28(2), Article VI of the Constitution, Congress did intend to bind the DTI Secretary to the
determination made by the Tariff Commission.112 It is of no consequence that such determination
results from the exercise of investigatory powers by the Tariff Commission since Congress is well
within its constitutional mandate to limit the authority of the DTI Secretary to impose safeguard
measures in the manner that it sees fit.
The Court of Appeals and Philcemcor also rely on Section 13 of the SMA and Rule 13 of the SMA's
Implementing Rules in support of the view that the DTI Secretary may decide independently of the
determination made by the Tariff Commission. Admittedly, there are certain infelicities in the
language of Section 13 and Rule 13. But reliance should not be placed on the textual imprecisions.
Rather, Section 13 and Rule 13 must be viewed in light of the fundamental prescription imposed by
Section 5. 113
Section 13 of the SMA lays down the procedure to be followed after the Tariff Commission renders
its report. The provision reads in full:
SEC. 13. Adoption of Definitive Measures. Upon its positive determination, the
Commission shall recommend to the Secretary an appropriate definitive measure, in the
form of:
(a) An increase in, or imposition of, any duty on the imported product;
(b) A decrease in or the imposition of a tariff-rate quota (MAV) on the product;
(c) A modification or imposition of any quantitative restriction on the importation of the
product into the Philippines;
(d) One or more appropriate adjustment measures, including the provision of trade
adjustment assistance;

(e) Any combination of actions described in subparagraphs (a) to (d).

The Commission may also recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of imports of the product, to
alleviate the injury or threat thereof to the domestic industry, and to facilitate positive
adjustment to import competition.
The general safeguard measure shall be limited to the extent of redressing or preventing the
injury and to facilitate adjustment by the domestic industry from the adverse effects directly
attributed to the increased imports: Provided, however, That when quantitative import
restrictions are used, such measures shall not reduce the quantity of imports below the
average imports for the three (3) preceding representative years, unless clear justification is
given that a different level is necessary to prevent or remedy a serious injury.
A general safeguard measure shall not be applied to a product originating from a developing
country if its share of total imports of the product is less than three percent (3%): Provided,
however, That developing countries with less than three percent (3%) share collectively
account for not more than nine percent (9%) of the total imports.
The decision imposing a general safeguard measure, the duration of which is more than one
(1) year, shall be reviewed at regular intervals for purposes of liberalizing or reducing its
intensity. The industry benefiting from the application of a general safeguard measure shall
be required to show positive adjustment within the allowable period. A general safeguard
measure shall be terminated where the benefiting industry fails to show any improvement, as
may be determined by the Secretary.
The Secretary shall issue a written instruction to the heads of the concerned government
agencies to implement the appropriate general safeguard measure as determined by the
Secretary within fifteen (15) days from receipt of the report.
In the event of a negative final determination, or if the cash bond is in excess of the definitive
safeguard duty assessed, the Secretary shall immediately issue, through the Secretary of
Finance, a written instruction to the Commissioner of Customs, authorizing the return of the
cash bond or the remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final decision has been
made: Provided, That the government shall not be liable for any interest on the amount to be
returned. The Secretary shall not accept for consideration another petition from the same
industry, with respect to the same imports of the product under consideration within one (1)
year after the date of rendering such a decision.
When the definitive safeguard measure is in the form of a tariff increase, such increase shall
not be subject or limited to the maximum levels of tariff as set forth in Section 401(a) of the
Tariff and Customs Code of the Philippines.
To better comprehend Section 13, note must be taken of the distinction between the investigatory
and recommendatory functions of the Tariff Commission under the SMA.
The word "determination," as used in the SMA, pertains to the factual findings on whether there are
increased imports into the country of the product under consideration, and on whether such
increased imports are a substantial cause of serious injury or threaten to substantially cause serious
injury to the domestic industry.114The SMA explicitly authorizes the DTI Secretary to make a
preliminary determination,115 and the Tariff Commission to make the final determination. 116 The

distinction is fundamental, as these functions are not interchangeable. The Tariff Commission makes
its determination only after a formal investigation process, with such investigation initiated only if
there is a positive preliminary determination by the DTI Secretary under Section 7 of the SMA. 117 On
the other hand, the DTI Secretary may impose definitive safeguard measure only if there is a
positive final determination made by the Tariff Commission.118
In contrast, a "recommendation" is a suggested remedial measure submitted by the Tariff
Commission under Section 13 after making a positive final determination in accordance with Section
5. The Tariff Commission is not empowered to make a recommendation absent a positive final
determination on its part.119 Under Section 13, the Tariff Commission is required to recommend to the
[DTI] Secretary an "appropriate definitive measure."120 The Tariff Commission "may also recommend
other actions, including the initiation of international negotiations to address the underlying cause of
the increase of imports of the products, to alleviate the injury or threat thereof to the domestic
industry and to facilitate positive adjustment to import competition." 121
The recommendations of the Tariff Commission, as rendered under Section 13, are not obligatory on
the DTI Secretary. Nothing in the SMA mandates the DTI Secretary to adopt the recommendations
made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the
application of such safeguard measures is in the public interest, notwithstanding the Tariff
Commission's recommendation on the appropriate safeguard measure based on its positive final
determination.122 The non-binding force of the Tariff Commission's recommendations is congruent
with the command of Section 28(2), Article VI of the 1987 Constitution that only the President may
be empowered by the Congress to impose appropriate tariff rates, import/export quotas and other
similar measures.123 It is the DTI Secretary, as alter ego of the President, who under the SMA may
impose such safeguard measures subject to the limitations imposed therein. A contrary conclusion
would in essence unduly arrogate to the Tariff Commission the executive power to impose the
appropriate tariff measures. That is why the SMA empowers the DTI Secretary to adopt safeguard
measures other than those recommended by the Tariff Commission.
Unlike the recommendations of the Tariff Commission, its determination has a different effect on the
DTI Secretary. Only on the basis of a positive final determination made by the Tariff Commission
under Section 5 can the DTI Secretary impose a general safeguard measure. Clearly, then the DTI
Secretary is bound by thedetermination made by the Tariff Commission.
Some confusion may arise because the sixth paragraph of Section 13 124 uses the variant word
"determined" in a different context, as it contemplates "the appropriate general safeguard measure
as determined by the Secretary within fifteen (15) days from receipt of the report." Quite plainly, the
word "determined" in this context pertains to the DTI Secretary's power of choice of the appropriate
safeguard measure, as opposed to the Tariff Commission's power to determine the existence of
conditions necessary for the imposition of any safeguard measure. In relation to Section 5, such
choice also relates to the mandate of the DTI Secretary to establish that the application of safeguard
measures is in the public interest, also within the fifteen (15) day period. Nothing in Section 13
contradicts the instruction in Section 5 that the DTI Secretary is allowed to impose the general
safeguard measures only if there is a positive determination made by the Tariff Commission.
Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is captioned "Final Determination by
the Secretary." The assailed Decision and Philcemcor latch on this phraseology to imply that the
factual determination rendered by the Tariff Commission under Section 5 may be amended or
reversed by the DTI Secretary. Of course, implementing rules should conform, not clash, with the law
that they seek to implement, for a regulation which operates to create a rule out of harmony with the
statute is a nullity.125 Yet imperfect draftsmanship aside, nothing in Rule 13.2 implies that the DTI

Secretary can set aside the determination made by the Tariff Commission under the aegis of Section
5. This can be seen by examining the specific provisions of Rule 13.2, thus:
RULE 13.2. Final Determination by the Secretary
RULE 13.2.a. Within fifteen (15) calendar days from receipt of the Report of the
Commission, the Secretary shall make a decision, taking into consideration the
measures recommended by the Commission.
RULE 13.2.b. If the determination is affirmative, the Secretary shall issue, within two
(2) calendar days after making his decision, a written instruction to the heads of the
concerned government agencies to immediately implement the appropriate general
safeguard measure as determined by him. Provided, however, that in the case of
non-agricultural products, the Secretary shall first establish that the imposition of the
safeguard measure will be in the public interest.
RULE 13.2.c. Within two (2) calendar days after making his decision, the Secretary
shall also order its publication in two (2) newspapers of general circulation. He shall
also furnish a copy of his Order to the petitioner and other interested parties, whether
affirmative or negative. (Emphasis supplied.)
Moreover, the DTI Secretary does not have the power to review the findings of the Tariff Commission
for it is not subordinate to the Department of Trade and Industry ("DTI"). It falls under the
supervision, not of the DTI nor of the Department of Finance (as mistakenly asserted by Southern
Cross),126 but of the National Economic Development Authority, an independent planning
agency of the government of co-equal rank as the DTI.127 As the supervision and control of a
Department Secretary is limited to the bureaus, offices, and agencies under him, 128 the DTI Secretary
generally cannot exercise review authority over actions of the Tariff Commission. Neither does the
SMA specifically authorize the DTI Secretary to alter, amend or modify in any way the determination
made by the Tariff Commission. The most that the DTI Secretary could do to express displeasure
over the Tariff Commission's actions is to ignore its recommendation, but not its determination.
The word "determination" as used in Rule 13.2 of the Implementing Rules is dissonant with the same
word as employed in the SMA, which in the latter case is undeviatingly in reference to the
determination made by the Tariff Commission. Beyond the resulting confusion, however, the
divergent use in Rule 13.2 is explicable as the Rule textually pertains to the power of the DTI
Secretary to review the recommendations of the Tariff Commission, not the latter's determination.
Indeed, an examination of the specific provisions show that there is no real conflict to reconcile. Rule
13.2 respects the logical order imposed by the SMA. The Rule does not remove the essential
requirement under Section 5 that a positive final determination be made by the Tariff Commission
before a definitive safeguard measure may be imposed by the DTI Secretary.
The assailed Decision characterizes the findings of the Tariff Commission as merely
recommendatory and points to the DTI Secretary as the authority who renders the final
decision.129 At the same time, Philcemcor asserts that the Tariff Commission's functions are merely
investigatory, and as such do not include the power to decide or adjudicate. These contentions,
viewed in the context of the fundamental requisite set forth by Section 5, are untenable. They run
counter to the statutory prescription that a positive final determination made by the Tariff Commission
should first be obtained before the definitive safeguard measures may be laid down.
Was it anomalous for Congress to have provided for a system whereby the Tariff Commission may
preclude the DTI, an office of higher rank, from imposing a safeguard measure? Of course, this

Court does not inquire into the wisdom of the legislature but only charts the boundaries of powers
and functions set in its enactments. But then, it is not difficult to see the internal logic of this statutory
framework.
For one, as earlier stated, the DTI cannot exercise review powers over the Tariff Commission which
is not its subordinate office.
Moreover, the mechanism established by Congress establishes a measure of check and balance
involving two different governmental agencies with disparate specializations. The matter of
safeguard measures is of such national importance that a decision either to impose or not to impose
then could have ruinous effects on companies doing business in the Philippines. Thus, it is ideal to
put in place a system which affords all due deliberation and calls to fore various governmental
agencies exercising their particular specializations.
Finally, if this arrangement drawn up by Congress makes it difficult to obtain a general safeguard
measure, it is because such safeguard measure is the exception, rather than the rule. The
Philippines is obliged to observe its obligations under the GATT, under whose framework trade
liberalization, not protectionism, is laid down. Verily, the GATT actually prescribes conditions before a
member-country may impose a safeguard measure. The pertinent portion of the GATT Agreement
on Safeguards reads:
2. A Member may only apply a safeguard measure to a product only if that member has
determined, pursuant to the provisions set out below, that such product is being imported
into its territory in such increased quantities, absolute or relative to domestic production, and
under such conditions as to cause or threaten to cause serious injury to the domestic
industry that produces like or directly competitive products. 130
3. (a) A Member may apply a safeguard measure only following an investigation by the
competent authorities of that Member pursuant to procedures previously established and
made public in consonance with Article X of the GATT 1994. This investigation shall include
reasonable public notice to all interested parties and public hearings or other appropriate
means in which importers, exporters and other interested parties could present evidence and
their views, including the opportunity to respond to the presentations of other parties and to
submit their views, inter alia, as to whether or not the application of a safeguard measure
would be in the public interest. The competent authorities shall publish a report setting forth
their findings and reasoned conclusions reached on all pertinent issues of fact and law.131
The SMA was designed not to contradict the GATT, but to complement it. The two requisites laid
down in Section 5 for a positive final determination are the same conditions provided under the
GATT Agreement on Safeguards for the application of safeguard measures by a member country.
Moreover, the investigatory procedure laid down by the SMA conforms to the procedure required by
the GATT Agreement on Safeguards. Congress has chosen the Tariff Commission as the competent
authority to conduct such investigation. Southern Cross stresses that applying the provision of the
GATT Agreement on Safeguards, the Tariff Commission is clearly empowered to arrive at binding
conclusions.132 We agree: binding on the DTI Secretary is the Tariff Commission's determinations on
whether a product is imported in increased quantities, absolute or relative to domestic production
and whether any such increase is a substantial cause of serious injury or threat thereof to the
domestic industry.133
Satisfied as we are with the proper statutory paradigm within which the SMA should be analyzed, the
flaws in the reasoning of the Court of Appeals and in the arguments of the respondents become

apparent. To better understand the dynamics of the procedure set up by the law leading to the
imposition of definitive safeguard measures, a brief step-by-step recount thereof is in order.
1. After the initiation of an action involving a general safeguard measure, 134 the DTI Secretary makes
a preliminary determination whether the increased imports of the product under consideration
substantially cause or threaten to substantially cause serious injury to the domestic industry,135 and
whether the imposition of a provisional measure is warranted under Section 8 of the SMA. 136 If the
preliminary determination is negative, it is implied that no further action will be taken on the
application.
2. When his preliminary determination is positive, the Secretary immediately transmits the records
covering the application to the Tariff Commission for immediate formal investigation. 137
3. The Tariff Commission conducts its formal investigation, keyed towards making a final
determination. In the process, it holds public hearings, providing interested parties the opportunity to
present evidence or otherwise be heard.138 To repeat, Section 5 enumerates what the Tariff
Commission is tasked to determine: (a) whether a product is being imported into the country in
increased quantities, irrespective of whether the product is absolute or relative to the domestic
production; and (b) whether the importation in increased quantities is such that it causes serious
injury or threat to the domestic industry.139 The findings of the Tariff Commission as to these matters
constitute the final determination, which may be either positive or negative.
4. Under Section 13 of the SMA, if the Tariff Commission makes a positive determination, the Tariff
Commission "recommends to the [DTI] Secretary an appropriate definitive measure." The Tariff
Commission "may also recommend other actions, including the initiation of international negotiations
to address the underlying cause of the increase of imports of the products, to alleviate the injury or
threat thereof to the domestic industry, and to facilitate positive adjustment to import competition." 140
5. If the Tariff Commission makes a positive final determination, the DTI Secretary is then to decide,
within fifteen (15) days from receipt of the report, as to what appropriate safeguard measures should
he impose.
6. However, if the Tariff Commission makes a negative final determination, the DTI Secretary cannot
impose any definitive safeguard measure. Under Section 13, he is instructed instead to return
whatever cash bond was paid by the applicant upon the initiation of the action for safeguard
measure.
The Effect of the Court's Decision
The Court of Appeals erred in remanding the case back to the DTI Secretary, with the instruction that
the DTI Secretary may impose a general safeguard measure even if there is no positive final
determination from the Tariff Commission. More crucially, the Court of Appeals could not have
acquired jurisdiction over Philcemcor's petition for certiorari in the first place, as Section 29 of the
SMA properly vests jurisdiction on the CTA. Consequently, the assailed Decision is an absolute
nullity, and we declare it as such.
What is the effect of the nullity of the assailed Decision on the 5 June 2003 Decision of the DTI
Secretary imposing the general safeguard measure? We have recognized that any initial judicial
review of a DTI ruling in connection with the imposition of a safeguard measure belongs to the CTA.
At the same time, the Court also recognizes the fundamental principle that a null and void judgment
cannot produce any legal effect. There is sufficient cause to establish that the 5 June
2003 Decision of the DTI Secretary resulted from the assailed Court of Appeals Decision, even if the

latter had not yet become final. Conversely, it can be concluded that it was because of the putative
imprimatur of the Court of Appeals' Decision that the DTI Secretary issued his ruling imposing the
safeguard measure. Since the 5 June 2003 Decision derives its legal effect from the void Decision of
the Court of Appeals, this ruling of the DTI Secretary is consequently void. The spring cannot rise
higher than the source.
The DTI Secretary himself acknowledged that he drew stimulating force from the appellate
court's Decision for in his own 5 June 2003 Decision, he declared:
From the aforementioned ruling, the CA has remanded the case to the DTI Secretary for a
final decision. Thus, there is no legal impediment for the Secretary to decide on the
application.141
The inescapable conclusion is that the DTI Secretary needed the assailed Decision of the Court of
Appeals to justify his rendering a second Decision. He explicitly invoked the Court of
Appeals' Decision as basis for rendering his 5 June 2003 ruling, and implicitly recognized that
without such Decision he would not have the authority to revoke his previous ruling and render a
new, obverse ruling.
It is clear then that the 25 June 2003 Decision of the DTI Secretary is a product of the void Decision,
it being an attempt to carry out such null judgment. There is therefore no choice but to declare it void
as well, lest we sanction the perverse existence of a fruit from a non-existent tree. It does not even
matter what the disposition of the 25 June 2003 Decision was, its nullity would be warranted even if
the DTI Secretary chose to uphold his earlier ruling denying the application for safeguard measures.
It is also an unfortunate spectacle to behold the DTI Secretary, seeking to enforce a judicial decision
which is not yet final and actually pending review on appeal. Had it been a judge who attempted to
enforce a decision that is not yet final and executory, he or she would have readily been subjected to
sanction by this Court. The DTI Secretary may be beyond the ambit of administrative review by this
Court, but we are capacitated to allocate the boundaries set by the law of the land and to exact fealty
to the legal order, especially from the instrumentalities and officials of government.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is
DECLARED NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25 June
2003 is also DECLARED NULL AND VOID and SET ASIDE. No Costs.
SO ORDERED.

