Commissioner of Internal Revenue vs.
Central Luzon Drug Corporation when there is, to begin with, no existing obligation to the government. However, as
GR No. 159647, April 15, 2005
Facts:
Respondent is a domestic corporation engaged in the retailing of medicines and other
pharmaceutical products. In 1996 it operated six (6) drugstores under the business
name and style Mercury Drug. From January to December 1996 respondent granted
20% sales discount to qualified senior citizens on their purchases of medicines
pursuant to RA 7432. For said period respondent granted a total of 904,769.
On April 15, 1997, respondent filed its annual ITR for taxable year 1996 declaring
therein net losses. On Jan. 16, 1998 respondent filed with petitioner a claim for tax
refund/credit of 904,769.00 alledgedly arising from the 20% sales discount. Unable
to obtain affirmative response from petitioner, respondent elevated its claim to the
CTA via Petition for Review. CTA dismissed the same but on MR, CTA reversed its
earlier ruling and ordered petitioner to issue a Tax Credit Certificate in favor of
respondent citing CA GR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs.
CIR) citing that Sec. 229 of RA 7432 deals exclusively with illegally collected or
erroneously paid taxes but that there are other situations which may warrant a tax
credit/refund.
CA affirmed CTA decision reasoning that RA 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the availment of a tax credit.
Moreover, such credit is not tantamount to an unintended benefit from the law, but
rather a just compensation for the taking of private property for public use.
ISSUE: W/N respondent, despite incurring a net loss, may still claim the 20% sales
discount as a tax credit.
RULING:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of
obtaining a 20% discount on their purchase of medicine from any private
establishment in the country. The latter may then claim the cost of the discount as a
tax credit. Such credit can be claimed even if the establishment operates at a loss.
A tax credit generally refers to an amount that is subtracted directly from ones total
tax liability. It is an allowance against the tax itself or a deduction from what is
owed by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these is
tax deduction which is subtraction from income for tax purposes, or an amount
that is allowed by law to reduce income prior to the application of the tax rate to
compute the amount of tax which is due. In other words, whereas a tax credit
reduces the tax due, tax deduction reduces the income subject to tax in order to
arrive at the taxable income.
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax
liability before the tax credit can be applied. Without that liability, any tax
credit application will be useless. There will be no reason for deducting the latter
Taxation Case
will be presented shortly, the existence of a tax credit or its grant by law is not the
same as the availment or use of such credit. While the grant is mandatory, the
availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a business
establishment, there will obviously be no tax liability against which any tax credit can
be applied. For the establishment to choose the immediate availment of a tax
credit will be premature and impracticable. Nevertheless, the irrefutable fact remains
that, under RA 7432, Congress has granted without conditions a tax credit benefit to
all covered establishments.However, for the losing establishment to immediately
apply such credit, where no tax is due, will be an improvident usance.
In addition, while a tax liability is essential to the availment or use of any tax credit,
prior tax payments are not. On the contrary, for the existence or grant solely of such
credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact
replete with provisions granting or allowing tax credits, even though no taxes have
been previously paid.
Petition is denied.
G.R. No. 159647 April 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
1. Central Luzon is a domestic corporation engaged in retailing medicines and other
pharmaceutical products, operating 6 drug stores in the name Mercury Drug
2. Pursuant to RA 7432, Respondent Central Luzon granted 20% sales discount to
senior citizens amounting to P 904,769
3. Respondent Central Luzon filed income tax return declaring that it incurred net
losses
4. Respondent Central Luzon filed with Petitioner CIR a claim for tax credit regarding
the amount. Petitioner CIR did not grant the claim
5. Respondent Central Luzon elevated claim to CTA
6. CTA dismissed the claim on the ground that if there is no tax liability, tax credit is
not available
7. Respondent Central Luzon filed MR to CTA.
 8. MR was granted. CTA ordered Petitioner CIR to issue tax credit certificate in favor
of Respondent Central Luzon based on this reason.

