Contents

I. GENERAL PRINCIPLES OF TAXATION ...........................................................................................................................3

1. MANILA MEMORIAL PARK v. SEC. OF DSWD &DOF (2013) .......................................................................................3
2. ROMEO P. GEROCHI vs. DEPARTMENT OF ENERGY (DOE) .....................................................................................4
3. Francia vs. Intermediate Appealate Court .................................................................................................................7
4. MELECIO R. DOMINGO, vs.HON. LORENZO C. GARLITOS and SIMEONA K. PRICE. ...................................................8
5. Diaz vs. Secretary of Finance (2011) ..........................................................................................................................8
6. Bagatsing v Ramirez GR No L-41631, December 17, 1976 ........................................................................................9
7. TIO vs. VRB151 SCRA 208.........................................................................................................................................10
8. LUTZ v. ARANETA 98 PHIL. 145 December 22, 1955 ................................................................................................10
9. Gomez vs. Palomar, discretion as to subjects of taxation G.R. No. L-23645 October 29, 1968 ..............................11
10. Pascual vs. Secretary of Public Works 110 PHIL 331..............................................................................................12
11. Planters Products, Inc. vs. FertiPhil Corporation G.R. No. 166006 ........................................................................12
12. Abakada Guro Partylist vs. Ermita G.R. No. 168056, September 1, 2005 ..............................................................13
13. MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA), Petitioner, v. CITY OF LAPU-LAPU AND ELENA T.
PACALDO, Respondents, G.R. No. 181756...................................................................................................................14
14. ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents. G.R. No. 115455 August 25, 1994.........................................................................................16
15. ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents. GR 115455 October 30, 1995 ...............................................................................................17
16. BRITISH AMERICAN TOBACCO, v CAMACHO August 20, 2008 ..............................................................................17
17. BRITISH AMERICAN TOBACCO v CAMACHO (2009) ...............................................................................................23
18. ANTERO M. SISON, JR., vs RUBEN B. ANCHETA ...................................................................................................27
19. OSMEA vs. ORBOS ...............................................................................................................................................28
20. LUNG CENTER OF THE PHILIPPINES VS. QUEZON CITY AND CONSTANTINO ROSAS .............................................29
21. CIR v CA and YMCA (Young Men Christian Assoc. Of the PH) ................................................................................31
22. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS, respondents. ................................................................................................................................................34
23. DEUTSCHE BANK AG MANILA BRANCH, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent . .37
24. Nursery Care Corporation et. al v. Anthony Acevedo, in his capacity as treasurer of Manila and City of Manila 39
25. City of Manila v. Coca-Cola Bottlers Philippines, Inc. ............................................................................................39
26. CIR vs. Estate of Benigno Toda ..............................................................................................................................42
27. Plaridel M. Abaya vs. Hon. Secretary Hermogenes E. Ebdane, Jr. .........................................................................43
28. DAVID vs. ARROYO .................................................................................................................................................44
29. Gonzales vs. Marcos ..............................................................................................................................................47
30. LIWAYWAY VINZONS-CHATO vs. FORTUNE TOBACCO CORPORATION, ................................................................50
II. ORGANIZATION AND FUNCTION OF THE BIR ...........................................................................................................53
1. British American Tobacco Corporation v. Finance Secretary Camacho, BIR Commissioner Parayno (2008) ..........53
2. Philippine American Life and General Insurance v. Secretary of Finance ...............................................................54
3. COMMISSIONER OF INTERNAL REVENUE v. COURT OF TAX APPEALS (SECOND DIVISION) AND PETRON
CORPORATION. ............................................................................................................................................................56
III. INCOME TAXATION .................................................................................................................................................57
1. COMMISSIONER OF INTERNAL REVENUE vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS G.R. No.
78953 July 31, 1991 .....................................................................................................................................................57
2. CONWI V. COURT OF APPEALS ................................................................................................................................62
3. OBILLOS vs.COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS ..............................................63
4. COMMISSIONER OF INTERNAL REVENUE vs ST. LUKES MEDICAL CENTER .............................................................65
5. COMMISSIONER OF INTERNAL REVENUE v. YMCA ..................................................................................................67
1

6. SMI-ED vs. CIR ..........................................................................................................................................................69

7. Republic vs Soriano ..................................................................................................................................................71

I. GENERAL PRINCIPLES OF TAXATION

1. MANILA MEMORIAL PARK v. SEC. OF DSWD &DOF (2013)
Petitioner: MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC.
Respondent: SEC. OF DSWD AND DOF
DOCTRINE: The senior citizens discount is treated as a deduction, a tax-deductible expense that is
subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an amount
that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of
tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis
but merely offers a fractional reduction in taxes owed.
FACTS:
1. Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432, as amended by
RA 9257, and the implementing rules and regulations issued by the DSWD and DOF insofar as
these allow business establishments to claim the 20% discount given to senior citizens as a tax
deduction.
a. Only that portion of the gross sales exclusively used, consumed or enjoyed by the senior
citizen shall be eligible for the deductible sales discount.
b. The gross selling price and the sales discount must be separately indicated in the OR or Sales
Invoice issued by the establishment for the sale of goods or services to the senior citizen.
c. Only the actual amount of the discount granted or a sales discount not exceeding 20% of the
gross selling price can be deducted from the gross income, net of value added tax, if
applicable, for income tax purposes, and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax purposes.
d. The discount can only be allowed as deduction from gross income for the same taxable year
that the discount is granted.
e. The business establishment giving sales discounts to qualified senior citizens is required to
keep separate and accurate records of sales (ex. name of the senior citizen, TIN, OSCA ID,
gross sales/receipts, sales discount granted, date and invoice number for every transaction).
f. Only the following business establishments which granted sales discount to senior citizens on
their sale of goods and/or services may claim the said discount granted as deduction from
gross income, namely: (i) Funeral parlors and similar establishments The beneficiary or any
person who shall shoulder the funeral and burial expenses of the deceased senior citizen shall
claim the discount, such as casket, embalmment, cremation cost and other related services
for the senior citizen upon payment and presentation of [his] death certificate.
2. The DSWD likewise issued its own Rules and Regulations.
3. Petitioners posit that the tax deduction scheme contravenes the Constitution, which provides that
private property shall not be taken for public use without just compensation. It is also
unconstitutional for shifting the States constitutional mandate or duty of improving the welfare of
the elderly to the private sector.
ISSUES:
WON Section 4 of RA 9257 providing that the 20% discount to senior citizens may be claimed as tax
deduction by private establishments are invalid and unconstitutional? NO
RULING + RATIO:
1. The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an
exercise of police power of the State, has already been settled in Carlos Superdrug Corporation. A
3

2.

3.

4.

5.

tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation. However, the State, in promoting the health and welfare
of a special group of citizens, can impose upon private establishments the burden of partly
subsidizing a government program. The Senior Citizens Act was enacted primarily to maximize
the contribution of senior citizens to nation-building, and to grant benefits and privileges to them
for their improvement and well-being as the State considers them an integral part of our society.
Has general welfare for its object. When the conditions so demand as determined by the
legislature, property rights must bow to the primacy of police power because property rights,
though sheltered by due process, must yield to general welfare.
In the case of Carlos Super Drug, it is incorrect for petitioners to insist that the grant of the senior
citizen discount is unduly oppressive to their business, because petitioners have not taken time to
calculate correctly and come up with a financial report, so that they have not been able to show
properly whether or not the tax deduction scheme really works greatly to their disadvantage.
No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos
Superdrug Corporation. We note that the discussion on eminent domain in Central Luzon Drug
Corporation is obiter dicta and, thus, not binding precedent. The 20% discount is a valid exercise
of police power and cannot be considered as an exercise of the power of eminent domain contrary
to the obiter in Central Luzon Drug Corporation. Whether that line between permissible regulation
under police power and "taking" under eminent domain has been crossed must, under the specific
circumstances of this case, be subject to proof and the one assailing the constitutionality of the
regulation carries the heavy burden of proving that the measure is unreasonable, oppressive or
confiscatory. The 20% senior citizen discount has not been shown to be unreasonable, oppressive
or confiscatory.
Congress may have legitimately concluded that business establishments have the capacity to
absorb a decrease in profits due to the 20% discount without substantially affecting the reasonable
rate of return on their investments considering that (1) not all customers of a business
establishment are senior citizens and (2) the level of its profit margins on goods and services
offered to the general public. Also, these establishments have the capacity to revise their pricing
strategy.

DISPOSITION: WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

2.

ROMEO P. GEROCHI vs. DEPARTMENT OF ENERGY (DOE)

G.R. No. 159796 July 17, 2007 Ponente: NACHURA, J.:

FACTS:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc.
(ECN) (petitioners), come before this Court in this original action praying that Section 34 of Republic Act
(RA) 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), imposing
the Universal Charge, and Rule 18 of the Rules and Regulations (IRR) which seeks to implement the
said imposition, be declared unconstitutional.
Petitioners also pray that the Universal Charge imposed upon the consumers be refunded and that a
preliminary injunction and/or temporary restraining order (TRO) be issued directing the respondents to
refrain from implementing, charging, and collecting the said charge.
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect. On April 5, 2002,
respondent National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) filed with respondent
Energy Regulatory Commission (ERC) a petition for the availment from the Universal Charge of its share
for Missionary Electrification. On May 7, 2002, NPC filed another petition with ERC, praying that the
proposed share from the Universal Charge for the Environmental charge be approved for withdrawal
from the Special Trust Fund (STF) managed by respondent Power Sector Assets and Liabilities
Management Group (PSALM) for the rehabilitation and management of watershed areas. On December 20,
2002, the ERC issued an Order provisionally approving the computed amount as the share of the
4

NPC-SPUG from the Universal Charge for Missionary Electrification and authorizing the National
Transmission Corporation (TRANSCO) and Distribution Utilities to collect the same from its end-users on a
monthly basis. On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among
others,[14] to set aside the Decision. On April 2, 2003, ERC authorized the NPC to draw up
to P70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject to the availability of
funds for the Environmental Fund component of the Universal Charge.
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged
petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as reflected in their
respective electric bills starting from the month of July 2003.
Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are
unconstitutional on the following grounds:
1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented under
Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric end-users
and self-generating entities. The power to tax is strictly a legislative function and as such, the
delegation of said power to any executive or administrative agency like the ERC is
unconstitutional, giving the same unlimited authority. The assailed provision clearly provides
that the Universal Charge is to be determined, fixed and approved by the ERC, hence leaving to the
latter complete discretionary legislative authority.
2) The ERC is also empowered to approve and determine where the funds collected should be used.
3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and
amounts to taxation without representation as the consumers were not given a chance to be heard
and represented.
Respondent PSALM through the Office of the Government Corporate Counsel (OGCC) and Respondents
Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General (OSG) contends:
1) Unlike a tax which is imposed to provide income for public purposes, the assailed Universal Charge
is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric
power industry.
2) It is exacted by the State in the exercise of its inherent police power. On this premise, PSALM
submits that there is no undue delegation of legislative power to the ERC since the latter merely
exercises a limited authority or discretion as to the execution and implementation of the provisions
of the EPIRA.
3) Universal Charge does not possess the essential characteristics of a tax, that its imposition
would redound to the benefit of the electric power industry and not to the public, and that its rate is
uniformly levied on electricity end-users, unlike a tax which is imposed based on the individual
taxpayer's ability to pay.
4) Imposition of the Universal Charge is not oppressive and confiscatory since it is an exercise of
the police power of the State and it complies with the requirements of due process.
PECO argues that it is duty-bound to collect and remit the amount pertaining to the Missionary
Electrification and Environmental Fund components of the Universal Charge, pursuant to Sec. 34 of the
EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165.Otherwise, PECO could be held liable
under Sec. 46[24] of the EPIRA, which imposes fines and penalties for any violation of its provisions or its
IRR.
ISSUE
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax
2) Whether or not there is undue delegation of legislative power to tax on the part of
the ERC.
HELD
st

1 ISSUE
5

The conservative and pivotal distinction between these two powers rests in the purpose for which
the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does
not make the imposition a tax. In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the
State's police power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34
which enumerates the purposes for which the Universal Charge is imposed. From the aforementioned
purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise
of the State's police power. Public welfare is surely promoted.
nd

ISSUE

There is no undue delegation of legislative power to the ERC.

The principle of separation of powers ordains that each of the three branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed
in the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated).
This is based on the ethical principle that such delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own judgment and not through the intervening
mind of another.
In the face of the increasing complexity of modern life, delegation of legislative power to various specialized
administrative agencies is allowed as an exception to this principle. Given the volume and variety of
interactions in today's society, it is doubtful if the legislature can promulgate laws that will deal adequately
with and respond promptly to the minutiae of everyday life. Hence, the need to delegate to administrative
bodies - the principal agencies tasked to execute laws in their specialized fields - the authority to
promulgate rules and regulations to implement a given statute and effectuate its policies. All that is required
for the valid exercise of this power of subordinate legislation is that the regulation be germane to the objects
and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the
standards prescribed by the law. These requirements are denominated as the completeness test and the
sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature
such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test
mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's
authority and prevent the delegation from running riot. The Court finds that the EPIRA, read and
appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its essential terms and conditions,
and that it contains sufficient standards.
st

1 test - Although Sec. 34 of the EPIRA merely provides that within one (1) year from the effectivity thereof,
a Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity
end-users, and therefore, does not state the specific amount to be paid as Universal Charge, the amount
nevertheless is made certain by the legislative parameters provided in the law itself. Moreover, contrary to
the petitioners contention, the ERC does not enjoy a wide latitude of discretion in the determination of the
Universal Charge. Thus, the law is complete and passes the first test for valid delegation of legislative
power.
nd

2 test - Provisions of the EPIRA such as, among others, to ensure the total electrification of the country
and the quality, reliability, security and affordability of the supply of electric power[59] and watershed
rehabilitation and management[60] meet the requirements for valid delegation, as they provide the
limitations on the ERCs power to formulate the IRR. These are sufficient standards.
From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative
power to the ERC.
6

Petitioners failed to pursue in their Memorandum the contention in the Complaint that the
imposition of the Universal Charge on all end-users is oppressive and confiscatory, and amounts
to taxation without representation. Hence, such contention is deemed waived or abandoned.
Moreover, the determination of whether or not a tax is excessive, oppressive or confiscatory is an
issue which essentially involves questions of fact, and thus, this Court is precluded from reviewing
the same.
Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification,
there must be a clear and unequivocal breach of the Constitution and not one that is doubtful,
speculative, or argumentative. Indubitably, petitioners failed to overcome this presumption in favor
of the EPIRA. We find no clear violation of the Constitution which would warrant a pronouncement
that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional and void.
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.

3. Francia vs. Intermediate Appealate Court

162 SCRA 753 Taxation Law General Principles Set-off of Taxes
FACTS:
Engracio Francia was the owner of a 328 square meter land in Pasay City. In October 1977, a portion of his
land (125 square meter) was expropriated by the government for P4,116.00. The expropriation was made
to give way to the expansion of a nearby road.
It also appears that Francia failed to pay his real estate taxes since 1963 amounting to P2,400.00. So in
December 1977, the remaining 203 square meters of his land was sold at a public auction (after due notice
was given him). The highest bidder was a certain Ho Fernandez who paid the purchase price of P2,400.00
(which was lesser than the price of the portion of his land that was expropriated).
Later, Francia filed a complaint to annul the auction sale on the ground that the selling price was grossly
inadequate. He further argued that his land should have never been auctioned because the P2,400.00 he
owed the government in taxes should have been set-off by the debt the government owed him (legal
compensation). He alleged that he was not paid by the government for the expropriated portion of his land
because though he knew that the payment therefor was deposited in the Philippine National Bank, he never
withdrew it.
ISSUE:
Whether or not the tax owed by Francia should be set-off by the debt owed him by the government.
HELD:
No. As a rule, set-off of taxes is not allowed. There is no legal basis for the contention. By legal
compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each
other, are extinguished (Art. 1278, Civil Code). This is not applicable in taxes. There can be no off-setting of
taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay
a tax on the ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the government.
The Supreme Court emphasized: A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy,
to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on.
Further, the government already Francia. All he has to do was to withdraw the money. Had he done that, he
could have paid his tax obligations even before the auction sale or could have exercised his right to redeem
which he did not do.
Anent the issue that the selling price of P2,400.00 was grossly inadequate, the same is not tenable. The
Supreme Court said: alleged gross inadequacy of price is not material when the law gives the owner the
right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the
7

easier it is for the owner to effect redemption. If mere inadequacy of price is held to be a valid objection to
a sale for taxes, the collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. Where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale. This rule arises from necessity, for, if a fair price for the land were essential to the sale,
it would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers
at tax sales are grossly out of proportion to the value of the land.

4. MELECIO R. DOMINGO, vs.HON. LORENZO C. GARLITOS and

SIMEONA K. PRICE.
Facts:
In the 1960 case of Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by the estate of the
estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First
Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late
Walter Scott Price."
In order to enforce the claims against the estate the fiscal presented a petition dated June 21,
1961, to the court below for the execution of the judgment. The petition was, however, denied by the court
which held that the execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200.
Issue: WON the execution of the claim of the Government against the estate is proper.
Ruling:
The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle
claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant
to present a claim before the probate court so that said court may order the administrator to pay the
amount thereof.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the
estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court
and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto.
During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to
allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to
require the administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of
the estate had found that the claim of the estate against the Government has been recognized and an
amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No.
2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and demandable is well as fully
liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the
creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the
estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the
proper remedy for the petitioner. Appeal is the remedy

5. Diaz vs. Secretary of Finance (2011)

Facts:
8

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief
assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal
Revenue (BIR) on the collections of tollway operators. Court treated the case as one of prohibition.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within
the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user's tax," not a sale of
services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was
never factored into the formula for computing toll fees, its imposition would violate the non-impairment
clause of the constitution.
The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including
tollway operations; that the Court should seek the meaning and intent of the law from the words used in the
statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of
several BIR rulings and circulars.
The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between
the government and tollway operators. At any rate, the non-impairment clause cannot limit the State's
sovereign taxing power which is generally read into contracts.
Issue: May toll fees collected by tollway operators be subjected to VAT (Are tollway operations a franchise
and/or a service that is subject to VAT)?
Ruling:
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter's use of the tollway
facilities over which the operator enjoys private proprietary rights that its contract and the law recognize. In
this sense, the tollway operator is no different from the service providers under Section 108 who allow
others to use their properties or facilities for a fee.
Tollway operators are franchise grantees and they do not belong to exceptions that Section 119 spares
from the payment of VAT. The word "franchise" broadly covers government grants of a special right to do
an act or series of acts of public concern. Tollway operators are, owing to the nature and object of their
business, "franchise grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special grant of authority
from the state.
A tax is imposed under the taxing power of the government principally for the purpose of raising revenues
to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the
tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the
use of public facilities, therefore, they are not government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded
by either the government or private individuals or entities, a s an attribute of ownership.

6. Bagatsing v Ramirez GR No L-41631, December 17, 1976

FACTS:
In 1974, the Municipal Board of Manila enacted Ordinance 7522, regulating the operation of public markets
and prescribing fees for the rentals of stalls and providing penalties for violation thereof. The Federation of
Manila Market Vendors Inc. assailed the validity of the ordinance, alleging among others the
noncompliance to the publication requirement under the Revised Charter of the City of Manila. CFI-Manila
declared the ordinance void. Thus, the present petition.