COMMISSIONER OF INTERNAL G.R. Nos. 167274-75

REVENUE,
Petitioner, Present:
QUISUMBING, J.,
Chairperson,

YNARES-SANTIAGO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
FORTUNE TOBACCO
CORPORATION, Promulgated:
Respondent.
July 21, 2008
x---------------------------------------------------------------------------x

DECISION
TINGA, J.:

Simple and uncomplicated is the central issue involved, yet whopping is the
amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and the Court of
Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was granted a tax refund
or tax credit representing specific taxes erroneously collected from its tobacco
products.The tax refund is being re-claimed by the Commissioner of Internal
Revenue (Commissioner) in this petition.

The following undisputed facts, summarized by the Court of Appeals, are quoted in
the assailed Decision[1] dated 28 September 2004:

CAG.R. SP No. 80675

xxxx

Petitioner[2] is a domestic corporation duly organized and existing

under and by virtue of the laws of the Republic of thePhilippines, with
principal address at Fortune Avenue, Parang, Marikina City.

Petitioner is the manufacturer/producer of, among others, the

following cigarette brands, with tax rate classification based on net retail
price prescribed by Annex D to R.A. No. 4280, to wit:

Brand Tax Rate

Champion M 100 P1.00
Salem M 100 P1.00
Salem M King P1.00
Camel F King P1.00
Camel Lights Box 20s P1.00
Camel Filters Box 20s P1.00
Winston F Kings P5.00
Winston Lights P5.00

Immediately prior to January 1, 1997, the above-mentioned

cigarette brands were subject to ad valorem tax pursuant to then Section
142 of the Tax Code of 1977, as amended. However, on January 1, 1997,
R.A. No. 8240 took effect whereby a shift from the ad valorem tax

(AVT) system to the specific tax system was made and subjecting the
aforesaid cigarette brands to specific tax under [S]ection 142 thereof,
now renumbered as Sec. 145 of the Tax Code of 1997, pertinent
provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. There shall be levied, assessed and collected

on cigars a tax of One peso (P1.00) per cigar.

(B) Cigarettes packed by hand. There shall be levied,

assessesed and collected on cigarettes packed by hand a tax of
Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine. There shall be levied,

assessed and collected on cigarettes packed by machine a tax at
the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack, the tax
shall be Twelve (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the
value added tax) exceeds Six pesos and Fifty centavos ( P6.50) but
does not exceed Ten pesos (P10.00) per pack, the tax shall
be Eight Pesos (P8.00) per pack.

(3) If the net retail price (excluding the excise tax and the
value-added tax) is Five pesos (P5.00) but does not exceed Six
Pesos and fifty centavos (P6.50) per pack, the tax shall be Five
pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax
shall be One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are
introduced in the domestic market after the effectivity of R.A. No.
8240 shall be taxed under the highest classification of any variant
of that brand.
The excise tax from any brand of cigarettes within the next
three (3) years from the effectivity of R.A. No. 8240 shall not be
lower than the tax, which is due from each brand on October 1,
1996. Provided, however, that in cases were (sic) the excise tax
rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will
result in an increase in excise tax of more than seventy percent
(70%), for a brand of cigarette, the increase shall take effect in
two tranches: fifty percent (50%) of the increase shall be effective
in 1997 and one hundred percent (100%) of the increase shall be
effective in 1998.

Duly registered or existing brands of cigarettes or new

brands thereof packed by machine shall only be packed in
twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000. (Emphasis supplied)

New brands shall be classified according to their current

net retail price.
For the above purpose, net retail price shall mean the price
at which the cigarette is sold on retail in twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable
excise tax and value-added tax. For brands which are marketed
only outside Metro [M]anila, the net retail price shall mean the
price at which the cigarette is sold in five (5) major supermarkets
in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its
average retail price as of October 1, 1996, as set forth in Annex D,
shall remain in force until revised by Congress.
Variant of a brand shall refer to a brand on which a
modifier is prefixed and/or suffixed to the root name of the brand
and/or a different brand which carries the same logo or design of
the existing brand.
To implement the provisions for a twelve percent (12%) increase
of excise tax on, among others, cigars and cigarettes packed by
machines by January 1, 2000, the Secretary of Finance, upon
recommendation of the respondent Commissioner of Internal Revenue,
issued Revenue Regulations No. 17-99, dated December 16, 1999,
which provides the increase on the applicable tax rates on cigar and
cigarettes as follows:

SECTION

DESCRIPTION OF
ARTICLES

PRESENT
SPECIFIC TAX
RATE PRIOR TO
JAN. 1, 2000

NEW SPECIFIC
TAX RATE
EFFECTIVE
JAN. 1, 2000

145

(A)
(B)Cigarettes
by machine

P1.00/cigar

P1.12/cigar

packed

(1) Net retail price

(excluding VAT and P12.00/pack
excise) exceedsP10.00
per pack
(2) Exceeds P10.00 per P8.00/pack
pack
(3) Net retail price
(excluding VAT and P5.00/pack
excise)
is P5.00
toP6.50 per pack
(4) Net Retail Price
(excluding VAT and P1.00/pack
excise) is belowP5.00
per pack

P13.44/ pack

P8.96/pack

P5.60/pack

P1.12/pack

Revenue Regulations No. 17-99 likewise provides in the last

paragraph of Section 1 thereof, (t)hat the new specific tax rate for
any existing brand of cigars, cigarettes packed by machine,
distilled spirits, wines and fermented liquor shall not be lower than
the excise tax that is actually being paid prior to January 1, 2000.
For the period covering January 1-31, 2000, petitioner allegedly
paid specific taxes on all brands manufactured and removed in the total
amounts of P585,705,250.00.

On February 7, 2000, petitioner filed with respondents Appellate

Division a claim for refund or tax credit of its purportedly overpaid

excise tax for the month of January 2000 in the amount

of P35,651,410.00
On June 21, 2001, petitioner filed with respondents Legal
Service a letter dated June 20, 2001 reiterating all the claims for
refund/tax credit of its overpaid excise taxes filed on various dates,
including the present claim for the month of January 2000 in the
amount of P35,651,410.00.
As there was no action on the part of the respondent, petitioner
filed the instant petition for review with this Court onDecember 11,
2001, in order to comply with the two-year period for filing a claim for
refund.
In his answer filed on January 16, 2002, respondent raised the
following Special and Affirmative Defenses;
4. Petitioners alleged claim for refund is subject to
administrative routinary investigation/examination by the
Bureau;
5.

The amount of P35,651,410 being claimed by petitioner

as alleged overpaid excise tax for the month of January
2000 was not properly documented.

6.

In an action for tax refund, the burden of proof is on the

taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to its claim for refund/credit.

7.

Petitioner must show that it has complied with the

provisions of Section 204(C) in relation [to] Section 229
of the Tax Code on the prescriptive period for claiming
tax refund/credit;

8.

Claims for refund are construed strictly against the

claimant for the same partake of tax exemption from
taxation; and

9.

The last paragraph of Section 1 of Revenue Regulation[s]

[No.]17-99 is a valid implementing regulation which has
the force and effect of law.

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said
case questions the CTAs December 4, 2003 decision in CTA Case No.
6612 granting respondents[3] claim for refund of the amount
of P355,385,920.00 representing erroneously or illegally collected
specific taxes covering the period January 1, 2002 to December 31,
2002, as well as its March 17, 2004 Resolution denying a
reconsideration thereof.
xxxx
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax
Appeals reduced the issues to be resolved into two as stipulated by
the parties, to wit: (1) Whether or not the last paragraph of Section 1 of
Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent
provisions of Republic Act [No.] 8240, now incorporated in Section 145 of
the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a
refund of P35,651,410.00 as alleged overpaid excise tax for the month of
January 2000.
xxxx
Hence, the respondent CTA in its assailed October 21, 2002 [twin]
Decisions[s] disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the
instant petition meritorious and in accordance with law.
Accordingly, respondent is hereby ORDERED to REFUND
to petitioner the amount of P35,651.410.00 representing
erroneously paid excise taxes for the period January 1
to January 31, 2000.
SO ORDERED.
Herein petitioner sought reconsideration of the above-quoted decision. In
[twin] resolution[s] [both] dated July 15, 2003, the Tax Court, in an

apparent change of heart, granted the petitioners consolidated motions for

reconsideration, thereby denying the respondents claim for refund.

However, on consolidated motions for reconsideration filed by the

respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002resolution
was set aside, and the Tax Court ruled, this time with a semblance of
finality, that the respondent is entitled to the refund claimed. Hence, in a
resolution dated November 4, 2003, the tax court reinstated its December
21, 2002 Decision and disposed as follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383
are hereby REINSTATED. Accordingly, respondent is
hereby ORDERED to REFUND petitioner the total amount
of P680,387,025.00 representing erroneously paid excise
taxes for the period January 1, 2000 to January 31,
2000 and February 1, 2000 to December 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered
decision in CTA Case No. 6612 granting the prayer for the refund of the
amount of P355,385,920.00 representing overpaid excise tax for the period
covering January 1, 2002 to December 31, 2002. The tax court disposed of
the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is
GRANTED. Accordingly, respondent is hereby ORDERED
to REFUND to petitioner the amount of P355,385,920.00
representing overpaid excise tax for the period
coveringJanuary 1, 2002 to December 31, 2002.
SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied
in a Resolution dated March 17, 2004.[4] (Emphasis supplied) (Citations
omitted)

The Commissioner appealed the aforesaid decisions of the CTA. The petition
questioning the grant of refund in the amount ofP680,387,025.00 was docketed as
CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the amount
ofP355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were
consolidated and eventually denied by the Court of Appeals. The appellate court
also denied reconsideration in its Resolution[5] dated 1 March 2005.
In its Memorandum[6] 22 dated November 2006, filed on behalf of the
Commissioner, the Office of the Solicitor General (OSG) seeks to convince the
Court that the literal interpretation given by the CTA and the Court of Appeals of
Section 145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax
imposable on 1 January 2000 than that imposable during the transition
period. Instead of an increase of 12% in the tax rate effective on 1 January 2000 as
allegedly mandated by the Tax Code, the appellate courts ruling would result in a
significant decrease in the tax rate by as much as 66%.
The OSG argues that Section 145 of the Tax Code admits of several interpretations,
such as:
1. That by January 1, 2000, the excise tax on cigarettes should be the
higher tax imposed under the specific tax system and the tax
imposed under the ad valorem tax system plus the 12% increase
imposed by par. 5, Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not apply to
the brands of cigarettes listed under Annex D referred to in par. 8,
Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail price
as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code even
if the resulting figure will be lower than the amount already being

paid at the end of the transition period. This is the interpretation

followed by both the CTA and the Court of Appeals. [7]

This being so, the interpretation which will give life to the legislative intent to raise
revenue should govern, the OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and
must, therefore, be construed strictly against the taxpayer, such as Fortune
Tobacco.
In its Memorandum[8] dated 10 November 2006, Fortune Tobacco argues that the
CTA and the Court of Appeals merely followed the letter of the law when they
ruled that the basis for the 12% increase in the tax rate should be the net retail price
of the cigarettes in the market as outlined in paragraph C, sub paragraphs (1)-(4),
Section 145 of the Tax Code. The Commissioner allegedly has gone beyond his
delegated rule-making power when he promulgated, enforced and implemented
Revenue Regulation No. 17-99, which effectively created a separate classification
for cigarettes based on the excise tax actually being paid prior to January 1, 2000.[9]

It should be mentioned at the outset that there is no dispute between the fact of
payment of the taxes sought to be refunded and the receipt thereof by the Bureau of
Internal Revenue (BIR). There is also no question about the mathematical accuracy
of Fortune Tobaccos claim since the documentary evidence in support of the refund
has not been controverted by the revenue agency. Likewise, the claims have been
made and the actions have been filed within the two (2)-year prescriptive period
provided under Section 229 of the Tax Code.
The power to tax is inherent in the State, such power being inherently
legislative, based on the principle that taxes are a grant of the people who are
taxed, and the grant must be made by the immediate representatives of the people;
and where the people have laid the power, there it must remain and be exercised.[10]

This entire controversy revolves around the interplay between Section 145 of the
Tax Code and Revenue Regulation 17-99.The main issue is an inquiry into whether
the revenue regulation has exceeded the allowable limits of legislative delegation.
For ease of reference, Section 145 of the Tax Code is again reproduced in full as
follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.There shall be levied, assessed and collected on cigars

a tax of One peso (P1.00) per cigar.

(B). Cigarettes packed by hand.There shall be levied, assessed

and collected on cigarettes packed by hand a tax of Forty centavos
(P0.40) per pack.

(C) Cigarettes packed by machine.There shall be levied,

assessed and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the valueadded tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve
pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value
added tax) exceeds Six pesos and Fifty centavos ( P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00)
per pack.