However, Sec. 229 clearly does not apply in the instant case because the tax
sought to be refunded or credited by petitioner was not erroneously paid or illegally
collected. We take exception to the CTAs sweeping but unfounded statement that
both tax refund and tax credit are modes of recovering taxes which are either
erroneously or illegally paid to the government. Tax refunds or credits do not
exclusively pertain to illegally collected or erroneously paid taxes as they may be
other circumstances where a refund is warranted. The tax refund provided under
Section 229 deals exclusively with illegally collected or erroneously paid taxes but
there are other possible situations, such as the refund of excess estimated corporate
quarterly income tax paid, or that of excess input tax paid by a VAT-registered
person, or that of excise tax paid on goods locally produced or manufactured but
actually exported. The standards and mechanics for the grant of a refund or credit
under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A.
7432, is yet another instance of a tax credit and it does not in any way refer to
illegally collected or erroneously paid taxes,
9. CA affirmed such ruling of the CTA. Ground = such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for the taking of
private property for public use.

10. Hence, this petition.

ISSUE: WON the respondent, despite incurring a net loss, may still claim the 20 percent sales
discount as a tax credit. [ WON entitled basi Respondent Central Luzonsa Tax Credit]
HELD: Yes.
Petition Denied.
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not
merely a tax deduction from the gross income or gross sale of the establishment concerned. A
tax credit is used by a private establishment only after the tax has been computed; a tax
deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all
covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend or revoke the
law.

Taxation Case

PLANTERS PRODUCTS, INC. VS. FERTIPHIL CORPORATION
(Ponente: Reyes)
Doctrine/s:
(1) If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax.
(2) The power to tax exists for the general welfare; hence, implicit in its power is the
limitation that it should be used only for a public purpose.
Facts:
Petitioner PPI and private respondent Fertiphil are private corporations
incorporated under Philippine laws. They are both engaged in the importation and
distribution of fertilizers, pesticides and agricultural chemicals.
On 3 June 1985, then President Ferdinand Marcos, exercising his legislative powers,
issued LOI No. 1465 which provided, among others, for the imposition of a capital
recovery component (CRC) on the domestic sale of all grades of fertilizers in the
Philippines. The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer
pricing formula a capital contribution component of not less than P10
per bag. This capital contribution shall be collected until adequate capital is
raised to make PPI viable. Such capital contribution shall be applied by FPA
to all domestic sales of fertilizers in the Philippines. (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the
domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted
the amount collected to the Far East Bank and Trust Company, the depositary bank
of PPI.Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986
Taxation Case
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10
levy. With the return of democracy, Fertiphil demanded from PPI a refund of the
amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.
Fertiphil filed a complaint for collection and damagesagainst FPA and PPI with the
RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust,
unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due
process of law.Fertiphil alleged that the LOI solely favored PPI, a privately owned
corporation, which used the proceeds to maintain its monopoly of the fertilizer
industry.
In its Answer, FPA, through the Solicitor General, countered that the issuance of LOI
No. 1465 was a valid exercise of the police power of the State in ensuring the
stability of the fertilizer industry in the country. It also averred that Fertiphil did not
sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate
consumer, not the seller.
RTC: the imposition of the P10 CRC was an exercise of the States inherent power of
taxation; invalidated the levy for violating the basic principle that taxes can only be
levied for public purpose. (PPI filed a M.R. -> denied; In a separate but related proceeding,
SC allowed appeal but remanded to CA)
CA: affirmed with modification; even on the assumption that LOI No. 1465 was issued
under the police power of the state, it is still unconstitutional because it did not
promote public welfare; the levy was NOT for the benefit, as alleged, of Planters
Foundation, Inc. (on the strength of the Letter of Understanding (LOU) issued by
then Prime Minister Cesar Virata on 18 April 1985 and affirmed by the Secretary of
Justice in an Opinion dated 12 October 1987.(PPI filed a M.R. -> denied)
Issue/s:
(1) Whether the imposition of the levy was an exercise by the State of its taxation power.
(2) Whether LOI 1465 constitutes a valid legislation pursuant to the exercise of taxation.
(3) Whether LOI 1465 constitutes a valid legislation pursuant to the exercise of police
power.
Held:
(1) Yes;
The imposition of the levy was an exercise by the State of its taxation power. While it is true that
the power of taxation can be used as an implement of police power,the primary purpose of the
levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the exaction is properly called
a tax.
