[G.R. No. 124043.

October 14, 1998]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF

APPEALS, COURT OF TAX APPEALS and YOUNG MENS
CHRISTIAN
ASSOCIATION
OF
THE
PHILIPPINES,
INC., respondents.
DECISION
PANGANIBAN, J.:

Is the income derived from rentals of real property owned by the Young Mens 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 CA-GR SP No. 32007. Both Resolutions affirmed the Decision
of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latters
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 if Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:

xxx [T]he leasing of private respondents 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] contractors tax in the amount[s] of P353.15
and P3,129.73, respectively.
xxxxxxxxx

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 Contractors 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 petitioners (herein respondent) 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 Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,

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 CTAs findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxxxxxxxx

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 CTAs decision is
AFFIRMED in toto.[9]
The internal revenue commissioners 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 Courts 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 respondents 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 not 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 -xxxxxxxxx

(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;
xxxxxxxxx

Notwithstanding the provision in the preceding paragraphs, the income of whatever

kind and character of the foregoing organization 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)
Petitioners 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 xxx from any
if their properties, real or personal, or from any of their activities conducted for profit, regardless,
of the disposition made of such income xxx.

Petitioner adds that rented 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 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 imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income f the YMCA from its rental 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.[21] Parenthetically, 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
literal 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 income 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 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 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 above-quoted 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 xxx what is exempted is
not the institution itself xxx; 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 property taxes only."[35] Indeed, the income tax exemption claimed by private respondent
finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, [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, nonprofit 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 chronological 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[42] 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 xxx school seminary, college or educational establishment xxx.
[46]
Therefore, the private respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.
xxx 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 phrases 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[50] and 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 if 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 had not given any proof that it is an educational institution, or that 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 its cause. However, the Courts 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 member of the Court may even believe in the wisdom and
prudence of granting more tax exemptions to private respondent. But such belief, however wellmeaning 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 dated February 16, 1995
is REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995
is REINSTATED, insofar as it ruled that the income tax. No pronouncement as to costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE v. YMCA
G.R. No. 124043 October 14, 1998
Panganiban, J.
Doctrine:
Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt
from income taxation, even if such income is exclusively used for the accomplishment of its objectives.
A claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on
which it is based. Thus, it must expressly be granted in a statute stated in a language too clear to be mistaken. Verba
legis non est recedendum where the law does not distinguish, neither should we.
The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient to justify its
exemption from the payment of income tax. 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.
The Court 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. The Court, given its limited constitutional authority, cannot
rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government.
Facts:
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.
YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, and from parking fees collected from non-members. Petitioner issued an assessment to private
respondent for deficiency taxes. Private respondent formally protested the assessment. In reply, the CIR denied the
claims of YMCA.

Issue:
Whether or not the income derived from rentals of real property owned by YMCA subject to income tax
Held:
Yes. Income of whatever kind and character of non-stock non-profit 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 the NIRC.
Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt
from income taxation, even if such income is exclusively used for the accomplishment of its objectives.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in
construing tax exemptions (Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613, April 18,
1997). 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 (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and
Court of Appeals, G.R. No. 117359, p. 15 July 23, 1998).
Verba legis non est recedendum. 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.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it is a non-stock, nonprofit 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. This is without merit since the exemption provided
lies on the payment of property tax, and not on the income tax on the rentals of its property. The bare allegation alone
that one is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of
income tax.
For the YMCA to be granted the exemption it claims under the above 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. Unfortunately
for respondent, the Court noted that not a scintilla of evidence was submitted to prove that it met the said requisites.
The Court appreciates the nobility of respondents cause. However, the Courts 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. 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.

[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 said MacGeorge 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 of P963,266.00 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.
COMMISSIONER OF INTERNAL REVENUE vs. S.C. JOHNSON AND SON, INC., and
COURT OF APPEALS
309 SCRA 87 ; June 25, 1999
Topic: Double Taxation
Facts: SC. JOHNSON AND SON, INC., 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 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. 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. SC. JOHNSON AND SON, INC 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 from July 1992 to May 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 Since the agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10% should apply hence 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.
The Commissioner did not act on said claim for refund. Respondent filed a petition for review
before the CTA to claim a refund of the overpaid withholding tax on royalty payments. CTA
decided for Respondent and ordered CIR 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. CIR filed a petition for review with CA. CA upheld CTA.
CIR contends that under 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 in 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. Also petitioner argues that since S.C.
Johnson's 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.
Respondent countered 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".
Issue: WON SC Johnson can refund.
Ruling: NO. 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. 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 The
apparent rationale for doing away with double taxation is of 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.
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.
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. 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

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.
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 RP-Germany 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.
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.
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 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.
Respondent cannot be deemed entitled to the 10 percent rate granted under the RP-West
Germany Tax Treaty for the reason that there is no payment of taxes on royalties under similar
circumstances in RP-US treaty.

Facts: Respondent is a domestic corporation organized and operating under

the Philippine Laws, entered into a licensed agreement with the SC Johnson and
Son, USA, a non-resident foreign corporation based in the USA pursuant to
which the respondent was granted the right to use the trademark, patents and
technology owned by the later 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 USA.
For the use of 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.

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 said
MacGeorge and Gillette rulings were issued. Since the agreement was approved
by the Technology Transfer Board, the preferential tax rate of 10% should apply
to the respondent. So, royalties paid by the respondent to SC Johnson and Son,
USA is only subject to 10% withholding tax.
The Commissioner did not act on said claim for refund. Private respondent
SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim
a refund of the overpaid withholding tax on royalty payments from July 1992 to
May 1993.
On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and
ordered the CIR to issue a tax credit certificate in the amount of P163,266.00
representing overpaid withholding tax on royalty payments beginning July 1992
to May 1993.
The CIR thus filed a petition for review with the CA 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.

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of taxexemptions. As
such they are registered as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the exemption.
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.
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 Treaty is paid under similar circumstances
as the tax on royalties under the RP-West Germany Tax Treaty.
G.R. No. 188550, August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE,Respondent.

DECISION
SERENO, C.J.:

This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the 1997
Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision2dated 29 May
2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997, petitioner
withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which
represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU)
net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. 5
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Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or issuance of
its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner requested
from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax
rate of 10% under the RP-Germany Tax Treaty.6
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Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review 7 with the
CTA on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit certificate
for the amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on branch profits
remittance to DB Germany.
THE CTA SECOND DIVISION RULING8

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After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of PHP
67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for 2002
and prior taxable years. Records also disclose that for the year 2003, petitioner remitted to DB Germany the
amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO), which
is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the application for a tax treaty
relief was not filed with ITAD prior to the payment by the former of its BPRT and actual remittance of its
branch profits to DB Germany, or prior to its availment of the preferential rate of ten percent (10%) under
the RP-Germany Tax Treaty provision. The court a quo held that petitioner violated the fifteen (15) day
period mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly Southern
Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue 9(Mirant)where the CTA En
Banc ruled that before the benefits of the tax treaty may be extended to a foreign corporation wishing to
avail itself thereof, the latter should first invoke the provisions of the tax treaty and prove that they indeed
apply to the corporation.
THE CTA EN BANC RULING10

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The CTA En Banc affirmed the CTA Second Divisions Decision dated 29 August 2008 and Resolution dated
14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must be
secured prior to the availment of a preferential tax rate under a tax treaty. Applying the principle of stare
decisis et non quieta movere, the CTA En Banc took into consideration that this Court had denied the Petition
in G.R. No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the assailed
judgment.11 The CTA En Banc ruled that once a case has been decided in one way, any other case involving
exactly the same point at issue should be decided in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000 cannot
be relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal Revenue.12 In
that case, the rule was relaxed and the claim for refund of excess final withholding taxes was partially