(3) If the net retail price (excluding the excise tax and the valueadded tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty
centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the valueadded tax) is below Five pesos (P5.00) per pack, the tax shall be One
peso (P1.00) per pack;
Variants of existing brands of cigarettes which are introduced in
the domestic market after the effectivity of R.A. No. 8240 shall be taxed
under the highest classification of any variant of that brand.
The excise tax from any brand of cigarettes within the next three
(3) years from the effectivity of R.A. No. 8240 shall not be lower than
the tax, which is due from each brand on October 1, 1996. Provided,
however, That in cases where the excise tax rates imposed in paragraphs
(1), (2), (3) and (4) hereinabove will result in an increase in excise tax of
more than seventy percent (70%), for a brand of cigarette, the increase
shall take effect in two tranches: fifty percent (50%) of the increase shall
be effective in 1997 and one hundred percent (100%) of the increase
shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands

thereof packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve
percent (12%) on January 1, 2000.
New brands shall be classified according to their current net retail
price.
For the above purpose, net retail price shall mean the price at
which the cigarette is sold on retail in twenty (20) major supermarkets in
Metro Manila (for brands of cigarettes marketed nationally), excluding
the amount intended to cover the applicable excise tax and value-added
tax. For brands which are marketed only outside Metro Manila, the net
retail price shall mean the price at which the cigarette is sold in five (5)

major intended to cover the applicable excise tax and the value-added
tax.
The classification of each brand of cigarettes based on its average
retail price as of October 1, 1996, as set forth in Annex D, shall remain
in force until revised by Congress.
Variant of a brand shall refer to a brand on which a modifier is
prefixed and/or suffixed to the root name of the brand and/or a different
brand which carries the same logo or design of the existing brand. [11]
(Emphasis supplied)

Revenue Regulation 17-99, which was issued pursuant to the unquestioned

authority of the Secretary of Finance to promulgate rules and regulations for the
effective implementation of the Tax Code,[12] interprets the above-quoted provision
and reflects the 12% increase in excise taxes in the following manner:

SECTION

DESCRIPTION OF
ARTICLES

145

(A) Cigars
(B)Cigarettes
by Machine

PRESENT
SPECIFIC TAX
RATES PRIOR
TO JAN. 1, 2000
P1.00/cigar

NEW SPECIFIC
TAX RATE
Effective Jan.. 1,
2000
P1.12/cigar

packed

(1) Net Retail Price

(excluding VAT and P12.00/pack
Excise) exceedsP10.00
per pack
(2) Net Retail Price
(excluding VAT and
Excise) is P6.51 up P8.00/pack
to P10.00 per pack

P13.44/pack

P8.96/pack

(3) Net Retail Price

(excluding VAT and
excise)
is P5.00 P5.00/pack
toP6.50 per pack
(4) Net Retail Price
(excluding VAT and
excise) is belowP5.00
P1.00/pack
per pack)

P5.60/pack

P1.12/pack

This table reflects Section 145 of the Tax Code insofar as it mandates a 12%
increase effective on 1 January 2000 based on the taxes indicated under paragraph
C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99 went further
and addedthat [T]he new specific tax rate for any existing brand of cigars,
cigarettes packed by machine, distilled spirits, wines and fermented liquor shall
not be lower than the excise tax that is actually being paid prior to January 1,
2000.[13]
Parenthetically, Section 145 states that during the transition period, i.e., within the
next three (3) years from the effectivity of the Tax Code, the excise tax from any
brand of cigarettes shall not be lower than the tax due from each brand on 1
October 1996. This qualification, however, is conspicuously absent as regards the
12% increase which is to be applied on cigars and cigarettes packed by machine,
among others, effective on 1 January 2000. Clearly and unmistakably, Section 145
mandates a new rate of excise tax for cigarettes packed by machine due to the 12%
increase effective on 1 January 2000 without regard to whether the revenue
collection starting from this period may turn out to be lower than that collected
prior to this date.
By adding the qualification that the tax due after the 12% increase becomes
effective shall not be lower than the tax actually paid prior to 1 January 2000,
Revenue Regulation No. 17-99 effectively imposes a tax which is the higher
amount between thead valorem tax being paid at the end of the three (3)-year
transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as

increased by 12%a situation not supported by the plain wording of Section 145 of
the Tax Code.

This is not the first time that national revenue officials had ventured in the area of
unauthorized administrative legislation.

In Commissioner of Internal Revenue v. Reyes,[14] respondent was not

informed in writing of the law and the facts on which the assessment of estate taxes
was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic
Act (R.A.) No. 8424. She was merely notified of the findings by the
Commissioner, who had simply relied upon the old provisions of the law and
Revenue Regulation No. 12-85 which was based on the old provision of the law.
The Court held that in case of discrepancy between the law as amended and the
implementing regulation based on the old law, the former necessarily prevails. The
law must still be followed, even though the existing tax regulation at that time
provided for a different procedure.[15]
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,[16] the
tax authorities gave the term tax credit in Sections 2(i) and 4 of Revenue
Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides.
Their interpretation muddled up the intent of Congress to grant a mere discount
privilege and not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing regulations may not enlarge,
alter or restrict the provisions of the law it administers, and it cannot engraft
additional requirements not contemplated by the legislature. The Court emphasized
that tax administrators are not allowed to expand or contract the legislative
mandate and that the plain meaning rule or verba legis in statutory construction
should be applied such that where the words of a statute are clear, plain and free
from ambiguity, it must be given its literal meaning and applied without attempted
interpretation.

As we have previously declared, rule-making power must be confined to details for

regulating the mode or proceedings in order to carry into effect the law as it has
been enacted, and it cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law because any
resulting discrepancy between the two will always be resolved in favor of the basic
law.[17]
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,
Commissioner Jose Ong issued Revenue Memorandum Order (RMO) No. 1591, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91,
imposing a 5% lending investors tax under the 1977 Tax Code, as amended by
Executive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored the
imposition on the definition of lending investors provided in the 1977 Tax Code
which, according to him, was broad enough to include pawnshop
operators. However, the Court noted that pawnshops and lending investors were
subjected to different tax treatments under the Tax Code prior to its amendment by
the executive order; that Congress never intended to treat pawnshops in the same
way as lending investors; and that the particularly involved section of the Tax Code
explicitly subjected lending investors and dealers in securities only to percentage
tax. And so the Court affirmed the invalidity of the challenged circulars, stressing
that administrative issuances must not override, supplant or modify the law, but
must remain consistent with the law they intend to carry out.[19]
[18]

In Philippine Bank of Communications v. Commissioner of Internal

Revenue,[20] the then acting Commissioner issued RMC 7-85, changing the
prescriptive period of two years to ten years for claims of excess quarterly income
tax payments, thereby creating a clear inconsistency with the provision of Section
230 of the 1977 Tax Code. The Court nullified the circular, ruling that the BIR did
not simply interpret the law; rather it legislated guidelines contrary to the statute
passed by Congress. The Court held:
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose

duty is to enforce it, is entitled to great respect by the

courts. Nevertheless, such interpretation is not conclusive and will be
ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and
implement.[21]

In Commissioner of Internal Revenue v. CA, et al.,[22] the central issue was the
validity of RMO 4-87 which had construed the amnesty coverage under E.O. No.
41 (1986) to include only assessments issued by the BIR after the promulgation of
the executive order on 22 August 1986 and not assessments made to that
date. Resolving the issue in the negative, the Court held:
x x x all such issuances must not override, but must remain
consistent and in harmony with, the law they seek to apply and
implement. Administrative rules and regulations are intended to carry
out, neither to supplant nor to modify, the law.[23]

xxx

If, as the Commissioner argues, Executive Order No. 41 had not

been intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply so
provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to be in
the nature of a general grant of tax amnesty subject only to the cases
specifically excepted by it.[24]

In the case at bar, the OSGs argument that by 1 January 2000, the excise tax on
cigarettes should be the higher tax imposed under the specific tax system and the
tax imposed under the ad valorem tax system plus the 12% increase imposed by
paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify
what is clearly an impermissible incursion into the limits of administrative

legislation. Such an interpretation is not supported by the clear language of the law
and is obviously only meant to validate the OSGs thesis that Section 145 of the Tax
Code is ambiguous and admits of several interpretations.
The contention that the increase of 12% starting on 1 January 2000 does not apply
to
the
brands
of
cigarettes
listed
under
Annex
D is likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax
Code simply states that, [T]he classification of each brand of cigarettes based on its
average net retail price as of October 1, 1996, as set forth in Annex D, shall remain
in force until revised by Congress. This declaration certainly does not lend itself to
the interpretation given to it by the OSG. As plainly worded, the average net retail
prices of the listed brands under Annex D, which classify cigarettes according to
their net retail price into low, medium or high, obviously remain the bases for the
application of the increase in excise tax rates effective on 1 January 2000.
The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed
indefensibly flawed. The Commissioner cannot seek refuge in his claim that the
purpose behind the passage of the Tax Code is to generate additional revenues for
the government. Revenue generation has undoubtedly been a major consideration
in the passage of the Tax Code. However, as borne by the legislative record, [25] the
shift from the ad valorem system to the specific tax system
is likewise meant topromote fair competition among the players in the industries
concerned, to ensure an equitable distribution of the tax burden and to simplify tax
administration by classifying cigarettes, among others, into high, medium and lowpriced based on their net retail price and accordingly graduating tax rates.
At any rate, this advertence to the legislative record is merely gratuitous because,
as we have held, the meaning of the law is clear on its face and free from the
ambiguities that the Commissioner imputes. We simply cannot disregard the letter
of the law on the pretext of pursuing its spirit.[26]
Finally, the Commissioners contention that a tax refund partakes the nature
of a tax exemption does not apply to the tax refund to which Fortune Tobacco is
entitled. There is parity between tax refund and tax exemption only when the
former is based either on a tax exemption statute or a tax refund statute. Obviously,
that is not the situation here. Quite the contrary, Fortune Tobaccos claim for refund

is premised on its erroneous payment of the tax, or better still the governments
exaction in the absence of a law.

Tax exemption is a result of legislative grace. And he who claims an

exemption from the burden of taxation must justify his claim by showing that the
legislature intended to exempt him by words too plain to be mistaken. [27] The rule
is that tax exemptions must be strictly construed such that the exemption will not
be held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention.[28]

A claim for tax refund may be based on statutes granting tax exemption or
tax refund. In such case, the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless granted in the most explicit and
categorical language. The taxpayer must show that the legislature intended to
exempt him from the tax by words too plain to be mistaken.[29]
Tax refunds (or tax credits), on the other hand, are not founded principally on
legislative grace but on the legal principle which underlies all quasi-contracts
abhorring a persons unjust enrichment at the expense of another.[30] The dynamic of
erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio
indebiti, which covers not only mistake in fact but also mistake in law.[31]

The Government is not exempt from the application of solutio indebiti.

Indeed, the taxpayer expects fair dealing from the Government, and the latter
has the duty to refund without any unreasonable delay what it has erroneously
collected.[33] If the State expects its taxpayers to observe fairness and honesty in
paying their taxes, it must hold itself against the same standard in refunding excess
(or erroneous) payments of such taxes. It should not unjustly enrich itself at the
expense of taxpayers.[34] And so, given its essence, a claim for tax refund
[32]

necessitates only preponderance of evidence for its approbation like in any other
ordinary civil case.

Under the Tax Code itself, apparently in recognition of the pervasive quasicontract principle, a claim for tax refund may be based on the following: (a)
erroneously or illegally assessed or collected internal revenue taxes; (b) penalties
imposed without authority; and (c) any sum alleged to have been excessive or in
any manner wrongfully collected.[35]

What is controlling in this case is the well-settled doctrine of strict interpretation in

the imposition of taxes, not the similar doctrine as applied to tax exemptions. The
rule in the interpretation of tax laws is 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. 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.[36] As burdens, taxes should not be unduly exacted
nor assumed beyond the plain meaning of the tax laws.[37]
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in
CA G.R. SP No. 80675, dated 28 September 2004, and its Resolution, dated 1
March 2005, are AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 45697

November 1, 1939

MANILA ELECTRIC COMPANY, plaintiff-appellant,

vs.
A.L. YATCO, Collector of Internal Revenue, defendant-appellee.

Ross, Lawrence, Selph and Carrascoso for appellant.

Office of the Solicitor-General Tuason for appellee.

MORAN, J.:
In 1935, plaintiff Manila Electric Company, a corporation organized and existing under the laws of the
Philippines, with its principal office and place of business in the City of Manila, insured with the city of
New York Insurance Company and the United States Guaranty Company, certain real and personal
properties situated in the Philippines. The insurance was entered into in behalf of said plaintiff by its
broker in New York City. The insurance companies are foreign corporations not licensed to do
business in the Philippines and having no agents therein. The policies contained provisions for the
settlement and payment of losses upon the occurence of any risk insured against, a sample of which
is policy No. 20 of the New York insurance Company attached to and made an integral part of the
agreed statement of facts.
Plaintiff through its broker paid, in New York, to said insurance company premiums in the sum of
P91,696. The Collector of Internal Revenue, under the authority of section 192 of act No. 2427, as
amended, assessed and levied a tax of one per centum on said premiums, which plaintiff paid under
protest. The protest having been overruled, plaintiff instituted the present action to recover the tax.
The trial court dismissed the complaint, and from the judgment thus rendered, plaintiff took the
instant appeal.
The pertinent portions of the Act here involved read:
SEC. 192. It shall be unlawful for any person, company or corporation, or forward
applications for insurance in or to issue or to deliver or accept policies of or for any company
or companies not having been legally authorized to transact business in the Philippine
Islands, as provided in this chapter; and any such person, company or corporation violating
the provisions of this section shall be deemed guilty of a penal offense, and upon conviction
thereof, shall for each such offense be punished by a fine of two hundred pesos, or
imprisonment for two months, or both in the discretion not authorized to transact business in
the Philippine Island may be placed upon terms and conditions as follows:
xxx

xxx

xxx

. . . . And provided further, that the prohibitions of this section shall not affect the right of an
owner of property to apply for and obtain for himself policies in foreign companies in cases
were said owner does not make use of the services of any agent, company or corporation
residing or doing business in the Philippine Islands. In all case where owners of property
obtain insurance directly with foreign companies, it shall be the duty of said owners to report
to the insurance commissioner and to the Collector of Internal Revenue each case where
insurance has been so effected, and shall pay the tax of one per centum on premium paid, in
the manner required by law of insurance companies, and shall be subject to the same
penalties for failure to do so.
Appellant maintains that the second paragraph of the provisions of the Act aforecited is
unconstitutional, and has been so declared by the Supreme Court of the United States in the case

of Compania General de Tabacos v. Collector of Internal Revenue, 275 U.S., 87, 48 Sup. Ct. Rep.,
100, 72 Law. ed., 177.
The case relied upon involves a suit to recover from the Collector of Internal Revenue certain taxes
in connection with insurance premiums which the Tobacco Barcelona, Spain, paid to the Guardian
Insurance Company of London, England, and to Le Comite des Assurances Maritimes de Paris, of
Paris, France. The Tobacco Company, through its head office in Barcelona, insured against fire with
the London Company the merchandise it had in deposit in the warehouse in the Philippines. As the
merchandise were from time to time shipped to Europe, the head office at Barcelona insured the
same with the Paris Company against marine risks while such merchandise were in transit from the
Philippines to Spain. The London Company, unlike the Paris Company, was licensed to do insurance
business in the Philippines and had an agent therein. Losses, if any, on policies were to be paid to
the Tobacco Company in Paris. The tax assessed and levied by the Collector of Internal Revenue,
under the same law now involved, was challenged as unconstitutional. The Supreme Court of the
united States sustained the tax with respect to premiums paid to the London Company and held it
erroneous with respect to premiums paid to the Paris Company.
lawphi1.net