In Philippine Airlines, Inc. v. Edu, it was held that the imposition of a vehicle registration fee is
not an exercise by the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61
of the Land Transportation and Traffic Code that the legislative intent and purpose
behind the law requiring owners of vehicles to pay for their registration is mainly to
raise funds for the construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. x xx Fees may
be properly regarded as taxes even though they also serve as an
instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98
Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is properly called a tax. Such is the
case of motor vehicle registration fees. The same provision appears as Section 59(b)
in the Land Transportation Code. It is patent therefrom that the legislators had in
mind a regulatory tax as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a "tax or fee." x xx Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep.
Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees"
such as the special permit fees for certain types of motor vehicles (Sec. 10) and
additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-
raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the
motor vehicle registration fee and chauffeurs license fee. Such fees are to go into the
expenditures of the Land Transportation Commission as provided for in the last
proviso of Sec. 61. (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It
increased the price of a bag of fertilizer by as much as five percent. A plain reading of the
LOI also supports the conclusion that the levy was for revenue generation. The LOI
expressly provided that the levy was imposed "until adequate capital is raised to
make PPI viable."
Taxation Case
(2) No;
The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to
give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted
only for a public purpose. They cannot be used for purely private purposes or for the
exclusive benefit of private persons. The reason for this is simple. The power to tax
exists for the general welfare; hence, implicit in its power is the limitation that it
should be used only for a public purpose.
The term "public purpose" is not defined. It is an elastic concept that can be hammered to
fit modern standards. Jurisprudence states that "public purpose" should be given a
broad interpretation. It does not only pertain to those purposes which are
traditionally viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes designed to
promote social justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light
of the expansion of government functions, the inherent requirement that taxes can only
be exacted for a public purpose still stands. Public purpose is the heart of a tax law.
When a tax law is only a mask to exact funds from the public when its true intent is
to give undue benefit and advantage to a private enterprise, that law will not satisfy
the requirement of "public purpose."
Indications that it is not for the public purpose
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."
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 which proves that PPI benefitted
from the LOI
4. The levy was used to pay the corporate debts of PPI.
(3) No;
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be
invalid for failing to comply with the test of "lawful subjects" and "lawful means."
Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished
from those of particular class, requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote
public interest. The law was enacted to give undue advantage to a private corporation.
Dispositive Portion: WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.
Taxation Case
Manila International Airport Authority vs CA
GR No. 155650, July 20, 2006, 495 SCRA 591
Facts:
Manila International Airport Authority (MIAA) is the operator of the
Ninoy International Airport located at Paranaque City. The Officers of
Paranaque City sent notices to MIAA due to real estate tax delinquency.
MIAA then settled some of the amount. When MIAA failed to settle the
entire amount, the officers of Paranaque city threatened to levy and subject to
auction the land and buildings of MIAA, which they did. MIAA sought for a
Temporary Restraining Order from the CA but failed to do so within the 60
days reglementary period, so the petition was dismissed. MIAA then sought
for the TRO with the Supreme Court a day before the public auction, MIAA
was granted with the TRO but unfortunately the TRO was received by the
Paranaque City officers 3 hours after the public auction.
MIAA claims that although the charter provides that the title of the
land and building are with MIAA still the ownership is with the Republic of
the Philippines. MIAA also contends that it is an instrumentality of the
government and as such exempted from real estate tax. That the land and
buildings of MIAA are of public dominion therefore cannot be subjected to
levy and auction sale. On the other hand, the officers of Paranaque City claim
that MIAA is a government owned and controlled corporation therefore not
exempted to real estate tax.
Issues:
Whether or not MIAA is an instrumentality of the government and
not a government owned and controlled corporation and as such exempted
from tax.
Whether or not the land and buildings of MIAA are part of the public
dominion and thus cannot be the subject of levy and auction sale.
Ruling:
Under the Local government code, government owned and
controlled corporations are not exempted from real estate tax. MIAA is not a
government owned and controlled corporation, for to become one MIAA
should either be a stock or non stock corporation. MIAA is not a stock
corporation for its capital is not divided into shares. It is not a non stock
corporation since it has no members. MIAA is an instrumentality of the
government vested with corporate powers and government functions.
Under the civil code, property may either be under public dominion
or private ownership. Those under public dominion are owned by the State
and are utilized for public use, public service and for the development of
national wealth. The ports included in the public dominion pertain either to
seaports or airports. When properties under public dominion cease to be for
public use and service, they form part of the patrimonial property of the
State.