granted. While it issued a ruling to CBK Power Company Limited after the payment of withholding taxes, the
ITAD did not issue any ruling to petitioner even if it filed a request for confirmation on 4 October 2005 that
the remittance of branch profits to DB Germany is subject to a preferential tax rate of 10% pursuant to
Article 10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-2000
will deprive persons or corporations of the benefit of a tax treaty.
THE COURTS RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance without any deduction of the tax
component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which
provides that where a resident of the Federal Republic of Germany has a branch in the Republic of the
Philippines, this branch may be subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by that
branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting to
its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty
relief must be preceded by an application with ITAD at least 15 days before the transaction. The Order was
issued to streamline the processing of the application of tax treaty relief in order to improve efficiency and
service to the taxpayers. Further, it also aims to prevent the consequences of an erroneous interpretation
and/or application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the overpayment of
taxes or for deficiency tax liabilities for underpayment). 13
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The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany Tax
Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax treaty
relief application is not a condition precedent to the availment of a preferential tax rate. Further, petitioner
posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for
refund solely on the basis of noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in
character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective implementation of the NIRC. Thus, courts cannot ignore
administrative issuances which partakes the nature of a statute and have in their favor a presumption of
legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayers availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Courts minute resolution on Mirant is not a binding precedent. The Court has clarified this
matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue 14as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of
the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being
questioned. As a result, our ruling in that case has already become final. When a minute resolution denies or
dismisses a petition for failure to comply with formal and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions, are deemed sustained. But what is its effect on other
cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata. However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v.
Baier-Nickel, the Court noted that a previous case, CIR v. Baier-Nickel involving the same parties and the
same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on
the latter case because the two cases involved different subject matters as they were concerned with the
taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision.
The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that
the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only
to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority
of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike
decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3)
of Article VIII speaks of a decision. Indeed, as a rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly signed by the members of the Court and certified by
the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court in
cases of a similar nature. There are differences in parties, taxes, taxable periods, and treaties involved;
more importantly, the disposition of that case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international law as part of
the law of the land.15 The time-honored international principle of pacta sunt servandademands
the performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty
must be performed by them in good faith.16 More importantly, treaties have the force and effect
of law in this jurisdiction.17
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Tax treaties are entered into to reconcile the national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid simultaneous taxations in two different
jurisdictions.18CIR v. S.C. Johnson and Son, Inc. further clarifies that 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. 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. 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.19
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Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax treaty or
double tax agreements.
A state that has contracted valid international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken.20 Thus, laws and issuances must ensure that the reliefs granted under tax treaties
are accorded to the parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international agreements. More
so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of
the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTAs outright
denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in
harmony with the objectives of the contracting state to ensure that the benefits granted under
tax treaties are enjoyed by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief
as it would constitute a violation of the duty required by good faith in complying with a tax
treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the
prescribed period under the administrative issuance would impair the value of the tax treaty. At
most, the application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No.
1-2000. Logically, noncompliance with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the consequences sought to be
prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied
through other system management processes, e.g., the imposition of a fine or penalty. But we
cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly
comply with an administrative issuance requiring prior application for tax treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or
application of the treaty provisions. The objective of the BIR is to forestall assessments against
corporations who erroneously availed themselves of the benefits of the tax treaty but are not
legally entitled thereto, as well as to save such investors from the tedious process of claims for a
refund due to an inaccurate application of the tax treaty provisions. However, as earlier
discussed, noncompliance with the 15-day period for prior application should not operate to
automatically divest entitlement to the tax treaty relief especially in claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as
the present case, where the very basis of the claim is erroneous or there is excessive payment
arising from non-availment of a tax treaty relief at the first instance. In this case, petitioner
should not be faulted for not complying with RMO No. 1-2000 prior to the transaction. It could
not have applied for a tax treaty relief within the period prescribed, or 15 days prior to the
payment of its BPRT, precisely because it erroneously paid the BPRT not on the basis of the
preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical. Therefore, the fact that petitioner invoked the
provisions of the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD
before filing an administrative claim for a refund should be deemed substantial compliance with
RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery
when there has been an erroneous payment of tax. The outright denial of petitioners claim for a
refund, on the sole ground of failure to apply for a tax treaty relief prior to the payment of the
BPRT, would defeat the purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied though belatedly for a tax treaty relief,
in substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed
whether petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany Tax
Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
Based on the evidence presented, both documentary and testimonial, petitioner was able to
establish the following facts:
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a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation
organized and existing under the laws of the Federal Republic of Germany;
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b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes
Withheld under BIR Form No. 1601-F and remitted the amount of P67,688,553.51 as branch
profits remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance,
petitioner remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or
P330,175,961.88 at 63.804 Peso/Euro) representing its 2002 profits remittance. 22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net
income, due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior
taxable years.23
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Likewise, both the administrative and the judicial actions were filed within the two-year
prescriptive period pursuant to Section 229 of the NIRC.24
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Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10%
BPRT in accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income
amounting to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT.
Thus, it is proper to grant petitioner a refund ofthe difference between the PHP 67,688,553.51
(15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of
Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009
are REVERSED and SET ASIDE. A new one is hereby entered ordering respondent Commissioner
of Internal Revenue to refund or issue a tax credit certificate in favor of petitioner Deutsche
Bank AG Manila Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO
THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN CENTAVOS (PHP
22,562,851.17), Philippine currency, representing the erroneously paid BPRT for 2002 and prior
taxable years.
SO ORDERED.

FACTS: Petitioner withheld a 15% tax on its remittances to its head office in Germany using as basis the
Tax Code provision on Branch Profit Remittance Tax (BPRT). Believing that it overpaid the BPRT since
the RP-Germany Treaty provides for a lower rate of 10% on branch remittances, the petitioner filed a
refund with the Bureau of Internal Revenue (BIR) and subsequently with the Court of Tax Appeals (CTA).
Both the BIR and the CTA denied stating that the branch office should have filed a tax treaty
relief application prior to availing of the preferential treaty rate in view of the existing doctrine n
the Mirant case.
ISSUE: Whether or not Deutsche Bank is entitled to the claim for refund even if it did not file a tax treaty
relief application with the BIR
RULING: Yes. The Court initially stated that the minute resolution upholding the doctrine in Mirant is not a
binding precedent specially since there are differences in the parties, taxable period, etc. On the
substantive issue, the Court said that the principle of pacta sunt servanda requires the performance in
good faith of treaty obligations. Thus, to require that taxpayers must first comply with an administrative
requirement (under RMO 1-2000) is not in consonance with the performance in good faith.
The obligation to comply with a tax treaty must take precedence over the objectives of the said RMO. In
addition, it was pointed out that the prior application becomes illogical if the premise of the claim was an
erroneous payment since the taxpayer could not have known it would be entitled to the refund since
precisely it was using a different basis when it paid the taxes due.

NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER, INC.; H&B,
INC.; SUPPLIES STATION, INC.; and HARDWARE WORKSHOP, INC., Petitioners,
vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE CITY OF
MANILA,Respondents.
DECISION

BERSAMIN, J.:
The issue here concerns double taxation. There is double taxation when the same taxpayer is taxed
twice when he should be taxed only once for the same purpose by the same taxing authority within
the same jurisdiction during the same taxing period, and the taxes are of the same kind or character.
Double taxation is obnoxious.
The Case
Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18, 2007, whereby
the Court of Appeals (CA) denied petitioners' appeal for lack of jurisdiction; and the resolution
promulgated on November 14, 2007, whereby the CA denied their motion for reconsideration for its
lack of merit.
1

Antecedents
The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section
15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue
Code of Manila. At the same time, the City of Manila imposed additional taxes upon the petitioners
pursuant to Section 21 ofthe Revenue Code of Manila, as amended, as a condition for the renewal
of their respective business licenses for the year 1999. Section 21 of the Revenue Code of Manila
stated:
3

Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the
NIRC - On any of the following businesses and articles of commerce subject to the excise, valueadded or percentage taxes under the National Internal Revenue Code, hereinafter referred to as
NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the
gross sales or receipts of the preceding calendar year is hereby imposed:
A) On person who sells goods and services in the course of trade or businesses; x x x PROVIDED,
that all registered businesses in the City of Manila already paying the aforementioned tax shall be
exempted from payment thereof.
To comply with the City of Manilas assessmentof taxes under Section 21, supra, the petitioners paid
under protest the following amounts corresponding to the first quarter of 1999, to wit:
5

(a) Nursery Care Corporation P595,190.25

(b) Shoemart Incorporated P3,283,520.14
(c) Star Appliance Center P236,084.03
(d) H & B, Inc. P1,271,118.74
(e) Supplies Station, Inc. P239,501.25

(f) Hardware Work Shop, Inc. P609,953.24

By letter dated March 1, 1999, the petitioners formally requested the Office of the City Treasurer for
the tax credit or refund of the local business taxes paid under protest. However, then City Treasurer
Anthony Acevedo (Acevedo) denied the request through his letter of March 10, 1999.
6

On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio, sought the
reconsideration of the denial of their request. Still, the City Treasurer did not reconsider. In the
meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of Manila.
8

10

On April 29, 1999, the petitioners filed their respective petitions for certiorariin the Regional Trial
Court (RTC) in Manila. The petitions, docketed as Civil Cases Nos. 99-93668 to 99-93673, were
initially raffled to different branches, but were soon consolidated in Branch 34. After the presiding
judge of Branch 34 voluntarily inhibited himself, the consolidated cases were transferred to Branch
23, but were again re-raffled to Branch 19 upon the designation of Branch 23 as a special drugs
court.
11

12

13

14

The parties agreed on and jointly submitted the following issues for the consideration and resolution
of the RTC, namely:
(a) Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as
amended, constitutes double taxation.
(b) Whether or not the failure of the petitioners to avail of the statutorily provided remedy for
their tax protest on the ground of unconstitutionality, illegality and oppressiveness under
Section 187 of the Local Government Code renders the present action dismissible for nonexhaustion of administrative remedy.
15

Decision of the RTC

On April 26, 2002, the RTC rendered its decision, holding thusly:
The Court perceives of no instance of the constitutionally proscribed double taxation, in the strict,
narrow or obnoxious sense, imposed upon the petitioners under Section 15 and 17, on the one
hand, and under Section 21, on the other, of the questioned Ordinance. The tax imposed under
Section 15 and 17, as against that imposed under Section 21, are levied against different tax objects
or subject matter. The tax under Section 15 is imposed upon wholesalers, distributors or dealers,
while that under Section 17 is imposedupon retailers. In short, taxes imposed under Section 15 and
17 is a tax on the business of wholesalers, distributors, dealers and retailers. On the other hand, the
tax imposed upon herein petitioners under Section 21 is not a tax against the business of the
petitioners (as wholesalers, distributors, dealers or retailers)but is rather a tax against consumers or
end-users of the articles sold by petitioners. This is plain from a reading of the modifying paragraph
of Section 21 which says:

"The tax shall be payable by the person paying for the services rendered and shall be paid to the
person rendering the services who is required to collect and pay the tax within twenty (20) days after
the end of each quarter." (Underscoring supplied)
In effect, the petitioners only act as the collection or withholding agent of the City while the ones
actually paying the tax are the consumers or end-users of the articles being sold by petitioners. The
taxes imposed under Sec. 21 represent additional amounts added by the business establishment to
the basic prices of its goods and services which are paid by the end-users to the businesses. It is
actually not taxes on the business of petitioners but on the consumers. Hence, there is no double
taxation in the narrow, strict or obnoxious sense,involved in the imposition of taxes by the City of
Manila under Sections 15, 17 and 21 of the questioned Ordinance. This in effect resolves infavor of
the constitutionality of the assailed sections of Ordinance No. 7807 of the City of Manila.
Petitioners, likewise, pray the Court to direct respondents to cease and desist from implementing
Section 21 of the questioned Ordinance. That the Court cannot do, without doing away with the
mandatory provisions of Section 187 of the Local Government Code which distinctly commands that
an appeal questioning the constitutionality or legality of a tax ordinance shall not have the effectof
suspending the effectivity of the ordinance and the accrual and payment of the tax, fee or charge
levied therein. This is so because an ordinance carries with it the presumption of validity.
xxx
With the foregoing findings, petitioners prayer for the refund of the amounts paid by them under
protest must, likewise, fail.
Wherefore, the petitions are dismissed. Without pronouncement as to costs.
SO ORDERED.