The factual basis upon which the imposition of the tax on premiums paid to the Paris Company was
declared erroneous, is stated by the Supreme Court of the United States thus:
Coming then to the tax on the premiums paid to the Paris Company the contract of insurance
on which the premium was paid was made at Barcelona in Spain, the headquarters of the
Tobacco Company between the Tobacco Company and the Paris Company, and any losses
arising thereunder were to be paid in Paris. The Paris Company had no communication
whatever with anyone in the Philippine Islands. The collection of this tax involves an exaction upon a company of Spain lawfully doing business in the Philippine Islands effected by
reason of a contract made by that company with a company in Paris on merchandise
shipped from the Philippine Islands for delivery in Barcelona. It is an imposition upon a
contract not made in the Philippines and having no situs there and to be measured by money
paid as premiums in Paris, with the place of payment of loss, if any, in Paris. We are very
clear that the contract and the premiums paid under it are not within the jurisdiction of the
government of the Philippine Islands.
And, upon the authority of the cases of Allgeyer v. Lousiana, 165 U.S., 578, 41 Law. ed., 832,
and St. Louis Cotton Compress Company v. Arkansas, 250 U.S., 346, 677 Law. ed., 279, the
Supreme Court of the United States held that "as the state is forbidden to deprive a person of his
liberty without due process of law, it may not compel anyone within its jurisdiction to pay tribute to it
for contracts or money paid to secure the benefits of contract made and to be performed outside of
the state."
On the other hand, the Supreme Court of the United States, in sustaining the imposition of the tax
upon premiums paid by the assured to the London Company, says:
. . . . Does the fact that while the Tobacco Company and the London Company were within
the jurisdiction of the Philippines they made a contract outside of the Philippines, prevent the
imposition upon the assured of a tax of 1 per cent upon the money paid by it as a premium to
the London Company? We may properly assume that this tax placed upon the assured must
ultimately be paid by the insurer, and treating its real incidence as such, the question arises
whether making and carrying out the policy does not involve an exercise or use of the right of

the London Company to do business in the Philippine Islands under its license, because the
policy covers fire risks no property within the Philippine Islands which may require
adjustment and the activities of agents in the Philippine Islands with respect to settlement of
losses arising thereunder. This we think must be answered affirmatively under Equitable Life
Assur. Soc. v. Pennsylvania, 238 U.S., 143 Law. ed., 1239, 35 Sup. Ct. Rep., 829. The case
is a close one, but in deference to the conclusion we reached in the latter case, we affirm the
judgment of the court below in respect to the tax upon the premium paid to the London
Company.
The ruling in the Paris Company case is obviously not applicable in the instant one, for there, not
only was the contract executed in a foreign country, but the merchandise insured was in transit from
the Philippines to Spain, and nothing was to be done in the Philippines in pursuance of the contract.
However, the rule laid down in connection with the London Company may, by analogy, be applied in
the present case, the essential facts of both cases being similar. Here, the insured is a corporation
organized under the laws of the Philippines, its principal office and place of business being in the
City of Manila. The New York Insurance Company and the United States Guaranty Company may be
said to be doing policies issued by them cover risks on properties within the Philippines, which may
require adjustment and the activities of agents in the Philippines with respect to the settlement of
losses arising thereunder. For instance, it is therein stipulated that "the insured, as often as may be
reasonably required, shall exhibit to any person designated by the company all the remains of any
property therein described and submit to examination under oath by any person named by the
company, and as often as may be reasonably required, shall exhibit to any person designated by the
company all the remains of any property therein described and submit to an examination all books of
accounts . . . at such reasonable time and place as may be designated by the company or its
representative." And, in case of disagreement as to the amount of losses or damages as to require
the appointment of appraisers, the insurance contract provides that "the appraisers shall first select a
competent umpire; and failure for fifteen days to agree to such umpire, then, on request of the
insured or of the company, such umpire shall be selected by a judge of the court of record in the
state in which the property insured is located.".
True it is that the London Company had a license to do business in the Philippines, but this fact was
not a decisive factor in the decision of that case, for reliance was therein placed on the Equitable
Life Assurance Society v. Pennsylvania, 238 U.S., 143, 59 Law. ed., 1239, 35 Sup. Ct. Rep., 829,
wherein it was said that "the Equitable Society was doing business in Pennsylvania when it was
annually paying the dividends in Pennsylvania or sending an adjuster into the state in case of
dispute or making proof of death," and therefore "the taxpayer had subjected itself to the jurisdiction
of Pennsylvania in doing business there." (See Compaia General de Tabacos v. Collector of
Internal Revenue, 275 U.S., 87, 72 Law. ed., 177, 182.)
The controlling consideration, therefore, in the decision of the London Company case was that said
company, by making and carrying out policies covering risks located in this country which might
require adjustment or the making of proof of loss therein, did business in the Philippines and
subjected itself to its jurisdiction, a rule that can perfectly be applied in the present case to the new
York Insurance Company and the United States Guaranty Company.
It is argued, however, that the sending of an unjuster to the Philippines to fix the amount of losses, is
a mere contingency and not an actual fact, as such, it cannot be a ground for holding that the
insurance companies subjected themselves to the taxing jurisdiction of the Philippines. This
argument could have been made in the London Company case where no adjuster appears to have

ever been sent to the Philippines nor any adjustment ever made, and yet the stipulations to that
effect were held to be sufficient to bring the foreign corporation within the taxing jurisdiction of the
Philippines.
In epitome, then, the whole question involved in this appeal is whether or not the disputed tax is one
imposed by the Commonwealth of the Philippines upon a contract beyond its jurisdiction. We are of
the opinion and so hold that where the insured against also within the Philippines, the risk insured
against also within the Philippines, and certain incidents of the contract are to be attended to in the
Philippines, such as, payment of dividends when received in cash, sending of an unjuster into the
Philippines in case of dispute, or making of proof of loss, the Commonwealth of the Philippines has
the power to impose the tax upon the insured, regardless of whether the contract is executed in a
foreign country and with a foreign corporation. Under such circumstances, substantial elements of
the contract may be said to be so situated in the Philippines as to give its government the power to
tax. And, even if it be assumed that the tax imposed upon the insured will ultimately be passed on
the insurer, thus constituting an indirect tax upon the foreign corporation, it would still be valid,
because the foreign corporation, by the stipulations of its contract, has subjected itself to the taxing
jurisdiction of the Philippines. After all, Commonwealth of the Philippines, by protecting the
properties insured, benefits the foreign corporation, and it is but reasonable that the latter should pay
a just contribution therefor. It would certainly be a discrimination against domestic corporations to
hold the tax valid when the policy is given by them and invalid when issued by foreign corporations.
Judgment affirmed, with costs against appellant.

G.R. No. L-22074

April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the Philippines
namely: Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp.,
Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union
Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on
insurance it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were
signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the
Philippines, except the contract with Swiss Reinsurance Company, which was signed by both parties
in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that
of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered,
and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The
foreign reinsurers further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance
contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .

P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . .

721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .

P768,580.00

Withholding tax due thereon at 24% . . . . . . . .

P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .

46,114.00
100.00

P230,673.00
==========
1954

Gross premium per investigation . . . . . . . . . .

P780.880.68

Withholding tax due thereon at 24% . . . . . . . .

P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .

P184,411.00

Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .

100.00

P234,364.00
==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc.
is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes
for the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs
against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to
the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers
commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under the original
insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the foreign resinsurers, localizing in the Philippines
the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the
foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of
doing insurance business in the Philippines were payable by the foreign reinsurers when the same
were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co.,
Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and
management by the latter of the affairs of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was
signed by both parties in Switzerland, the same specifically provided that its provision shall be
construed according to the laws of the Philippines, thereby manifesting a clear intention of the
parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within
the Philippines. The word "sources" has been interpreted as the activity, property or service giving
rise to the income.1 The reinsurance premiums were income created from the undertaking of the
foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss
under original insurances. Such undertaking, as explained above, took place in the Philippines.
These insurance premiums, therefore, came from sources within the Philippines and, hence, are
subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may consist
of only a single transaction. An activity may occur outside the place of business. Section 24 of the
Tax Code does not require a foreign corporation to engage in business in the Philippines in

subjecting its income to tax. It suffices that the activity creating the income is performed or done in
the Philippines. What is controlling, therefore, is not the place of business but the place ofactivity that
created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein
should be treated as income from sources within the Philippines but it does not require that other
kinds of income should not be considered likewise.
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The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvement designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were afforded protection by the government
and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner
may free if from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents. 3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax
Code, suffice it to state that this question has already been answered in the affirmative in Alexander
Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit
any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted and withheld
at the source in the same manner and upon the same items as is provided in Section fiftythree a tax equal to twenty-four per centum thereof, and such tax shall be returned and paid
in the same manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships
(compaias colectivas), in what ever capacity acting, including lessees or mortgagors of real
or personal property, trustees acting in any trust capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, salaries, wages, premiums, annuities, compensation,

remunerations, emoluments, or other fixed or determinable annual or periodical gains,

profits, and income of any nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from such annual
or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more
than eighty-five per centum of the gross income of such corporation for the three-year period
ending with the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence)was derived from sources
within the Philippines as determined under the provisions of section thirtyseven:Provided, further, That the Collector of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which are not
known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining
the amount to be withheld. According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00,
or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the
amount of P375,345.00 is not paid within 30 days from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum amount that may
be collected as interest shall not exceed the amount corresponding to a period of three (3) years.
With costs againsts petitioner.

G.R. No. L-22814

August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendantsappellees.
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 "Pepsi-Cola 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

xxx

1wph1.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 powers 2 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. Nos. L-49839-46

April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their capacities as appointed
and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H.
NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as appointed
and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS
CATIIL in his capacity as City Assessor of Manila,respondents.

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board
of Assessment Appeals in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v.
Board of Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29,
1976 decision of the Board of Tax Assessment Appeals in BTAA Cases Nos. 614, 614-A-J, 615,
615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros
Reyes v. City Assessor of Manila" upholding the classification and assessments made by the City
Assessor of Manila.
1

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in
Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling
sites by tenants. Said tenants were paying monthly rentals not exceeding three hundred pesos
(P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted Republic Act No. 6359
prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units or of lands
on which another's dwelling is located, where such rentals do not exceed three hundred pesos
(P300.00) a month but allowing an increase in rent by not more than 10% thereafter. The said Act
also suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity
thereby disallowing the ejectment of lessees upon the expiration of the usual legal period of lease.
On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the
prohibition to increase monthly rentals below P300.00 and by indefinitely suspending the
aforementioned provision of the Civil Code, excepting leases with a definite period. Consequently,
the Reyeses, petitioners herein, were precluded from raising the rentals and from ejecting the
tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the value of the
subject properties based on the schedule of market values duly reviewed by the Secretary of
Finance. The revision, as expected, entailed an increase in the corresponding tax rates prompting
petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They
averred that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and
unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income
derived from their properties. They argued that the income approach should have been used in
determining the land values instead of the comparable sales approach which the City Assessor
adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however, considered the
assessments valid, holding thus:
WHEREFORE, and considering that the appellants have failed to submit concrete evidence
which could overcome the presumptive regularity of the classification and assessments
appear to be in accordance with the base schedule of market values and of the base
schedule of building unit values, as approved by the Secretary of Finance, the cases should
be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among
others, the summary of the yearly rentals to show the income derived from the properties.
Respondent City Assessor, on the other hand, submitted three (3) deeds of sale showing the
1wphi1

different market values of the real property situated in the same vicinity where the subject properties
of petitioners are located. To better appreciate the locational and physical features of the land, the
Board of Hearing Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners nor their
authorized representatives were present during the said ocular inspection despite proper notices
served them. It was found that certain parcels of land were below street level and were affected by
the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive
portion of which reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD266, the appealed Decision is modified by allowing a 20% reduction in their respective
market values and applying therein the assessment level of 30% to arrive at the
corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES
APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in question.
Petitioners maintain that the "Income Approach" method would have been more realistic for in
disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties
affected, respondent Assessor of the City of Manila unlawfully and unjustifiably set increased new
assessed values at levels so high and successive that the resulting annual real estate taxes would
admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under
P.D. 20. Hence, petitioners protested against the levels of the values assigned to their properties as
revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that
the income approach is used in determining land values in some vicinities, it maintains that when
income is affected by some sort of price control, the same is rejected in the consideration and study
of land values as in the case of properties affected by the Rent Control Law for they do not project
the true market value in the open market (Rollo, p. 21). Thus, respondents opted instead for the
"Comparable Sales Approach" on the ground that the value estimate of the properties predicated
upon prices paid in actual, market transactions would be a uniform and a more credible standards to
use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents
would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market

value of properties within its coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable methods of appraisal for
taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition).
However, it is conceded that the propriety of one as against the other would of course depend on
several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao
Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in finding the value
of the property, have to consider all the circumstances and elements of value and must exercise a
prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only
be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property of the
same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of
taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221,
Second Edition). Thus, the need to examine closely and determine the specific mandate of the
Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection clauses of
the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it
were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to
tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to
destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984];
Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
confiscation of property. That would be a clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different both in the privileges conferred and the liabilities imposed
(Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation purposes
is that the property must be "appraised at its current and fair market value."
By no strength of the imagination can the market value of properties covered by P.D. No. 20 be
equated with the market value of properties not so covered. The former has naturally a much lesser
market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject
properties under the "comparable sales approach" were presented by the public respondents,
namely: (1) that the sale must represent a bonafide arm's length transaction between a willing seller
and a willing buyer and (2) the property must be comparable property (Rollo, p. 27). Nothing can
justify or support their view as it is of judicial notice that for properties covered by P.D. 20 especially
during the time in question, there were hardly any willing buyers. As a general rule, there were no
takers so that there can be no reasonable basis for the conclusion that these properties were
comparable with other residential properties not burdened by P.D. 20. Neither can the given
circumstances be nonchalantly dismissed by public respondents as imposed under distressed
conditions clearly implying that the same were merely temporary in character. At this point in time,
the falsity of such premises cannot be more convincingly demonstrated by the fact that the law has
existed for around twenty (20) years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which
is the promotion of the common good, may be achieved (Commissioner of Internal Revenue v. Algue
Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle
of social justice should not now be penalized by the same government by the imposition of
excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would amount to
only P10.00 per sq. meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment by the
income approach method to guarantee a fairer and more realistic basis of computation (Rollo, p. 71).
SO ORDERED.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's Christian Association
of the Philippines, Inc. (YMCA) established as "a welfare, educational and charitable non-profit
corporation" subject to income tax under the National Internal Revenue Code (NIRC) and the
Constitution?
The Case

This is the main question raised before us in this petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CAGR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the
YMCA to claim tax exemption on the latter's income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a
portion of its premises to small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner of
internal revenue (CIR) issued an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Private
respondent formally protested the assessment and, as a supplement to its basic protest, filed a letter
dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals
(CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of
the [private respondents]. It appears from the testimonies of the witnesses for the
[private respondent] particularly Mr. James C. Delote, former accountant of YMCA,
that these facilities were leased to members and that they have to service the needs
of its members and their guests. The rentals were minimal as for example, the
barbershop was only charged P300 per month. He also testified that there was
actually no lot devoted for parking space but the parking was done at the sides of the
building. The parking was primarily for members with stickers on the windshields of
their cars and they charged P.50 for non-members. The rentals and parking fees
were just enough to cover the costs of operation and maintenance only. The
earning[s] from these rentals and parking charges including those from lodging and
other charges for the use of the recreational facilities constitute [the] bulk of its
income which [is] channeled to support its many activities and attainment of its
objectives. As pointed out earlier, the membership dues are very insufficient to
support its program. We find it reasonably necessary therefore for [private
respondent] to make [the] most out [of] its existing facilities to earn some income. It
would have been different if under the circumstances, [private respondent] will
purchase a lot and convert it to a parking lot to cater to the needs of the general
public for a fee, or construct a building and lease it out to the highest bidder or at the
market rate for commercial purposes, or should it invest its funds in the buy and sell
of properties, real or personal. Under these circumstances, we could conclude that
the activities are already profit oriented, not incidental and reasonably necessary to
the pursuit of the objectives of the association and therefore, will fall under the last

paragraph of Section 27 of the Tax Code and any income derived therefrom shall be
taxable.
Considering our findings that [private respondent] was not engaged in the business
of operating or contracting [a] parking lot, we find no legal basis also for the
imposition of [a] deficiency fixed tax and [a] contractor's tax in the amount[s] of
P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but
not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National
Internal Revenue Code effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA 6 initially decided in favor of the CIR and disposed of the appeal
in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs.
Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court
of Tax Appeals that "the leasing of petitioner's (herein respondent's) facilities to small
shop owners, to restaurant and canteen operators and the operation of the parking
lot are reasonably incidental to and reasonably necessary for the accomplishment of
the objectives of the petitioners, and the income derived therefrom are tax exempt,
must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed
the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported
by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from
the income on rentals of small shops and parking fees [are] in accord with the
applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the exemption.
Not even the petitioner would hazard the suggestion that YMCA is designed for profit.
Consequently, the little income from small shops and parking fees help[s] to keep its
head above the water, so to speak, and allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's
decision is AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent
Court in its second assailed Resolution of February 29, 1996. Hence, this petition for review under
Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I