ISSUE: What law should govern the publication of a tax ordinance, the Revised City Charter, which requires
publication of the ordinance before its enactment and after its approval, or the Local Tax Code, which only
demands publication after approval?
RULING:
The Local Tax Code prevails. There is no question that the Revised Charter of the City of Manila is a
special act since it relates only to the City of Manila whereas the Local Tax Code is a general law because
it applies universally to all local governments. The fact that one is special and the other general creates a
presumption that the special is to be considered as remaining an exception of the general, one as a general
law of the land, the other as the law of a particular case. However, the rule readily yields to a situation where
the special statute refers to a subject in general, which the general statute treats in particular. The Revised
Charter of the City prescribes a rule for the publication of ordinance in general, while the Local Tax Code
establishes a rule for the publication of ordinance levying or imposing taxes fees or other charges in
particular.

7. TIO vs. VRB151 SCRA 208

"The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose
thetax was to favor one industry over another."
FACTS:
The petitioner assails the validity of PD 1987 entitled an "Act creating the Videogram Regulatory Board,"
citing especially Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government. Petitioner contends that aside from its being a rider and not germane to the subject matter
thereof, and such imposition was being harsh, confiscatory, oppressive and/or unlawfully restraints trade in
violation of the due process clause of the Constitution.
ISSUE: Whether or not PD 1987 is a valid exercise of taxing power of the state?
HELD:Yes.
It is beyond serious question that a tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in
force and so searching in extent, that the courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as those rest in the discretion of the authority which exercises it. In
imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation. The levy of the 30% tax is for a public purpose. It was imposed
primarily to answer the need for regulating the video industry, particularly because of the rampant film
piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes.
And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid
imposition. The public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one industry over another.

8. LUTZ v. ARANETA 98 PHIL. 145 December 22, 1955

FACTS:
Appelant in this case Walter Lutz in his capacity as the Judicial Administrator of the intestate of the
deceased Antonio Jayme Ledesma, seeks to recover from the Collector of the Internal Revenue the total
sum of fourteen thousand six hundred sixty six and forty cents (P 14, 666.40) paid by the estate as taxes,
under section 3 of Commonwealth Act No. 567, also known as the Sugar Adjustment Act, for the crop
years 1948-1949 and 1949-1950. Commonwealth Act. 567 Section 2 provides for an increase of the
existing tax on the manufacture of sugar on a graduated basis, on each picul of sugar manufacturer; while
section 3 levies on the owners or persons in control of the land devoted tot he cultivation of sugarcane and
10

ceded to others for consideration, on lease or otherwise - "a tax equivalent to the difference between the
money value of the rental or consideration collected and the amount representing 12 per centum of the
assessed value of such land. It was alleged that such tax is unconstitutional and void, being levied for the
aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for
which a tax may be constitutionally levied. The action was dismissed by the CFI thus the plaintiff appealed
directly to the Supreme Court.

ISSUE:Whether or not the tax imposition in the Commonwealth Act No. 567 are unconstitutional.
RULING: Yes.
The Supreme Court held that the fact that sugar production is one of the greatest industry of our nation,
sugar occupying a leading position among its export products; that it gives employment to thousands of
laborers in the fields and factories; that it is a great source of the state's wealth, is one of the important
source of foreign exchange needed by our government and is thus pivotal in the plans of a regime
committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare
demanded that the sugar industry be stabilized in turn; and in the wide field of its police power, the
law-making body could provide that the distribution of benefits therefrom be readjusted among its
components to enable it to resist the added strain of the increase in taxes that it had to sustain.
The subject tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization
of the threatened sugar industry. In other words, the act is primarily a valid exercise of police power.

9. Gomez vs. Palomar, discretion as to subjects of taxation G.R. No.

L-23645 October 29, 1968
Facts:
Petitioner questions the constitutionality of the statute, claiming that R.A. 1635 otherwise known as the
Anti-TB Stamp Law, is violative of the equal protection clause of the Constitution because it constitutes mail
users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even
among postal patrons the statute discriminatory grant exemptions.
Moreover, petitioner contends that the statutory classification of taxpayers has no relation to the object
sought by the Anti-TB law.
Issue:Whether or not the Anti-Tb law violates the equal protection clause of the constitution.
Ruling:
No, Supreme Court reiterated that the legislature has the inherent power to select the subjects of taxation
and to grant exemptions. The reason for this is that traditionally, classification has been a device for fitting
tax programs to local needs and usages in order to achieve an equitable distribution of the tax burden. The
legislative classifications must be reasonable is of course undenied in this case.
The classification of mail users is not without any reason. It is based on ability to pay, let alone the
enjoyment of a privilege, and on administrative convenience. The classification is likewise based on
considerations of administrative convenience. For it is now a settled principle of law that "consideration of
practical administrative convenience and cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class. Lastly, mail users were already a class by
themselves even before the enactment of the statue and all that the legislature did was merely to select
their class. Legislation is essentially empiric and Republic Act 1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact is
11

living law; to disregard [them] and concentrate on some abstract identities is lifeless logic."
Petitioner's assertions that statutory classification of mail users must bear some reasonable
relationship to the end sought to be attained, and that absent such relationship the selection of mail users is
constitutionally impermissible does not hold water. This is altogether a different proposition, since explained
by the court "that while the principle that there must be a reasonable relationship between classification
made by the legislation and its purpose is undoubtedly true in some contexts, it has no application to a
measure whose sole purpose is to raise revenue, so long as the classification imposed is based upon some
standard capable of reasonable comprehension, be that standard based upon ability to produce revenue or
some other legitimate distinction, equal protection of the law has been afforded."

10. Pascual vs. Secretary of Public Works 110 PHIL 331

FACTS:
In 1953, Republic Act No. 920 was passed. This law appropriated P85,000.00 for the construction,
reconstruction, repair, extension and improvement Pasig feeder road terminals. Wenceslao Pascual, then
governor of Rizal, assailed the validity of the law. He claimed that the appropriation was actually going to be
used for private use for the terminals sought to be improved were part of the Antonio Subdivision. The said
Subdivision is owned by Senator Jose Zulueta who was a member of the same Senate that passed and
approved the same RA. Pascual claimed that Zulueta misrepresented in Congress the fact that he owns
those terminals and that his property would be unlawfully enriched at the expense of the taxpayers if the
said RA would be upheld. Pascual then prayed that the Secretary of Public Works and Communications be
restrained from releasing funds for such purpose. Zulueta, on the other hand, perhaps as an afterthought,
donated the said property to the City of Pasig.
ISSUE: Whether or not the appropriation is valid.
HELD:
No, the appropriation is void for being an appropriation for a private purpose. The subsequent
donation of the property to the government to make the property public does not cure the constitutional
defect. The fact that the law was passed when the said property was still a private property cannot be
ignored. In accordance with the rule that the taxing power must be exercised for public purposes only,
money raised by taxation can be expanded only for public purposes and not for the advantage of private
individuals. Inasmuch as the land on which the projected feeder roads were to be constructed belonged
then to Zulueta, the result is that said appropriation sought a private purpose, and, hence, was null and void.

11. Planters Products, Inc. vs. FertiPhil Corporation G.R. No.

166006
Facts:
Petitioner PLANTERS PRODUCTS INC. and respondent FERTIPHIL CORP. are private
corporations engaged in importation and distribution of FERTILIZERS, PESTICIDES & other Agricultural
Products.
Then President Marcos issued a Levy Tax through a Letter of Instruction (LOI No. 1465) imposing capital
recovery component of P10 per bag of fertilizer to be remitted to FERTILIZER & PESTICIDE AUTHORITY
(FPA). The levy was to continue till adequate capital was raised to make PPI financially viable. So
FertiPhil remitted the same to said agency, which was then remitted to the depository bank of PPI.
FertiPhil paid roughly P6M to FPA from 1985 to 1986.
After the 1986 EDSA Revolution, FPA voluntarily stopped the imposition of the P10 levy. FertiPhil
therefore demanded from PPI a full refund of the amount it remitted, however PPI refused. As a result
12

FertiPhil filed a complaint for collection and damages questioning the constitutionality of LOI 1465,
claiming that it was an unjust, unreasonable, oppressive, invalid and unlawful tax imposition that amounted
to a denial of due process.
Issue: WoN the P10 levy under LOI No. 1465 is constitutional (valid exercise of taxation power)
Held: No
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a
public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private
persons. The levy imposed under LOI No. 1465 was not for a public purpose because (1) the LOI expressly
provided that the levy be imposed to benefit PPI, a private company; (2) the LOI provides that the imposition
of the P10 levy was conditional and dependent upon PPI becoming financially viable (this suggests that the
levy was actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when PPI is
deemed financially viable. Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the
levy is made indefinite. They are required to continuously pay the levy until adequate capital is raised for
PPI); (3) the levies paid under the LOI were directly remitted and deposited by FPA to Far East Bank and
Trust Company, the depositary bank of PPI (this proves that PPI benefited from the LOI and also proves
that the main purpose of the law was to give undue benefit and advantage to PPI); and (4) the levy was
used to pay the corporate debts of PPI.

12. Abakada Guro Partylist vs. Ermita G.R. No. 168056,

September 1, 2005
Facts:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section
4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of
goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These
questioned provisions contain a uniformp ro v is o authorizing the President, upon recommendation of the
Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions
have been satisfied. Petitioners argue that the law is unconstitutional.
Issues:
Whether or not there is a violation of Article VI, Section 24 of the Constitution.
Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of
the Constitution.
Held: NO
It is not the law but the revenue bill which is required by the Constitution to originate exclusively in
the House of Representatives. To insist that a revenue statute and not only the bill which initiated the
legislative process culminating in the enactment of the law must substantially be the same as the House
bill would be to deny the Senates power not only to concur with amendments but also to propose
amendments. It would be to violate the coequality of legislative power of the two houses of Congress and
in fact make the House superior to the Senate. Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate was acting within its constitutional power to
introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, and excise and franchise taxes.
Delegation is valid only if the law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate; and (b) fixes a standard the limits of which are
sufficiently determinate and determinable to which the delegate must conform in the performance of his
13

functions. The legislature may delegate to executive officers or bodies the power to determine certain facts
or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made
to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority.
While the power to tax cannot be delegated to executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to them, including the power to determine the
existence of facts on which its operation depends. This case is not a delegation of legislative power. It is
simply a delegation of ascertainment of facts upon which enforcement and administration of the increase
rate under the law is contingent. The legislature has made the operation of the 12% rate effective January
1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the
12% rate upon factual matters outside of the control of the executive.

13. MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY

(MCIAA), Petitioner, v. CITY OF LAPU-LAPU AND ELENA T.
PACALDO, Respondents, G.R. No. 181756
FACTS:
Petitioner, Mactan-Cebu International Airport Authority (MCIAA) was created by Congress under
Republic Act No. 6958. Upon its creation, petitioner enjoyed exemption from realty taxes imposed by the
National Government or any of its political subdivision. On September 11, 1996, however, this Court
rendered a decision in MCIAA v. Marcos (the 1996 MCIAA case) declaring that upon the effectivity of
Republic Act No. 7160 (The Local Government Code of 1991), petitioner was no longer exempt from real
estate taxes.
On January 7, 1997, Respondent City issued to petitioner a Statement of Real Estate Tax assessing
the lots comprising the Mactan International Airport which included the airfield, runway, taxi way and the
lots on which these are built. Petitioner contends that these lots, and the lots to which they are built, are
utilized solely and exclusively for public purposes and are exempt from real property tax. Petitioner based
its claim for exemption on DOJ Opinion No. 50.
Respondent City Treasurer Elena T. Pacaldo sent petitioner a Statement of Real Property Tax
Balances up to the year 2002 reflecting the amount of P246,395,477.20. Petitioner claimed that the
statement again included the lots utilized solely and exclusively for public purpose such as the airfield,
runway, and taxiway and the lots on which these are built. Respondent Pacaldo then issued Notices of
Levy on 18 sets of real properties of petitioner.
Petitioner filed a petition for Prohibition, TRO, and a writ of preliminary injunction with RTC Lapulapu
which sought to enjoin respondent City from issuing the warrant of levy against petitioners properties from
selling them at public auction for delinquency in realty tax obligations.
Petitioner claimed before the RTC that it had discovered that respondent City did not pass any
ordinance authorizing the collection of real property tax, a tax for the special education fund (SEF), and a
penalty interest for its nonpayment. Petitioner argued that without the corresponding tax ordinances,
respondent City could not impose and collect real property tax, an additional tax for the SEF, and penalty
interest from petitioner.
RTC granted the writ of preliminary which was later on lifted upon motion by the respondents.
RULING OF THE CA:
the Court of Appeals held that petitioners airport terminal building, airfield, runway, taxiway, and the lots
on which they are situated are not exempt from real estate tax reasoning as follows:
Under the Local Government Code (LGC for brevity), enacted pursuant to the
constitutional mandate of local autonomy, all natural and juridical persons, including
government-owned or controlled corporations (GOCCs), instrumentalities and agencies,
14

are no longer exempt from local taxes even if previously granted an exemption. The only
exemptions from local taxes are those specifically provided under the Code itself, or those
enacted through subsequent legislation.
Thus, the LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for
the exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemptions from local taxation.
ISSUE: Whether or not petitioner is a government instrumentality exempt from paying real property taxes.
RULING OF THE SUPREME COURT: YES
The petitioner is an instrumentality of the government; thus, its properties actually, solely and
exclusively used for public purposes, consisting of the airport terminal building, airfield, runway, taxiway
and the lots on which they are situated, are not subject to real property tax and respondent City is not
justified in collecting taxes from petitioner over said properties.
The Court of Appeals (Cebu City) erred in declaring that the 1996 MCIAA case still controls and that
petitioner is a GOCC. The 2006 MIAA case governs.
To recall, in the 2006 MIAA case, we held that MIAAs airport lands and buildings are exempt from
real estate tax imposed by local governments; that it is not a GOCC but an instrumentality of the national
government, with its real properties being owned by the Republic of the Philippines, and these are exempt
from real estate tax.
Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real estate
tax. However, MIAA is not a government-owned or controlled corporation under Section 2(13) of the
Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock
corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII of
the 1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA is a
government instrumentality vested with corporate powers and performing essential public
services pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a
government instrumentality, MIAA is not subject to any kind of tax by local governments under Section
133(o) of the Local Government Code. The exception to the exemption in Section 234(a) does not apply to
MIAA because MIAA is not a taxable entity under the Local Government Code. Such exception applies
only if the beneficial use of real property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
As properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public dominion are not subject
to execution or foreclosure sale.
Petitioners properties that are actually, solely and exclusively used for public purpose, consisting of
the airport terminal building, airfield, runway, taxiway and the lots on which they are
situated, EXEMPT from real property tax imposed by the City of Lapu-Lapu.

15

VOID all the real property tax assessments, including the additional tax for the special education fund
and the penalty interest, as well as the final notices of real property tax delinquencies, issued by the City of
Lapu-Lapu on petitioners properties, except the assessment covering the portions that petitioner has
leased to private parties.
NULL and VOID the sale in public auction of 27 of petitioners properties and the eventual forfeiture
and purchase of the said properties by respondent City of Lapu-Lapu. We likewise declare VOID the
corresponding Certificates of Sale of Delinquent Property issued to respondent City of Lapu-Lapu.

14. ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF

FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents. G.R. No. 115455 August 25, 1994
FACTS:
Herein various petitioners seek to declare RA 7166 as unconstitutional as it seeks to widen the tax
base of the existing VAT system and enhance its administration by amending the National Internal
Revenue Code. The value-added tax (VAT) is levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price
or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from
the sale or exchange of services.
CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions
as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and
equitable and that Congress shall "evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing contracts of
the sale of real property by installment or on deferred payment basis would result in substantial increases
in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out,
is something that the buyer did not anticipate at the time he entered into the contract.
It is next pointed out that while Section 4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no exemption
on the sale of real property which is equally essential. The sale of real property for socialized and low-cost
housing is exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e.,
the middle class, who are equally homeless, should likewise be exempted.
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, Section
28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."
ISSUE: Whether or not RA 7166 violates the principle of progressive system of taxation.
RULING: No,
There is no justification for passing upon the claims that the law also violates the rule that taxation
must be progressive and that it denies petitioners' right to due process and that equal protection of the
laws. The reason for this different treatment has been cogently stated by an eminent authority on
constitutional law thus: "When freedom of the mind is imperiled by law, it is freedom that commands a
momentum of respect; when property is imperiled it is the lawmakers' judgment that commands respect.
This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but
obviously it does set up a hierarchy of values within the due process clause."
Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption goods of those who
are in the higher-income bracket, which before were taxed at a rate higher than 10%, has been reduced,
while basic commodities, which before were taxed at rates ranging from 3% to 5%, are now taxed at a
higher rate.
Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by
respondents that in fact it distributes the tax burden to as many goods and services as possible particularly
to those which are within the reach of higher-income groups, even as the law exempts basic goods and
16

services. It is thus equitable. The goods and properties subject to the VAT are those used or consumed by
higher-income groups. These include real properties held primarily for sale to customers or held for lease
in the ordinary course of business, the right or privilege to use industrial, commercial or scientific
equipment, hotels, restaurants and similar places, tourist buses, and the like. On the other hand, small
business establishments, with annual gross sales of less than P500,000, are exempted. This, according
to respondents, removes from the coverage of the law some 30,000 business establishments. On the
other hand, an occasional paper of the Center for Research and Communication cities a NEDA study that
the VAT has minimal impact on inflation and income distribution and that while additional expenditure for
the lowest income class is only P301 or 1.49% a year, that for a family earning P500,000 a year or more is
P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion regarding these arguments, any discussion
whether the VAT is regressive in the sense that it will hit the "poor" and middle-income group in society
harder than it will the "rich," is largely an academic exercise. On the other hand, the CUP's contention that
Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives, and service
cooperatives, while maintaining that granted to electric cooperatives, not only goes against the
constitutional policy to promote cooperatives as instruments of social justice (Art. XII, 15) but also denies
such cooperatives the equal protection of the law is actually a policy argument. The legislature is not
required to adhere to a policy of "all or none" in choosing the subject of taxation. 44
Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in
G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90% any more
concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press Institute, petitioner in
G.R. No. 115544, that the VAT will drive some of its members out of circulation because their profits from
advertisements will not be enough to pay for their tax liability, while purporting to be based on the financial
statements of the newspapers in question, still falls short of the establishment of facts by evidence so
necessary for adjudicating the question whether the tax is oppressive and confiscatory.
Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the
Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like
the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the
reduction of social, economic and political inequalities (Art. XIII, 1), or for the promotion of the right to
"quality education" (Art. XIV, 1). These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.

15. ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF

FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents. GR 115455 October 30, 1995
Facts:
The VAT is levied on the sale, barter, or exchanged of the goods and properties as well as on
the sale of services. RA7116 seeks to wider the tax base of the existing VAT system and enhance it
administration on by amending the NIRC. CRTBA asserts that R.A. 7116 is unconstitutional as it violate
the rule that taxes should be uniform and equitable.
Issue: Whether or not it is meritorious?
Ruling: No.
Equity and uniformity in taxation means that all the taxable articles or kinds of properties of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement, it is enough that the statute or
ordinance applies equally to all persons, firms, and corporations placed in a similar situation.