16

The petitioners appealed to the CA.

17

Ruling of the CA
On June 18, 2007, the CA deniedthe petitioners appeal, ruling as follows:
The six (6) cases were consolidated on a common question of fact and law, that is, whether the act
ofthe City Treasurer of Manila of assessing and collecting business taxes under Section 21of
Ordinance 7807, on top of other business taxes alsoassessed and collected under the previous
sections of the same ordinance is a violation of the provisions of Section 143 of the Local
Government Code.
Clearly, the disposition of the present appeal in these consolidated cases does not necessitate the
calibration of the whole evidence as there is no question or doubt as to the truth or the falsehood of
the facts obtaining herein, as both parties agree thereon. The present case involves a question of
law that would not lend itself to an examination or evaluation by this Court of the probative value of
the evidence presented.

Thus the Court is constrained todismiss the instant petition for lack of jurisdiction under Section
2,Rule 50 of the 1997 Rules on Civil Procedure which states:
"Sec. 2. Dismissal of improper appeal to the Court of Appeals. An appeal under Rule 41 taken from
the Regional Trial Court to the Court of Appeals raising only questions of law shall be dismissed,
issues purely of law not being reviewable by said court. similarly, an appeal by notice of appeal
instead of by petition for review from the appellate judgment of a Regional Trial Court shall be
dismissed.
An appeal erroneously taken tothe Court of Appeals shall not be transferred to the appropriate court
but shall be dismissed outright.
WHEREFORE, the foregoing considered, the appeal is DISMISSED.
SO ORDERED.

18

The petitioners moved for reconsideration, but the CA denied their motion through the resolution
promulgated on November 14, 2007.
19

Issues
The petitioners now appeal, raising the following grounds, to wit:
A.
THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS AND DENYING
THEIR MOTION FOR RECONSIDERATION, ERRED INRULING THAT THE ISSUE INVOLVED IS A
PURELY LEGAL QUESTION.
B.
THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH 19 OF
THE REGIONAL TRIAL COURT OF MANILA DATED 26 APRIL 2002 DENYING PETITIONERS
PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER PROTEST AND DISMISSING
THE PETITION FOR CERTIORARI FILED BY THE PETITIONERS.
C.
THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY TREASURER
OF MANILA IN IMPOSING, ASSESSING AND COLLECTING THE ADDITIONAL BUSINESS TAX
UNDER SECTION 21 OFORDINANCE NO. 7794, AS AMENDED BY ORDINANCE NO. 7807, ALSO
KNOWN AS THE REVENUE CODE OF THE CITY OFMANILA, IS CONSTITUTIVE OF DOUBLE
TAXATION AND VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991.
20

The main issues for resolution are, therefore, (1) whether or not the CA properly denied due course
to the appeal for raising pure questions of law; and (2) whether or not the petitioners were entitled to
the tax credit or tax refund for the taxes paid under Section 21, supra.
Ruling
The appeal is meritorious.
1.
The CA did not err in dismissing the appeal;
but the rules should be liberally applied
for the sake of justice and equity
The Rules of Courtprovides three modes of appeal from the decisions and final orders of the RTC,
namely: (1) ordinary appeal or appeal by writ of error under Rule 41, where the decisionsand final
orders were rendered in civil or criminal actions by the RTC in the exercise of original jurisdiction; (2)
petition for review under Rule 42, where the decisions and final orders were rendered by the RTC in
the exerciseof appellate jurisdiction; and (3) petition for review on certiorarito the Supreme Court
under Rule 45. The first mode of appeal is taken to the CA on questions of fact, or mixed questions
of fact and law. The second mode of appeal is brought to the CA on questions of fact, of law, or
mixed questions of fact and law. The third mode of appeal is elevated to the Supreme Court only on
questions of law.
21

22

23

The distinction between a question oflaw and a question of fact is well established. On the one hand,
a question of law ariseswhen there is doubt as to what the law is on a certain state of facts; on the
other, there is a question of fact when the doubt arises asto the truth or falsity of the alleged
facts. According to Leoncio v. De Vera:
24

25

x x x For a question to beone of law, the same must not involve an examination of the probative
value ofthe evidence presented by the litigants or any of them. The resolution of the issue must
restsolely on what the law provides on the given set of circumstances. Once it is clear that the issue
invites a review of the evidence presented, the question posed is one of fact. Thus, the test of
whether a question isone of law or offact is not the appellation given to such question by the party
raising the same; rather, it is whether the appellate court can determine the issue raised without
reviewing or evaluating the evidence, in which case, it is a question oflaw; otherwise it is a question
of fact.
26

The nature of the issues to be raised on appeal can be gleaned from the appellants notice of appeal
filed in the trial court, and from the appellants brief submitted to the appellate court. In this case,
the petitioners filed a notice of appeal in which they contended that the April 26, 2002 decision and
the order of July 17, 2002 issued by the RTC denying their consolidated motion for reconsideration
were contrary to the facts and law obtaining in the consolidated cases. In their consolidated
memorandum filed in the CA, they essentially assailed the RTCs ruling that the taxes imposed on
and collected from the petitioners under Section 21 of the Revenue Code of Manila constituted
double taxation in the strict, narrow or obnoxious sense. Considered together, therefore, the notice
27

28

of appeal and consolidated memorandum evidently did notraise issues that required the reevaluation
of evidence or the relevance of surrounding circumstances.
The CA rightly concluded that the petitioners thereby raised only a question of law. The dismissal of
their appeal was proper, strictly speaking, because Section 2, Rule 50 of the Rules of Court provides
that an appeal from the RTC to the CA raising only questions of law shall be dismissed;
and that an appeal erroneously taken to the CA shall be outrightly dismissed.

29

2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double taxation
The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in light of
jurisprudence promulgated subsequent to the filing of the petition, deems it fitting and proper to
adopt a liberal approach in order to render a justand speedy disposition of the substantive issue at
hand. Hence, we resolve, bearing inmind the following pronouncement in Go v. Chaves:
30

Our rules of procedure are designed to facilitate the orderly disposition of cases and permit the
prompt disposition of unmeritorious cases which clog the court dockets and do little more than waste
the courts time. These technical and procedural rules, however, are intended to ensure, rather than
suppress, substantial justice. A deviation from their rigid enforcement may thus be allowed, as
petitioners should be given the fullest opportunity to establish the merits of their case, rather than
lose their property on mere technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance
Corporation that:
Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful
of the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due
process.In numerous cases, this Court has allowed liberal construction of the rules when to do so
would serve the demands of substantial justice and equity.
The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself
unconstitutional or invalid, its enforcement against the petitioners constituted double taxation
because the local business taxes under Section 15 and Section 17 of the Revenue Code of Manila
were already being paid by them. They contend that the proviso in Section 21 exempted all
registered businesses in the City of Manila from paying the tax imposed under Section 21; and that
the exemption was more in accord with Section 143 of the Local Government Code, the law that
vested in the municipal and city governments the power to impose business taxes.
31

32

33

The respondents counter, however, that double taxation did not occur from the imposition and
collection of the tax pursuant to Section 21 of the Revenue Code of Manila; that the taxes imposed
pursuant to Section 21 were in the concept of indirect taxes upon the consumers of the goods and
services sold by a business establishment; and that the petitioners did not exhaust their
administrative remedies by first appealing to the Secretary of Justice to challenge the
constitutionalityor legality of the tax ordinance.
34

35

36

In resolving the issue of double taxation involving Section 21 of the Revenue Code of Manila, the
Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers Philippines, Inc., which has
been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila. In the
latter, the Court has held:
37

38

x x x [T]he issue of double taxation is not novel, as it has already been settled by this Court in The
City of Manila v. Coca-Cola Bottlers Philippines, Inc.,in this wise:
Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to
their own detriment. Said exempting proviso was precisely included in said section so as to avoid
double taxation.
1wphi1