In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of
the CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that
the leasing of private respondent's facilities to small shop owners, to restaurant and canteen
operators and the operation of parking lots are reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the private respondent and that the income derived
therefrom are tax exempt." 12 Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts. 14 In the present case, this Court finds that the February 16,
1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to the facts as
found by the CTA and ruled on the issue raised by the CIR: "Whether or not the collection or earnings of
rental income from the lease of certain premises and income earned from parking fees shall fall under the
last paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as
indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law is
on a certain state of facts; there is a question of fact when the doubt or difference arises as to the
truth or falsehood of alleged facts."16 In the present case, the CA did not doubt, much less change, the
facts narrated by the CTA. It merely applied the law to the facts. That its interpretation or conclusion is
different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to
tax? At the outset, we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. The following organizations shall
not be taxed under this Title in respect to income received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
xxx xxx xxx
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 the tax imposed under this
Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27
(now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income
received by them as such," the exemption does not apply to income derived ". . . 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 . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income [is]
exclusively used for the accomplishment of its objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which it is based. Thus, the
claimed exemption "must expressly be granted in a statute stated in a language too clear to be
mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording
of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax
imposed by the same Code. Because the last paragraph of said section unequivocally subjects to
tax the rent income of the YMCA from its real property, 20 the Court is duty-bound to abide strictly by its
literal meaning and to refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms must
be applied. 21Parenthetically, a consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict construction or a liberal one on statutes
that grant tax exemptions to "religious, charitable and educational propert[ies] or institutions." 22

The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the
income from the properties must arise from activities 'conducted for profit' before it may be
considered taxable." 23 This argument is erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt organizations, as well as that arising from
any activity it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does
not qualify the word "properties." This makes from the property of the organization taxable, regardless of
how that income is used whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error
when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from
renting out its real property, on the solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its operation. The law does not make a distinction. The
rental income is taxable regardless of whence such income is derived and how it is used or disposed
of. Where the law does not distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI,
Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from the payment not
only of property taxes but also of income tax from any source. 25 In support of its novel theory, it compares
the use of the words "charitable institutions," "actually" and "directly" in the 1973 and the 1987
Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of the 1935 Constitution, on the other
hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant thereto,
mosques and non-profit cemeteries," the incomes of which are, from whatever source, all taxexempt; 27 and (2) "[a]ll lands, buildings and improvements actually and directly used for religious,
charitable or educational purposes," which are exempt only from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited the exemption only to the payment of property taxes,
referred to the provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987
Constitutions. 30 Third, the phrase "actually, directly and exclusively used for religious, charitable or
educational purposes" refers not only to "all lands, buildings and improvements," but also to the abovequoted first category which includes charitable institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers
of the Constitution reveal their intent which, in turn, may have guided the people in ratifying the
Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a
member of this Court, stressed during the Concom debates that ". . . 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." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of
the Concom, adhered to the same view that the exemption created by said provision pertained only to
property taxes. 34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers propertytaxes only." 35 Indeed, the income tax exemption claimed by private respondent finds no
basis in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the
YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from taxes on its properties and
income." 37 We reiterate that private respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term "educational institution" or "institution of learning" has
acquired a well-known technical meaning, of which the members of the Constitutional Commission
are deemed cognizant. 38 Under the Education Act of 1982, such term refers to schools. 39 The school
system is synonymous with formal education, 40 which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades or move to the higher
levels." 41 The Court has examined the "Amended Articles of Incorporation" and "By-Laws" 43 of the YMCA,
but found nothing in them that even hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations" are ruled
out. 45 It is settled that the term "educational institution," when used in laws granting tax exemptions,
refers to a ". . . school seminary, college or educational establishment . . . ." 46 Therefore, the private
respondent cannot be deemed one of the educational institutions covered by the constitutional provision
under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation.
While in its broadest and best sense education embraces all forms and phases of
instruction, improvement and development of mind and body, and as well of religious
and moral sentiments, yet in the common understanding and application it means a
place where systematic instruction in any or all of the useful branches of learning is
given by methods common to schools and institutions of learning. That we conceive
to be the true intent and scope of the term [educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court
also notes that the former did not submit proof of the proportionate amount of the subject income
that was actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the
YMCA by-laws, which formed part of the evidence submitted, is patently insufficient, since the same
merely signified that "[t]he net income derived from the rentals of the commercial buildings shall be
apportioned to the Federation and Member Associations as the National Board may decide." 48 In

sum, we find no basis for granting the YMCA exemption from income tax under the constitutional
provision invoked.

Cases Cited by Private

Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v. Collector of
Internal Revenue 50and Abra Valley College, Inc. v. Aquino 51 are not applicable, because the controversy
in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan
de Dios, Inc. v. Pasay City 52 is not in point either, because it involves a claim for exemption from the
payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City
an issue not at all related to that involved in a claimed exemption from the payment of income taxes
imposed on property leases. In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party
therein, which claimed an exemption from the payment of income tax, was an educational institution
which submitted substantial evidence that the income subject of the controversy had been devoted or
used solely for educational purposes. On the other hand, the private respondent in the present case has
not given any proof that it is an educational institution, or that part of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility of its cause. However, the Court's power and function are limited merely to
applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the government. It
needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that,
given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of government. Indeed, some of the members of the
Court may even believe in the wisdom and prudence of granting more tax exemptions to private
respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the
power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September
28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court
of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by
petitioner from rentals of its real property is subject to income tax. No pronouncement as to costs.
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 Decision[1] 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
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-1-B-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 andElliptical 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 ofP4,554,860 by the City
Assessor of Quezon City.[3] Accordingly, Tax Declaration Nos. C-021-01226
(16-2518) and C-021-01231 (15-2518-A) were issued for the land and the
hospital building, respectively.[4] On August 25, 1993, the petitioner filed a
Claim for Exemption[5] from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. The petitioners request
was denied, and a petition was, thereafter, filed before the Local Board of
Assessment Appeals of Quezon City (QC-LBAA, 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
QC-LBAA 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:
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. QC-BAA[9] 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 be P357,000 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 by-laws, 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 well-doing 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;
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;
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 Care and 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 inIntermountain
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, non-stock
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 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
[33]
covers property taxes only. 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, and exclusively 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, DIRECTLYand 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 nonpaying, 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 andP1,679,999.28 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. 119775. October 24, 2003]

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO

FOUNDATION INC., CENTER FOR ALTERNATIVE SYSTEMS

FOUNDATION
INC.,
REGINA
VICTORIA
A.
BENAFIN
REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA
BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY
HER MOTHER MRS. REBECCA MOLINA LUYK, KATHERINE PE
REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G.
PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS KEVAB,
BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS
BA-YAY, EDILBERTO T. CLARAVALL, CARMEN CAROMINA,
LILIA G. YARANON, DIANE MONDOC, petitioners, vs. VICTOR
LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT
AUTHORITY; JOHN HAY PORO POINT DEVELOPMENT
CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD.,
ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF
ENVIRONMENT AND NATURAL RESOURCES,respondents.
DECISION
CARPIO MORALES, J.:

By the present petition for prohibition, mandamus and declaratory relief

with prayer for a temporary restraining order (TRO) and/or writ of preliminary
injunction, petitioners assail, in the main, the constitutionality of Presidential
Proclamation No. 420, Series of 1994, CREATING AND DESIGNATING A
PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN [HAY]
AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO
REPUBLIC ACT NO. 7227.
Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF
MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING
THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS
PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER
PURPOSES, otherwise known as the Bases Conversion and Development
Act of 1992, which was enacted on March 13, 1992, set out the policy of the
government to accelerate the sound and balanced conversion into alternative
productive uses of the former military bases under the 1947 PhilippinesUnited States of America Military Bases Agreement, namely, the Clark and
Subic military reservations as well as their extensions including the John Hay
Station (Camp John Hay or the camp) in the City of Baguio.
[1]

As noted in its title, R.A. No. 7227 created public respondent Bases
Conversion and Development Authority (BCDA), vesting it with powers
pertaining to the multifarious aspects of carrying out the ultimate objective of
utilizing the base areas in accordance with the declared government policy.
[2]

R.A. No. 7227 likewise created the Subic Special Economic [and Free
Port] Zone (Subic SEZ) the metes and bounds of which were to be delineated
in a proclamation to be issued by the President of the Philippines.
[3]

R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and
duty-free importations, exemption of businesses therein from local and
national taxes, to other hallmarks of a liberalized financial and business
climate.
[4]

And R.A. No. 7227 expressly gave authority to the President to

create through executive proclamation, subject to the concurrence of the local
government units directly affected, other Special Economic Zones (SEZ) in the
areas covered respectively by the Clark military reservation, the Wallace Air
Station in San Fernando, La Union, and Camp John Hay.
[5]

On August 16, 1993, BCDA entered into a Memorandum of Agreement

and Escrow Agreement with private respondents Tuntex (B.V.I.) Co., Ltd
(TUNTEX) and Asiaworld Internationale Group, Inc. (ASIAWORLD), private
corporations registered under the laws of the British Virgin Islands,
preparatory to the formation of a joint venture for the development of Poro
Point in La Union and Camp John Hay as premier tourist destinations and
recreation centers. Four months later or on December 16, 1993, BCDA,
TUNTEX and ASIAWORD executed a Joint Venture Agreement whereby they
bound themselves to put up a joint venture company known as the Baguio
International Development and Management Corporation which would lease
areas within Camp John Hay and Poro Point for the purpose of turning such
places into principal tourist and recreation spots, as originally envisioned by
the parties under their Memorandum of Agreement.
[6]

The Baguio City government meanwhile passed a number of resolutions in

response to the actions taken by BCDA as owner and administrator of Camp
John Hay.

By Resolution of September 29, 1993, the Sangguniang Panlungsod of

Baguio City (the sanggunian) officially asked BCDA to exclude all the
barangays partly or totally located within Camp John Hay from the reach or
coverage of any plan or program for its development.
[7]

By
a
subsequent
Resolution dated
January
19,
1994,
the sanggunian sought from BCDA an abdication, waiver or quitclaim of its
ownership over the home lots being occupied by residents of nine (9)
barangays surrounding the military reservation.
[8]

Still by another resolution passed on February 21, 1994,

the sanggunian adopted and submitted to BCDA a 15-point concept for the
development of Camp John Hay. The sanggunians vision expressed, among
other things, a kind of development that affords protection to the environment,
the making of a family-oriented type of tourist destination, priority in
employment opportunities for Baguio residents and free access to the base
area, guaranteed participation of the city government in the management and
operation of the camp, exclusion of the previously named nine barangays
from the area for development, and liability for local taxes of businesses to be
established within the camp.
[9]

[10]

BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or

modified the other proposals of the sanggunian. They stressed the need to
declare Camp John Hay a SEZ as a condition precedent to its full
development in accordance with the mandate of R.A. No. 7227.
[11]

[12]

On May 11, 1994, the sanggunian passed a resolution requesting the

Mayor to order the determination of realty taxes which may otherwise be
collected from real properties of Camp John Hay. The resolution was
intended to intelligently guide the sanggunian in determining its position on
whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the
view that such declaration would exempt the camps property and the
economic activity therein from local or national taxation.
[13]

More than a month later, however, the sanggunian passed Resolution No.
255, (Series of 1994), seeking and supporting, subject to its concurrence, the
issuance by then President Ramos of a presidential proclamation declaring an
area of 288.1 hectares of the camp as a SEZ in accordance with the
[14]

provisions of R.A. No. 7227. Together with this resolution was submitted a
draft of the proposed proclamation for consideration by the President.
[15]

On July 5, 1994 then President Ramos issued Proclamation No. 420, the
title of which was earlier indicated, which established a SEZ on a portion of
Camp John Hay and which reads as follows:
[16]

xxx
Pursuant to the powers vested in me by the law and the resolution of concurrence by
the City Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do
hereby create and designate a portion of the area covered by the former John Hay
reservation as embraced, covered, and defined by the 1947 Military Bases Agreement
between the Philippines and the United States of America, as amended, as the John
Hay Special Economic Zone, and accordingly order:
SECTION 1. Coverage of John Hay Special Economic Zone. The John Hay Special
Economic Zone shall cover the area consisting of Two Hundred Eighty Eight and
one/tenth (288.1) hectares, more or less, of the total of Six Hundred Seventy-Seven
(677) hectares of the John Hay Reservation, more or less, which have been surveyed
and verified by the Department of Environment and Natural Resources (DENR) as
defined by the following technical description:
A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon,
and particularly described in survey plans Psd-131102-002639 and Ccs-131102000030 as approved on 16 August 1993 and 26 August 1993, respectively, by the
Department of Environment and Natural Resources, in detail containing :
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of
Ccs-131102-000030
-andLot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16,
Lot 17, and Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC
Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH
HECTARES (288.1 hectares); Provided that the area consisting of approximately Six
and two/tenth (6.2) hectares, more or less, presently occupied by the VOA and the

residence of the Ambassador of the United States, shall be considered as part of the
SEZ only upon turnover of the properties to the government of the Republic of the
Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone. Pursuant to Section
15 of Republic Act No. 7227, the Bases Conversion and Development Authority is
hereby established as the governing body of the John Hay Special Economic Zone
and, as such, authorized to determine the utilization and disposition of the lands
comprising it, subject to private rights, if any, and in consultation and coordination
with the City Government of Baguio after consultation with its inhabitants, and to
promulgate the necessary policies, rules, and regulations to govern and regulate the
zone thru the John Hay Poro Point Development Corporation, which is its
implementing arm for its economic development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section
5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development
Corporation shall implement all necessary policies, rules, and regulations governing
the zone, including investment incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the applicable incentives of the
Special Economic Zone under Section 12 of Republic Act No. 7227 and those
applicable incentives granted in the Export Processing Zones, the Omnibus
Investment Code of 1987, the Foreign Investment Act of 1991, and new investment
laws that may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. All
Heads of departments, bureaus, offices, agencies, and instrumentalities of the
government are hereby directed to give full support to Bases Conversion and
Development Authority and/or its implementing subsidiary or joint venture to
facilitate the necessary approvals to expedite the implementation of various projects
of the conversion program.
Sec. 5. Local Authority. Except as herein provided, the affected local government
units shall retain their basic autonomy and identity.
Sec. 6. Repealing Clause. All orders, rules, and regulations, or parts thereof, which are
inconsistent with the provisions of this Proclamation, are hereby repealed, amended,
or modified accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.

Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen
hundred and ninety-four.
The issuance of Proclamation No. 420 spawned the present petition for
prohibition, mandamus and declaratory relief which was filed on April 25, 1995
challenging, in the main, its constitutionality or validity as well as the legality of
the Memorandum of Agreement and Joint Venture Agreement between public
respondent BCDA and private respondents TUNTEX and ASIAWORLD.
[17]

Petitioners allege as grounds for the allowance of the petition the

following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS
IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN
UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER GRANTED
ONLY TO THE LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE
POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OF
BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.
III.

PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS

UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL TAXES
SHOULD BE UNIFORM AND EQUITABLE.

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN

PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION DEVELOPMENT
AUTHORITY HAVING BEEN ENTERED INTO ONLY BY DIRECT NEGOTIATION IS
ILLEGAL.
V. THE
TERMS
AND
CONDITIONS
OF
THE
MEMORANDUM
OF
AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC
RESPONDENT
BASES
CONVERSION
DEVELOPMENT
AUTHORITY IS (sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING
UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS BEING ILLEGALLY
CONSIDERED WITHOUT A VALID ENVIRONMENTAL IMPACT ASSESSMENT.