16. BRITISH AMERICAN TOBACCO, v CAMACHO August 20, 2008

FACTS:
17

This petition for review assails the validity of: (1) Section 145 of the National Internal Revenue Code
(NIRC), as recodified by Republic Act (RA) 8424; (2) RA 9334, which further amended Section 145
of the NIRC on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4)
Revenue Memorandum Order No. 6-2003. Petitioner argues that the said provisions are violative of
the equal protection and uniformity clauses of the Constitution.
RA 8240, entitled An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and
For Other Purposes, took effect on January 1, 1997. In the same year, Congress passed RA 8424
or The Tax Reform Act of 1997, re-codifying the NIRC. Section 142 was renumbered as Section
145 of the NIRC.
Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net retail price per
pack of cigarettes.
Paragraph (c) of Section 145,

[1]

states

SEC. 145. Cigars and cigarettes.

xxxx
(c) Cigarettes packed by machine. There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax)
is above Ten pesos (P10.00) per pack, the tax shall be Thirteen pesos and
forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten
pesos (10.00) per pack, the tax shall be Eight pesos and ninety-six
centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax)
is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos
(P6.50) per pack, the tax shall be Five pesos and sixty centavos (P5.60)
per pack;
(4) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax shall be
One peso and twelve centavos (P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic
market after the effectivity of this Act shall be taxed under the highest classification of any
variant of that brand.
xxxx
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette
is sold on retail in 20 major supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover the applicable excise tax and
the value-added tax. For brands which are marketed only outside Metro Manila, the net
retail price shall mean the price at which the cigarette is sold in five major supermarkets in
the region excluding the amount intended to cover the applicable excise tax and the
value-added tax.

18

The classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex D of this Act, shall remain in force
until revised by Congress. (Emphasis supplied)

As such, new brands of cigarettes shall be taxed according to their current net retail price while
existing or old brands shall be taxed based on their net retail price as of October 1, 1996.

To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No.
[2]
1-97, which classified the existing brands of cigarettes as those duly registered or active brands
prior to January 1, 1997. New brands, or those registered after January 1, 1997, shall be initially
assessed at their suggested retail price until such time that the appropriate survey to determine
their current net retail price is conducted.
In June 2001, petitioner British American Tobacco introduced into the market Lucky Strike Filter,
Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail price of
[3]
P9.90 per pack. Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brands were initially
assessed the excise tax at P8.96 per pack.
[4]

On February 17, 2003, Revenue Regulations No. 9-2003, amended Revenue Regulations No.
1-97 by providing, among others, a periodic review every two years or earlier of the current net
retail price of new brands and variants thereof for the purpose of establishing and updating their tax
classification, thus:
For the purpose of establishing or updating the tax classification of new brands and
variant(s) thereof, their current net retail price shall be reviewed periodically through the
conduct of survey or any other appropriate activity, as mentioned above, every two (2)
years unless earlier ordered by the Commissioner. However, notwithstanding any increase
in the current net retail price, the tax classification of such new brands shall remain in force
until the same is altered or changed through the issuance of an appropriate Revenue
Regulations.

[5]

Pursuant thereto, Revenue Memorandum Order No. 6-2003 was issued on March 11,
2003, prescribing the guidelines and procedures in establishing current net retail prices of
new brands of cigarettes and alcohol products.
[6]

Subsequently, Revenue Regulations No. 22-2003 was issued on August 8, 2003 to

implement the revised tax classification of certain new brands introduced in the market
after January 1, 1997, based on the survey of their current net retail price. The survey
revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights, are
sold at the current net retail price of P22.54, P22.61 and P21.23, per pack,
[7]
respectively. Respondent Commissioner of the Bureau of Internal Revenue thus
recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky Strikes
average net retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial Court (RTC) of
Makati, Branch 61, a petition for injunction with prayer for the issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction. Said petition sought to enjoin
the implementation of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003,
22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that they
discriminate against new brands of cigarettes, in violation of the equal protection and
uniformity provisions of the Constitution.

19

[15]

On May 12, 2004, the trial court rendered a decision upholding the constitutionality of
Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue
Memorandum Order No. 6-2003. The trial court also lifted the writ of preliminary injunction.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax Rates
Imposed on Alcohol And Tobacco Products, Amending For The Purpose Sections 131,
141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took effect on January 1,
2005. The statute, among others,
(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified according to
their suggested net retail price, until such time that their correct tax bracket is finally
determined under a specified period and, after which, their classification shall remain in
force until revised by Congress;
(3) retained Annex D as tax base of those surveyed as of October 1, 1996
including the classification of brands for the same products which, although not set forth in
said Annex D, were registered on or before January 1, 1997 and were being commercially
produced and marketed on or after October 1, 1996, and which continue to be
commercially produced and marketed after the effectivity of this Act. Said classification
shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between the
[17]
period January 2, 1997 toDecember 31, 2003, such that said cigarettes shall remain in
the classification under which the BIR has determined them to belong as of December 31,
2003, until revised by Congress.

Under RA 9334, the excise tax due on petitioners products was increased to P25.00 per
pack. In the implementation thereof, respondent Commissioner assessed petitioners
importation of 911,000 packs of Lucky Strike cigarettes at the increased tax rate of P25.00
per pack, rendering it liable for taxes in the total sum of P22,775,000.00.
[19]

[20]

Petitioner filed a Motion to Admit Attached Supplement and a Supplement to the

petition for review, assailing the constitutionality of RA 9334 insofar as it retained Annex D
and praying for a downward classification of Lucky Strike products at the bracket taxable at
P8.96 per pack. Petitioner contended that the continued use of Annex D as the tax base of
existing brands of cigarettes gives undue protection to said brands which are still taxed
based on their price as of October 1996 notwithstanding that they are now sold at the same
or even at a higher price than new brands like Lucky Strike. Thus, old brands of cigarettes
such as Marlboro and Philip Morris which, like Lucky Strike, are sold at or more than
P22.00 per pack, are taxed at the rate of P10.88 per pack, while Lucky Strike products are
taxed at P26.06 per pack.
Respondents, through the Office of the Solicitor General (OSG), claims that the provision
in Section 145, as amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, cured the perceived defect of Section 145 considering that,
like the cigarettes under Annex D, petitioners brands and other brands introduced between
January 2, 1997 and December 31, 2003, shall remain in the classification under which the
BIR has placed them and only Congress has the power to reclassify them.
Philip Morris Philippines Manufacturing Incorporated filed a Motion for Leave to Intervene
with attached Comment-in-Intervention. This was followed by the Motions for Leave to
[22]
[23]
Intervene of Fortune Tobacco Corporation, Mighty Corporation,
and JT
International, S.A., with their respective Comments-in-Intervention. According to the
Intervenors, no inequality exists because cigarettes classified by the BIR based on their net
20

retail price as of December 31, 2003 now enjoy the same status quo provision that
prevents the BIR from reclassifying cigarettes included in Annex D. It added that the Court
has no power to pass upon the wisdom of the legislature in retaining Annex D in RA 9334;
and that the nullification of said Annex would bring about tremendous loss of revenue to the
government, chaos in the collection of taxes, illicit trade of cigarettes, and cause decline in
cigarette demand to the detriment of the farmers who depend on the tobacco industry.

Intervenor Fortune Tobacco further contends that petitioner is estopped from questioning
the constitutionality of Section 145 and its implementing rules and regulations because it
entered into the cigarette industry fully aware of the existing tax system and its
consequences. Petitioner imported cigarettes into the country knowing that its suggested
retail price, which will be the initial basis of its tax classification, will be confirmed and
validated through a survey by the BIR to determine the correct tax that would be levied on
its cigarettes.

ISSUE: Whether or not the classification freeze provision violates the equal protection and
uniformity of taxation clauses of the Constitution.
HELD:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that
nd

(2) Section 4(B)(e)(c), 2 paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of
Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by
machine, are INVALID insofar as they grant the BIR the power to reclassify or update the classification of
new brands every two years or earlier.

As can be seen, the law creates a four-tiered system which we may refer to as the
[33]
[34]
[35]
[36]
low-priced, medium-priced, high-priced, and premium-priced tax brackets. When a
brand is introduced in the market, the current net retail price is determined through the aforequoted
specified procedure. The current net retail price is then used to classify under which tax bracket the
brand belongs in order to finally determine the corresponding excise tax rate on a per pack
basis. The assailed feature of this law pertains to the mechanism where, after a brand is classified
based on its current net retail price, the classification is frozen and only Congress can thereafter
reclassify the same. From a practical point of view, Annex D is merely a by-product of the whole
mechanism and philosophy of the assailed law. That is, the brands under Annex D were also
classified based on their current net retail price, the only difference being that they were the first
ones so classified since they were the only brands surveyed as of October 1, 1996, or prior to the
effectivity of RA 8240 on January 1, 1997.
Due to this legislative classification scheme, it is possible that over time the net retail
price of a previously classified brand, whether it be a brand under Annex D or a new brand
classified after the effectivity of RA 8240 on January 1, 1997, would increase(due to inflation,
increase of production costs, manufacturers decision to increase its prices, etc.) to a point that its
net retail price pierces the tax bracket to which it was previously classified. Consequently, even if its
present day net retail price would make it fall under a higher tax bracket, the previously classified
brand would continue to be subject to the excise tax rate under the lower tax bracket by virtue of the
legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and Philip Morris
brands, which were permanently classified under Annex D. As of October 1, 1996, Marlboro had
net retail prices ranging from P6.78 to P6.84 while Philip Morris had net retail prices ranging from
[39]
P7.39 to P7.48. Thus, pursuant to RA 8240, Marlboro and Philip Morris were classified under the
high-priced tax bracket and subjected to an excise tax rate of P8.96 per pack. Petitioner then
presented evidence showing that after the lapse of about seven years or sometime in 2004,
[40]
Marlboros and Philip Morris net retail prices per pack both increased to about P15.59. This
meant that they would fall under the premium-priced tax bracket, with a higher excise tax rate of
21

[41]

P13.44 per pack, had they been classified based on their 2004 net retail prices. However, due to
the legislative classification freeze, they continued to be classified under the high-priced tax bracket
with a lower excise tax rate. Petitioner thereafter deplores the fact that its Lucky Strike Filter, Lucky
Strike Lights, and Lucky Strike Menthol Lights cigarettes, introduced in the market sometime in
2001 and validated by a BIR survey in 2003, were found to have net retail prices of P11.53, P11.59
[42]
and P10.34, respectively, which are lower than those of Marlboro and Philip Morris. However,
since petitioners cigarettes were newly introduced brands in the market, they were taxed based on
their current net retail prices and, thus, fall under the premium-priced tax bracket with a higher
excise tax rate of P13.44 per pack. This unequal tax treatment between Marlboro and Philip Morris,
on the one hand, and Lucky Strike, on the other, is the crux of petitioners contention that the
legislative classification freeze violates the equal protection and uniformity of taxation clauses of
the Constitution.
In our jurisdiction, the standard and analysis of equal protection challenges in the main
have followed the rational basis test, coupled with a deferential attitude to legislative classifications
and a reluctance to invalidate a law unless there is a showing of a clear and unequivocal breach of
the Constitution.
Within the present context of tax legislation on sin products which neither contains a suspect
classification nor impinges on a fundamental right, the rational-basis test thus finds
application. Under this test, a legislative classification, to survive an equal protection
challenge, must be shown to rationally further a legitimate state interest.
A legislative classification that is reasonable does not offend the constitutional guaranty of the
equal protection of the laws. The classification is considered valid and reasonable provided that: (1)
it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things
being equal, to both present and future conditions; and (4) it applies equally to all those belonging
[52]
to the same class.
The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in
the law for reasons of practicality and expediency. This does not explain, however, why the
classification is frozen after its determination based on current net retail price and how this is
germane to the purpose of the assailed law.

From the foregoing, it is quite evident that the classification freeze provision could hardly
be considered arbitrary, or motivated by a hostile or oppressive attitude to unduly favor older
brands over newer brands. Congress was unequivocal in its unwillingness to delegate the power to
periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price index to the DOF and
the BIR. Congress doubted the constitutionality of such delegation of power, and likewise,
considered the ethical implications thereof. Curiously, the classification freeze provision was put in
place of the periodic adjustment and reclassification provision because of the belief that the latter
would foster an anti-competitive atmosphere in the market.
RA 9334 did not alter this classification freeze provision of RA 8240. On the contrary,
Congress affirmed this freezing mechanism by clarifying the wording of the law. We can thus
reasonably conclude, as the deliberations on RA 9334 readily show, that the administrative
concerns in tax administration, which moved Congress to enact the classification freeze
provision in RA 8240, were merely continued by RA 9334. Indeed, administrative concerns may
[70]
provide a legitimate, rational basis for legislative classification. In the case at bar, these
administrative concerns in the measurement and collection of excise taxes on sin products are
readily apparent as afore-discussed.
The classification freeze provision addressed Congresss administrative concerns in the
simplification of tax administration of sin products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue generation, and ease of projection of

22

revenues. Consequently, there can be no denial of the equal protection of the laws since the
rational-basis test is amply satisfied.

Going now to the contention of petitioner that the classification freeze provision unduly
favors older brands over newer brands, we must first contextualize the basis of this claim. As
previously discussed, the evidence presented by the petitioner merely showed that in 2004,
Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the other, would have been taxed
at the same rate had the classification freeze provision been not in place. But due to the operation
of the classification freeze provision, Lucky Strike was taxed higher. From here, petitioner
generalizes that this differential tax treatment arising from the classification freeze
provision adversely impacts the fairness of the playing field in the industry, particularly, between
older and newer brands. Thus, it is virtually impossible for new brands to enter the market.
SECOND HOLDING:

It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as amended by Section
2 of Revenue Regulations 9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably
emasculate the operation of Section 145 of the NIRC because they authorize the Commissioner of
Internal Revenue to update the tax classification of new brands every two years or earlier subject
only to its issuance of the appropriate Revenue Regulations, when nowhere in Section 145 is such
authority granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify
cigarette brands remains a prerogative of the legislature which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent was for new brands to benefit
from the same freezing mechanism accorded to Annex D brands. To reiterate, in enacting RA
8240, Congress categorically rejected the DOF proposal and Senate Version which would have
empowered the DOF and BIR to periodically adjust the excise tax rate and tax brackets, and to
periodically resurvey and reclassify cigarette brands.
For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar as the freezing
mechanism is concerned, must be seen merely as underscoring the legislative intent already in
place then, i.e. new brands as being covered by the freezing mechanism after their classification
based on their current net retail prices.

17. BRITISH AMERICAN TOBACCO v CAMACHO (2009)

YNARES-SANTIAGO, J.:

In its Motion for Reconsideration, petitioner insists that the assailed provisions (1) violate the equal
protection and uniformity of taxation clauses of the Constitution, (2) contravene Section
[1]
19, Article XII of the Constitution on unfair competition, and (3) infringe the constitutional
provisions on regressive and inequitable taxation. Petitioner further argues that assuming the
assailed provisions are constitutional, petitioner is entitled to a downward reclassification of Lucky
Strike from the premium-priced to the high-priced tax bracket.

HELD: MR not granted

The assailed law does not violate the equal protection and uniformity of taxation clauses.
The instant case neither involves a suspect classification nor impinges on a fundamental
right. Consequently, the rational basis test was properly applied to gauge the constitutionality of the
assailed law in the face of an equal protection challenge. It has been held that in the areas of social and
economic policy, a statutory classification that neither proceeds along suspect lines nor infringes
constitutional rights must be upheld against equal protection challenge if there is any reasonably
23

[3]

conceivable state of facts that could provide a rational basis for the classification. Under the rational basis
test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State
interest. As the Court ruled in the assailed Decision, viz:
A legislative classification that is reasonable does not offend the constitutional
guaranty of the equal protection of the laws. The classification is considered valid and
reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the
purpose of the law; (3) it applies, all things being equal, to both present and future
conditions; and (4) it applies equally to all those belonging to the same class.
The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency. That is, since
a new brand was not yet in existence at the time of the passage of RA 8240, then Congress
needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail
price, similar to what was used to classify the brands under Annex D as of October 1, 1996,
was thus the logical and practical choice. Further, with the amendments introduced by RA
9334, the freezing of the tax classifications now expressly applies not just to Annex D
brands but to newer brands introduced after the effectivity of RA 8240 on January 1,
1997 and any new brand that will be introduced in the future. (However, as will be
discussed later, the intent to apply the freezing mechanism to newer brands was already in
place even prior to the amendments introduced by RA 9334 to RA 8240.) This does not
explain, however, why the classification is frozen after its determination based on current
net retail price and how this is germane to the purpose of the assailed law. An examination
of the legislative history of RA 8240 provides interesting answers to this question.
xxxx
From the foregoing, it is quite evident that the classification freeze provision could
hardly be considered arbitrary, or motivated by a hostile or oppressive attitude to unduly
favor older brands over newer brands. Congress was unequivocal in its unwillingness to
delegate the power to periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify the cigarette brands based on the increase in the
consumer price index to the DOF and the BIR. Congress doubted the constitutionality of
such delegation of power, and likewise, considered the ethical implications
thereof. Curiously, the classification freeze provision was put in place of the periodic
adjustment and reclassification provision because of the belief that the latter would foster
an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is being
foisted by petitioner upon the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of
Congresss earnest efforts to improve the efficiency and effectivity of the tax administration
over sin products while trying to balance the same with other State interests. In particular,
the questioned provision addressed Congresss administrative concerns regarding
delegating too much authority to the DOF and BIR as this will open the tax system to
potential areas for abuse and corruption. Congress may have reasonably conceived that a
tax system which would give the least amount of discretion to the tax implementers would
address the problems of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the
DOF proposal and the Senate Version, the periodic reclassification of brands would tempt
the cigarette manufacturers to manipulate their price levels or bribe the tax implementers in
order to allow their brands to be classified at a lower tax bracket even if their net retail
prices have already migrated to a higher tax bracket after the adjustment of the tax
brackets to the increase in the consumer price index. Presumably, this could be done when
a resurvey and reclassification is forthcoming. As briefly touched upon in the
Congressional deliberations, the difference of the excise tax rate between the
24

medium-priced and the high-priced tax brackets under RA 8240, prior to its amendment,
was P3.36. For a moderately popular brand which sells around 100 million packs per year,
this easily translates to P336,000,000. The incentive for tax avoidance, if not outright tax
evasion, would clearly be present. Then again, the tax implementers may use the power to
periodically adjust the tax rate and reclassify the brands as a tool to unduly oppress the
taxpayer in order for the government to achieve its revenue targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin
products to remove these potential areas of abuse and corruption from both the side of the
taxpayer and the government. Without doubt, the classification freeze provision was an
integral part of this overall plan. This is in line with one of the avowed objectives of the
assailed law to simplify the tax administration and compliance with the tax laws that are
about to unfold in order to minimize losses arising from inefficiencies and tax avoidance
scheme, if not outright tax evasion. RA 9334 did not alter this classification freeze
provision of RA 8240. On the contrary, Congress affirmed this freezing mechanism by
clarifying the wording of the law. We can thus reasonably conclude, as the deliberations on
RA 9334 readily show, that the administrative concerns in tax administration, which moved
Congress to enact the classification freeze provision in RA 8240, were merely continued
by RA 9334. Indeed, administrative concerns may provide a legitimate, rational basis for
legislative classification. In the case at bar, these administrative concerns in the
measurement and collection of excise taxes on sin products are readily apparent as
afore-discussed.
Aside from the major concern regarding the elimination of potential areas for
abuse and corruption from the tax administration of sin products, the legislative
deliberations also show that the classification freeze provision was intended to generate
buoyant and stable revenues for government. With the frozen tax classifications, the
revenue inflow would remain stable and the government would be able to predict with a
greater degree of certainty the amount of taxes that a cigarette manufacturer would pay
given the trend in its sales volume over time. The reason for this is that the previously
classified cigarette brands would be prevented from moving either upward or downward
their tax brackets despite the changes in their net retail prices in the future and, as a result,
the amount of taxes due from them would remain predictable. The classification freeze
provision would, thus, aid in the revenue planning of the government.
All in all, the classification freeze provision addressed Congresss administrative
concerns in the simplification of tax administration of sin products, elimination of potential
areas for abuse and corruption in tax collection, buoyant and stable revenue generation,
and ease of projection of revenues. Consequently, there can be no denial of the equal
protection of the laws since the rational-basis test is amply satisfied.
Moreover, petitioners contention that the assailed provisions violate the uniformity of taxation clause is
[4]
similarly unavailing. In Churchill v. Concepcion, we explained that a tax is uniform when it operates with
[5]
the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but
[6]
simply a geographical uniformity. A levy of tax is not unconstitutional because it is not intrinsically equal
[7]
and uniform in its operation. The uniformity rule does not prohibit classification for purposes of
[8]
[9]
taxation. As ruled in Tan v. Del Rosario, Jr.:
Uniformity of taxation, like the kindred concept of equal protection, merely requires
that all subjects or objects of taxation, similarly situated, are to be treated alike both in
privileges and liabilities (citations omitted). Uniformity does not forfend classification as
long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose, (3) the law applies, all things
being equal, to both present and future conditions, and (4) the classification applies equally
[10]
well to all those belonging to the same class (citations omitted).