Double taxation means taxingthe same property twice when it should be taxed only once; that is,
"taxing the same person twice by the same jurisdictionfor 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 the taxes
must be of the same kind or character.
Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are
being imposed: (1) on the same subject matter the privilege of doing business in the City of Manila;
(2) for the same purpose to make persons conducting business within the City of Manila contribute
tocity revenues; (3) by the same taxing authority petitioner Cityof Manila; (4) within the same taxing
jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods
per calendar year; and (6) of the same kind or character a local business tax imposed on gross
sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the
power of municipalities and cities to impose a local business tax, and to which any local business tax
imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a
municipality or city has already imposed a business tax on manufacturers, etc.of liquors, distilled
spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the same manufacturers, etc.to a business tax under
Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are
subject to excise tax, VAT, or percentagetax under the NIRC, and that are "not otherwise specified in
preceding paragraphs." In the same way, businesses such as respondents, already subject to a
local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of
the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax
Ordinance [which is based on Section 143(h) of the LGC].
Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section
21 of the ManilaRevenue Code for the fourth quarter of 2001, considering thatit had already been
paying local business tax under Section 14 of the same ordinance.

xxxx
Accordingly, respondents assessment under both Sections 14 and 21 had no basis. Petitioner is
indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the former
has already paid these taxes under Section 14 of the Manila Revenue Code, it is exempt from the
same payments under Section 21 of the same code. Hence, payments made under Section 21 must
be refunded in favor of petitioner.
It is undisputed thatpetitioner paid business taxes based on Sections 14 and 21 for the fourth quarter
of 2001 in the total amount of P470,932.21. Therefore, it is entitled to a refund of P164,552.04
corresponding to the payment under Section 21 of the Manila Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines,
Inc., the Court now holds that all the elements of double taxation concurred upon the Cityof Manilas
assessment on and collection from the petitioners of taxes for the first quarter of 1999 pursuant to
Section 21 of the Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold
goods and services in the course of trade or business based on a certain percentage ofhis gross
sales or receipts in the preceding calendar year, while Section 15 and Section 17 likewise imposed
the tax on a person who sold goods and services in the course of trade or business but only
identified such person with particularity, namely, the wholesaler, distributor or dealer (Section 15),
and the retailer (Section 17), all the taxes being imposed on the privilege of doing business in the
City of Manila in order to make the taxpayers contributeto the citys revenues were imposed on the
same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the
same jurisdiction in the same taxing period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc.
involved Section 21 vis--vis Section 14 (Tax on Manufacturers, Assemblers and Other
Processors) of the Revenue Code of Manila, the legal principlesenunciated therein should similarly
apply because Section 15 (Tax on Wholesalers, Distributors, or Dealers)and Section 17 (Tax on
Retailers) of the Revenue Code of Manila imposed the same nature of tax as that imposed under
Section 14, i.e., local business tax, albeit on a different subject matter or group of taxpayers.
39

In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted double
taxation, and the taxes collected pursuant thereto must be refunded.
WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS
ASIDE the resolutions promulgated on June 18, 2007 and November 14, 2007 in CA-G.R. SP No.
72191; and DIRECTS the City of Manila to refund the payments made by the petitioners of the taxes
assessed and collected for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of
Manila.

No pronouncement on costs of suit.

SO ORDERED.

The Facts:
Alleging double taxation, the petitioners filed a petition for certiorari with the
RTC. In their petition, the petitioners asserted that the City of Manila
assessed and collected taxes from them pursuant to Section 15 (Tax on
Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers)
of the Revenue Code of Manila. At the same time, as a precondition for
renewal of their business licenses for the year, 1999, the city also imposed
additional taxes upon them pursuant to Section 21 of the Revenue Code of
Manila. Section 21 of the Revenue Code stated:
Section 21. Tax on Business Subject to the Excise, Value-Added or
Percentage Taxes under the NIRC On any of the following
businesses and articles of commerce subject to the excise, valueadded or percentage taxes under the National Internal Revenue
Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY
PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross
sales or receipts of the preceding calendar year is hereby imposed:
A) On person who sells goods and services in the course of trade or
businesses; x x x
PROVIDED, that all registered businesses in the City of Manila
already paying the aforementioned tax shall be exempted from
payment thereof.
Petitioners paid under protest and requested the Office of the City
Treasurer for the tax credit or refund of the local business tax paid
under protest. The City Treasurer denied the request. They moved
for reconsideration, but it was denied by the City Treasurer. Upon
stipulation of the facts and the issues, the RTC rendered its decision
dismissing the petition for certiorari. It ruled that there was no
double taxation since the taxes imposed under Sections 15 and 17
as against that imposed in Section 21 are levied against different
tax subjects. Whereas Section 15 is imposed on wholesalers and
Section 17 is imposed on retailers, both sections imposed a tax the

business of wholesalers, distributors, dealers and retailers. Section

21 on the other hand imposed on Section 21 is not a tax on against
the business of the petitioners but a tax against consumers or endusers, while the petitioners merely acted as collection or withholding
agents of the City. It is actually not taxes on the business but on the
customers. Thus there is no double taxation in the strict sense.
Therefore, the assailed sections of Ordinance No. 7807 are not
constitutional.
On appeal to the CA, the latter dismissed the appeal, holding that an
appeal purely raising a question of law is not reviewable by the CA.
Being an improper appeal, the case shall not be elevated to the
court but out rightly dismissed.

The Issue:
Whether double taxation exists in the case hence entitling petitioner
to tax credit or refund of the taxes paid under Section 21.

The Ruling:
The appeal is meritorious.
1.
The CA did not err in dismissing the appeal;
but the rules should be liberally applied
for the sake of justice and equity
The Rules of Court provides three modes of appeal from the
decisions and final orders of the RTC, namely: (1) ordinary appeal or
appeal by writ of error under Rule 41, where the decisions and final
orders were rendered in civil or criminal actions by the RTC in the
exercise of original jurisdiction; (2) petition for review under Rule 42,
where the decisions and final orders were rendered by the RTC in the
exercise of appellate jurisdiction; and (3) petition for review
on certiorari to the Supreme Court under Rule 45.1 The first mode of
appeal is taken to the CA on questions of fact, or mixed questions of
fact and law. The second mode of appeal is brought to the CA on
questions of fact, of law, or mixed questions of fact and law. 2 The
third mode of appeal is elevated to the Supreme Court only on
questions of law.3

The distinction between a question of law and a question of fact is

well established. On the one hand, a question of law arises when
there is doubt as to what the law is on a certain state of facts; on
the other, there is a question of fact when the doubt arises as to the
truth or falsity of the alleged facts.4 According to Leoncio v. De
Vera:5
x x x For a question to be one of law, the same must not involve an
examination of the probative value of the evidence presented by the
litigants or any of them. The resolution of the issue must rest solely
on what the law provides on the given set of circumstances. Once it
is clear that the issue invites a review of the evidence presented,
the question posed is one of fact. Thus, the test of whether a
question is one of law or of fact is not the appellation given to such
question by the party raising the same; rather, it is whether the
appellate court can determine the issue raised without reviewing or
evaluating the evidence, in which case, it is a question of law;
otherwise it is a question of fact.6
The nature of the issues to be raised on appeal can be gleaned from
the appellants notice of appeal filed in the trial court, and from the
appellants brief submitted to the appellate court.7 In this case, the
petitioners filed a notice of appeal in which they contended that the
April 26, 2002 decision and the order of July 17, 2002 issued by the
RTC denying their consolidated motion for reconsideration were
contrary to the facts and law obtaining in the consolidated
cases.8 In their consolidated memorandum filed in the CA, they
essentially assailed the RTCs ruling that the taxes imposed on and
collected from the petitioners under Section 21 of the Revenue Code
of Manila constituted double taxation in the strict, narrow or
obnoxious sense. Considered together, therefore, the notice of
appeal and consolidated memorandum evidently did not raise issues
that required the re-evaluation of evidence or the relevance of
surrounding circumstances.
The CA rightly concluded that the petitioners thereby raised only a
question of law. The dismissal of their appeal was proper, strictly
speaking, because Section 2, Rule 50 of the Rules of Court provides
that an appeal
from the RTC to the CA raising only questions of law shall be
dismissed; and that an appeal erroneously taken to the CA shall be
outrightly dismissed.9
2. Collection of taxes pursuant to Section 21 of the Revenue
Code of Manila constituted double taxation

The foregoing notwithstanding, the Court, given the circumstances

obtaining herein and in light of jurisprudence promulgated
subsequent to the filing of the petition, deems it fitting and proper
to adopt a liberal approach in order to render a just and speedy
disposition of the substantive issue at hand. Hence, we resolve,
bearing in mind the following pronouncement in Go v. Chaves:10
Our rules of procedure are designed to facilitate the orderly
disposition of cases and permit the prompt disposition of
unmeritorious cases which clog the court dockets and do little more
than waste the courts time. These technical and procedural rules,
however, are intended to ensure, rather than suppress, substantial
justice. A deviation from their rigid enforcement may thus be
allowed, as petitioners should be given the fullest opportunity to
establish the merits of their case, rather than lose their property on
mere technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and
Finance Corporation that:
Courts have the prerogative to relax procedural rules of even the
most mandatory character, mindful of the duty to reconcile both the
need to speedily put an end to litigation and the parties right to due
process. In numerous cases, this Court has allowed liberal
construction of the rules when to do so would serve the demands of
substantial justice and equity.
The petitioners point out that although Section 21 of the Revenue
Code of Manila was not itself unconstitutional or invalid, its
enforcement against the petitioners constituted double taxation
because the local business taxes under Section 15 and Section 17 of
the Revenue Code of Manila were already being paid by
them.11 They contend that the proviso in Section 21 exempted all
registered businesses in the City of Manila from paying the tax
imposed under Section 21;12 and that the exemption was more in
accord with Section 143 of the Local Government Code,13 the law
that vested in the municipal and city governments the power to
impose business taxes.
The respondents counter, however, that double taxation did not
occur from the imposition and collection of the tax pursuant to
Section 21 of the Revenue Code of Manila;14 that the taxes imposed
pursuant to Section 21 were in the concept of indirect taxes upon
the consumers of the goods and services sold by a business
establishment;15 and that the petitioners did not exhaust their