A temporary restraining order and/or writ of preliminary injunction was

prayed for to enjoin BCDA, John Hay Poro Point Development Corporation
and the city government from implementing Proclamation No. 420,
and TUNTEX and ASIAWORLD from proceeding with their plan respecting

Camp John Hays development pursuant to their Joint Venture Agreement with
BCDA.
[18]

Public respondents, by their separate Comments, allege as moot and

academic the issues raised by the petition, the questioned Memorandum of
Agreement and Joint Venture Agreement having already been deemed
abandoned by the inaction of the parties thereto prior to the filing of the
petition as in fact, by letter of November 21, 1995, BCDA formally
notified TUNTEX and ASIAWORLDof the revocation of their said agreements.
[19]

In maintaining the validity of Proclamation No. 420, respondents contend

that by extending to the John Hay SEZ economic incentives similar to those
enjoyed by the Subic SEZ which was established under R.A. No. 7227, the
proclamation is merely implementing the legislative intent of said law to turn
the US military bases into hubs of business activity or investment. They
underscore the point that the governments policy of bases conversion can not
be achieved without extending the same tax exemptions granted by R.A. No.
7227 to Subic SEZ to other SEZs.
Denying that Proclamation No. 420 is in derogation of the local autonomy
of Baguio City or that it is violative of the constitutional guarantee of equal
protection, respondents assail petitioners lack of standing to bring the present
suit even as taxpayers and in the absence of any actual case or controversy
to warrant this Courts exercise of its power of judicial review over the
proclamation.
Finally, respondents seek the outright dismissal of the petition for having
been filed in disregard of the hierarchy of courts and of the doctrine of
exhaustion of administrative remedies.
Replying, petitioners aver that the doctrine of exhaustion of
administrative remedies finds no application herein since they are invoking the
exclusive authority of this Court under Section 21 of R.A. No. 7227 to enjoin or
restrain implementation of projects for conversion of the base areas; that the
established exceptions to the aforesaid doctrine obtain in the present petition;
and that they possess the standing to bring the petition which is a taxpayers
suit.
[20]

Public respondents have filed their Rejoinder and the parties have filed
their respective memoranda.
[21]

Before dwelling on the core issues, this Court shall first address the
preliminary procedural questions confronting the petition.
The judicial policy is and has always been that this Court will not entertain
direct resort to it except when the redress sought cannot be obtained in the
proper courts, or when exceptional and compelling circumstances warrant
availment of a remedy within and calling for the exercise of this Courts primary
jurisdiction. Neither will it entertain an action for declaratory relief, which is
partly the nature of this petition, over which it has no original jurisdiction.
[22]

Nonetheless, as it is only this Court which has the power under Section
21 of R.A. No. 7227 to enjoin implementation of projects for the development
of the former US military reservations, the issuance of which injunction
petitioners pray for, petitioners direct filing of the present petition with it is
allowed. Over and above this procedural objection to the present suit, this
Court retains full discretionary power to take cognizance of a petition filed
directly to it if compelling reasons, or the nature and importance of the issues
raised, warrant. Besides, remanding the case to the lower courts now would
just unduly prolong adjudication of the issues.
[23]

[24]

The transformation of a portion of the area covered by Camp John Hay

into a SEZ is not simply a re-classification of an area, a mere ascription of a
status to a place. It involves turning the former US military reservation into a
focal point for investments by both local and foreign entities. It is to be made a
site of vigorous business activity, ultimately serving as a spur to the countrys
long awaited economic growth. For, as R.A. No. 7227 unequivocally declares,
it is the governments policy to enhance the benefits to be derived from the
base areas in order to promote the economic and social development of
Central Luzon in particular and the country in general. Like the Subic SEZ,
the John Hay SEZ should also be turned into a self-sustaining, industrial,
commercial, financial and investment center.
[25]

[26]

More than the economic interests at stake, the development of Camp John
Hay as well as of the other base areas unquestionably has critical links to a
host of environmental and social concerns. Whatever use to which these
lands will be devoted will set a chain of events that can affect one way or

another the social and economic way of life of the communities where the
bases are located, and ultimately the nation in general.
Underscoring the fragility of Baguio Citys ecology with its problem on the
scarcity of its water supply, petitioners point out that the local and national
government are faced with the challenge of how to provide for an ecologically
sustainable, environmentally sound, equitable transition for the city in the
wake of Camp John Hays reversion to the mass of government property. But
that is why R.A. No. 7227 emphasizes the sound and balanced conversion of
the Clark and Subic military reservations and their extensions consistent with
ecological and environmental standards. It cannot thus be gainsaid that the
matter of conversion of the US bases into SEZs, in this case Camp John Hay,
assumes importance of a national magnitude.
[27]

[28]

Convinced then that the present petition embodies crucial issues, this
Court assumes jurisdiction over the petition.
As
far
as
the
questioned
agreements
between
BCDA
and TUNTEX and ASIAWORLD are concerned, the legal questions being
raised thereon by petitioners have indeed been rendered moot and academic
by the revocation of such agreements. There are, however, other issues
posed by the petition, those which center on the constitutionality of
Proclamation No. 420, which have not been mooted by the said supervening
event upon application of the rules for the judicial scrutiny of constitutional
cases. The issues boil down to:
(1) Whether the present petition complies with the requirements for this Courts
exercise of jurisdiction over constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by providing for national and local
tax exemption within and granting other economic incentives to the John Hay
Special Economic Zone; and
(3) Whether Proclamation No. 420 is constitutional for limiting or interfering with the
local autonomy of Baguio City;

It is settled that when questions of constitutional significance are raised,

the court can exercise its power of judicial review only if the following
requisites are present: (1) the existence of an actual and appropriate case; (2)
a personal and substantial interest of the party raising the constitutional

question; (3) the exercise of judicial review is pleaded at the earliest

opportunity; and (4) the constitutional question is the lis mota of the case.
[29]

An actual case or controversy refers to an existing case or controversy

that is appropriate or ripe for determination, not conjectural or anticipatory.
The controversy needs to be definite and concrete, bearing upon the legal
relations of parties who are pitted against each other due to their adverse
legal interests. There is in the present case a real clash of interests and
rights between petitioners and respondents arising from the issuance of a
presidential proclamation that converts a portion of the area covered by Camp
John Hay into a SEZ, the former insisting that such proclamation contains
unconstitutional provisions, the latter claiming otherwise.
[30]

[31]

R.A. No. 7227 expressly requires the concurrence of the affected local
government units to the creation of SEZs out of all the base areas in the
country. The grant by the law on local government units of the right of
concurrence on the bases conversion is equivalent to vesting a legal standing
on them, for it is in effect a recognition of the real interests that communities
nearby or surrounding a particular base area have in its utilization. Thus, the
interest of petitioners, being inhabitants of Baguio, in assailing the legality of
Proclamation No. 420, is personal and substantial such that they have
sustained or will sustain direct injury as a result of the government act being
challenged. Theirs is a material interest, an interest in issue affected by the
proclamation and not merely an interest in the question involved or an
incidental interest, for what is at stake in the enforcement of Proclamation
No. 420 is the very economic and social existence of the people of Baguio
City.
[32]

[33]

[34]

Petitioners locus standi parallels that of the petitioner and other residents
of Bataan, specially of the town of Limay, in Garcia v. Board of
Investments where this Court characterized their interest in the
establishment of a petrochemical plant in their place as actual, real, vital and
legal, for it would affect not only their economic life but even the air they
breathe.
[35]

Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly

elected councilors of Baguio at the time, engaged in the local governance of
Baguio City and whose duties included deciding for and on behalf of their
constituents the question of whether to concur with the declaration of a portion

of the area covered by Camp John Hay as a SEZ. Certainly then, petitioners
Claravall
and
Yaranon,
as
city
officials
who
voted
against the sanggunian Resolution No. 255 (Series of 1994) supporting the
issuance of the now challenged Proclamation No. 420, have legal standing to
bring the present petition.
[36]

That there is herein a dispute on legal rights and interests is thus beyond
doubt. The mootness of the issues concerning the questioned agreements
between public and private respondents is of no moment.
By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is deemed to have ripened into a judicial controversy even without any other
overt act. Indeed, even a singular violation of the Constitution and/or the law is
enough to awaken judicial duty.
[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no

question that they have been complied with in the case at bar. This is an
action filed purposely to bring forth constitutional issues, ruling on which this
Court must take up. Besides, respondents never raised issues with respect to
these requisites, hence, they are deemed waived.
Having cleared the way for judicial review, the constitutionality of
Proclamation No. 420, as framed in the second and third issues above, must
now be addressed squarely.
The second issue refers to petitioners objection against the creation by
Proclamation No. 420 of a regime of tax exemption within the John Hay SEZ.
Petitioners argue that nowhere in R. A. No. 7227 is there a grant of tax
exemption to SEZs yet to be establishedin base areas, unlike the grant
under Section 12 thereof of tax exemption and investment incentives to the
therein established Subic SEZ. The grant of tax exemption to the John Hay
SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the
Constitution which provides that No law granting any tax exemption shall be
passed without the concurrence of a majority of all the members of Congress.
Section 3 of Proclamation No. 420, the challenged provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section
5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development

Corporation shall implement all necessary policies, rules, and regulations governing
the zone, including investment incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the applicable incentives of the
Special Economic Zone under Section 12 of Republic Act No. 7227 and those
applicable incentives granted in the Export Processing Zones, the Omnibus
Investment Code of 1987, the Foreign Investment Act of 1991, and new
investment laws that may hereinafter be enacted.(Emphasis and underscoring
supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
xxx
(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the Subic
Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in
and around the zone and to attract and promote productive foreign investments;
b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as well as provide incentives
such as tax and duty free importations of raw materials, capital and equipment.
However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;
(c) The provisions of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within theSubic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent (1%) each to the local
government units affected by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone to be utilized for the
Municipality of Subic, and other municipalities contiguous to be base areas. In case of

conflict between national and local laws with respect to tax exemption privileges in
the Subic Special Economic Zone, the same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and futures shall be allowed and maintained in the Subic
Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within theSubic Special
Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign
currency depository units of local commercial banks and offshore banking units of
foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than Two Hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under twenty-one (21) years of age, shall be
granted permanent resident status within the Subic Special Economic Zone. They
shall have freedom of ingress and egress to and from the Subic Special Economic
Zone without any need of special authorization from the Bureau of Immigration and
Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this
Act may also issue working visas renewable every two (2) years to foreign executives
and other aliens possessing highly-technical skills which no Filipino within the Subic
Special Economic Zone possesses, as certified by the Department of Labor and
Employment. The names of aliens granted permanent residence status and working
visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after issuance thereof;
x x x (Emphasis supplied)
It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ
which was granted by Congress with tax exemption, investment incentives
and the like. There is no express extension of the aforesaid benefits to other
SEZs still to be created at the time via presidential proclamation.
The deliberations of the Senate confirm the exclusivity to Subic SEZ of the
tax and investment privileges accorded it under the law, as the following
exchanges between our lawmakers show during the second reading of the

precursor bill of R.A. No. 7227 with respect to the investment policies that
would govern Subic SEZ which are now embodied in the aforesaid Section 12
thereof:
xxx
Senator Maceda: This is what I was talking about. We get into problems here because
all of these following policies are centered around the concept of free port. And in the
main paragraph above, we have declared both Clark and Subic as special economic
zones, subject to these policies which are, in effect, a free-port arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must
confine these policies only to Subic.
May I withdraw then my amendment, and instead provide that THE SPECIAL
ECONOMIC ZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE
WITH THE FOLLOWING POLICIES. Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are applicable only to Subic as
a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment suggested by Senator Angara would
then prevent the establishment of other special economic zones observing these
policies.
Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel
raised the point that if we give this delegation to the President to establish other
economic zones, that may be an unwarranted delegation.
So we agreed that we will simply limit the definition of powers and description of the
zone to Subic, but that does not exclude the possibility of creating other economic
zones within the baselands.
Senator Paterno: But if that amendment is followed, no other special economic zone
may be created under authority of this particular bill. Is that correct, Mr. President?

Senator Angara: Under this specific provision, yes, Mr. President. This provision
now will be confined only to Subic.
[38]

x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the
privileges given to Subic SEZ consist principally of exemption from tariff or
customs duties, national and local taxes of business entities therein
(paragraphs (b) and (c)), free market and trade of specified goods or
properties (paragraph d), liberalized banking and finance (paragraph f), and
relaxed immigration rules for foreign investors (paragraph g). Yet, apart from
these, Proclamation No. 420 also makes available to the John Hay SEZ
benefits existing in other laws such as the privilege of export processing zonebased businesses of importing capital equipment and raw materials free from
taxes, duties and other restrictions; tax and duty exemptions, tax holiday, tax
credit, and other incentives under the Omnibus Investments Code of 1987;
and the applicability to the subject zone of rules governing foreign
investments in the Philippines.
[39]

[40]

[41]

While the grant of economic incentives may be essential to the creation

and success of SEZs, free trade zones and the like, the grant thereof to the
John Hay SEZ cannot be sustained. The incentives under R.A. No. 7227
are exclusive only to the Subic SEZ, hence, the extension of the same to the
John Hay SEZ finds no support therein. Neither does the same grant of
privileges to the John Hay SEZ find support in the other laws specified under
Section 3 of Proclamation No. 420, which laws were already extant before the
issuance of the proclamation or the enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges is one of tax
exemption. It is the legislature, unless limited by a provision of the state
constitution, that has full power to exempt any person or corporation or class
of property from taxation, its power to exempt being as broad as its power to
tax. Other than Congress, the Constitution may itself provide for specific tax
exemptions, or local governments may pass ordinances on exemption only
from local taxes.
[42]

[43]

[44]

The challenged grant of tax exemption would circumvent the Constitutions

imposition that a law granting any tax exemption must have the concurrence
of a majority of all the members of Congress. In the same vein, the other
[45]

kinds of privileges extended to the John Hay SEZ are by tradition and usage
for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed statutory
exemption of the John Hay SEZ from taxation should be manifest and
unmistakable from the language of the law on which it is based; it must be
expressly granted in a statute stated in a language too clear to be mistaken.
Tax exemption cannot be implied as it must be categorically and
unmistakably expressed.
[46]

[47]

If it were the intent of the legislature to grant to the John Hay SEZ the
same tax exemption and incentives given to the Subic SEZ, it would have so
expressly provided in the R.A. No. 7227.
This Court no doubt can void an act or policy of the political departments
of the government on either of two groundsinfringement of the Constitution or
grave abuse of discretion.
[48]

This Court then declares that the grant by Proclamation No. 420 of tax
exemption and other privileges to the John Hay SEZ is void for being violative
of the Constitution. This renders it unnecessary to still dwell on petitioners
claim that the same grant violates the equal protection guarantee.
With respect to the final issue raised by petitioners that Proclamation No.
420 is unconstitutional for being in derogation of Baguio Citys local autonomy,
objection is specifically mounted against Section 2 thereof in which BCDA is
set up as the governing body of the John Hay SEZ.
[49]

Petitioners argue that there is no authority of the President to subject the

John Hay SEZ to the governance of BCDA which has just oversight functions
over SEZ; and that to do so is to diminish the city governments power over an
area within its jurisdiction, hence, Proclamation No. 420 unlawfully gives the
President power of control over the local government instead of just mere
supervision.
Petitioners arguments are bereft of merit. Under R.A. No. 7227, the BCDA
is entrusted with, among other things, the following purpose:
[50]

xxx

(a) To own, hold and/or administer the military reservations of John Hay Air Station,
Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval
Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions
of Metro Manila Camps which may be transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in BCDA over
Camp John Hay, BCDA virtually has control over it, subject to certain
limitations provided for by law. By designating BCDA as the governing agency
of the John Hay SEZ, the law merely emphasizes or reiterates the statutory
role or functions it has been granted.
The unconstitutionality of the grant of tax immunity and financial incentives
as contained in the second sentence of Section 3 of Proclamation No. 420
notwithstanding, the entire assailed proclamation cannot be declared
unconstitutional, the other parts thereof not being repugnant to law or the
Constitution. The delineation and declaration of a portion of the area covered
by Camp John Hay as a SEZ was well within the powers of the President to
do so by means of a proclamation. The requisite prior concurrence by the
Baguio City government to such proclamation appears to have been given in
the form of a duly enacted resolution by the sanggunian. The other provisions
of the proclamation had been proven to be consistent with R.A. No. 7227.
[51]

Where part of a statute is void as contrary to the Constitution, while

another part is valid, the valid portion, if separable from the invalid, may stand
and be enforced. This Court finds that the other provisions in Proclamation
No. 420 converting a delineated portion of Camp John Hay into the John Hay
SEZ are separable from the invalid second sentence of Section 3 thereof,
hence they stand.
[52]

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420

is hereby declared NULL AND VOID and is accordingly declared of no legal
force and effect. Public respondents are hereby enjoined from implementing
the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains valid and
effective.

SO ORDERED.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA,
Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner,
Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of
Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding

1 on the
validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends
Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the

Petitioner 3as taxpayer alleges that by virtue thereof, "he

would be unduly discriminated against by the imposition of higher rates of tax upon his income arising
from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class legislation,
oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the
equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in
taxation. 7
net profits of taxable partnership, (f) adjusted gross income.