25

In the instant case, there is no question that the classification freeze provision meets the geographical
uniformity requirement because the assailed law applies to all cigarette brands in the Philippines. And, for
reasons already adverted to in our August 20, 2008 Decision, the above four-fold test has been met in the
present case.

The assailed law does not transgress the constitutional provisions on regressive and
inequitable taxation.
Petitioner argues that the classification freeze provision is a form of regressive and inequitable tax
[18]
system which is proscribed under Article VI, Section 28(1) of the Constitution. It claims that people in
equal positions should be treated alike. The use of different tax bases for brands under Annex D vis--vis
new brands is discriminatory, and thus, iniquitous. Petitioner further posits that the classification freeze
provision is regressive in character. It asserts that the harmonization of revenue flow projections and ease
of tax administration cannot override this constitutional command.
Anent the issue of regressivity, it may be conceded that the assailed law imposes an excise tax on
cigarettes which is a form of indirect tax, and thus, regressive in character. While there was an attempt to
make the imposition of the excise tax more equitable by creating a four-tiered taxation system where higher
priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of a cigarette brand
within a specific tax bracket pays the same tax rate. To this extent, the tax does not take into account the
persons ability to pay. Nevertheless, this does not mean that the assailed law may be declared
unconstitutional for being regressive in character because the Constitution does not prohibit the imposition
of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation. As we
[19]
explained in Tolentino v. Secretary of Finance:

Petitioner is not entitled to a downward reclassification of Lucky Strike.

First, BIR Ruling No. 018-2001 was requested by petitioner for the purpose of fixing Lucky Strikes
initial tax classification based on its suggested gross retail price relative to its planned introduction of Lucky
Strike in the market sometime in 2001 and not for the conduct of the market survey within three months from
product launch. In fact, the said Ruling contained an express reservation that the tax classification of Lucky
Strike set therein is without prejudice, however, to the subsequent conduct of a survey x x x in order to
determine if the actual gross retail price thereof is consistent with [petitioners] suggested gross retail
[22]
price. In short, petitioner acknowledged that the initial tax classification of Lucky Strike may be modified
depending on the outcome of the survey which will determine the actual current net retail price of Lucky
Strike in the market.
Second, there was no upward reclassification of Lucky Strike because it was taxed based on its
suggested gross retail price from the time of its introduction in the market in 2001 until the BIR market
survey in 2003. We reiterate that Lucky Strikes actualcurrent net retail price was surveyed for the first time
in 2003 and was found to be from P10.34 to P11.53 per pack, which is within the premium-priced tax
bracket. There was, thus, no prohibited upward reclassification of Lucky Strike by the BIR based on its
current net retail price.
Third, the failure of the BIR to conduct the market survey within the three-month period under the
revenue regulations then in force can in no way make the initial tax classification of Lucky Strike based on
its suggested gross retail price permanent. Otherwise, this would contravene the clear mandate of the law
which provides that the basis for the tax classification of a new brand shall be the current net retail price and
not the suggested gross retail price. It is a basic principle of law that the State cannot be estopped by the
mistakes of its agents.
Last, the issue of timeliness of the market survey was never raised before the trial court because
petitioners theory of the case was wholly anchored on the alleged unconstitutionality of the classification
freeze provision. As a consequence, no documentary evidence as to the actual net retail price of Lucky
Strike in 2001, based on a market survey at least comparable to the one mandated by law, was presented
before the trial court. Evidently, it cannot be assumed that had the BIR conducted the market survey within
26

three months from its product launch sometime in 2001, Lucky Strike would have been found to fall under
the high-priced tax bracket and not the premium-priced tax bracket. To so hold would run roughshod over
the States right to due process. Verily, petitioner prosecuted its case before the trial court solely on the
theory that the assailed law is unconstitutional instead of merely challenging the timeliness of the market
survey. The rule is that a party is bound by the theory he adopts and by the cause of action he stands
on. He cannot be permitted after having lost thereon to repudiate his theory and cause of action, and
thereafter, adopt another and seek to re-litigate the matter anew either in the same forum or on
[23]
appeal. Having pursued one theory and lost thereon, petitioner may no longer pursue another
inconsistent theory without thereby trifling with court processes and burdening the courts with endless
litigation.

18. ANTERO M. SISON, JR., vs RUBEN B. ANCHETA

FACTS:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding on
the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional
infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code
of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation
income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank
deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and
similar arrangements, (e) dividends and share of individual partner in the net profits of taxable
partnership, (f) adjusted gross income.
3
Petitioner as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by
the imposition of higher rates of tax upon his income arising from the exercise of his
profession vis-a-vis those which are imposed upon fixed income or salaried individual
4
taxpayers. He characterizes the above section as arbitrary amounting to class legislation,
5
oppressive and capricious in character For petitioner, therefore, there is a transgression of both
6
the equal protection and due process clauses of the Constitution as well as of the rule requiring
7
uniformity in taxation.
The answer of respondents then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the
State's power to tax. The authorities and cases cited while correctly quoted or paragraph do not
support petitioner's stand." The prayer is for the dismissal of the petition for lack of merit.
ISSUE: Whether the imposition of a higher tax rate on taxable net income derived from business or
profession than on compensation is constitutionally infirm.
HELD: Yes, it is valid The petition was dismissed
Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative
and which the government was called upon to enter optionally, and only 'because it was better
equipped to administer for the public welfare than is any private individual or group of individuals,'
continue to lose their well-defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet the increasing social challenges
of the times." Hence the need for more revenues. The power to tax, an inherent prerogative, has to
be availed of to assure the performance of vital state functions. It is the source of the bulk of public
funds. To paraphrase a recent decision, taxes being the lifeblood of the government, their prompt
and certain availability is of the essence.

The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of of government." It is, of course, to be admitted that for all its plenitude
'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits.
Adversely affecting as it does properly rights, both the due process and equal protection clauses
inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure.
if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the
power to tax involves the power to destroy."
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as
here. does not suffice. There must be a factual foundation of such unconstitutional taint.
27

Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail.
Equal protection clause. It suffices then that the laws operate equally and uniformly on all persons
under similar circumstances or that all persons must be treated in the same manner, the conditions
not being different, both in the privileges conferred and the liabilities imposed. xxx If law be looked
upon in terms of burden or charges, those that fall within a class should be treated in the same
fashion, whatever restrictions cast on some in the group equally binding on the rest." That same
formulation applies as well to taxation measures.

The Constitution does not require things which are different in fact or opinion to be treated in law as
21
though they were the same." Hence the constant reiteration of the view that classification if
22
rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, this
Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
'inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation.'"
On Uniformity. The problem of classification did not present itself in that case."Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." There is quite a similarity
then to the standard of equal protection for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar situation."
What misled petitioner is his failure to take into consideration the distinction between a tax rate and
a tax base.
There is no legal objection to a broader tax base or taxable income by eliminating all deductible
items and at the same time reducing the applicable tax rate. Taxpayers may be classified into
different categories. It. is enough that the classification must rest upon substantial distinctions that
make real differences.
In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible
basis of classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates
to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as
a class. As there is practically no overhead expense, these taxpayers are not entitled to make
deductions for income tax purposes because they are in the same situation more or less.
On the other hand, in the case of professionals in the practice of their calling and businessmen,
there is no uniformity in the costs or expenses necessary to produce their income. It would not be
just then to disregard the disparities by giving all of them zero deduction and indiscriminately
impose on all alike the same tax rates on the basis of gross income. There is ample justification
then for the Batasang Pambansa to adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as regards professional and business
income.

19. OSMEA vs. ORBOS

220 SCRA 703
28

GR No. 99886, March 31, 1993

" To avoid the taint of unlawful delegation of the power to tax, there must be a standard which
implies that the legislature determines matter of principle and lays down fundamental policy."
FACTS: Senator John Osmea assails the constitutionality of paragraph 1c of PD 1956, as
amended by EO 137, empowering the Energy Regulatory Board (ERB) to approve the increase of fuel
prices or impose additional amounts on petroleum products which proceeds shall accrue to the Oil Price
Stabilization Fund (OPSF) established for the reimbursement to ailing oil companies in the event of sudden
price increases. The petitioner avers that the collection on oil products establishments is an undue and
invalid delegation of legislative power to tax. Further, the petitioner points out that since a 'special fund'
consists of monies collected through the taxing power of a State, such amounts belong to the State,
although the use thereof is limited to the special purpose/objective for which it was created. It thus appears
that the challenge posed by the petitioner is premised primarily on the view that the powers granted to the
ERB under P.D. 1956, as amended, partake of the nature of the taxation power of the State.
ISSUE: Is there an undue delegation of the legislative power of taxation?
HELD: None. It seems clear that while the funds collected may be referred to as taxes, they are
exacted in the exercise of the police power of the State. Moreover, that the OPSF as a special fund is plain
from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed
in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny
and review of the COA. The Court is satisfied that these measures comply with the constitutional
description of a "special fund."
With regard to the alleged undue delegation of legislative power, the
Court finds that the provision conferring the authority upon the ERB to impose additional amounts on
petroleum products provides a sufficient standard by which the authority must be exercised. In addition to
the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump
rates, P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of
the Fund.

20. LUNG CENTER OF THE PHILIPPINES VS. QUEZON CITY AND

CONSTANTINO ROSAS
G.R. No. 144104
June 29, 2004
FACTS
Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of PD No. 1823. It
is the registeredowner of the land on which the Lung Center of the Philippines Hospital is erected. A big
space in the ground floor of the hospital is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their private clinics. Also, a big
portion on the right side of the hospital is being leased for commercial purposes to a private enterprise
known as the Elliptical Orchids and Garden Center.
When the City Assessor of Quezon City assessed both its land and hospital building for real property taxes,
the Lung Center of the Philippines filed a claim for exemption on its averment that it is a charitable
institution with a minimum of 60% of its hospital beds exclusively used for charity patients and that the
major thrust of its hospital operation is to serve charity patients. The claim forexemption was denied,
prompting a petition for the reversal of the resolution of the City Assessor with the Local Board of
Assessment Appeals of Quezon City, which denied the same. On appeal, the Central Board of
29

Assessment Appeals of Quezon City affirmed the local boards decision, finding that Lung Center of the
Philippines is not a charitable institution and that its properties were not actually, directly and exclusively
used for charitable purposes. Hence, the present petition for review with averments that the Lung Center
of the Philippines is a charitable institution under Section 28(3), Article VI of the Constitution,
notwithstanding that it accepts paying patients and rents out portions of the hospital building to private
individualsand enterprises.

ISSUES
1. Whether Lung Center is a charitable institution within the context of PD 1823 ans the 1973
and 1987 Constitutions ans Section 234(b) of RA 7160;
2. Whether the real properties of the Lung Center are exempt from real property taxes.
RULING
On the first issue, petitioner Lung Center is a charitable institution within the context of the 1973
and 1987 Constitutions. To determine whether an enterprise id a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise, its corporate purposes,
its constitution and by-laws, the method of administration, the nature of the actual work performed ,
character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of
the properties.
Under Pd 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President with the Ministry of Health and
the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in the Philippines.
Hence, the medical services of the petitioner are to be rendered to the public in general in any and all
walks of life including those who are poor and the needy without discrimination.
As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve, and no money inures to the
private benefit of the persons managing or operating the institution.
The money received by the petitioners becomes part of the trust fund and must be devoted to public trust
purposes and cannot be diverted to private profit or benefit. Under PD 1823, the petitioner is entitled to
receive donations. The petitioner does not lose its character as a charitable institution simply because the
gift or donations is in the form of subsidies granted by the government.
Therefore, the fact that subsidization is by the government rather than private charitable contributions does
not dictate the denial of a charitable exemption if the facts otherwise support such an exemption, as they
do here.
Even if we find that petitioner Lung Center is a charitable institution, we hold, anent the second issue,
that those portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly, and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is
the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption
from payment of taxes must be clearly shown and based on language in the law too plain to be mistaken.
It is plain as day that under the decree, petitioner Lung Center does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax exempt privileges
under Section 2 of the decree.
Section 28(3) Article VI of the 1987 Constitution provides:
(3) charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from taxation.

30

The tax exemption under this constitutional provision covers property taxes only. what is exempted is not
the institution itself... those exempted from real estate taxes are lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable, or educational purposes.
What is meant by actual, direct, and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the
property is used for tax-exempt purposes.
Petitioner Lung Center failed to discharge its burden to prove that the entirety of its real property is
actually, directly, and exclusively used for charitable purposes. While portions of the hospital are
used for the treatment of patients, other portions thereof are being leased to individuals for their clinics,
canteen, and for business enterprise named Elliptical Orchids and Garden Center.
Accordingly, we hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other hand, the
portions of the land occupied by the hospital and portions used for its patients, paying or
non-paying, are exempt from real property taxes.

21. CIR v CA and YMCA (Young Men Christian Assoc. Of the PH)
Private Respondent YMCA is a non-stock, non-profit institution, conducting programs and activities for the
public, especially the young people, pursuant to its religious, educational and charitable objectives. Private
respondent earned 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.
The commissioner of internal revenue (CIR) issued an assessment to YMCA, 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. YMCA formally protested
the assessment and filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA)
on March 14, 1989.
CTA: [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for
the accomplishment of the objectives of the [private respondents].As pointed out earlier, the membership
dues are very insufficient to support its program."Considering our findings that [private respondent] was
not engaged in the business of operating or contracting [a] parking lot, we find no legal basis also for the
imposition of [a] deficiency fixed tax and [a] contractor's tax in the amount[s] of P353.15 and P3,129.73,
respectively.
CIR elevated the case to the CA. CA: in favor of CIR(feb. 16, 1994)
YMCA filed MR.CA: affirmed CTAs decision. (sept 28, 1995)
CIR filed MR but denied by CA. Hence this petition.
Issue: 1. W/N CA departed from the factual findings of CTA on its Feb decision.
2. W/N the income of private respondent from rentals of small shops and parking fees [is]
exempt from taxation.

NOT

Held:
1. No. CA did not alter the fact or evidence, it merely applied the law.
CA merely reversed the "ruling of the CTA that the leasing of private respondent's facilities to small shop
owners, to restaurant and canteen operators and the operation of parking lots are reasonably incidental to
31

and reasonably necessary for the accomplishment of the objectives of the private respondent and that the
income derived therefrom are tax exempt." Petitioner insists that what the appellate court reversed was the
legal conclusion, not the factual finding of the CTA.
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. The CA 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."
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.
2. YES .We set forth the relevant provision of the NIRC:
"SEC. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under
this Title in respect to income received by them as such xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes,
no part of the net income of which inures to the benefit of any private stockholder or member; xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed
under this Code. (as amended by Pres. Decree No. 1457)"
Petitioner argued (which the court agreed to):the exemption does not apply to income derived ". . . from
any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income . . ." Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal, [is] not, therefore, exempt from income
taxation, even if such income [is] exclusively used for the accomplishment of its objectives.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. 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."
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the
last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations
(such as the YMCA) from any of their properties, real or personal, be subject to the tax imposed by the
same Code.
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.

32

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.
Accordingly, Justice Hilario G. Davide, Jr. (JBL Reyes agreed), "what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly
and exclusively used for religious, charitable or educational purposes.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.
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.
laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the
Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the
said requisites.
YMCA is not an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution. 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. Under
the Education Act of 1982, such term refers to schools. The school system is synonymous with formal
education, which "refers to the hierarchically structured and chronologically graded learnings organized
and provided by the formal school system and for which certification is required in order for the learner to
progress through the grades or move to the higher levels." The Court has examined the "Amended Articles
of Incorporation" and "By-Laws" of the YMCA, but found nothing in them that even hints that it is a school
or an educational institution.
It is settled that the term "educational institution," when used in laws granting tax exemptions,
refers to a ". . . school seminary, college or educational establishment . . ." Therefore, the private
respondent cannot be deemed one of the educational institutions covered by the constitutional provision
under consideration. Educational institution 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.
Court also notes that the YMCA 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 bylaws, 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. Thus, no
basis for exemption.
Some inapplicable cases cited by YMCA:
YMCA of Manila v. Collector of Internal Revenue 50 and Abra Valley College, Inc. v. Aquino - 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 - 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.
Jesus Sacred Heart College v. Com. of Internal Revenue, - party therein was an educational institution
which submitted substantial evidence that the income used solely for educational purposes.

33

On the other hand, the private respondent in the present case has not given any proof that it is an
educational institution, or that part of its rent income is actually directly and exclusively used for
educational purposes.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28,
1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of
Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by petitioner
from rentals of its real property is subject to income tax.