administrative remedies by first appealing to the Secretary of Justice

to challenge the constitutionality or legality of the tax ordinance. 16
In resolving the issue of double taxation involving Section 21 of the
Revenue Code of Manila, the Court is mindful of the ruling in City of
Manila v. Coca-Cola Bottlers Philippines, Inc.,17 which has been
reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the
City of Manila.18 In the latter, the Court has held:
x x x [T]he issue of double taxation is not novel, as it has already
been settled by this Court in The City of Manila v. Coca-Cola Bottlers
Philippines, Inc., in this wise:
Petitioners obstinately ignore the exempting proviso in Section 21 of
Tax Ordinance No. 7794, to their own detriment. Said exempting
proviso was precisely included in said section so as to avoid double
taxation.
Double taxation means taxing the same property twice when it
should be taxed only once; that is, 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 the taxes must be of the
same kind or character.
Using the aforementioned test, the Court finds that there is indeed
double taxation if respondent is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794, since these are being
imposed: (1) on the same subject matter the privilege of doing
business in the City of Manila; (2) for the same purpose to make
persons conducting business within the City of Manila contribute to
city revenues; (3) by the same taxing authority petitioner City of
Manila; (4) within the same taxing jurisdiction within the territorial
jurisdiction of the City of Manila; (5) for the same taxing periods
per calendar year; and (6) of the same kind or character a local
business tax imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under
Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court
revisits Section 143 of the LGC, the very source of the power of
municipalities and cities to impose a local business tax, and to which
any local business tax imposed by petitioner City of Manila must

conform. It is apparent from a perusal thereof that when a

municipality or city has already imposed a business tax on
manufacturers, etc. of liquors, distilled spirits, wines, and any other
article of commerce, pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the same manufacturers,
etc. to a business tax under Section 143(h) of the same Code.
Section 143(h) may be imposed only on businesses that are subject
to excise tax, VAT, or percentage tax under the NIRC, and that are
not otherwise specified in preceding paragraphs. In the
same way, businesses such as respondents, already subject to a
local business tax under Section 14 of Tax Ordinance No. 7794
[which is based on Section 143(a) of the LGC], can no longer be
made liable for local business tax under Section 21 of the same Tax
Ordinance [which is based on Section 143(h) of the LGC].
Based on the foregoing reasons, petitioner should not have been
subjected to taxes under Section 21 of the Manila Revenue Code for
the fourth quarter of 2001, considering that it had already been
paying local business tax under Section 14 of the same ordinance.
xxxx
Accordingly, respondents assessment under both Sections 14 and
21 had no basis. Petitioner is indeed liable to pay business taxes to
the City of Manila; nevertheless, considering that the former has
already paid these taxes under Section 14 of the Manila Revenue
Code, it is exempt from the same payments under Section 21 of the
same code. Hence, payments made under Section 21 must be
refunded in favor of petitioner.
It is undisputed that petitioner paid business taxes based on
Sections 14 and 21 for the fourth quarter of 2001 in the total
amount of P470,932.21. Therefore, it is entitled to a refund of
P164,552.04 corresponding to the payment under Section 21 of the
Manila Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and
Swedish Match Philippines, Inc., the Court now holds that all the
elements of double taxation concurred upon the City of Manilas
assessment on and collection from the petitioners of taxes for the
first quarter of 1999 pursuant to Section 21 of the Revenue Code of
Manila.

Firstly, because Section 21 of the Revenue Code of Manila imposed

the tax on a person who sold goods and services in the course of
trade or business based on a certain percentage of his gross sales or
receipts in the preceding calendar year, while Section 15 and
Section 17 likewise imposed the tax on a person who sold goods and
services in the course of trade or business but only identified such
person with particularity, namely, the wholesaler, distributor or
dealer (Section 15), and the retailer (Section 17), all the taxes
being imposed on the privilege of doing business in the City of
Manila in order to make the taxpayers contribute to the citys
revenues were imposed on the same subject matter and for the
same purpose.
Secondly, the taxes were imposed by the same taxing authority (the
City of Manila) and within the same jurisdiction in the same taxing
period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines,
Inc. and Swedish Match Philippines, Inc. involved Section 21 vis--vis
Section 14 (Tax on Manufacturers, Assemblers and Other
Processors)19 of the Revenue Code of Manila, the legal principles
enunciated therein should similarly apply because Section 15 (Tax
on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on
Retailers) of the Revenue Code of Manila imposed the same nature
of tax as that imposed under Section 14, i.e., local business tax,
albeit on a different subject matter or group of taxpayers.
In fine, the imposition of the tax under Section 21 of the Revenue
Code of Manila constituted double taxation, and the taxes collected
pursuant thereto must be refunded.
WHEREFORE, the Court GRANTS the petition for review on
certiorari; REVERSES and SETS ASIDE the resolutions promulgated
on June 18, 2007 and November 14, 2007 in CA-G.R. SP No. 72191;
and DIRECTS the City of Manila to refund the payments made by the
petitioners of the taxes assessed and collected for the first quarter
of 1999 pursuant to Section 21 of the Revenue Code of Manila.
No pronouncement on costs of suit.
SO ORDERED.
THE

CITY

G.R. No. 181845

OF MANILA,LIBERTY M. T
OLEDO, in her capacity
as
THE
TREASURER
OF MANILA and
JOSEPH SANTIAGO, in his
capacity as the CHIEF OF
THE LICENSE DIVISION
OF CITY OF MANILA,

Present:

YNARES-SANTIAGO, J.,
Petitioners,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
- versus -

NACHURA, and
PERALTA, JJ.

COCA-COLA
BOTTLERS
PHILIPPINES, INC.,

Promulgated:

Respondent.
August 4, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This case is a Petition for Review on Certiorari under Rule 45

of the Revised Rules of Civil Procedure seeking to review and
reverse
the
Decision[1] dated
18
January
2008
and
[2]
Resolution dated 18 February 2008 of the Court of Tax
Appeals en banc (CTA en banc) in C.T.A. EB No. 307. In its assailed
Decision, the CTA en banc dismissed the Petition for Review of
herein petitioners City of Manila, Liberty M. Toledo (Toledo), and
Joseph Santiago (Santiago); and affirmed the Resolutions dated 24
May 2007,[3] 8 June 2007,[4] and 26 July 2007,[5] of the CTA
First Division in C.T.A. AC No. 31, which, in turn, dismissed the
Petition for Review of petitioners in said case for being filed out of
time. In its questioned Resolution, the CTA en banc denied the
Motion for Reconsideration of petitioners.

Petitioner City of Manila is a public corporation empowered

to collect and assess business taxes, revenue fees, and permit
fees, through its officers, petitioners Toledo and Santiago, in their
capacities as City Treasurer and Chief of the Licensing Division,
respectively. On the other hand, respondent Coca-Cola Bottlers
Philippines, Inc. is a corporation engaged in the business of
manufacturing and selling beverages, and which maintains a
sales office in the City of Manila.

The case stemmed from the following facts:

Prior to 25 February 2000, respondent had been paying the

City of Manila local business tax only under Section 14 of Tax

Ordinance No. 7794,[6] being expressly exempted from the

business
tax
under
Section
21
of
the
same
tax
ordinance. Pertinent provisions of Tax Ordinance No. 7794
provide:

Section 14. Tax on Manufacturers, Assemblers and Other Processors.

There is hereby imposed a graduated tax on manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers, and compounders of liquors, distilled
spirits, and wines or manufacturers of any article of commerce of whatever kind
or nature, in accordance with any of the following schedule:
xxxx

over P6,500,000.00 up to
P25,000,000.00 - - - - - - - - - - - - - - - - - - - -- P36,000.00 plus 50% of 1%
in excess of P6,500,000.00

xxxx

Section 21. Tax on Businesses Subject to the Excise, Value-Added or

Percentage Taxes under the NIRC. On any of the following businesses and articles
of commerce subject to excise, value-added or percentage taxes under the
National Internal Revenue Code hereinafter referred to as NIRC, as amended, a
tax of FIFTY PERCENT (50%) of ONE PERCENT (1%) per annum on the gross
sales or receipts of the preceding calendar year is hereby imposed:

(A) On persons who sell goods and services in the course of trade or
business; and those who import goods whether for business or otherwise; as
provided for in Sections 100 to 103 of the NIRC as administered and determined

by the Bureau of Internal Revenue pursuant to the pertinent provisions of the said
Code.

xxxx
(D) Excisable goods subject to VAT
(1) Distilled spirits
(2) Wines
xxxx

(8) Coal and coke

(9) Fermented liquor, brewers wholesale price, excluding the ad valorem
tax

xxxx

PROVIDED, that all registered businesses in the City of Manila that are
already paying the aforementioned tax shall be exempted from payment thereof.