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days
from notice. Such an answer, after two extensions were granted the Office of the Solicitor General,
was filed on May 28, 1982.8 The facts as alleged were admitted but not the allegations which to their
mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being
those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa
Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly
quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual or

group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes
being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is
not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due
process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In
a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a
flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that
it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while
this Court sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision as petitioner here alleges fails to abide by
its command, then this Court must so declare and adjudge it null. The injury thus is centered on the
question of whether the imposition of a higher tax rate on taxable net income derived from business
or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here. does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. An obvious example is where it can be shown to amount
to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of
this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred.
That properly calls for the application of the Holmes dictum. It has also been held that where the
assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case
of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process
grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the lice power or the power of
eminent domain is to demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under circumtances which if not Identical are
analogous. If law be looked upon in terms of burden or charges, those that fall within a class should
be treated in the same fashion, whatever restrictions cast on some in the group equally binding on

the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is,
of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to
all and the affairs of men being governed by that serene and impartial uniformity, which is of the very
essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution
does not require things which are different in fact or opinion to be treated in law as though they were the
same." 21 Hence the constant reiteration of the view that classification if rational in character is allowable.
As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went
so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does
not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when the Supreme
Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then
to the standard of equal protection for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the applicable tax
rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income
tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of net income
taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the

reasonableness of the distinction between compensation and taxable net income of professionals and
businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

[G.R. No. 127410. January 20, 1999]

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.
JUNGCO, petitioners, vs. COURT OF APPEALS, HON. TEOFISTO T.
GUINGONA JR., BASES CONVERSION AND DEVELOPMENT
AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY,
BUREAU OF INTERNAL REVENUE, CITY TREASURER OF
OLONGAPO and MUNICIPAL TREASURER OF SUBIC,
ZAMBALES, respondents.
DECISION
PANGANIBAN, J.:

The constitutional right to equal protection of the law is not violated by an executive order,
issued pursuant to law, granting tax and duty incentives only to businesses and residents within
the secured area of the Subic Special Economic Zone and denying them to those who live within
the Zone but outside such fenced-in territory. The Constitution does not require absolute equality
among residents. It is enough that all persons under like circumstances or conditions are given
the same privileges and required to follow the same obligations. In short, a classification based
on valid and reasonable standards does not violate the equal protection clause.
The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking the reversal
of the Court of Appeals Decision [1] promulgated on August 29, 1996, and Resolution [2] dated
November 13, 1996, in CA-GR SP No. 37788. [3] The challenged Decision upheld the
constitutionality and validity of Executive Order No. 97-A (EO 97-A), according to which the
grant and enjoyment of the tax and duty incentives authorized under Republic Act No. 7227 (RA
7227) were limited to the business enterprises and residents within the fenced-in area of the
Subic Special Economic Zone (SSEZ).
The assailed Resolution denied the petitioners motion for reconsideration.
The Facts

On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227
entitled An Act Accelerating the Conversion of Military Reservations Into Other Productive

Uses, Creating the Bases Conversion and Development Authority for this Purpose, Providing
Funds Therefor and for Other Purposes. Section 12 thereof created the Subic Special Economic
Zone and granted thereto special privileges, as follows:

SEC. 12. Subic Special Economic Zone. -- Subject to the concurrence by resolution of
the sangguniang panlungsod of the City of Olongapo and the sangguniang bayan of
the Municipalities of Subic, Morong and Hermosa, there is hereby created a Special
Economic and Free-port Zone consisting of the City of Olongapo and the
Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval
Base and its contiguous extensions as embraced, covered, and defined by the 1947
Military Bases Agreement between the Philippines and the United States of America
as amended, and within the territorial jurisdiction of the Municipalities of Morong and
Hermosa, Province of Bataan, hereinafter referred to as the Subic Special Economic
Zone whose metes and bounds shall be delineated in a proclamation to be issued by
the President of the Philippines. Within thirty (30) days after the approval of this Act,
each local government unit shall submit its resolution of concurrence to join the Subic
Special Economic Zone to the Office of the President. Thereafter, the President of the
Philippines shall issue a proclamation defining the metes and bounds of the zone as
provided herein.
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the Subic
Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in
and around the zone and to attract and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as well as provide incentives
such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the Subic
Special Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;
(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross

income earned by all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent (1%) each to the local
government units affected by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of Olongapo and the Municipality of
Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor of
the latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained in the Subic
Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within the Subic Special Economic
Zone;
(f) Banking and finance shall be liberalized with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign
banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than two hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under twenty-one (21) years of age, shall be
granted permanent resident status within the Subic Special Economic Zone. They
shall have the freedom of ingress and egress to and from the Subic Special Economic
Zone without any need of special authorization from the Bureau of Immigration and
Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this
Act may also issue working visas renewable every two (2) years to foreign executives
and other aliens possessing highly technical skills which no Filipino within the Subic
Special Economic Zone possesses, as certified by the Department of Labor and
Employment. The names of aliens granted permanent residence status and working
visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after issuance thereof;

(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own security and fire-fighting forces; and
(i) Except as herein provided, the local government units comprising the Subic Special
Economic Zone shall retain their basic autonomy and identity. The cities shall be
governed by their respective charters and the municipalities shall operate and function
in accordance with Republic Act No. 7160, otherwise known as the Local
Government Code of 1991.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO 97),
clarifying the application of the tax and duty incentives thus:

Section 1. On Import Taxes and Duties -- Tax and duty-free importations shall apply
only to raw materials, capital goods and equipment brought in by business enterprises
into the SSEZ. Except for these items, importations of other goods into the SSEZ,
whether by business enterprises or resident individuals, are subject to taxes and duties
under relevant Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ
to other parts of the Philippine territory shall be subject to duties and taxes under
relevant Philippine laws.
Section 2. On All Other Taxes. -- In lieu of all local and national taxes (except import
taxes and duties), all business enterprises in the SSEZ shall be required to pay the tax
specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO 97A), specifying the area within which the tax-and-duty-free privilege was operative, viz.:

Section 1.1. The Secured Area consisting of the presently fenced-in former Subic
Naval Base shall be the only completely tax and duty-free area in the SSEFPZ [Subic
Special Economic and Free Port Zone]. Business enterprises and individuals (Filipinos
and foreigners) residing within theSecured Area are free to import raw materials,
capital goods, equipment, and consumer items tax and duty-free. Consumption items,
however, must be consumed within the Secured Area. Removal of raw materials,
capital goods, equipment and consumer items out of the Secured Area for sale to nonSSEFPZ registered enterprises shall be subject to the usual taxes and duties, except as
may be provided herein

On October 26, 1994, the petitioners challenged before this Court the constitutionality of EO
97-A for allegedly being violative of their right to equal protection of the laws. In a Resolution
dated June 27, 1995, this Court referred the matter to the Court of Appeals, pursuant to Revised
Administrative Circular No. 1-95.
Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos. It
delineated the exact metes and bounds of the Subic Special Economic and Free Port Zone,
pursuant to Section 12 of RA 7227.
Ruling of the Court of Appeals

Respondent Court held that there is no substantial difference between the provisions of EO
97-A and Section 12 of RA 7227. In both, the Secured Area is precise and well-defined as
xxx the lands occupied by the Subic Naval Base and its contiguous extensions as embraced,
covered and defined by the 1947 Military Bases Agreement between the Philippines and the
United States of America, as amended, xxx. The appellate court concluded that such being the
case, petitioners could not claim that EO 97-A is unconstitutional, while at the same time
maintaining the validity of RA 7227.
The court a quo also explained that the intention of Congress was to confine the coverage of
the SSEZ to the secured area and not to include the entire Olongapo City and other areas
mentioned in Section 12 of the law. It relied on the following deliberations in the Senate:
Senator Paterno. Thank you, Mr. President. My first question is the extent of the economic
zone. Since this will be a free port, in effect, I believe that it is important to delineate or make sure that
the delineation will be quite precise[. M]y question is: Is it the intention that the entire of Olongapo City,
the Municipality of Subic and the Municipality of Dinalupihan will be covered by the special economic
zone or only portions thereof?
Senator Shahani. Only portions, Mr. President. In other words, where the actual operations of the
free port will take place.
Senator Paterno. I see. So, we should say, COVERING THE DESIGNATED PORTIONS OR
CERTAIN PORTIONS OF OLONGAPO CITY, SUBIC AND DINALUPIHAN to make it clear that it is
not supposed to cover the entire area of all of these territories.
Senator Shahani. So, the Gentleman is proposing that the words CERTAIN AREAS ...
The President. The Chair would want to invite the attention of the Sponsor and Senator Paterno to
letter C, which says: THE PRESIDENT OF THE PHILIPPINES IS HEREBY AUTHORIZED TO
PROCLAIM, DELINEATE AND SPECIFY THE METES AND BOUNDS OF OTHER SPECIAL
ECONOMIC ZONES WHICH MAY BE CREATED IN THE CLARK MILITARY RESERVATIONS
AND ITS EXTENSIONS.

Probably, this provision can be expanded since, apparently, the intention is that what is referred to in
Olongapo as Metro Olongapo is not by itself ipso jure already a special economic zone.
Senator Paterno. That is correct.
The President. Someone, some authority must declare which portions of the same shall be the
economic zone. Is it the intention of the author that it is the President of the Philippines who will make
such delineation?
Senator Shahani. Yes, Mr. President.

The Court of Appeals further justified the limited application of the tax incentives as being
within the prerogative of the legislature, pursuant to its avowed purpose [of serving] some public
benefit or interest. It ruled that EO 97-A merely implements the legislative purpose of [RA
7227].
Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals
Decision and Resolution.
The Issue

Petitioners submit the following issue for the resolution of the Court:
[W]hether or not Executive Order No. 97-A violates the equal protection clause of the
Constitution. Specifically the issue is whether the provisions of Executive Order No. 97-A
confining the application of R.A. 7227 within the secured area and excluding the residents of the
zone outside of the secured area is discriminatory or not.[4]
The Courts Ruling

The petition[5] is bereft of merit.

Main Issue: The Constitutionality of EO 97-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City
of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by
the Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within
which the special privileges granted to the entire zone would apply to the present fenced-in
former Subic Naval Base only. It has thereby excluded the residents of the first two components
of the zone from enjoying the benefits granted by the law. It has effectively discriminated against
them, without reasonable or valid standards, in contravention of the equal protection guarantee.
On the other hand, the solicitor general defends, on behalf of respondents, the validity of EO
97-A, arguing that Section 12 of RA 7227 clearly vests in the President the authority to delineate

the metes and bounds of the SSEZ. He adds that the issuance fully complies with the
requirements of a valid classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not
violative of the equal protection clause; neither is it discriminatory. Rather, we find real and
substantive distinctions between the circumstances obtaining inside and those outside the Subic
Naval Base, thereby justifying a valid and reasonable classification.
The fundamental right of equal protection of the laws is not absolute, but is subject to
reasonable classification. If the groupings are characterized by substantial distinctions that make
real differences, one class may be treated and regulated differently from another. [6] The
classification must also be germane to the purpose of the law and must apply to all those
belonging to the same class.[7] Explaining the nature of the equal protection guarantee, the Court
in Ichong v. Hernandez[8] said:

The equal protection of the law clause is against undue favor and individual or class
privilege, as well as hostile discrimination or the oppression of inequality. It is not
intended to prohibit legislation which is limited either [by] the object to which it is
directed or by [the] territory within which it is to operate. It does not demand absolute
equality among residents; it merely requires that all persons shall be treated
alike, under like circumstances and conditions both as to privileges conferred and
liabilities enforced. The equal protection clause is not infringed by legislation which
applies only to those persons falling within a specified class, if it applies alike to all
persons within such class, and reasonable grounds exist for making a distinction
between those who fall within such class and those who do not.
Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the
purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all
members of the same class.[9]
We first determine the purpose of the law. From the very title itself, it is clear that RA 7227
aims primarily to accelerate the conversion of military reservations into productive
uses. Obviously, the lands covered under the 1947 Military Bases Agreement are its object. Thus,
the law avows this policy:

SEC. 2. Declaration of Policies. -- It is hereby declared the policy of the Government

to accelerate the sound and balanced conversion into alternative productive uses of the
Clark and Subic military reservations and their extensions (John Hay Station, Wallace
Air Station, ODonnell Transmitter Station, San Miguel Naval Communications
Station and Capas Relay Station), to raise funds by the sale of portions of Metro
Manila military camps, and to apply said funds as provided herein for the

development and conversion to productive civilian use of the lands covered under the
1947 Military Bases Agreement between the Philippines and the United States of
America, as amended.
To undertake the above objectives, the same law created the Bases Conversion and
Development Authority, some of whose relevant defined purposes are:

(b) To adopt, prepare and implement a comprehensive and detailed development plan
embodying a list of projects including but not limited to those provided in the
Legislative-Executive Bases Council (LEBC) framework plan for the sound and
balanced conversion of the Clark and Subic military reservations and their extensions
consistent with ecological and environmental standards, into other productive uses to
promote the economic and social development of Central Luzon in particular and the
country in general;
(c) To encourage the active participation of the private sector in transforming the
Clark and Subic military reservations and their extensions into other productive uses;
Further, in creating the SSEZ, the law declared it a policy to develop the zone into a selfsustaining, industrial, commercial, financial and investment center.[10]
From the above provisions of the law, it can easily be deduced that the real concern of RA
7227 is to convert the lands formerly occupied by the US military bases into economic or
industrial areas. In furtherance of such objective, Congress deemed it necessary to extend
economic incentives to attract and encourage investors, both local and foreign. Among such
enticements are:[11] (1) a separate customs territory within the zone, (2) tax-and-duty-free
importations, (3) restructured income tax rates on business enterprises within the zone, (4) no
foreign exchange control, (5) liberalized regulations on banking and finance, and (6) the grant of
resident status to certain investors and of working visas to certain foreign executives and
workers.
We believe it was reasonable for the President to have delimited the application of some
incentives to the confines of the former Subic military base. It is this specific area which the
government intends to transform and develop from its status quo ante as an abandoned naval
facility into a self-sustaining industrial and commercial zone, particularly for big foreign and
local investors to use as operational bases for their businesses and industries. Why the seeming
bias for big investors? Undeniably, they are the ones who can pour huge investments to spur
economic growth in the country and to generate employment opportunities for the Filipinos, the
ultimate goals of the government for such conversion. The classification is, therefore, germane to
the purposes of the law. And as the legal maxim goes, The intent of a statute is the law.[12]

Certainly, there are substantial differences between the big investors who are being lured to
establish and operate their industries in the so-called secured area and the present business
operators outside the area. On the one hand, we are talking of billion-peso investments and
thousands of new jobs. On the other hand, definitely none of such magnitude. In the first, the
economic impact will be national; in the second, only local.Even more important, at this time the
business activities outside the secured area are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive use for the benefit of
the Philippine economy. There is, then, hardly any reasonable basis to extend to them the
benefits and incentives accorded in RA 7227. Additionally, as the Court of Appeals pointed out,
it will be easier to manage and monitor the activities within the secured area, which is already
fenced off, to prevent fraudulent importation of merchandise or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of
laws.[13] As long as there are actual and material differences between territories, there is no
violation of the constitutional clause. And of course, anyone, including the petitioners,
possessing the requisite investment capital can always avail of the same benefits by channeling
his or her resources or business operations into the fenced-off free port zone.
We believe that the classification set forth by the executive issuance does not apply merely
to existing conditions. As laid down in RA 7227, the objective is to establish a self-sustaining,
industrial, commercial, financial and investment center in the area. There will, therefore, be a
long-term difference between such investment center and the areas outside it.
Lastly, the classification applies equally to all the resident individuals and businesses within
the secured area. The residents, being in like circumstances or contributing directly to the
achievement of the end purpose of the law, are not categorized further. Instead, they are all
similarly treated, both in privileges granted and in obligations required.
All told, the Court holds that no undue favor or privilege was extended. The classification
occasioned by EO 97-A was not unreasonable, capricious or unfounded. To repeat, it was based,
rather, on fair and substantive considerations that were germane to the legislative purpose.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and
Resolution are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

G.R. No. L-60126 September 25, 1985

CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

Quasha, De Guzman Makalintal & Barot for petitioner.