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

JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
[G.R. No. 127105. June 25, 1999.]
SYNOPSIS
Pursuant to the license agreement entered into by private respondent S.C. Johnson and Son,
U.S.A., the private respondent was granted, among others, the right to use the trademark, patents and
technology of SC Johnson and Son, U.S.A. and was obliged to pay to the latter royalties based on a
percentage of net sales. The said royalties were subjected by the government to a 25% withholding tax.
Consequently, from July, 1992 to May, 1993, the private respondent paid a total withholding tax in the
amount of P1,603,433.00. However, on October 29, 1993 the private respondent led before the
International Tax Aairs Division of the Bureau of Internal Revenue a claim for refund of the overpaid
withholding tax on royalties in the amount of P963,266.00. The Commissioner, not having acted on the
claim for refund, the private respondent then led a petition for review before the Court of Tax Appeals
(CTA) wherein the latter rendered a decision in favor of tax refund. The Court of Appeals affirmed in
toto the CTA ruling. Hence, this petition.
The Court ruled that 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, 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. The Court agreed 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
entry 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-USTax Treaty is paid under similar circumstances as
the tax on royalties under the RP-West Germany Tax Treaty.
The petition was GRANTED.
SYLLABUS
1.REMEDIAL LAW; SUPREME COURT CIRCULAR NO. 28-91; CERTIFICATE OF NON- FORUM
SHOPPING; NECESSARY IN PETITIONS FILED BEFORE THE SUPREME COURT AND THE COURT
OF APPEALS. The circular expressly requires that a certicate ofnon-forum shopping should be
attached to petitions led before this Court and the Court of Appeals. Petitioner's 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 dierent courts.
2.ID.; ID.; ID.; SUBSTANTIALLY COMPLIED BY CERTIFICATION EXECUTED BY OFFICE OF THE
SOLICITOR GENERAL REPRESENTING A GOVERNMENT AGENCY. Anent the requirement that the
party, not counsel, must certify under oath that he has not commenced any other action involving the same
34

issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept
petitioner's 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 to be
represented only by the Solicitor General, the certication executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.
3.TAXATION; TAX TREATIES; PAYMENT OF ROYALTIES; TAX RATES ARE THE SAME FOR ALL
RECIPIENTS. 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.
4.ID.; ID.; RP-US TAX TREATY; PURPOSE. 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. The purpose of these
international agreements is to reconcile the national scal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two dierent jurisdictions. More precisely, the tax
conventions are drafted with a view towards the elimination of international juridical double taxation, which
is dened 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 ow 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.
5.ID.; DOUBLE TAXATION; DEFINED. 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.
6.ID.; TAX TREATIES; METHODS TO ELIMINATE DOUBLE TAXATION. 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. 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.
7.ID.; ID.; ID.; EXEMPTION METHOD AND CREDIT METHOD; ELUCIDATED. 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 taxpayer's 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.
8.ID.; ID.; RATIONALE FOR REDUCING TAX RATE. 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. 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."
9.ID.; ID.; RP-US TAX TREATY; IMPOSABLE RATES ON TAX CREDITS. Under the RP-USTax Treaty,
the state of residence and the state of sources are both permitted to tax the royalties, with a restraint on
the tax that may be collected by the state of source. 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. 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.
35

10.ID.; ID.; RP-GERMANY TAX TREATY; 10 PERCENT CONCESSIONAL TAX RATE IS APPLICABLE
TO ROYALTIES PAID UNDER SIMILAR CIRCUMSTANCES. 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 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.
11.ID.; ID.; RP-US AND RP-WEST GERMANY TAX TREATIES DO NOT CONTAIN SIMILAR
PROVISIONS ON TAX CREDITING. 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 theRP-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.
12.STATUTORY CONSTRUCTION; LAW NEEDS LIBERAL CONSTRUCTION TO EFFECTUATE ITS
PURPOSE. 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. 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 eectuate its purpose.
13.ID.; ID.; ID.; TREATIES TO BE INTERPRETED IN GOOD FAITH. 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.
14.TAXATION; TAX RELIEF; ENCOURAGES FOREIGN INVESTORS TO INVEST IN PHILIPPINES.
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. The goal of double taxation
conventions would be thwarted if such treaties did not provide for eective 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. 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 benet 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. SECcAI
15.ID.; TAX TREATIES; MOST FAVORED NATION CLAUSE; PURPOSE. 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. 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. 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.
16.ID.; TAX REFUNDS; TAX EXEMPTIONS IN NATURE. 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. 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.

36

23. DEUTSCHE BANK AG MANILA BRANCH, petitioner, vs.

COMMISSIONER OF INTERNAL REVENUE, respondent .
[G.R. No. 188550. August 28, 2013.]

This is a Petition for Review 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) Decision
dated 29 May 2009 and Resolution dated 1 July 2009 in C.T.A. EB No. 456.
Facts:
In accordance with Section 28 (A) (5) of the National Internal Revenue Code (NIRC) of 1997,
petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP67,688,553.51,
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.
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 PHP22,562,851.17. 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. EAcIST
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review 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 PHP22,562,851.17 representing the alleged excess BPRT paid on branch
profits remittance to DB Germany.
CTA Second Division Ruling
After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of
PHP67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP451,257,023.29 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 PHP330,175,961.88 at the exchange rate of
PHP63.804:1 EURO), which is net of the 15% BPRT. cEHITA
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 RPGermany 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 case 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.
CTA En Banc Ruling
The CTA En Banc affirmed the CTA Second Division's 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. It ruled that prior
application for a tax treaty relief is mandatory, and noncompliance with this prerequisite is fatal to the
taxpayer's availment of the preferential tax rate.
Issue:
Whether or not the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations
of the benefit of a tax treaty.
Ruling:
NO. 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
37

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.
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." CIR 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." 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. cA
The BIR must not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RPGermany 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 CTA's 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. The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000.
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 fora refund should be deemed
substantial compliance with RMO No. 1-2000.
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 (PHP22,562,851.17), Philippine currency, representing the
erroneously paid BPRT for 2002 and prior taxable years.

38

24. Nursery Care Corporation et. al v. Anthony Acevedo, in his

capacity as treasurer of Manila and City of Manila
Topic: Double Taxation; Direct Double Taxation or Direct Duplicate Taxation
Principle: There is (direct) 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 during the same taxing period, and the
taxes are of the same character or kind. (Direct) double taxation is obnoxious.
Facts:
The City of Manila assessed and collected taxes from the petitioners pursuant to Sec. 15 (Tax on
wholesalers, distributors, or dealers) and Sec. 17 (Tax on retailers) of the Revenue Code of Manila. At the
same time, additional tax is imposed upon them as a condition for the renewal of their respective business
licenses under Sec. 21 (Tax on Business Subject to the Excise, VAT, or Percentage Taxes under NIRC) of
the same law.
The petitioners paid the assessed tax under Sec. 21 under protest, thus they are asking the city
treasurer for the refund of the said amount.
Petitioners Contention:
Taxes imposed under Sec. 21 constitute double taxation.
Respondents Contention:
There is no double taxation.
Issue: WON the tax under Sec. 21 imposed upon petitioners constitutes double taxation thus payments
made by them under the said section should be returned.
RTCs Decision:
There is no double taxation.
Taxes are levied on different subject matter. Taxes under Sec. 15 and 17 are imposed upon
businesses of wholesalers, distributors, dealers and retailers, while that under Sec. 21 is a tax against end
users of the articles sold by the petitioners.
The petitioners only act as collecting agents while the ones actually paying the tax are the consumers
of the articles being sold by petitioners.
CAS Decision:
The petition is dismissed for being purely questions of law.
SCs Decision:
There is double taxation.
All elements of double taxation are present in this case.
1. Same person.
Sec. 21 imposed tax on a person who sold goods and services in the course of trade or business
based on certain percentage of his gross sales or receipts while Sec. 15 and 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, wholesaler, distributor or dealer and retailer.
2. Same taxing authority City of Manila
3. Same period Same calendar year
4. Same purpose To raise revenues
5. Same kind or character Local business Tax, albeit on different subject matter or group of
taxpayers.
6. Same taxing jurisdiction Within the territorial jurisdiction of the City of Manila

25. City of Manila v. Coca-Cola Bottlers Philippines, Inc.

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.

39

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 (tax on Manufacturers),being expressly exempted from the
business tax under Section 21 (applies to businesses subject to the Excise, Value-added or Percentage
Taxes of the NIRC) of the same tax ordinance.
Petitioner City of Manila subsequently approved Tax Ordinance No. 7988, 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.
The amending ordinance was later declared by the Supreme Court as null and void in the case
Coca-cola Bottlers Philippines, Inc. v. City of Manila. However, before the Court could declare the said
ordinance 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. Respondent filed a protest with petitioner Toledo on the ground that the said
assessment amounted to double taxation, as respondent was taxed twice. Petitioner Toledo did not
respond to the protest of respondent.
The RTC ruled in favor of the respondent and the decision was received by petitioner on April 20, 2007.
On May 4, 2007, Petitioner filed with the CTA a Motion for Extension of Time to File Petition for Review
asking for 150-day extension or until May 20, 2007 within which to file its Petition. A second Motion for
Extension was filed on May 18, 2007, this time asking for a 10-day extension to file the Petition. Petitioner
finally filed the Petition on May 30, 2007 even if the CTA had earlier issued a resolution dismissing the
case for failure to timely file the petition.
Issues:
1. WON petitioners substantially complied with the reglementary period to timely appeal
the case for review before the CTA division.
2. WON the ruling of this court in the earlier (Coca-cola case) is doctrinal and controlling in
the instant case and petitioner city of Manila can still assess taxes under section 14 and
21 of Tax Ordinance No. 7794, amended.
3. WON the enforcement of Section 21 of the Tax Ordinance No. 7794, as amended
constitutes double taxation.
Ruling:
1.

NO. Petitioner complied with the reglementary period for filing the petition. From April
20, 2007, Petitioner had 30 days, or until May 20, 2007, within which to file their Petition
for Review with the CTA. The Motion for Extension filed by the petitioners on May 18,
2007, prior to the lapse of the 30-day 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. Thus, when
Petitioner filed their Petition via registered mail their Petition for Review on 30 May
2007, they were able to comply with the period for filing such a petition.

2.

Coca-Cola case is applicable to the instant case.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.
40

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 Coca-Cola 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.
3.

YES. 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
41

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].

26. CIR vs. Estate of Benigno Toda

Tax Evasion
G.R. No. 147188.

September 14, 2004

Facts:
Cibeles 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
42

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.

27. Plaridel M. Abaya vs. Hon. Secretary Hermogenes E. Ebdane,

Jr.
Facts:
The Government of Japan and the Government of the Philippines, through their respective
representatives, namely, Mr. Yoshihisa Ara, Ambassador Extraordinary and Plenipotentiary of Japan to
the Republic of the Philippines, and then Secretary of Foreign Affairs Domingo L. Siazon, have reached an
understanding concerning Japanese loans to be extended to the Philippines. These loans were aimed at
promoting our countrys economic stabilization and development efforts.
The petitioners, Plaridel M. Abaya claims that he filed the instant petition as a taxpayer, former
lawmaker, and a Filipino citizen, and Plaridel C. Garcia likewise claims that he filed the suit as a taxpayer,
former military officer, and a Filipino citizen.They had assailed the resolution recommending the award to
private respondent China Road & Bridge Corporation of the contract for the implementation of civil works
for Contract Package No. I (CP I), which consists of the improvement/rehabilitation of the San Andres
(Codon)-Virac-Jct. Bago-Viga road, with the length of 79.818 kilometers, in the island province of
Catanduanes.The DPWH caused the publication of the Invitation to Prequalify and to Bid for the
implementation of the CP I project, in two leading national newspapers, namely, the Manila Times and
Manila Standard on November 22 and 29, and December 5, 2002.
A total of twenty-three (23) foreign and local contractors responded to the invitation by submitting
their accomplished prequalification documents on January 23, 2003. In accordance with the established
prequalification criteria, eight contractors were evaluated or considered eligible to bid as concurred by the
JBIC. Prior to the opening of the respective bid proposals, it was announced that the Approved Budget for
the Contract (ABC) was in the amount of P738,710,563.67.
The bid goes to private respondent China Road & Bridge Corporation was corrected from the
original P993,183,904.98 (with variance of 34.45% from the ABC) to P952,564,821.71 (with variance of
28.95% from the ABC) based on their letter clarification dated April 21, 2004.
Petitioners Contention:
a.) contends that the award of the contract to private respondent China Road & Bridge Corporation
violates RA 9184, particularly Section 31 thereof which reads:
SEC. 31. Ceiling for Bid Prices. The ABC shall be the upper limit or ceiling for the Bid prices. Bid prices
that exceed this ceiling shall be disqualified outright from further participating in the bidding. There shall be
no lower limit to the amount of the award.
b.)insists that Loan Agreement is neither an international nor an executive agreement that would bar the
application of RA 9184.
--- They point out that to be considered a treaty, an international or an executive agreement, the parties
must be two sovereigns or States whereas in the case of Loan Agreement No. PH-P204, the parties are
the Philippine Government and the JBIC, a banking agency of Japan, which has a separate juridical
personality from the Japanese Government.

43

The respondents however contend that foreign loan agreements, including Loan Agreement No.
PH-P204, as executive agreements and, as such, should be observed pursuant to the fundamental
principle in international law of pactasuntservanda. The Constitution, the public respondents emphasize,
recognizes the enforceability of executive agreements in the same way that it recognizes generally
accepted principles of international law as forming part of the law of the land.34 This recognition allegedly
buttresses the binding effect of executive agreements to which the Philippine Government is a signatory. It
is pointed out by the public respondents that executive agreements are essentially contracts governing the
rights and obligations of the parties. A contract, being the law between the parties, must be faithfully
adhered to by them. Guided by the fundamental rule of pactasuntservanda, the Philippine Government
bound itself to perform in good faith its duties and obligations under Loan Agreement.
Issues:
1. Whether or not the the loan agreement violates RA 9184.
2. Has petitioners as taxpayers the legal standing to file the instant case against the government?

Ruling:
1.) The court ruled in favor of the respondents.
Significantly, an exchange of notes is considered a form of an executive agreement, which becomes
binding through executive action without the need of a vote by the Senate or Congress. executive
agreements, They sometimes take the form of exchange of notes and at other times that of more formal
documents denominated agreements or protocols.
The fundamental principle of international law of pactasuntservanda, which is, in fact, embodied in
Section 4 of RA 9184 as it provides that [a]ny treaty or international or executive agreement affecting the
subject matter of this Act to which the Philippine government is a signatory shall be observed, the DPWH,
as the executing agency of the projects financed by Loan Agreement No. PH-P204, rightfully awarded the
contract for the implementation of civil works for the CP I project to private respondent China Road &
Bridge Corporation.
2.) Petitioners, as taxpayers, possess locus standi to file the present suit. Briefly stated, locus standi is a
right of appearance in a court of justice on a given question. More particularly, it is a partys personal and
substantial interest in a case such that he has sustained or will sustain direct injury as a result of the
governmental act being challenged. Locus standi, however, is merely a matter of procedure and it has
been recognized that in some cases, suits are not brought by parties who have been personally injured by
the operation of a law or any other government act but by concerned citizens, taxpayers or voters who
actually sue in the public interest. Consequently, the Court, in a catena of cases, has invariably adopted a
liberal stance on locus standi, including those cases involving taxpayers.
The prevailing doctrine in taxpayers suits is to allow taxpayers to question contracts entered into by the
national government or government- owned or controlled corporations allegedly in contravention of law. A
taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. Significantly, a taxpayer need not be a party to the
contract to challenge its validity.

28. DAVID vs. ARROYO

G.R. No. 171396
May 3, 2006
Facts: : On February 24, 2006, as the nation celebrated the 20th Anniversary of the Edsa People Power I, President
Arroyo issued PP 1017 declaring a state of national emergency, due to the alleged conspiracy among some military
officers, leftist insurgents of the New Peoples Army (NPA), and some members of the political opposition in a plot
to unseat or assassinate President Arroyo. On the same day, the President issued G. O. No. 5 implementing PP
44

1017 calling out the AFP and PNP, to immediately carry out the necessary and appropriate actions and measures to
suppress and prevent acts of terrorism and lawless violence. On March 3, 2006, exactly one week after the
declaration of a state of national emergency and after all these petitions had been filed, the President lifted PP
1017.
These seven (7) consolidated petitions for certiorari and prohibition allege that in issuing Presidential Proclamation
No. 1017 (PP 1017) and General Order No. 5 (G.O. No. 5), President Gloria Macapagal-Arroyo committed grave
abuse of discretion.
Petitioners contend that the Office of the President revoked the permits to hold rallies issued earlier by the local
governments. Presidential Chief of Staff Michael Defensor announced that warrantless arrests and take-over of
facilities, including media, can already be implemented. Several protesters near the EDSA site were violently
dispersed by huge clusters of anti-riot police while several participants were arrested.
Also at around 12:20 in the early morning of February 25, 2006, operatives of the Criminal Investigation and
Detection Group (CIDG) of the PNP, on the basis of PP 1017 and G.O. No. 5, raided the Daily Tribune offices in
Manila without warrants. The raiding team confiscated news stories by reporters, documents, pictures, and
mock-ups of the Saturday issue.
A few minutes after the search and seizure at the Daily Tribune offices, the
police surrounded the premises of another pro-opposition paper, Malaya, and its sister publication, the tabloid
Abante.
The Solicitor General argued that the intent of the Constitution is to give full discretionary powers to the President
in determining the necessity of calling out the armed forces.
He emphasized that none of the petitioners has
shown that PP 1017 was without factual bases.
Issues:
A.
PROCEDURAL:
1) Whether the issuance of PP 1021 renders the petitions moot and academic.
2) Whether petitioners in 171485 (Escudero et al.), G.R. Nos. 171400 (ALGI), 171483 (KMU et al.), 171489
(Cadiz et al.), and 171424 (Legarda) have legal standing.
B.
SUBSTANTIVE:
1)
Whether the Supreme Court can review the factual bases of PP 1017.
2)
Whether PP 1017 and G.O. No. 5 are unconstitutional.
a. Constitutional Basis
b. As Applied Challenge
Held: The Court rules that PP 1017 is CONSTITUTIONAL insofar as it constitutes a call by President Gloria
Macapagal-Arroyo on the AFP to prevent or suppress lawless violence. However, the provisions of PP 1017
commanding the AFP to enforce laws not related to lawless violence, as well as decrees promulgated by the
President, are declared UNCONSTITUTIONAL.
G.O. No. 5 is partly CONSTITUTIONAL since it provides a standard by which the AFP and the PNP should implement
PP 1017.
PROCEDURAL ISSUES
Whether the issuance of PP 1021 renders the petitions moot and academic.
No. the case is not moot and academic.
The Court holds that President Arroyos issuance of PP 1021 did not render the petitions moot and academic.
During the eight (8) days that PP 1017 was operative, the police officers, according to petitioners, committed
illegal acts in implementing it which should be resolved.
The moot and academic principle is not a magical formula that can automatically dissuade the courts in resolving a
case. Courts will decide cases, otherwise moot and academic, if: first, there is a grave violation of the
Constitution; second, the exceptional character of the situation and the paramount public interest is involved;
third, when constitutional issue raised requires formulation of controlling principles to guide the bench, the bar,
and the public; and fourth, the case is capable of repetition yet evading review. All the foregoing exceptions are
present here and justify this Courts assumption of jurisdiction over the instant petitions.
Whether petitioners in 171485 (Escudero et al.), G.R. Nos. 171400 (ALGI), 171483 (KMU et al.), 171489 (Cadiz et
al.), and 171424 (Legarda) have legal standing.
Yes. The petitioners have locus standi.