Petitioner City of Manila subsequently approved on 25

February 2000, Tax Ordinance No. 7988,[7] amending certain
sections of Tax Ordinance No. 7794, particularly: (1) Section 14,
by increasing the tax rates applicable to certain establishments
operating within the territorial jurisdiction of the City of Manila;
and (2) Section 21, by deleting the proviso found therein, which

stated that all registered businesses in the City of Manila that are
already paying the aforementioned tax shall be exempted from
payment thereof.Petitioner City of Manila approved only after a
year, on 22 February 2001, another tax ordinance, Tax Ordinance
No. 8011, amending Tax Ordinance No. 7988.

Tax Ordinances No. 7988 and No. 8011 were later declared
by the Court null and void in Coca-Cola Bottlers Philippines, Inc. v.
City of Manila[8] (Coca-Cola case) for the following reasons: (1) Tax
Ordinance No. 7988 was enacted in contravention of the
provisions of the Local Government Code (LGC) of 1991 and its
implementing rules and regulations; and (2) Tax Ordinance No.
8011 could not cure the defects of Tax Ordinance No. 7988, which
did not legally exist.

However, before the Court could declare Tax Ordinance No.

7988 and Tax Ordinance No. 8011 null and void, petitioner City of
Manila assessed respondent on the basis of Section 21 of Tax
Ordinance No. 7794, as amended by the aforementioned tax
ordinances, for deficiency local business taxes, penalties, and
interest, in the total amount of P18,583,932.04, for the third and
fourth quarters of the year 2000. Respondent filed a protest with
petitioner Toledo on the ground that the said assessment
amounted to double taxation, as respondent was taxed twice, i.e.,
under Sections 14 and 21 of Tax Ordinance No. 7794, as amended
by Tax Ordinances No. 7988 and No. 8011. Petitioner Toledo did
not respond to the protest of respondent.

Consequently, respondent filed with the Regional Trial Court

(RTC) of Manila, Branch 47, an action for the cancellation of the
assessment against respondent for business taxes, which was
docketed as Civil Case No. 03-107088.

On 14 July 2006, the RTC rendered a Decision [9] dismissing

Civil Case No. 03-107088. The RTC ruled that the business taxes
imposed upon the respondent under Sections 14 and 21 of Tax
Ordinance No. 7988, as amended, were not of the same kind or
character; therefore, there was no double taxation. The RTC,
though, in an Order[10]dated 16 November 2006, granted the
Motion for Reconsideration of respondent, decreed the
cancellation and withdrawal of the assessment against the latter,
and barred petitioners from further imposing/assessing local
business taxes against respondent under Section 21 of Tax
Ordinance No. 7794, as amended by Tax Ordinance No. 7988 and
Tax Ordinance No. 8011. The 16 November 2006 Decision of the
RTC was in conformity with the ruling of this Court in the CocaCola case, in which Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 were declared null and void. The Motion for
Reconsideration of petitioners was denied by the RTC in an
Order[11] dated 4 April 2007. Petitioners received a copy of the 4
April 2007 Order of the RTC, denying their Motion for
Reconsideration of the 16 November 2006 Order of the same
court, on 20 April 2007.

On 4 May 2007, petitioners filed with the CTA a Motion for

Extension of Time to File Petition for Review, praying for a 15-day
extension or until 20 May 2007 within which to file their
Petition. The Motion for Extension of petitioners was docketed as
C.T.A. AC No. 31, raffled to the CTA First Division.

Again, on 18 May 2007, petitioners filed, through registered

mail, a Second Motion for Extension of Time to File a Petition for
Review, praying for another 10-day extension, or until 30 May
2007, within which to file their Petition.

On 24 May 2007, however, the CTA First Division already

issued a Resolution dismissing C.T.A. AC No. 31 for failure of
petitioners to timely file their Petition for Review on 20 May 2007.

Unaware of the 24 May 2007 Resolution of the CTA First

Division, petitioners filed their Petition for Review therewith on 30
May 2007 via registered mail. On 8 June 2007, the CTA First
Division issued another Resolution, reiterating the dismissal of the
Petition for Review of petitioners.

Petitioners moved for the reconsideration of the foregoing

Resolutions dated 24 May 2007 and 8 June 2007, but their motion
was denied by the CTA First Division in a Resolution dated 26 July
2007. The CTA First Division reasoned that the Petition for Review
of petitioners was not only filed out of time -- it also failed to
comply with the provisions of Section 4, Rule 5; and Sections 2
and 3, Rule 6, of the Revised Rules of the CTA.

Petitioners thereafter filed a Petition for Review before the

CTA en banc, docketed as C.T.A. EB No. 307, arguing that the CTA
First Division erred in dismissing their Petition for Review in C.T.A.
AC No. 31 for being filed out of time, without considering the
merits of their Petition.

The CTA en banc rendered its Decision on 18 January 2008,

dismissing the Petition for Review of petitioners and affirming the
Resolutions dated 24 May 2007, 8 June 2007, and 26 July 2007 of
the CTA First Division. The CTA en banc similarly denied the
Motion for Reconsideration of petitioners in a Resolution dated 18
February 2008.

Hence, the present Petition, where petitioners raise the

following issues:

I.

WHETHER
OR
NOT
PETITIONERS
SUBSTANTIALLY
COMPLIED
WITH
THE
REGLEMENTARY PERIOD TO TIMELY APPEAL THE
CASE FOR REVIEW BEFORE THE [CTA DIVISION].

II.

WHETHER OR NOT THE RULING OF THIS COURT

IN THE EARLIER [COCA-COLA CASE] IS DOCTRINAL
AND CONTROLLING IN THE INSTANT CASE.

III.

WHETHER
OR
NOT
PETITIONER
CITY
OF MANILA CAN STILL ASSESS TAXES UNDER
[SECTIONS] 14 AND 21 OF [TAX ORDINANCE NO.
7794, AS AMENDED].

IV.

WHETHER OR NOT THE ENFORCEMENT OF

[SECTION] 21 OF THE [TAX ORDINANCE NO. 7794,
AS AMENDED] CONSTITUTES DOUBLE TAXATION.

Petitioners assert that Section 1, Rule 7 [12] of the Revised

Rules of the CTA refers to certain provisions of the Rules of Court,
such as Rule 42 of the latter, and makes them applicable to the
tax court. Petitioners then cannot be faulted in relying on the
provisions of Section 1, Rule 42[13] of the Rules of Court as regards
the period for filing a Petition for Review with the CTA in

division. Section 1, Rule 42 of the Rules of Court provides for a 15day period, reckoned from receipt of the adverse decision of the
trial court, within which to file a Petition for Review with the Court
of Appeals. The same rule allows an additional 15-day period
within which to file such a Petition; and, only for the most
compelling reasons, another extension period not to exceed 15
days. Petitioners received on 20 April 2007 a copy of the 4 April
2007 Order of the RTC, denying their Motion for Reconsideration
of the 16 November 2006 Order of the same court. On 4 May
2007, believing that they only had 15 days to file a Petition for
Review with the CTA in division, petitioners moved for a 15-day
extension, or until 20 May 2007, within which to file said
Petition. Prior to the lapse of their first extension period, or on 18
May 2007, petitioners again moved for a 10-day extension, or
until 30 May 2007, within which to file their Petition for
Review. Thus, when petitioners filed their Petition for Review with
the CTA First Division on 30 May 2007, the same was filed well
within the reglementary period for doing so.

Petitioners argue in the alternative that even assuming that

Section 3(a), Rule 8[14] of the Revised Rules of the CTA governs the
period for filing a Petition for Review with the CTA in division, still,
their Petition for Review was filed within the reglementary
period. Petitioners call attention to the fact that prior to the lapse
of the 30-day period for filing a Petition for Review under Section
3(a), Rule 8 of the Revised Rules of the CTA, they had already
moved for a 10-day extension, or until 30 May 2007, within which
to file their Petition. Petitioners claim that there was sufficient
justification in equity for the grant of the 10-day extension they
requested, as the primordial consideration should be the
substantive,
and not the procedural,
aspect of the
case. Moreover, Section 3(a), Rule 8 of the Revised Rules of the
CTA, is silent as to whether the 30-day period for filing a Petition
for Review with the CTA in division may be extended or not.

Petitioners also contend that the Coca-Cola case is not

determinative of the issues in the present case because the issue
of nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011
is not the lis mota herein. The Coca-Cola case is not doctrinal and
cannot be considered as the law of the case.

Petitioners further insist that notwithstanding the declaration

of nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011,
Tax Ordinance No. 7794 remains a valid piece of local
legislation. The nullity of Tax Ordinance No. 7988 and Tax
Ordinance No. 8011 does not effectively bar petitioners from
imposing local business taxes upon respondent under Sections 14
and 21 of Tax Ordinance No. 7794, as they were read prior to their
being amended by the foregoing null and void tax ordinances.

Petitioners finally maintain that imposing upon respondent

local business taxes under both Sections 14 and 21 of Tax
Ordinance No. 7794 does not constitute direct double
taxation. Section 143 of the LGC gives municipal, as well as city
governments, the power to impose business taxes, to wit:

SECTION 143. Tax on Business. The municipality may impose taxes on

the following businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers,

distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or
manufacturers of any article of commerce of whatever kind or nature, in
accordance with the following schedule:

xxxx

(b) On wholesalers, distributors, or dealers in any article of commerce of

whatever kind or nature in accordance with the following schedule:

xxxx

(c) On exporters, and on manufacturers, millers, producers, wholesalers,

distributors, dealers or retailers of essential commodities enumerated hereunder at
a rate not exceeding one-half (1/2) of the rates prescribed under subsections (a),
(b) and (d) of this Section:

xxxx

Provided, however, That barangays shall have the exclusive power to levy
taxes, as provided under Section 152 hereof, on gross sales or receipts of the
preceding calendar year of Fifty thousand pesos (P50,000.00) or less, in the case
of cities, and Thirty thousand pesos (P30,000) or less, in the case of
municipalities.