AQUINO, J.:
This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax
amounting to P75,149.73 for the more than seven-month period of the year 1969 in addition to
franchise tax.
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its
payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of all taxes and
assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee, from which taxes and assessments the grantee is
hereby expressly exempted" (Sec. 3).
On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making liable for
income tax all corporate taxpayers not specifically exempt under paragraph (c) (1) of said section
and section 27 of the Tax Code notwithstanding the "provisions of existing special or general laws to
the contrary". Thus, franchise companies were subjected to income tax in addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective August
4, 1969, by authorizing the petitioner to furnish electricity to the municipalities of Villanueva and
Jasaan, Misamis Oriental in addition to Cagayan de Oro City and the municipalities of Tagoloan and
Opol. The amendment reenacted the tax exemption in its original charter or neutralized the
modification made by Republic Act No. 5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue
in a demand letter dated February 15, 1973 required the petitioner to pay deficiency income taxes
for 1968-to 1971. The petitioner contested the assessments. The Commissioner cancelled the
assessments for 1970 and 1971 but insisted on those for 1968 and 1969.
The petitioner filed a petition for review with the Tax Court, which on February 26, 1982 held the
petitioner liable only for the income tax for the period from January 1 to August 3, 1969 or before the
passage of Republic Act No. 6020 which reiterated its tax exemption. The petitioner appealed to this
Court.
It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the petitioner is a
commutative tax which already includes the income tax; (2) in holding that Republic Act No. 5431 as
amended, altered or repealed petitioner's franchise; (3) in holding that petitioner's franchise is a
contract which can be impaired by an implied repeal and (4) in not holding that section 24(d) of the
Tax Code should be construed strictly against the Government.
We hold that Congress could impair petitioner's legislative franchise by making it liable for income
tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its
franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal by the
Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV,
1973 Constitution),

Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions
of the Constitution and to the terms and conditions established in Act No. 3636 whose section 12
provides that the franchise is subject to amendment, alteration or repeal by Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect
of withdrawing petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the subsequent
enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption.
Hence, the petitioner is liable only for the income tax for the period from January 1 to August 3, 1969
when its tax exemption was modified by Republic Act No. 5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone
Company, have been paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The
Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to
pay income tax because of the tax exemption in its franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the surcharge
and interest. (Advertising Associates, Inc. vs. Commissioner of Internal Revenue and Court of Tax
Appeals, G. R. No. 59758, December 26, 1984,133 SCRA 765; Imus Electric Co., Inc. vs.
Commissioner of Internal Revenue, 125 Phil. 1024; C.M. Hoskins & Co., Inc. vs. Commissioner of
Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511.)
WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the petitioner is
liable only for the tax proper and that it should not pay the delinquency penalties. No costs.
SO ORDERED.

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX
APPEALS,respondents.

ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No.

affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering
it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991
to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977.
36975 1

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the
total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52

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

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating
that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the
amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied
against the tax liabilities, citing our ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines,
Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these
pending claims have not yet been established or determined with certainty, it follows that no legal
compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus
interest within 30 days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its
excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In
the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of

P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered
the latter's tax obligation to P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of
P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. "Liquidated" debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition,
p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A
fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be
set-off against the unliquidated claim which Petitioner conceived to exist in its favor
(see Compaia General de Tabacos vs. French and Unson, No. 14027, November 8,
1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since
claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount of
P110,677,668.52 representing excise tax liability for the period from the 2nd quarter
of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until
fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CAGR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax
Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and
the decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July
11, 1996. 13
However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT
input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as
follows: 14

Period Covered Tax Credit Date

By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso
jure, off-set its excise tax liabilities 15 since both had already become "due and demandable, as well as
fully liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement that taxes
cannot be subject to compensation for the simple reason that the government and the taxpayer are
not creditors and debtors of each other. 17 There is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity. 18 We find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically held that
taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax cannot await the results
of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit,20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines
Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even
though the refund has not yet been approved by the Commissioner, 21 is no longer without any support
in statutory law.
It is important to note, that the premise of our ruling in the aforementioned case was anchored on
Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue
Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was
based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of
surcharge and interest for the non-payment of the excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law
that taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has
a pending tax claim for refund or credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer
the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall
due simply because he has a claim against the government or that the collection of the tax is contingent
on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion
and abuse, depriving the government of authority over the manner by which taxpayers credit and offset
their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is
immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the
Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any
authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar
to the one advanced by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of
1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to
grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to
establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has
submitted all the required documents it is the function of the BIR to assess these documents with
purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government
render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these
erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious
with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice
requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge of its function. As aptly held inRoxas v. Court of Tax
Appeals: 36

The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill
the "hen that lays the golden egg" And, in order to maintain the general public's trust
and confidence in the Government this power must be used justly and not
treacherously.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a
settled rule that in the performance of governmental function, the State is not bound by the neglect
of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we

understand Philex's predicament, it must be stressed that the same is not a valid reason for the nonpayment of its tax liabilities.

To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet
needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can
seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if
the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the
Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may file
an action for damages and other relief against the latter, without prejudice to any
disciplinary action that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoyed by
law.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain terms must we stress that every public employee or
servant must strive to render service to the people with utmost diligence and efficiency. Insolence and
delay have no place in government service. The BIR, being the government collecting arm, must and
should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take judicial notice of the
taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its
detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the
same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law
into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed
decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.

STATE
LAND
CORPORATION,

INVESTMENT
Petitioner,

G.R. No. 171956

Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.

-versus-

COMMISSIONER
INTERNALREVENUE,

OF
Respondent.

Promulgated:
January 18, 2008

x-----------------------------------------------------------------------------------------x
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a Petition for Review on Certiorari[1] assailing the
Decision[2] dated November 22, 2004 and Resolution dated March 14, 2006 of the
Court of Appeals in CA-G.R. SP No. 72500.
State Land Investment Corporation, petitioner, is a corporation duly
organized and existing under the laws of the Republic of the Philippines. It is a real
estate developer engaged in the development and marketing of low, medium and
high cost subdivision projects in the cities of Manila, Pasay and Quezon; and
in Cavite and Bulacan.
On April 15, 1997, petitioner filed with the Bureau of Internal Revenue
(BIR) its annual income tax return for the calendar year ending December 31,
1997. Its taxable income was P27,723,328.00 with tax due in the amount
ofP9,703,165.54. Its total tax credits for the same year amounted

to P23,632,959.05, inclusive of its prior years excess tax credits

of P9,289,084.00. Thus, after applying its total tax credits of P23,632,959.05
against its income tax liability ofP9,703,165.54, the amount of P13,929,793.51
remained unutilized. Petitioner opted to apply this amount as tax credit to the
succeeding taxable year 1998.
On April 15, 1999, petitioner again filed with the BIR its annual income
tax return for the calendar year endingDecember 31, 1998, declaring a
minimum corporate income tax due in the amount of P4,187,523.00. Petitioner
charged the said amount against its 1997 excess credit of P13,929,793.51, leaving a
balance of P9,742,270.51.
On April 7, 2000, petitioner filed with the BIR a claim for refund of its
unutilized tax credit for the year 1997 in the amount P9,742,270.51.
On April 13, 2000, in order to toll the running of the two-year prescriptive
period
and
there
being
no
immediate
action
on
the
part
of respondent Commissioner of Internal Revenue, petitioner filed a petition for
review with the Court of Tax Appeals (CTA).
On April 4, 2002, the CTA denied petitioners claim for refund of its
unutilized tax credit for 1997. In its Decision dated April 4, 2002, the CTA held
that petitioners 1998 income tax return showed its intention of carrying over its
1997 excess tax credit to the following taxable year 1999 by marking an x on the
box (appearing on its 1998 income tax return) indicating to be carried as tax credit
next year; and that petitioner failed to present its 1999 income tax return to enable
the CTA to determine with certainty that its 1997 tax credit was not charged against
its tax liabilities for the said year (1999). Specifically, the CTA ruled that the
failure of petitioner to present its 1999 corporate annual income tax return is fatal
to its claim for refund. Well-settled is the rule that tax refunds, like tax exemptions,
are construed strictly against the taxpayer.

Petitioner filed a motion for reconsideration and attached its 1999 and 2000
income tax returns. In its motion, petitioner alleged that the x mark in its 1998
income tax return indicating to be carried as tax credit next year was intended to
show its intention to carry over as tax credit for 1999 only what it earned during
the taxable year 1998 amounting to P6,228,288.00, as it was aware it could no
longer utilize the 1997 excess tax credit for the year 1999. However, in a
Resolution dated August 8, 2002, the CTA denied the motion.
Petitioner then filed with the Court of Appeals a petition for review.
In its Decision, the appellate court affirmed the CTA judgment, holding that:
While we agree with petitioner that since the CTA, under its
charter, is not governed strictly by technical rules of evidence so that
additional evidence may be submitted by a party in the motion for
reconsideration, nonetheless, we deny petitioners claim for refund of its
excess tax credit for the year 1997.
xxx
It bears reiterating that after signifying its option in its 1998
Annual Income Tax Return to apply the 1997 excess tax credit to the
following year 1999, petitioner never submitted succeeding quarterly
returns to negate the fact that said tax overpayment was applied to its
1999 Annual Income Tax Return, or beyond the one-year period
limitation.

Petitioner filed a motion for reconsideration but the same was denied.
Hence, this petition.
The main issue for our resolution is whether petitioner is entitled to the
refund of P9,742,270.51 representing the excess creditable withholding tax for
taxable year 1997.

Petitioner contends that it has shown by sufficient and uncontested evidence

that it did not utilize the 1997 excess withholding tax credits amounting
to P9,742,270.51 against its income tax liability for taxable year 1999 and
succeeding years. Petitioner pointed out that the CTA and the Court of
Appeals misappreciated the x marking on its 1998 income tax return, thus
concluding that petitioner intended to carry over its 1997 excess tax credit to
taxable year 1999. Petitioner stressed that its 1999 annual income tax return clearly
shows that it incurred a net loss that year in the amount of P33,610,028.00.Thus, it
has no tax liability in 1999 to which the 1997 excess tax credits may be applied or
utilized.
On the other hand, respondent maintains that despite petitioners knowledge
that it could carry over the excess tax credits only to the succeeding taxable year
(1998), it still signified its intention to apply the 1997 excess tax credits to taxable
year 1999 by marking an x on the box (printed on the 1998 income tax return
form) stating to be credited as tax credit next year, referring to taxable year
1999. Respondent also clarified that the two remedies of refund and tax credit are
alternative and the choice of one precludes the other. Since the x mark shows
that petitioner intended to carry over the questioned tax credit to taxable year 1999,
it can no longer claim for refund.
We find for petitioner.
Time and again, we have held that this Court is not a trier of facts and it is
not its function to examine and evaluate the probative value of the evidence
presented before the concerned tribunal upon which its impugned decision or
resolution is based.[3] However, this rule does not apply where the judgment is
premised on a misapprehension of facts, or when the appellate court failed to
notice certain relevant facts which if considered would justify a different
conclusion.[4] This case is one such exception.

Under Section 69[5] (now Section 76) of the Tax Code then in force, a
corporation entitled to a refund of excess creditable withholding tax may either
obtain the refund or credit the amount to the succeeding taxable year, thus:
Section 69. Final Adjustment Return. Every corporation liable to
tax under Section 24 shall file a final adjustment return covering the total
net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable net income of that year the
corporation shall either:
(a)
(b)
paid, as the case may be.

Pay the excess tax still due; or

Be refunded the excess amount

In case the corporation is entitled to a refund of the excess

estimated quarterly income taxes paid, the refundable amount shown on
its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding
taxable year.

It is well-defined from the said provision that if the total tax due is less than
the quarterly tax payments made during the year, a taxpayer is entitled to a refund
or credit for the excess amount paid. Petitioners 1997 income tax due amounted
toP9,703,165.54. After applying its tax excess credits for 1996 in the amount
of P9,289,084.00, the net income tax payable for 1997 was
only P414,081.54. However, based on the quarterly income tax payments of
petitioner, the total creditable withholding tax for the year 1997 amounted
to P14,343,875.05. Thus, the amount of overpayment of tax as of 1997
wasP13,929,793.51 (after deducting P414,081.54 from P14,343,875.05). In the
final adjustment return filed for the same taxable year, petitioner indicated its
option to apply the said overpayment as tax credit for the succeeding taxable year
1998, not 1999. There still remains a considerable excess payment in the amount
of P9,742,270.51 after petitioners payment of tax due for the year 1998 in the sum
of P4,187,523.00.

Section 69 clearly provides that a taxable corporation is entitled to a tax

refund when the sum of the quarterly income taxes it paid during a taxable year
exceeds its total income tax due also for that year. Consequently, the refundable
amount that is shown on its final adjustment return may be credited, at its option,
against its quarterly income tax liabilities for the next taxable year. Excess income
taxes paid in a year that could not be applied to taxes due the following year may
be refunded the next year. Thus, if the excess income taxes paid in a given taxable
year have not been entirely used by a taxable corporation against its quarterly
income tax liabilities for the next taxable year, the unused amount of the excess
may still be refunded, provided that the claim for such a refund is made within two
years after payment of the tax.[6]
This was done by the petitioner. After applying the excess credits for 1997 to
its tax due for 1998, there still remained an unutilized tax credit in the amount
of P9,742,270.51. Petitioner filed with the BIR its claim for the refund of this
amount within the two-year statutory limitation.
Both the CTA and the Court of Appeals failed to consider that petitioners
intention was to apply the tax credit corresponding to taxable year 1997 to its
income tax due in 1998. As previously mentioned, after paying P4,187,523.00 as
income tax due in 1998, there remained an unutilized tax credit
of P9,742,270.51. It was not necessary on the part of petitionerto file with the BIR
its income tax return for 1999. In Philam Asset Management, Inc. v. Commissioner
of Internal Revenue,[7]we held that the Tax Code merely requires the filing of the
final adjustment return for the preceding not the succeeding taxable
year. Indeed, any refundable amount indicated therein corresponding to the
preceding taxable year may be credited against the estimated income tax liabilities
for the taxable quarters of the succeeding taxable year. Requiring that the income
tax return or the final adjustment return of the succeeding year be presented to the
BIR in requesting a tax refund has no basis in law and jurisprudence.
In order to show that it would have been impossible for petitioner to utilize
the excess credit in taxable year 1999, it attached its 1999 and 2000 annual income
tax returns in its motion for reconsideration filed with the CTA. These show

thatpetitioner incurred
losses
in
1999
in
the
amount
of P33,610,028.00. Clearly, petitioner has no tax liability in 1999 to which the
1997 excess tax credits could be applied or utilized. This Court has held that if a
taxpayer suffered a net loss in a subsequent year, incurring no tax liability to which
a previous years tax credit could be applied, there is no reason for the BIR to
withhold the tax refund which rightfully belongs to the taxpayer.[8]
Substantial justice, equity and fair play are on the side of
petitioner. Technicalities and legalisms, however exalted, should not be misused by
the government to keep money not belonging to it, thereby enriching itself at the
expense of its law-abiding citizens.[9] Under the principle of solutio
indebiti provided in Art. 2154, Civil Code,[10] the BIR received something when
there [was] no right to demand it, and thus, it has the obligation to return it.
[11]
Heavily militating against respondent Commissioner is the ancient principle that
no one, not even the state, shall enrich oneself at the expense of another. Indeed,
simple justice requires the speedy refund of the wrongly held taxes.[12]
WHEREFORE, we GRANT the petition. The Decision dated November 22,
2004 and Resolution dated March 14, 2006 of the Court of Appeals in CA-G.R. SP
No. 72500 are REVERSED. Respondent Commissioner of Internal Revenue is
ordered to refund to petitioner the amount of P9,742,270.51 as excess creditable
withholding taxes paid for taxable year 1997.
SO ORDERED.