45

In G.R. No. 171485, the opposition Congressmen alleged there was usurpation of legislative powers.
They also
raised the issue of whether or not the concurrence of Congress is necessary whenever the alarming powers
incident to Martial Law are used.
In G.R. No. 171400, (ALGI), this Court applied the liberality rule that when the issue concerns a public right, it is
sufficient that the petitioner is a citizen and has an interest in the execution of the laws.
In G.R. No. 171489, petitioners, Cadiz et al., who are national officers of the Integrated Bar of the Philippines (IBP)
have no legal standing, having failed to allege any direct or potential injury which the IBP as an institution or its
members may suffer as a consequence of the issuance of PP No. 1017 and G.O. No. 5. However, in view of the
transcendental importance of the issue, this Court declares that petitioner have locus standi.
In G.R. No. 171424, Loren Legarda has no personality as a taxpayer to file the instant petition as there are no
allegations of illegal disbursement of public funds. But considering once more the transcendental importance of
the issue involved, this Court may relax the standing rules.
SUBSTANTIVE ISSUES
Whether the Supreme Court can review the factual bases of PP 1017.
Yes, the Supreme Court can review factual bases and it found that Arroyos issuances were justified.
While the Court considered the Presidents calling-out power as a discretionary power solely vested in his wisdom,
it stressed that this does not prevent an examination of whether such power was exercised within permissible
constitutional limits or whether it was exercised in a manner constituting grave abuse of discretion. The
broadening of judicial power under the 1987 Constitution enables the courts of justice to review the discretion of
the political departments of the government.
Petitioners failed to show that President Arroyos exercise of the calling-out power, by issuing PP 1017, is totally
bereft of factual basis. A reading of the Solicitor Generals Consolidated Comment and Memorandum shows a
detailed narration of the events leading to the issuance of PP 1017. The Court is convinced that the President was
justified in issuing PP 1017 calling for military aid. However, the exercise of such power or duty must not stifle
liberty.
Whether PP 1017 and G.O. No. 5 are unconstitutional.
Constitutional Basis of PP 1017
Calling-out Power
Citing Integrated Bar of the Philippines v. Zamora, the Court ruled that the only criterion for the exercise of the
calling-out power is that whenever it becomes necessary, the President may call the armed forces to prevent or
suppress lawless violence, invasion or rebellion. Considering the circumstances then prevailing, President Arroyo
found it necessary to issue PP 1017. Owing to her Offices vast intelligence network, she is in the best position to
determine the actual condition of the country.
Take Care Power
The second provision pertains to the power of the President to ensure that the laws be faithfully executed.
Petitioners argue that PP 1017 is unconstitutional as it gave President Arroyo the power to enact laws and decrees
in violation of Section 1, Article VI of the Constitution, which vests the power to enact laws in Congress. The Court
agrees with the petitioners and rules that the assailed PP 1017 is unconstitutional insofar as it grants President
Arroyo the authority to promulgate decrees. It follows that these decrees are void and, therefore, cannot be
enforced. With respect to laws, she cannot call the military to enforce or implement certain laws, such as
customs laws, laws governing family and property relations, laws on obligations and contracts and the like. She
can only order the military, under PP 1017, to enforce laws pertinent to its duty to suppress lawless violence.
Power to Take Over
Sec. 17. In times of national emergency, when the public interest so requires, the State may, during the
emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of
any privately-owned public utility or business affected with public interest.
The Court rules that such Proclamation does not authorize her during the emergency to temporarily take over or
direct the operation of any privately owned public utility or business affected with public interest without
authority from Congress.
While the President alone can declare a state of national emergency, however, without legislation, he has no
power to take over privately-owned public utility or business affected with public interest. Likewise, without
legislation, the President has no power to point out the types of businesses affected with public interest that

46

should be taken over. In short, the President has no absolute authority to exercise all the powers of the State
under Section 17, Article VII in the absence of an emergency powers act passed by Congress.
As Applied Challenge
The Court finds G.O. No. 5 valid. It is an Order issued by the President acting as Commander-in-Chief addressed
to the AFP to carry out the provisions of PP 1017. The validity of a statute or ordinance is to be determined from
its general purpose and its efficiency to accomplish the end desired, not from its effects in a particular case. PP
1017 is merely an invocation of the Presidents calling-out power. Its general purpose is to command the AFP to
suppress all forms of lawless violence, invasion or rebellion.
It had accomplished the end desired which
prompted President Arroyo to issue PP 1021. The Court cannot adjudge a law or ordinance unconstitutional on
the ground that its implementor committed illegal acts.

29. Gonzales vs. Marcos

GR No. L-31685 July 31, 1975
Facts:
Petitioner questioned the validity of EO No. 30 for benefit of the Filipino people under the
name and style of the Cultural Center of the Philippines entrusted with the task to construct a national
theatre, a national music hall, an arts building and facilities, to awaken our people's consciousness in the
nation's cultural heritage and to encourage its assistance in the preservation, promotion, enhancement and
development thereof, with the Board of Trustees to be appointed by the President, the Center having as its
estate the real and personal property vested in it as well as donations received, financial commitments that
could thereafter be collected, and gifts that may be forthcoming in the future. Intended for the construction
of the Cultural Center building estimated to cost P48 million.
Petitioners contention:
EO No. 30 was invalid for it is impermissible encroachment by the President of the
Philippines on the legislative prerogative
Defendants contention:
Petitioner did not have the requisite personality to contest as a taxpayer the validity of the
executive order in question, as the funds held by the Cultural Center came from donations and contributions,
not one centavo being raised by taxation
Trial Courts ruling:
Petition was dismissed and the lower court stressed that the funds administered by the
Center came from donations and contributions, not by taxation.
Issue:
WON petitioner can validly question EO 30 under a taxpayers suit?
Held:
A suit filed a taxpayer questioning the validity of an Executive Order creating a trust, the
funds of which came from donations and contributions and not from taxation, fails to satisfy the elemental
requisite for a taxpayer's suit. It was therein pointed out as "one more valid reason" why such an outcome
was unavoidable that "the funds administered by the President of the Philippines came from donations [and]
contributions [not] by taxation." Accordingly, there was that absence of the"requisite pecuniary or monetary
interest."
The Presidential alone cannot and need not personally handle the duties of a trustee for and
in behalf of the Filipino people in relation with the trust in establishing the Cultural Center of the Philippines
as the instrumentality to carry out the agreement between the Republic of the Philippines and the United
States as to the use of a special fund coming from the latter for a Philippine Cultural development project.
He can, through an executive order, set up a group of persons who would receive and administer the trust
estate responsible to him.
Public funds that accrued by way of donation from the United States and financial
contributions for the Cultural Center project could be legally considered as "governmental property." They
may be acquired under the concept of dominium ,the State as a person in law not being deprived of such an
attribute, thereafter to be administered by virtue of its prerogative of imperium , through the Executive, the
department precisely entrusted with management functions.
47

The passage of Presidential Decree No. 15 on October 15, 1972 creating the Cultural Center
superseding Executive Order No. 30, rendered moot and academic the issue whether the creation of trust
fund by executive order constitutes an encroachment by the President on the legislative prerogative. The
institution known as the Cultural Center is other than that assailed in the instant case. In that sense a coup
de grace was administered to this proceeding.

28. LIWAYWAY VINZONS-CHATO vs. FORTUNE TOBACCO CORPORATION,

G.R. No. 141309, June 19, 2007
Facts: Petitioner Liwayway Vinzons-Chato was then the Commissioner of Internal Revenue while
respondent Fortune Tobacco Corporation is an entity engaged in the manufacture of different brands of
cigarettes, among which are "Champion," "Hope," and "More" cigarettes.
On June 10, 1993, the legislature enacted Republic Act No. 7654 (RA 7654), which took effect on July 3,
1993. Prior to its effectivity, cigarette brands Champion," "Hope," and "More" were considered local brands
subjected to an ad valorem tax at the rate of 20-45%. However, on July 1, 1993, or two days before RA
7654 took effect, petitioner issued RMC 37-93 reclassifying "Champion," "Hope," and "More" as locally
manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax.
On July 2, 1993, at about 5:50 p.m., BIR Deputy Commissioner Victor A. Deoferio, Jr. sent via telefax a
copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On July 15, 1993,
Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. On July 20, 1993,
respondent filed a motion for reconsideration requesting the recall of RMC 37-93, but was denied. The
same letter assessed respondent for ad valorem tax deficiency amounting to P9,598,334.00 (computed on
the basis of RMC 37-93) and demanded payment within 10 days from receipt thereof. On August 3, 1993,
respondent filed a petition for review with the Court of Tax Appeals (CTA), which on September 30, 1993,
issued an injunction enjoining the implementation of RMC 37-93. In its decision dated August 10, 1994, the
CTA ruled that RMC 37-93 is defective, invalid, and unenforceable and further enjoined petitioner from
collecting the deficiency tax assessment issued pursuant to RMC No. 37-93. This ruling was affirmed by the
Court of Appeals, and finally by this Court in Commissioner of Internal Revenue v. Court of Appeals. It was
held, among others, that RMC 37-93, has fallen short of the requirements for a valid administrative
issuance.
On April 10, 1997, respondent filed before the RTC a complaint for damages against petitioner in her private
capacity. Respondent contended that the latter should be held liable for damages under Article 32 of the
Civil Code considering that the issuance of RMC 37-93 violated its constitutional right against deprivation of
property without due process of law and the right to equal protection of the laws.
Petitioner filed a motion to dismiss contending that: (1) respondent has no cause of action against her
because she issued RMC 37-93 in the performance of her official function and within the scope of her
authority. She claimed that she acted merely as an agent of the Republic and therefore the latter is the one
responsible for her acts; and (2) the complaint states no cause of action for lack of allegation of malice or
bad faith.
The case was elevated to the Court of Appeals via a petition for certiorari under Rule 65. However, same
was dismissed on the ground that under Article 32 of the Civil Code, liability may arise even if the defendant
did not act with malice or bad faith. The appellate court ratiocinated that Section 38, Book I of the
Administrative Code is the general law on the civil liability of public officers while Article 32 of the Civil Code
is the special law that governs the instant case. Consequently, malice or bad faith need not be alleged in the
complaint for damages.

48

Petitioner then filed the instant recourse contending that the suit is grounded on her acts done in the
performance of her functions as a public officer, hence, it is Section 38, Book I of the Administrative Code
which should be applied. Under this provision, liability will attach only when there is a clear showing of bad
faith, malice, or gross negligence. She further averred that the Civil Code, specifically, Article 32 which
allows recovery of damages for violation of constitutional rights, is a general law on the liability of public
officers; while Section 38, Book I of the Administrative Code is a special law on the superior public officers
liability, such that, if the complaint, as in the instant case, does not allege bad faith, malice, or gross
negligence, the same is dismissible for failure to state a cause of action.
Issues:
(1) Whether or not a public officer may be validly sued in his/her private capacity for acts done in connection
with the discharge of the functions of his/her office; and
(2) Whether or not the instant complaint states a cause of action as regards to which of the two provisions of
law -- Article 32 of the Civil Code or Section 38, Book I of the Administrative Code.
1.) The general rule is that a public officer is not liable for damages which a person may suffer arising from
the just performance of his official duties and within the scope of his assigned tasks. An officer who acts
within his authority to administer the affairs of the office which he/she heads is not liable for damages that
may have been caused to another, as it would virtually be a charge against the Republic, which is not
amenable to judgment for monetary claims without its consent. However, a public officer is by law not
immune from damages in his/her personal capacity for acts done in bad faith which, being outside the
scope of his authority, are no longer protected by the mantle of immunity for official actions.
Specifically, under Section 38, Book I of the Administrative Code, civil liability may arise where there is bad
faith, malice, or gross negligence on the part of a superior public officer. And, under Section 39 of the same
Book, civil liability may arise where the subordinate public officers act is characterized by willfulness or
negligence. Thus
Sec. 38. Liability of Superior Officers. (1) A public officer shall not be civilly liable for acts done in the
performance of his official duties, unless there is a clear showing of bad faith, malice or gross negligence.
Section 39. Liability of Subordinate Officers. No subordinate officer or employee shall be civilly liable for
acts done by him in good faith in the performance of his duties. However, he shall be liable for willful or
negligent acts done by him which are contrary to law, morals, public policy and good customs even if he
acts under orders or instructions of his superior.
In addition, the Court held in Cojuangco, Jr. v. Court of Appeals, that a public officer who directly or
indirectly violates the constitutional rights of another, may be validly sued for damages under Article 32 of
the Civil Code even if his acts were not so tainted with malice or bad faith.
Thus, the rule in this jurisdiction is that a public officer may be validly sued in his/her private capacity for acts
done in the course of the performance of the functions of the office, where said public officer: (1) acted with
malice, bad faith, or negligence; or (2) where the public officer violated a constitutional right of the plaintiff.
2.) The complaint filed by respondent stated a cause of action and that the decisive provision thereon is
Article 32 of the Civil Code.
A general statute is one which embraces a class of subjects or places and does not omit any subject or
place naturally belonging to such class. A special statute, as the term is generally understood, is one which
relates to particular persons or things of a class or to a particular portion or section of the state only.
A general law and a special law on the same subject are statutes in pari materia and should, accordingly, be
read together and harmonized, if possible, with a view to giving effect to both. The rule is that where there
are two acts, one of which is special and particular and the other general which, if standing alone, would
include the same matter and thus conflict with the special act, the special law must prevail since it evinces
the legislative intent more clearly than that of a general statute and must not be taken as intended to affect
the more particular and specific provisions of the earlier act, unless it is absolutely necessary so to construe
it in order to give its words any meaning at all.
The circumstance that the special law is passed before or after the general act does not change the
principle. Where the special law is later, it will be regarded as an exception to, or a qualification of, the prior
general act; and where the general act is later, the special statute will be construed as remaining an
exception to its terms, unless repealed expressly or by necessary implication.
Let us examine the provisions involved in the case at bar. Article 32 of the Civil Code provides:

49

ART. 32. Any public officer or employee, or any private individual, who directly or indirectly obstructs,
defeats, violates, or in any manner impedes or impairs any of the following rights and liberties of another
person shall be liable to the latter for damages:
xxxx
(6) The right against deprivation of property without due process of law;
xxxx
(8) The right to the equal protection of the laws;
xxxx
Article 32 was patterned after the "tort" in American law. A tort is a wrong, a tortious act which has been
defined as the commission or omission of an act by one, without right, whereby another receives some
injury, directly or indirectly, in person, property, or reputation. There are cases in which it has been stated
that civil liability in tort is determined by the conduct and not by the mental state of the tortfeasor, and there
are circumstances under which the motive of the defendant has been rendered immaterial. The reason
sometimes given for the rule is that otherwise, the mental attitude of the alleged wrongdoer, and not the act
itself, would determine whether the act was wrongful. Presence of good motive, or rather, the absence of an
evil motive, does not render lawful an act which is otherwise an invasion of anothers legal right; that is,
liability in tort is not precluded by the fact that defendant acted without evil intent.
Sections 38 and 39, Book I of the Administrative Code, laid down the rule on the civil liability of superior and
subordinate public officers for acts done in the performance of their duties. For both superior and
subordinate public officers, the presence of bad faith, malice, and negligence are vital elements that will
make them liable for damages. Note that while said provisions deal in particular with the liability of
government officials, the subject thereof is general, i.e., "acts" done in the performance of official duties,
without specifying the action or omission that may give rise to a civil suit against the official concerned.
Contrarily, Article 32 of the Civil Code specifies in clear and unequivocal terms a particular specie of an
"act" that may give rise to an action for damages against a public officer, and that is, a tort for impairment of
rights and liberties. Indeed, Article 32 is the special provision that deals specifically with violation of
constitutional rights by public officers. All other actionable acts of public officers are governed by Sections
38 and 39 of the Administrative Code. While the Civil Code, specifically, the Chapter on Human Relations is
a general law, Article 32 of the same Chapter is a special and specific provision that holds a public officer
liable for and allows redress from a particular class of wrongful acts that may be committed by public
officers. Compared thus with Section 38 of the Administrative Code, which broadly deals with civil liability
arising from errors in the performance of duties, Article 32 of the Civil Code is the specific provision which
must be applied in the instant case precisely filed to seek damages for violation of constitutional rights.

30. LIWAYWAY VINZONS-CHATO vs. FORTUNE TOBACCO

CORPORATION,
G.R. No. 141309, June 19, 2007
Facts: Petitioner Liwayway Vinzons-Chato was then the Commissioner of Internal Revenue while
respondent Fortune Tobacco Corporation is an entity engaged in the manufacture of different brands of
cigarettes, among which are "Champion," "Hope," and "More" cigarettes.
On June 10, 1993, the legislature enacted Republic Act No. 7654 (RA 7654), which took effect on July 3,
1993. Prior to its effectivity, cigarette brands Champion," "Hope," and "More" were considered local brands
subjected to an ad valorem tax at the rate of 20-45%. However, on July 1, 1993, or two days before RA
7654 took effect, petitioner issued RMC 37-93 reclassifying "Champion," "Hope," and "More" as locally
manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax.
On July 2, 1993, at about 5:50 p.m., BIR Deputy Commissioner Victor A. Deoferio, Jr. sent via telefax a
copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On July 15, 1993,
Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. On July 20, 1993,
respondent filed a motion for reconsideration requesting the recall of RMC 37-93, but was denied. The
same letter assessed respondent for ad valorem tax deficiency amounting to P9,598,334.00 (computed on
50

the basis of RMC 37-93) and demanded payment within 10 days from receipt thereof. On August 3, 1993,
respondent filed a petition for review with the Court of Tax Appeals (CTA), which on September 30, 1993,
issued an injunction enjoining the implementation of RMC 37-93. In its decision dated August 10, 1994, the
CTA ruled that RMC 37-93 is defective, invalid, and unenforceable and further enjoined petitioner from
collecting the deficiency tax assessment issued pursuant to RMC No. 37-93. This ruling was affirmed by the
Court of Appeals, and finally by this Court in Commissioner of Internal Revenue v. Court of Appeals. It was
held, among others, that RMC 37-93, has fallen short of the requirements for a valid administrative
issuance.
On April 10, 1997, respondent filed before the RTC a complaint for damages against petitioner in her private
capacity. Respondent contended that the latter should be held liable for damages under Article 32 of the
Civil Code considering that the issuance of RMC 37-93 violated its constitutional right against deprivation of
property without due process of law and the right to equal protection of the laws.
Petitioner filed a motion to dismiss contending that: (1) respondent has no cause of action against her
because she issued RMC 37-93 in the performance of her official function and within the scope of her
authority. She claimed that she acted merely as an agent of the Republic and therefore the latter is the one
responsible for her acts; and (2) the complaint states no cause of action for lack of allegation of malice or
bad faith.
The case was elevated to the Court of Appeals via a petition for certiorari under Rule 65. However, same
was dismissed on the ground that under Article 32 of the Civil Code, liability may arise even if the defendant
did not act with malice or bad faith. The appellate court ratiocinated that Section 38, Book I of the
Administrative Code is the general law on the civil liability of public officers while Article 32 of the Civil Code
is the special law that governs the instant case. Consequently, malice or bad faith need not be alleged in the
complaint for damages.
Petitioner then filed the instant recourse contending that the suit is grounded on her acts done in the
performance of her functions as a public officer, hence, it is Section 38, Book I of the Administrative Code
which should be applied. Under this provision, liability will attach only when there is a clear showing of bad
faith, malice, or gross negligence. She further averred that the Civil Code, specifically, Article 32 which
allows recovery of damages for violation of constitutional rights, is a general law on the liability of public
officers; while Section 38, Book I of the Administrative Code is a special law on the superior public officers
liability, such that, if the complaint, as in the instant case, does not allege bad faith, malice, or gross
negligence, the same is dismissible for failure to state a cause of action.
Issues:
(1) Whether or not a public officer may be validly sued in his/her private capacity for acts done in connection
with the discharge of the functions of his/her office; and
(2) Whether or not the instant complaint states a cause of action as regards to which of the two provisions of
law -- Article 32 of the Civil Code or Section 38, Book I of the Administrative Code.
1.) The general rule is that a public officer is not liable for damages which a person may suffer arising from
the just performance of his official duties and within the scope of his assigned tasks. An officer who acts
within his authority to administer the affairs of the office which he/she heads is not liable for damages that
may have been caused to another, as it would virtually be a charge against the Republic, which is not
amenable to judgment for monetary claims without its consent. However, a public officer is by law not
immune from damages in his/her personal capacity for acts done in bad faith which, being outside the
scope of his authority, are no longer protected by the mantle of immunity for official actions.
Specifically, under Section 38, Book I of the Administrative Code, civil liability may arise where there is bad
faith, malice, or gross negligence on the part of a superior public officer. And, under Section 39 of the same
Book, civil liability may arise where the subordinate public officers act is characterized by willfulness or
negligence. Thus
Sec. 38. Liability of Superior Officers. (1) A public officer shall not be civilly liable for acts done in the
performance of his official duties, unless there is a clear showing of bad faith, malice or gross negligence.
Section 39. Liability of Subordinate Officers. No subordinate officer or employee shall be civilly liable for
acts done by him in good faith in the performance of his duties. However, he shall be liable for willful or
negligent acts done by him which are contrary to law, morals, public policy and good customs even if he
acts under orders or instructions of his superior.