(e) On contractors and other independent contractors, in accordance with

the following schedule:

xxxx

(f) On banks and other financial institutions, at a rate not exceeding fifty percent
(50%) of one percent (1%) on the gross receipts of the preceding calendar year
derived from interest, commissions and discounts from lending activities, income
from financial leasing, dividends, rentals on property and profit from exchange or
sale of property, insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article of

commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler annually.

(h) On any business, not otherwise specified in the

preceding paragraphs, which the sanggunian concerned
may deem proper to tax: Provided, That on any business
subject to the excise, value-added or percentage tax
under the National Internal Revenue Code, as amended,
the rate of tax shall not exceed two percent (2%) of gross
sales or receipts of the preceding calendar year.

Section 14 of Tax Ordinance No. 7794 imposes local business

tax on manufacturers, etc. of liquors, distilled spirits, wines, and
any other article of commerce, pursuant to Section 143(a) of the
LGC. On the other hand, the local business tax under Section 21
of Tax Ordinance No. 7794 is imposed upon persons selling goods
and services in the course of trade or business, and those
importing goods for business or otherwise, who, pursuant to
Section 143(h) of the LGC, are subject to excise tax, value-added
tax (VAT), or percentage tax under the National Internal Revenue
Code (NIRC). Thus, there can be no double taxation when
respondent is being taxed under both Sections 14 and 21 of Tax
Ordinance No. 7794, for under the first, it is being taxed as a
manufacturer; while under the second, it is being taxed as a

person selling goods in the course of trade or business subject to

excise, VAT, or percentage tax.

The Court first addresses the issue raised by petitioners

concerning the period within which to file with the CTA a Petition
for Review from an adverse decision or ruling of the RTC.

The period to appeal the decision or ruling of the RTC to the

CTA via a Petition for Review is specifically governed by Section
11 of Republic Act No. 9282, [15] and Section 3(a), Rule 8 of the
Revised Rules of the CTA.

Section 11 of Republic Act No. 9282 provides:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of

Appeal. Any party adversely affected by a decision, ruling
or inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or
the Regional Trial Courts may file an Appeal with the
CTA within thirty (30) days after the receipt of such
decision or ruling or after the expiration of the period
fixed by law for action as referred to in Section 7(a)(2)
herein.

Appeal shall be made by filing a petition for

review under a procedure analogous to that
provided for under Rule 42 of the 1997 Rules of
Civil Procedure with the CTA within thirty (30)

days from the receipt of the decision or ruling or in the

case of inaction as herein provided, from the expiration of
the period fixed by law to act thereon. x x x. (Emphasis
supplied.)

Section 3(a), Rule 8 of the Revised Rules of the CTA

states:

SEC 3. Who may appeal; period to file petition. (a) A party

adversely affected by a decision, ruling or the inaction of
the Commissioner of Internal Revenue on disputed
assessments or claims for refund of internal revenue
taxes, or by a decision or ruling of the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade
and Industry, the Secretary of Agriculture, or a Regional
Trial Court in the exercise of its original jurisdiction may
appeal to the Court by petition for review filed
within thirty days after receipt of a copy of such decision
or ruling, or expiration of the period fixed by law for the
Commissioner of Internal Revenue to act on the disputed
assessments. x x x. (Emphasis supplied.)

It is crystal clear from the afore-quoted provisions that to

appeal an adverse decision or ruling of the RTC to the CTA, the
taxpayer must file a Petition for Review with the CTA within 30
days from receipt of said adverse decision or ruling of the RTC.

It is also true that the same provisions are silent as to

whether such 30-day period can be extended or not. However,
Section 11 of Republic Act No. 9282 does state that the Petition
for Review shall be filed with the CTA following the procedure
analogous to Rule 42 of the Revised Rules of Civil
Procedure. Section 1, Rule 42[16] of the Revised Rules of Civil
Procedure provides that the Petition for Review of an adverse
judgment or final order of the RTC must be filed with the Court of
Appeals within: (1) the original 15-day period from receipt of the
judgment or final order to be appealed; (2) an extended period of
15 days from the lapse of the original period; and (3) only for the
most compelling reasons, another extended period not to
exceed 15 days from the lapse of the first extended period.

Following by analogy Section 1, Rule 42 of the Revised Rules

of Civil Procedure, the 30-day original period for filing a Petition
for Review with the CTA under Section 11 of Republic Act No.
9282, as implemented by Section 3(a), Rule 8 of the Revised
Rules of the CTA, may be extended for a period of 15 days. No
further extension shall be allowed thereafter, except only for the
most compelling reasons, in which case the extended period shall
not exceed 15 days.

Even the CTA en banc, in its Decision dated 18 January 2008,

recognizes that the 30-day period within which to file the Petition
for Review with the CTA may, indeed, be extended, thus:
Being suppletory to R.A. 9282, the 1997 Rules of Civil
Procedure allow an additional period of fifteen (15) days
for the movant to file a Petition for Review, upon Motion,
and payment of the full amount of the docket fees. A
further extension of fifteen (15) days may be granted on
compelling reasons in accordance with the provision of

Section 1, Rule 42 of the 1997 Rules of Civil Procedure x x

x.[17]

In this case, the CTA First Division did indeed err in finding
that petitioners failed to file their Petition for Review in C.T.A. AC
No. 31 within the reglementary period.

From 20 April 2007, the date petitioners received a copy of

the 4 April 2007 Order of the RTC, denying their Motion for
Reconsideration of the 16 November 2006 Order, petitioners had
30 days, or until 20 May 2007, within which to file their Petition
for Review with the CTA. Hence, the Motion for Extension filed by
petitioners on 4 May 2007 grounded on their belief that the
reglementary period for filing their Petition for Review with the
CTA was to expire on 5 May 2007, thus, compelling them to seek
an extension of 15 days, or until 20 May 2007, to file said
Petition was unnecessary and superfluous. Even without said
Motion for Extension, petitioners could file their Petition for
Review until 20 May 2007, as it was still within the 30-day
reglementary period provided for under Section 11 of Republic Act
No. 9282; and implemented by Section 3(a), Rule 8 of the Revised
Rules of the CTA.

The Motion for Extension filed by the petitioners on 18 May

2007, prior to the lapse of the 30-day reglementary period on 20
May 2007, in which they prayed for another extended period of 10
days, or until 30 May 2007, to file their Petition for Review was,
in reality, only the first Motion for Extension of petitioners. The
CTA First Division should have granted the same, as it was
sanctioned by the rules of procedure. In fact, petitioners were
only praying for a 10-day extension, five days less than the 15-

day extended period allowed by the rules. Thus, when petitioners

filed via registered mail their Petition for Review in C.T.A. AC No.
31 on 30 May 2007, they were able to comply with the
reglementary period for filing such a petition.

Nevertheless, there were other reasons for which the CTA

First Division dismissed the Petition for Review of petitioners in
C.T.A. AC No. 31; i.e., petitioners failed to conform to Section 4 of
Rule 5, and Section 2 of Rule 6 of the Revised Rules of the
CTA. The Court sustains the CTA First Division in this regard.

Section 4, Rule 5 of the Revised Rules of the CTA requires

that:

SEC. 4. Number of copies. The parties shall file eleven

signed copies of every paper for cases before the
Court en banc and six signed copies for cases before
a Division of the Court in addition to the signed
original copy, except as otherwise directed by the Court.
Papers to be filed in more than one case shall include one
additional copy for each additional case. (Emphasis
supplied.)

Section 2, Rule 6 of the Revised Rules of the CTA further

necessitates that:

SEC. 2. Petition for review; contents. The petition for

review shall contain allegations showing the jurisdiction of

the Court, a concise statement of the complete facts and

a summary statement of the issues involved in the case,
as well as the reasons relied upon for the review of the
challenged decision. The petition shall be verified and
must contain a certification against forum shopping as
provided in Section 3, Rule 46 of the Rules of Court. A
clearly legible duplicate original or certified true
copy of the decision appealed from shall be
attached to the petition.(Emphasis supplied.)

The aforesaid provisions should be read in conjunction with

Section 1, Rule 7 of the Revised Rules of the CTA, which provides:

SECTION 1. Applicability of the Rules of Court on

procedure in the Court of Appeals, exception. The
procedure in the Court en banc or in Divisions in original
or in appealed cases shall be the same as those in
petitions for review and appeals before the Court of
Appeals pursuant to the applicable provisions of Rules
42, 43, 44, and 46 of the Rules of Court, except as
otherwise provided for in these Rules. (Emphasis
supplied.)

As found by the CTA First Division and affirmed by the

CTA en
banc,
the
Petition
for
Review
filed
by
petitioners via registered mail on 30 May 2007 consisted only of
one copy and all the attachments thereto, including the Decision
dated 14 July 2006; and that the assailed Orders dated 16
November 2006 and 4 April 2007 of the RTC in Civil Case No. 03-

107088 were mere machine copies. Evidently, petitioners did not

comply at all with the requirements set forth under Section 4,
Rule 5; or with Section 2, Rule 6 of the Revised Rules of the
CTA. Although the Revised Rules of the CTA do not provide for the
consequence of such non-compliance, Section 3, Rule 42 of the
Rules of Court may be applied suppletorily, as allowed by Section
1, Rule 7 of the Revised Rules of the CTA. Section 3, Rule 42 of the
Rules of Court reads:

SEC. 3. Effect of failure to comply with

requirements. The failure of the petitioner to comply with
any of the foregoing requirements regarding the payment
of the docket and other lawful fees, the deposit for costs,
proof of service of the petition, and the contents of and
the documents which should accompany the petition shall
be sufficient ground for the dismissalthereof. (Emphasis
supplied.)

True, petitioners subsequently submitted certified copies of

the Decision dated 14 July 2006 and assailed Orders dated 16
November 2006 and 4 April 2007 of the RTC in Civil Case No. 03107088, but a closer examination of the stamp on said documents
reveals that they were prepared and certified only on 14 August
2007, about two months and a half after the filing of the Petition
for Review by petitioners.

Petitioners never offered an explanation for their noncompliance with Section 4 of Rule 5, and Section 2 of Rule 6 of the
Revised Rules of the CTA. Hence, although the Court had, in
previous instances, relaxed the application of rules of procedure,
it cannot do so in this case for lack of any justification.

Even assuming arguendo that the Petition for Review of

petitioners in C.T.A. AC No. 31 should have been given due course
by the CTA First Division, it is still dismissible for lack of merit.

Contrary to the assertions of petitioners, the Coca-Cola case

is indeed applicable to the instant case. The pivotal issue raised
therein was whether Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 were null and void, which this Court resolved in the
affirmative. Tax Ordinance No. 7988 was declared by the
Secretary of the Department of Justice (DOJ) as null and void and
without
legal
effect
due
to
the
failure
of
herein petitioner City of Manila to satisfy the requirement under
the law that said ordinance be published for three consecutive
days. Petitioner City of Manila never appealed said declaration of
the DOJ Secretary; thus, it attained finality after the lapse of the
period for appeal of the same. The passage of Tax Ordinance No.
8011, amending Tax Ordinance No. 7988, did not cure the defects
of the latter, which, in any way, did not legally exist.

By virtue of the Coca-Cola case, Tax Ordinance No. 7988 and

Tax Ordinance No. 8011 are null and void and without any legal
effect. Therefore, respondent cannot be taxed and assessed
under the amendatory laws--Tax Ordinance No. 7988 and Tax
Ordinance No. 8011.

Petitioners insist that even with the declaration of nullity of

Tax Ordinance No. 7988 and Tax Ordinance No. 8011, respondent
could still be made liable for local business taxes under both
Sections 14 and 21 of Tax Ordinance No. 7944 as they were
originally read, without the amendment by the null and void tax
ordinances.

Emphasis must be given to the fact that prior to the passage

of Tax Ordinance No. 7988 and Tax Ordinance No. 8011
by petitioner City of Manila, petitioners subjected and assessed
respondent only for the local business tax under Section 14 of Tax
Ordinance No. 7794, but never under Section 21 of the same. This
was due to the clear and unambiguous proviso in Section 21 of
Tax Ordinance No. 7794, which stated that all registered business
in the City of Manila that are already paying the aforementioned
tax shall be exempted from payment thereof. The aforementioned
tax referred to in said proviso refers to local business tax. Stated
differently, Section 21 of Tax Ordinance No. 7794 exempts from
the payment of the local business tax imposed by said section,
businesses that are already paying such tax under other sections
of the same tax ordinance. The said proviso, however, was
deleted from Section 21 of Tax Ordinance No. 7794 by Tax
Ordinances No. 7988 and No. 8011. Following this deletion,
petitioners began assessing respondent for the local business tax
under Section 21 of Tax Ordinance No. 7794, as amended.

The Court easily infers from the foregoing circumstances that

petitioners themselves believed that prior to Tax Ordinance No.
7988 and Tax Ordinance No. 8011, respondent was exempt from
the local business tax under Section 21 of Tax Ordinance No.
7794. Hence, petitioners had to wait for the deletion of the
exempting proviso in Section 21 of Tax Ordinance No. 7794 by Tax
Ordinance No. 7988 and Tax Ordinance No. 8011 before they
assessed respondent for the local business tax under said
section. Yet, with the pronouncement by this Court in the CocaCola case that Tax Ordinance No. 7988 and Tax Ordinance No.
8011 were null and void and without legal effect, then Section 21
of Tax Ordinance No. 7794, as it has been previously worded, with
its exempting proviso, is back in effect. Accordingly, respondent
should not have been subjected to the local business tax under

Section 21 of Tax Ordinance No. 7794 for the third and fourth
quarters of 2000, given its exemption therefrom since it was
already paying the local business tax under Section 14 of the
same ordinance.

Petitioners obstinately ignore the exempting proviso in

Section 21 of Tax Ordinance No. 7794, to their own
detriment. Said exempting proviso was precisely included in said
section so as to avoid double taxation.

Double taxation means taxing the same property twice when

it should be taxed only once; that is, 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 the taxes
must be of the same kind or character.[18]

Using the aforementioned test, the Court finds that there is indeed double taxation
if respondent is subjected to the taxes under both Sections 14 and 21 of Tax
Ordinance No. 7794, since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for the same purpose to
make persons conducting business within the City of Manila contribute to city
revenues; (3) by the same taxing authority petitioner City of Manila; (4) within the
same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5)
for the same taxing periods per calendar year; and (6) of the same kind or character
a local business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14
and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of

the LGC, the very source of the power of municipalities and cities to impose a
local business tax, and to which any local business tax imposed
by petitioner City of Manila must conform. It is apparent from a perusal thereof
that when a municipality or city has already imposed a business tax on
manufacturers, etc. of liquors, distilled spirits, wines, and any other article of
commerce, pursuant to Section 143(a) of the LGC, said municipality or city may
no longer subject the same manufacturers, etc. to a business tax under Section
143(h) of the same Code. Section 143(h) may be imposed only on businesses that
are subject to excise tax, VAT, or percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs. In the same way, businesses such
as respondents, already subject to a local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer
be made liable for local business tax under Section 21 of the same Tax Ordinance
[which is based on Section 143(h) of the LGC].
WHEREFORE, premises considered, the
on Certiorari is hereby DENIED. No costs.

instant

Petition

for

Review

SO ORDERED.

COCA-COLA BOTTLERS PHILIPPINES, INC. vs. CA and MS. LYDIA GERONIMO

G.R. No. 110295 October 18, 1993
Petition for review on certiorari (under Rule45) the decision of the CA
DAVIDE, JR., J.:
FACTS: Private respondent was the proprietress of Kindergarten Wonderland Canteen in Dagupan City.
In August 1989, some parents of the students complained to her that the Coke and Sprite soft drinks sold
by her contained fiber-like matter and other foreign substances. She brought the said bottles for
examination to DOH and it was found out that the soft drinks are adulterated. As a result, her per day
sales of soft drinks severely plummeted that she had to close her shop on 12 December 1989 for losses.
She demanded damages from petitioner before the RTC which dismissed the same on motion by
petitioner based on the ground of Prescription. On appeal, the CA annulled the orders of the RTC.
ISSUE: WON the action for damages by the proprietress against the soft drinks manufacturer should be
treated as one for breach of implied warranty under article 1561 of the CC which prescribes after six
months from delivery of the thing sold.
RULING: Petition Denied.
The SC agrees with the CAs conclusion that the cause of action in the case at bar is found on quasi-delict
under Article 1146 of the CC which prescribes in four years and not on breach of warranty under article

1562 of the same code. This is supported by the allegations in the complaint which makes reference to the
reckless and negligent manufacture of "adulterated food items intended to be sold for public
consumption."

[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
of P79,099,999.22 for the year 1989, and ordered the cancellation and setting
aside of the assessment issued by Commissioner of Internal Revenue
Liwayway Vinzons-Chato on 9 January 1995.
[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
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%.
[14]

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
[16]

[17]

directors of CIC, should be held liable for the deficiency income tax, especially
because the gains realized from the sale were withdrawn by him as cash
advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its 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
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.
[18]

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
[36]

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.
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 CAG.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.
CIR v. Toda, Jr.
GR No. 147188; 14 September 2004

F A C T S: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its outstanding capital stock, to sell the Cibeles Building. 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. Three and a half years
later Toda died. On 29 March 1994, the BIR sent an assessment notice and demand letter to the
CIC for deficiency income tax for the year 1989. 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 from the CIR for deficiency income tax for the year 1989. The
Estate thereafter filed a letter of protest. The Commissioner dismissed the protest. On 15
February 1996, the Estate filed a petition for review with the CTA. In its decision 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. Hence, the CTA declared that the
Estate is not liable for deficiency of income tax. The Commissioner filed a petition for review
with the Court of Appeals. The Court of Appeals affirmed the decision of the CTA, hence, this
recourse.
I S S U E: Whether or not this is a case of tax evasion or tax avoidance.
H E L D: 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 nonpayment 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. All these factors are present in the instant
case. 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. Altonagas sole purpose of acquiring
and transferring title of the subject properties on the same day was to create a tax shelter. 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.

Facts:
Cebiles Insurance Corporation 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.
Toda purportedly sold the property for P100 million to Rafael A. Altonaga. However, Altonaga
in turn, sold the same property on the same day to Royal Match Inc. for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.
For the sale of the property to Royal Dutch, Altonaga paid capital gains tax [6%] in the
amount of P10 million.
Issue:
Whether or not the scheme employed by Cibelis Insurance Company constitutes tax evasion.
Ruling:
Yes! The scheme, explained the Court, 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.
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.
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.
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.