51

In addition, the Court held in Cojuangco, Jr. v. Court of Appeals, that a public officer who directly or
indirectly violates the constitutional rights of another, may be validly sued for damages under Article 32 of
the Civil Code even if his acts were not so tainted with malice or bad faith.
Thus, the rule in this jurisdiction is that a public officer may be validly sued in his/her private capacity for acts
done in the course of the performance of the functions of the office, where said public officer: (1) acted with
malice, bad faith, or negligence; or (2) where the public officer violated a constitutional right of the plaintiff.
2.) The complaint filed by respondent stated a cause of action and that the decisive provision thereon is
Article 32 of the Civil Code.
A general statute is one which embraces a class of subjects or places and does not omit any subject or
place naturally belonging to such class. A special statute, as the term is generally understood, is one which
relates to particular persons or things of a class or to a particular portion or section of the state only.
A general law and a special law on the same subject are statutes in pari materia and should, accordingly, be
read together and harmonized, if possible, with a view to giving effect to both. The rule is that where there
are two acts, one of which is special and particular and the other general which, if standing alone, would
include the same matter and thus conflict with the special act, the special law must prevail since it evinces
the legislative intent more clearly than that of a general statute and must not be taken as intended to affect
the more particular and specific provisions of the earlier act, unless it is absolutely necessary so to construe
it in order to give its words any meaning at all.
The circumstance that the special law is passed before or after the general act does not change the
principle. Where the special law is later, it will be regarded as an exception to, or a qualification of, the prior
general act; and where the general act is later, the special statute will be construed as remaining an
exception to its terms, unless repealed expressly or by necessary implication.
Let us examine the provisions involved in the case at bar. Article 32 of the Civil Code provides:
ART. 32. Any public officer or employee, or any private individual, who directly or indirectly obstructs,
defeats, violates, or in any manner impedes or impairs any of the following rights and liberties of another
person shall be liable to the latter for damages:
xxxx
(6) The right against deprivation of property without due process of law;
xxxx
(8) The right to the equal protection of the laws;
xxxx
Article 32 was patterned after the "tort" in American law. A tort is a wrong, a tortious act which has been
defined as the commission or omission of an act by one, without right, whereby another receives some
injury, directly or indirectly, in person, property, or reputation. There are cases in which it has been stated
that civil liability in tort is determined by the conduct and not by the mental state of the tortfeasor, and there
are circumstances under which the motive of the defendant has been rendered immaterial. The reason
sometimes given for the rule is that otherwise, the mental attitude of the alleged wrongdoer, and not the act
itself, would determine whether the act was wrongful. Presence of good motive, or rather, the absence of an
evil motive, does not render lawful an act which is otherwise an invasion of anothers legal right; that is,
liability in tort is not precluded by the fact that defendant acted without evil intent.
Sections 38 and 39, Book I of the Administrative Code, laid down the rule on the civil liability of superior and
subordinate public officers for acts done in the performance of their duties. For both superior and
subordinate public officers, the presence of bad faith, malice, and negligence are vital elements that will
make them liable for damages. Note that while said provisions deal in particular with the liability of
government officials, the subject thereof is general, i.e., "acts" done in the performance of official duties,
without specifying the action or omission that may give rise to a civil suit against the official concerned.
Contrarily, Article 32 of the Civil Code specifies in clear and unequivocal terms a particular specie of an
"act" that may give rise to an action for damages against a public officer, and that is, a tort for impairment of
rights and liberties. Indeed, Article 32 is the special provision that deals specifically with violation of
constitutional rights by public officers. All other actionable acts of public officers are governed by Sections
38 and 39 of the Administrative Code. While the Civil Code, specifically, the Chapter on Human Relations is
a general law, Article 32 of the same Chapter is a special and specific provision that holds a public officer
liable for and allows redress from a particular class of wrongful acts that may be committed by public
officers. Compared thus with Section 38 of the Administrative Code, which broadly deals with civil liability
arising from errors in the performance of duties, Article 32 of the Civil Code is the specific provision which
must be applied in the instant case precisely filed to seek damages for violation of constitutional rights.
52

II. ORGANIZATION AND FUNCTION OF THE BIR

1. British American Tobacco Corporation v. Finance Secretary
Camacho, BIR Commissioner Parayno (2008)
Doctrine: Classification if rational in character is allowable. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation.
Facts:
British American Tobacco is the distributor of Lucky Strike Cigarette in the Philippines
The company is questioning the constitutionality of RA 8240, entitled "An Act Amending Sections
138, 139, 140, and 142 of the NIRC, as Amended and For Other Purposes," which took effect on
January 1, 1997
The law provided a legislative freeze on brands of cigarettes introduced between the period
January 2, 1997 to December 31, 2003, such that said cigarettes shall remain in the classification
under which the BIR has determined them to belong as of December 31, 2003, until revised by
Congress.
In effect: older brands or existing brands will have, in the long term, lower price and tax rate as
inflation and price appreciation were not factored in.
o Their tax rate shall remain until Congress changes it
o Hence, a legislative freeze in the class of cigarettes
Net Retail
2005 Tax
2007 Tax
2009 Tax
2011 Tax
Supreme
Price
Court
(excluding
Classification
excise tax
and VAT

Less than
P5 per
pack

P2/pack

P2.23/pack

P2.47/pack

P2.72/pack

Low-priced

Bet
P5-P6.50

P6.35/pack

P6.74/pack

P7.14/pack

P7.56/pack

Medium-price
d

Bet
P6.50-P10

P10.35/pack

P10.88/pack

P11.43/pack

P12/pack

High-priced

Above P10

P25/pack

P26.06/pack

P27.16/pack

P28.30/pack

Premium-pric
ed

New brands shall be classified according to current net retail price

New brands are the ones registered after January 1, 1997
In 2001, Lucky Strike was introduced in the market
Lucky Strike was classified as premium-priced hence was imposed the Above P10 tax rate
Lucky Strike protested the P22.77M tax assessment pegged at P25/pack
Lucky Strike interposes that the legislative freeze is discriminatory against new brands and poses
barrier to entry in the cigarette industry
53

o Legislative freeze means: existing or "old" brands shall be taxed based on their net retail
price as of October 1, 1996.
o Hence, the classification based on pricing is lower for older brands compared to new
entrants
Lucky Strike found it unfair that Philip Morris and Marlboro are classified only as High-priced while
it is classified as Premium Priced.

Issues:
Whether or not:
1. The pertinent portions of RA 8240, as amended by RA 9334, discriminates against new
cigarette brands and favors old cigarette brands?
2. The classification freeze provision unduly favors older brands over newer brands?

Held: In applying the rational basis test, the Court found the questioned law Constitutional.
A legislative classification that is reasonable does not offend the constitutional guaranty of the
equal protection of the laws.
The classification is considered valid and reasonable provided that:
(1) it rests on substantial distinctions;
(2) it is germane to the purpose of the law;
(3) it applies, all things being equal, to both present and future conditions; and
(4) it applies equally to all those belonging to the same class.
classification freeze provision uniformly applies to all newly introduced brands in the market,
Finding that the assailed law seems to derogate, to a limited extent, one of its avowed objectives
(i.e. promoting fair competition among the players in the industry) would suggest that, by
Congresss own standards, the current excise tax system on sin products is imperfect.
But the
Court cannot declare a statute unconstitutional merely because it can be improved or that it does
not tend to achieve all of its stated objectives.

2. Philippine American Life and General Insurance v. Secretary

of Finance
Philam Life sold its shares in Philam Care Health Systems to STI Investments Inc., the highest bidder.
After the sale was completed, Philam life applied for a tax clearance and was informed by BIR that there is
a need to secure a BIR Ruling due to a potential donors tax liability on the sold shares.
Issue:
Whether or not the sales of shares sold for less than an adequate consideration be subjcet to donor's tax.
PETITIONERS CONTENTION:
The transaction cannot attract donors tax liability since there was no donative intent and, ergo, no taxable
donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009; that the shares were sold at
their actual fair market value and at arms length; that as long as the transaction conducted is at arms
lengthsuch that a bonafide business arrangement of the dealings is done in the ordinary course of

54

businessa sale for less than an adequate consideration is not subject to donors tax; and that donors tax
does not apply to sale of shares sold in an open bidding process.
CIR DENYING THE REQUEST:
Through BIR Ruling No. 015-12. As determined by the Commissioner, the selling price of the shares thus
sold was lower than their book value based on the financial statements of Philam Care as of the end of
2008. The Commissioner held donors tax became imposable on the price difference pursuant to Sec.
100 of the National Internal Revenue Code (NIRC):
SEC. 100. Transfer for Less Than Adequate and full Consideration. - Where property, other than real
property referred to in Section 24(D), is transferred for less than an adequate and full consideration in
money or moneys worth, then the amount by which the fair market value of the property exceeded the
value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and
shall be included in computing the amount of gifts made during the calendar year.
HELD:
The price difference is subject to donors tax.
Petitioners substantive arguments are unavailing. The absence of donative intent, if that be the case, does
not exempt the sales of stock transaction from donors tax since Sec. 100 of the NIRC categorically states
that the amount by which the fair market value of the property exceeded the value of the consideration
shall be deemed a gift. Thus, even if there is no actual donation, the difference in price is considered a
donation by fiction of law.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the parameters
for determining the fair market value of a sale of stocks. Such issuance was made pursuant to the
Commissioners power to interpret tax laws and to promulgate rules and regulations for their
implementation.
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was being
applied retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it merely called for the strict
application of Sec. 100, which was already in force the moment the NIRC was enacted.
ISSUE on TAX REMEDIES:
The issue that now arises is thiswhere does one seek immediate recourse from the adverse ruling of the
Secretary of Finance in its exercise of its power of review under Sec. 4?
Petitioner essentially questions the CIRs ruling that Petitioners sale of shares is a taxable donation under
Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and RMC 25-11 is merely
questioned incidentally since it was used by the CIR as bases for its unfavourable opinion. Clearly, the
Petition involves an issue on the taxability of the transaction rather than a direct attack on the
constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the instant Petition properly
pertains to the CTA under Sec. 7 of RA 9282.
As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are now at a
quandary on what mode of appeal should be taken, to which court or agency it should be filed, and which
case law should be followed.
Petitioners above submission is specious (erroneous).
CTA, through its power of certiorari, to rule on the validity of a particular administrative rule or regulation so
long as it is within its appellate jurisdiction. Hence, it can now rule not only on the propriety of an

55

assessment or tax treatment of a certain transaction, but also on the validity of the revenue regulation or
revenue memorandum circular on which the said assessment is based.
Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only
contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise questioned the
validity of Sec. 7(c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction over the
controversy, contrary to petitioners arguments.

3. COMMISSIONER OF INTERNAL REVENUE v. COURT OF TAX

APPEALS (SECOND DIVISION) AND PETRON CORPORATION.
G.R. No. 207843, July 15, 2015
Facts:
Petron, which is engaged in the manufacture and marketing of petroleum products, imports alkylate as a
raw material or blending component for the manufacture of ethanol-blended motor gasoline. For the period
January 2009 to August 2011, as well as for the month of April 2012, Petron transacted an aggregate of 22
separate importations for which petitioner the Commissioner of Internal Revenue issued Authorities to
Release Imported Goods, categorically stating that Petron's importation of alkylate is exempt from the
payment of the excise tax because it was not among those articles enumerated as subject to excise tax
under Title VI of Republic Act No. (RA) 8424,5 as amended, or the 1997 National Internal Revenue Code.
With respect, however, to Petron's alkylate importations, the CIR issued an assessment:
[A]lkylate which is a product of distillation similar to that of naphta, is subject to excise tax under Section 1
48(e) of the National Internal Revenue Code of 1997.

In view of the CIR's assessment, Petron filed before the CTA a petition for review, raising the issue of
whether its importation of alkylate as a blending component is subject to excise tax as contemplated under
Section 148 (e) of the NIRC.
CIR sought recourse to the Court, through the instant petition, alleging that the CTA committed grave
abuse of discretion when it assumed authority to take cognizance of the case despite its lack of jurisdiction
to do so.
Issue:
Whether or not the CTA properly assumed jurisdiction over the petition assailing the imposition of excise
tax on Petron's importation of alkylate based on Section 148 (e) of the NIRC.
Held:
No. CTA has no jurisdiction.
In asserting its jurisdiction over the present case, the CTA explained that Petron's petition filed before it
"simply puts in question" the propriety or soundness of the CIR's interpretation and application of Section
148 (e) of the NIRC (as embodied in CMC No. 164-2012) "in relation to" the imposition of excise tax on
Petron's importation of alkylate; thus, the CTA posits that the case should be regarded as "other matters
arising under [the NIRC]" under the second paragraph of Section 4 of the NIRC, therefore falling within the
CTA's jurisdiction:

56

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction
of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
As the CIR aptly pointed out, the phrase "other matters arising under this Code," as stated in the second
paragraph of Section 4 of the NIRC, should be understood as pertaining to those matters directly related to
the preceding phrase "disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto" and must therefore not be taken in isolation to invoke the jurisdiction
of the CTA.27 In other words, the subject phrase should be used only in reference to cases that are, to
begin with, subject to the exclusive appellate jurisdiction of the CTA, i.e., those controversies over which
the CIR had exercised her quasi-judicial functions or her power to decide disputed assessments, refunds
or internal revenue taxes, fees or other charges, penalties imposed in relation thereto, not to those that
involved the CIR's exercise of quasi-legislative powers.
[T]he 'other matters' that may come under the general clause should be of the same nature as those that
have preceded them applying the rule of construction known as ejusdem generis.

III. INCOME TAXATION

1. COMMISSIONER OF INTERNAL REVENUE vs. MELCHOR J.
JAVIER, JR. and THE COURT OF TAX APPEALS G.R. No. 78953 July
31, 1991
SARMIENTO, J.
This is a petition for review before the Court of the portion of the Decision dated July 27, 1983 of
the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs.
Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the
deletion of the 50% surcharge from Javier's deficiency income tax assessment on his income for
1977. The respondent CTA in a Resolution denied the Commissioner's Motion for Reconsideration
and Motion for New Trial
Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the
Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her
sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon
Bank, N.A.
Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal against the private
respondent, claiming that its remittance of US$1,000,000.00 was a clerical error and should have
been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on
the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank.
The City Fiscal of Pasay City filed an Information with the then Circuit Criminal Court charging
private respondent and his wife with the crime of estafa.
The private respondent filed his Income Tax Return for the taxable year 1977 showing a gross
income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of the return that

57

"Taxpayer was recipient of some money received from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation."
Private respondent received a letter from the acting Commissioner of Internal Revenue, together
with income assessment notices for the years 1976 and 1977, demanding that the private
respondent pay on or before December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as
deficiency assessments for the years 1976 and 1977 respectively. .
Private respondent wrote the Bureau of Internal Revenue denied that he had any undeclared
income for the year 1977 and requested that the assessment for 1977 be made to await final court
decision on the case filed against him for filing an allegedly fraudulent return.
Private respondent received from Acting Commissioner of Internal Revenue a letter stating in reply
to his letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able
to dispose, is definitely taxable." The Commissioner also imposed a 50% fraud penalty against
Javier.
Javier filed an appeal before the respondent Court of Tax Appeals. The respondent CTA, rendered
that the 50% surcharge imposed in the deficiency assessment should be deleted.

ISSUE: Whether or not a taxpayer who merely states as a footnote in his income tax return that a
sum of money that he erroneously received and already spent is the subject of a pending litigation
and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return
HELD: The petition is DENIED and the decision appealed from the Court of Tax Appeals is
AFFIRMED
The following circumstances attendant to the case at bar show that in filing the questioned return,
the private respondent was guided, not by that "willful and deliberate intent to prevent the
Government from making a proper assessment" which constitute fraud, but by an honest doubt as
to whether or not the "mistaken remittance" was subject to tax.
Even in the United States, the authorities are not unanimous in holding that similar receipts are
subject to the income tax. It should be noted that the decision in the Rutkin case is a five-to-four
decision; and in the very case before this Honorable Court, one out of three Judges of the
respondent Court was of the opinion that the amount in question is not taxable. Thus, even without
the footnote, the failure to declare the "mistaken remittance" is not fraudulent.
When the private respondent filed his income tax return on March 15, 1978 he was being sued by
the Mellon Bank for the return of the money, and was being prosecuted by the Government for
estafa committed allegedly by his failure to return the money and by converting it to his personal
benefit. The basic tax amounted to P4,899,377.00 and could not have been paid without using
part of the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply
state in his income tax return that the amount received was still under litigation.
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal
Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the
tax due from him or of the deficiency tax in case payment has been made on the basis of the
return filed before the discovery of the falsity or fraud.
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the
herein petitioner. The government was not induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because
Javier did not conceal anything. Error or mistake of law is not fraud. The records lack a clear
showing of fraud committed because he did not conceal the fact that he had received an amount
of money although it was a "subject of litigation."

58

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
Elison G. Natividad for accused-appellant.
SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in
his income tax return that a sum of money that he erroneously received and already spent is the subject of
a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a
fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated
July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr.
vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of
the 50% surcharge from Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or
imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein),
received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70
remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is
Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of
Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private
respondent herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a
clerical error and should have been US$1,000.00 only, and praying that the excess amount of
US$999,000.00 be returned on the ground that the defendants are trustees of an implied trust for the
benefit of Mellon Bank with the clear, immediate, and continuing duty to return the said amount from the
moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then
Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein)
and his wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their
own personal use and benefit the amount of US$999,000.00 which they received under an implied trust for
the benefit of Mellon Bank and as a result of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the
taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in
the footnote of the return that "Taxpayer was recipient of some money received from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from
the acting Commissioner of Internal Revenue dated November 14, 1980, together with income
assessment notices for the years 1976 and 1977, demanding that petitioner (private respondent herein)
pay on or before December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency
assessments for the years 1976 and 1977 respectively. . . .

59

7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal
Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had
any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await
final court decision on the case filed against him for filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his
December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were
able to dispose, is definitely taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the
concluding portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner here)
further requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72
of the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since
petitioner (private respondent) filed his income tax return for taxable year 1977, the 50% surcharge was
imposed, in all probability, by respondent (petitioner) because he considered the return filed false or
fraudulent. This additional requirement, to our mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was recipient of some
money received from abroad which he presumed to be gift but turned out to be an error and is now subject
of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully
and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government
to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals,
L-20569, August 23, 1974, 56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for
respondent to examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100,
April 28, 1956.). Besides, Section 29 is not too plain and simple to understand. Since the question involved
in this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge imposed
in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter
to us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which
held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he
submitted in the same memorandum "that the issue may be raised in the case not for the purpose of
correcting or setting aside the decision which held him liable for deficiency income tax, but only to show
that there is no basis for the imposition of the surcharge." This subsequent disavowal therefore renders
moot and academic the posturings articulated in as Comment 10 on the non-taxability of the amount he
erroneously received and the bulk of which he had already disbursed. In any event, an appeal at that time
(of the filing of the Comments) would have been already too late to be seasonable. The petitioner, through
the office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is
self-convinced, and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put
another way, the studied insinuation that private respondent may not be the beneficial owner of the money
or income flowing to him as enhanced by the studied claim that the amount is "subject of litigation" is belied
by the record and clearly exposed as a fraudulent ploy, as witness what transpired upon receipt of the
amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount
of private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the
amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven
(11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the
said dollar account in the sum of $975,000.00 or P7,020,000.00. . . . 11
In reply, the private respondent argues:
xxx xxx xxx
60

The petitioner contends that the private respondent committed fraud by not declaring the "mistaken
remittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer was
the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation." It is respectfully submitted that the said return was not fraudulent. The footnote
was practically an invitation to the petitioner to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782),
that is, it must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain
a judgment on the issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A.
Neddas, 40 BTA 672). The following circumstances attendant to the case at bar show that in filing the
questioned return, the private respondent was guided, not by that "willful and deliberate intent to prevent
the Government from making a proper assessment" which constitute fraud, but by an honest doubt as to
whether or not the "mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given
very, very wide publicity by media; and only one who is not in his right mind would have entertained the
idea that the BIR would not make an assessment if the amount in question was indeed subject to the
income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in this
jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not
unanimous in holding that similar receipts are subject to the income tax. It should be noted that the
decision in the Rutkin case is a five-to-four decision; and in the very case before this Honorable Court, one
out of three Judges of the respondent Court was of the opinion that the amount in question is not taxable.
Thus, even without the footnote, the failure to declare the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by
the Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa
committed allegedly by his failure to return the money and by converting it to his personal benefit. The
basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using
part of the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in
his income tax return that the amount received was still under litigation. If he had paid the tax, would that
not constitute estafa for using the funds for his own personal benefit? and would the Government refund it
to him if the courts ordered him to refund the money to the Mellon Bank? 12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code),
a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis of the return filed before the discovery of the
falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of
the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income
tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or
mistake of fact or law" not constituting fraud, that such notation was practically an invitation for
investigation and that Javier had literally "laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in this
manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up some legal
right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It
necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner
and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns
and in the assessment, respectively, under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in
good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most,
create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion. 15

61

A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be, Rick v.
U.S., App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right and place itself at a disadvantage so as to prevent
its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or
mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to
Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified
by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of
the money he received, but the records lack a clear showing of fraud committed because he did not
conceal the fact that he had received an amount of money although it was a "subject of litigation." As ruled
by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner
against the private respondent in the deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is
AFFIRMED. No costs.
SO ORDERED.

2. CONWI V. COURT OF APPEALS

Facts:
Petitioners are Filipino citizens and employees of Procter and Gamble, PH Manufacturing Corp.,
which is a subsidiary of P&G, USA. In 1970 and 1971, petitioners were assigned to other subsidiaries
outside the PH and during which, they were paid USD as compensation. When they filed their income tax
returns for 1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of the
floating rate ordained under BIR Ruling No. 70-027, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00
Petitioners used the same conversion rate when they filed for their income tax returns for 1971.
However, on Feb.8, 1973 and Oct.8, 1973, petitioners filed with the office of the CIR an amended version
of their income tax returns for 1970 and 1971. They used the par value of the peso as prescribed in Sec.48
of RA 265 in relation to Sec.6 of CA 699 as basis for converting their respective dollar income into PHP for
purposes of taxation. This computation resulted in the alleged overpayments, refund or tax credit.
Accordingly, claims for refund were filed with the CIR. Without awaiting the resolution from the CIR on their
claims, petitioners filed a petition for review with the CTA.
The CTA held that the proper conversion rate for the purpose of reporting and paying PH income tax
on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars No.
7-71 and 41-71. The claim for refund or tax credit was denied.
Issue:
1. WON the CTA erred in holding that the petitioners' dollar earnings are receipts derived from foreign
exchange transactions; and
2. WON the CTA erred in holding that the proper rate of conversion of petitioners' dollar earnings for
tax purposes is the prevailing free market rate of exchange and not the par value of the peso.
Ruling:
1. Yes. The CTA erred in holding that the petitioners' dollar earnings are receipts derived from foreign
exchange transactions.
The Court held that petitioners are correct as to their claim that their dollar earnings are not receipts
derived from foreign exchange transactions. For a foreign exchange transaction is simply that a
transaction in foreign exchange, foreign exchange being "the conversion of an amount of money or
currency of one country into an equivalent amount of money or currency of another." When petitioners
were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's
currency and were also spending in said currency. There was no conversion, therefore, from one currency
to another.
62

2. No. The CTA did not err in holding that the proper rate of conversion of petitioners' dollar earnings
for tax purposes is the prevailing free market rate of exchange and not the par value of the peso.
A careful reading of said CB Circular No. 289 shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign
borrowing, and investments nothing by way of income tax payments. Thus, petitioners are in error by
concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the
guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21.
Rates of tax on citizens or residents. A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every individual,
whether a citizen of the Philippines residing therein or abroad or an alien residing in the
Philippines, determined in accordance with the following schedule:
xxx

xxx xxx

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section
338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to
effectively enforce its provisions.
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribe a uniform rate of exchange from US dollars to Philippine pesos for internal revenue tax purposes
for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority
given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these
are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.
Petitioners argue that since there were no remittances and acceptances of their salaries and wages in
US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that
they are citizens of the Philippines, and their income, within or without, and in these cases wholly without,
are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for
respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars,
being of long standing and not contrary to law, are valid.

3. OBILLOS vs.COMMISSIONER OF INTERNAL REVENUE and

COURT OF TAX APPEALS
G.R. No. L-68118 October 29, 1985
FACTS:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which
they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of
1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights
to his four children, the petitioners, to enable them to build their residences. The company sold the two lots
to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles
issued to them would show that they were co-owners of the two lots.

63

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived
from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital
gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in
addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax,
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable
in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76
on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue
vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.

ISSUE:
WHETHER OR NOT THE PETITIONERS SHOULD BE HELD LIABLE FOR DEFICIENCY INCOME
TAXES? OR WHETHER OR NOT THE PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
WITHIN THE MEANING OF THE TAX CODE?
RULING:

NO, We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of
the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same
and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should
be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership. The
petitioners were not engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but to
resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated
sooner or later.
64

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*

4. COMMISSIONER OF INTERNAL REVENUE vs ST. LUKES

MEDICAL CENTER
Facts:
St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non-stock and non-profit
corporation.
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding
tax on compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57
4
during trial in the First Division of the CTA.
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the NIRC.
Thus, St. Luke's appealed to the CTA.
The BIR claimed that St. Lukes should be liable for income tax at a preferential rate of 10% as provided for
by Section 27(B). Further, the BIR claimed that St. Lukes was actually operating for profit in 1998 because
only 13% of its revenues came from charitable purposes. Moreover, the hospitals board of trustees,
officers and employees directly benefit from its profits and assets.
On the other hand, St. Lukes maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. It argued that
the making of profit per se does not destroy its income tax exemption.

Issue:
The sole issue is whether St. Lukes is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit
hospitals.

Ruling:
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of such tax exemption.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. Proprietary means private, following the
65

definition of a proprietary educational institution as any privateschool maintained and administered

by private individuals or groups with a government permit. Non-profit means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institutions purposes and all its activities conducted not for profit.
Non-profit does not necessarily mean charitable. In Collector of Internal Revenue v. Club Filipino Inc. de
Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of its
stockholders and members. The club was primarily funded by membership fees and dues. If it had profits,
they were used for overhead expenses and improving its golf course. The club was non-profit because of its
purpose and there was no evidence that it was engaged in a profit-making enterprise.
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined charity in Lung Center of the Philippines v. Quezon City as a gift, to be
applied consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government. However, despite its being a
tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Sec. 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Centerconcerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In other words, charitable institutions
provide for free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities already assume a part of the
burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes
by the government is compensated by its relief from doing public works which would have been funded by
appropriations from the Treasury
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the
NIRC is materially different from Section 28(3), Article VI of the Constitution. (Emphasis supplied)
Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the
other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires
that the institution actually, directly and exclusively use the property for a charitable purpose. (Emphasis
supplied)
To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property actually, directly and exclusively for charitable purposes. (Emphasis supplied)
To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution
must be organized and operated exclusively for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution be operated exclusively for social
welfare. (Emphasis supplied)
However, the last paragraph of Section 30 of the NIRC qualifies the words organized and operated
exclusively by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)
66

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts any
activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt.
Thus, even if the charitable institution must be organized and operated exclusively for charitable purposes,
it is nevertheless allowed to engage in activities conducted for profit without losing its tax exempt status for
its not-for-profit activities. The only consequence is that the income of whatever kind and character
of a charitable institution from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax. Prior to the introduction of Section 27(B), the tax
rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%. (Emphasis supplied)
The Court finds that St. Lukes is a corporation that is not operated exclusively for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only
on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section
30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be operated exclusively for
charitable or social welfare purposes to be completely exempt from income tax. An institution under Section
30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from
for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the
ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).(Emphasis supplied)
St. Lukes fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the
NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Lukes, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.
St. Lukes is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St.
Lukes has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Lukes is
a corporation for purely charitable and social welfare purposes and thus exempt from income tax.
In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to
implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.
WHEREFORE, St. Lukes Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(8) of the National
Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code. All
other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

5. 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.
67

 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, 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. 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

68

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.

6. SMI-ED vs. CIR

G.R. No. 175410
November 12, 2014
Ponente: Leonen, J.:
Topic:
Principle: In an action for the refund of taxes allegedly erroneously paid, the Court of Tax
Appeals may determine whether there are taxes that should have been paid in lieu of the
taxes paid. Determining the proper category of tax that should have been paid is not an
assessment. It is incidental to determining whether there should be a refund.
Parties of the case:
Petitioners: SMI-ED Philippines Technology, Inc.
Respondents: Commissioner of Internal Revenue
Petition: This is a petition for review on certiorari of the November 3, 2006 Court of Tax
Appeals En Banc decision. It affirmed the Court of Tax Appeals Second Divisions
decision and resolution denying petitioner SMI-Ed Philippines Technology, Inc.s (SMI-Ed
Philippines) claim for tax refund.
Facts:
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the
business of manufacturing ultra high-density microprocessor unit package."
After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings
and purchased machineries and equipment. As of December 31, 1999, the total cost of the
properties amounted to P3,150,925,917.00.
SMI-Ed Philippines "failed to commence operations." Its factory was temporarily
closed, effective October 15, 1999. On August 1, 2000, it sold its buildings and some of its
installed machineries and equipment to Ibiden Philippines, Inc., another PEZA-registered

69

enterprise, for 2,100,000,000.00 (P893,550,000.00). SMI-Ed Philippines was dissolved

on November 30, 2000.
In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the
entire gross sales of its properties to 5% final tax on PEZA registered corporations. SMI-Ed
Philippines paid taxes amounting to P44,677,500.00.
On February 2, 2001, after requesting the cancellation of its PEZA registration and
amending its articles of incorporation to shorten its corporate term, SMI-Ed Philippines
filed an administrative claim for the refund of P44,677,500.00 with the Bureau of Internal
Revenue (BIR). SMIEd Philippines alleged that the amount was erroneously paid. It also
indicated the refundable amount in its final income tax return filed on March 1, 2001. It
also alleged that it incurred a net loss of P2,233,464,538.00.
The BIR did not act on SMI-Ed Philippines claim, which prompted the latter to file
a petition for review before the Court of Tax Appeals on September 9, 2002.
The Court of Tax Appeals Second Division denied SMI-Ed Philippines claim for
refund in the decision dated December 29, 2004.
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of
Tax Appeals En Banc. The CTA En Banc dismissed the petition.
Issue:
1.) Whether or not CTA may decide on proper tax category in refund cases.
2.) Whether or not petitioner is liable for income tax.
Held:
1. Yes.
In an action for refund of taxes allegedly erroneously paid, the CTA may determine
whether there are other taxes that should have been paid in lieu of the taxes paid. Such is
not an assessment but a determination of the proper category of tax to be paid which is
merely incidental in determining the propriety of refund.
If the taxpayer is found liable for taxes other than the ones alleged to be
erroneously paid, the amount of taxpayers liability should be computed and deducted
from the refundable amount.

70

The Supreme Court ruled that a PEZA-registered corporation that has never
commenced operations may not avail of the tax incentives and preferential rates given to
PEZA-registered enterprises.
2. No.
The BIR did not make a deficiency assessment for this declaration. Neither did the
BIR dispute this statement in its pleadings filed before this court. There is, therefore, no
reason to doubt the truth that petitioner indeed suffered a net loss in 2000.
Since petitioner had not started its operations, it was also not subject to the
minimum corporate income tax of 2% on gross income. Therefore, petitioner is not liable
for any income tax.
WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE.
The Bureau of Internal Revenue is ordered to refund petitioner SMI-Ed Philippines
Technology, Inc. the amount of 5% final tax paid to the BIR, less the 6% capital gains tax
on the sale of petitioner SMI-Ed Philippines Technology, Inc. 's land and building. In view
of the lapse of the prescriptive period for assessment, any capital gains tax accrued from
the sale of its land and building that is in excess of the 5% final tax paid to the Bureau of
Internal Revenue may no longer be recovered from petitioner SMI-Ed Philippines
Technology, Inc.

7. Republic vs Soriano
Facts: Republic of the Philippines, represented by the Department of Public Works and Highways (DPWH), filed an
expropriation case against respondent Arlene R. Soriano, pursuant to Republic Act (RA) No. 8974, otherwise known
as An Act to Facilitate the Acquisition of Right-Of-Way, Site or Location for National Government Infrastructure
Projects and for other Purposes. The property sought to be expropriated shall be used in implementing the
construction of the North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur
Highway, Valenzuela City.
Petitioner duly deposited to the Acting Branch Clerk of Court the amount of P420,000.00 representing 100% of the
zonal value of the subject property. According to the RTC, the records of the case reveal that petitioner adduced
evidence to show that the total amount deposited is just, fair, and equitable.
On November 15, 2013, the RTC rendered its Decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing determination of just compensation, judgment is hereby rendered:
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per square meter or the sum of
Four Hundred Twenty Thousand Pesos (Php420,000.00) for the 200 square meters as fair, equitable, and
just compensation with legal interest at 12% per annum from the taking of the possession of the property,
subject to the payment of all unpaid real property taxes and other relevant
4) Plaintiff is likewise ordered to pay the defendant consequential damages which shall include the value
of the transfer tax necessary for the transfer of the subject property from the name of the defendant to
that of the plaintiff;
Petitioner filed a Motion for Reconsideration maintaining that pursuant to Bangko Sentral ng Pilipinas (BSP)
Circular No. 799, Series of 2013, which took effect on July 1, 2013, the interest rate imposed by the RTC on just
compensation should be lowered to 6% for the instant case falls under a loan or forbearance of money. In its Order
dated March 10, 2014, the RTC reduced the interest rate to 6% per annum not on the basis of the aforementioned
Circular, but on Article 2209 of the Civil Code in the nature of indemnity for delay.

71

Issues: (1) WON Respondent is entitled to 6% per annum interest; (2) WON Petitioners should pay for the transfer
taxes
Held: The petition is partly meritorious.

(1) Payment of just compensation for the expropriated property amounts to an effective
forbearance on the part of the State. The law applicable is the Central Bank Circular and not the
Civil Code. RTCs reliance on National Power Corporation vs. Angas is misplaced for the same has
already been overturned by Republic v. Court of Appeals, where the court held that the
payment of just compensation for the expropriated property amounts to an effective
forbearance on the part of the State. In line with the recent circular of the Monetary Board of
the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, Series of 2013, the prevailing rate of interest
for loans or forbearance of money is six percent (6%) per annum.
However, the imposition of interest in this case is unnecessary because petitioner was able to
deposit with the trial court the amount representing the zonal value of the property before its
taking. The award of interest is imposed in the nature of damages for delay in payment to
ensure prompt payment of the value of the land and limit the opportunity loss of the owner.
However, when there is no delay in the payment of just compensation, there should be no
imposition of interest.
(2) Regarding petitioners contention that it cannot be made to pay the value of the transfer taxes
in the nature of capital gains tax and documentary stamp tax, the same is partly meritorious.
With respect to the capital gains tax, the court finds merit in petitioners posture that pursuant
to Sections 24(D) and 56(A)(3) of the 1997 National Internal Revenue Code (NIRC), capital gains
tax due on the sale of real property is a liability for the account of the seller. It has been held
that since capital gains is a tax on passive income, it is the seller, not the buyer, who generally
would shoulder the tax.
As to the documentary stamp tax, petitioner cites Section 196 of the 1997 NIRC as its basis in
saying that the documentary stamp tax is the liability of the seller. The provision cited does
not explicitly impute the obligation to pay the documentary stamp tax on the seller. In fact,
according to the BIR, all the parties to a transaction are primarily liable for the documentary
stamp tax, as provided by Section 2 of BIR Revenue Regulations No. 9-2000. As a general rule,
any of the parties to a transaction shall be liable for the full amount of the documentary stamp
tax due, unless they agree among themselves on who shall be liable for the same.
In this case, there is no agreement as to the party liable for the documentary stamp tax due on
the sale of the land to be expropriated. But petitioners Citizens Charter, which functions as a
guide for the procedure to be taken by the DPWH in acquiring real property through
expropriation under RA 8974. The Citizens Charter, issued by petitioner DPWH itself on
December 4, 2013, explicitly provides that the documentary stamp tax, transfer tax, and
registration fee due on the transfer of the title of land in the name of the Republic shall be
72

shouldered by the implementing agency of the DPWH, while the capital gains tax shall be paid
by the affected property owner.

73