The court held that the land and buildings of MIAA are part of the
public dominion. Since the airport is devoted for public use, for the domestic
and international travel and transportation. Even if MIAA charge fees, this is
for support of its operation and for regulation and does not change the
character of the land and buildings of MIAA as part of the public dominion.
As part of the public dominion the land and buildings of MIAA are outside
the commerce of man. To subject them to levy and public auction is contrary
to public policy. Unless the President issues a proclamation withdrawing the
airport land and buildings from public use, these properties remain to be of
public dominion and are inalienable. As long as the land and buildings are for
public use the ownership is with the Republic of the Philippines.
Taxation Case
Philippine Health Care v CIR G.R. No. 167330 September 18, 2009
J. Corona
Facts:
Philippine Health Cares objectives were:
"[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization.
It lost the case in 2004 when it was made to pay over 100 million in VAT deficiencies. At the
time the MFR was filed, it was able to avail of tax amnesty under RA 9840 by paying 5
percent of the tax or 5 million pesos.
Petitioner passed an MFR but the CA denied. Hence, this case.
Issue:
Was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable
years, and was thus liable for DST?
Held: No. Mfr granted. CIR must desist from collecting tax.
Ratio:
Section 185 of the NIRC . Stamp tax on fidelity bonds and other insurance policies. On all
policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting
the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance).
Two requisites must concur before the DST can apply, namely: (1) the document must be a
policy of insurance or an obligation in the nature of indemnity and (2) the maker should be
transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance).
Under RA 7875, an HMO is "an entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a fixed prepaid premium."
Various courts in the United States have determined that HMOs are not in the insurance
business. One test that they have applied is whether the assumption of risk and
indemnification of loss are the principal object and purpose of the organization or whether
they are merely incidental to its business. If these are the principal objectives, the business is
that of insurance. But if such is incidental and service is the principal purpose, then the
business is not insurance.
Applying the "principal object and purpose test," there is significant American case law
supporting the argument that a corporation, whose main object is to provide the members of a
group with health services, is not engaged in the insurance business.
For the purpose of determining what "doing an insurance business" means, we have to
scrutinize the operations of the business as a whole. This is of course only prudent and
appropriate, taking into account laws applicable to those in the insurance business.
Petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it
is not supervised by the Insurance Commission but by the Department of Health. In fact, in a
letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not
engaged in the insurance business.
As to whether the business is covered by the DST, we can see that while the contract did
contains all the elements of an insurance contract, as stated in Sec 2., Par 1 of the Insurance
Code, the primary purpose of the company is to render service. The primary purpose of the
parties in making the contract may negate the existence of an insurance contract.
Also, there is no loss, damage or liability on the part of the member that should be indemnified
by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined
consideration in exchange for the hospital, medical and professional services rendered by the
petitioners physician or affiliated physician to him.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability
on the part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presume
that a liability or claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in advance at a pre-
agreed price under the agreements.
Also, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination and consultations, vaccine administration
as well as family planning counseling, even in the absence of any peril, loss or damage on his
or her part.
Petitioner is obliged to reimburse the member who receives care from a non-participating
physician or hospital. However, this is only a very minor part of the list of services available.
The assumption of the expense by petitioner is not confined to the happening of a contingency
but includes incidents even in the absence of illness or injury.
Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner)
from the usual insurance contracts.
However, assuming that petitioners commitment to provide medical services to its members
can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it
still will not qualify as an insurance contract because petitioners objective is to provide
medical services at reduced cost, not to distribute risk like an insurer.
If it had been the intent of the legislature to impose DST on health care agreements, it could
have done so in clear and categorical terms. It had many opportunities to do so. But it did not.
The fact that the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any legislative intent
to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on
January 27, 2000, after more than a decade in the business as an HMO.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes
the tax liabilities of petitioner.
21 Our Insurance Code was based on California and New York laws. When a statute has been
adopted from some other state or country and said statute has previously been construed by the
Taxation Case
courts of such state or country, the statute is deemed to have been adopted with the
construction given.
PHC vs CIR
FACTS:
Petitioner is a domestic corporation whose primary purpose is to establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and
to provide for the administrative, legal, and financial responsibilities of the organization. On
January 27, 2000, respondent CIR sent petitioner a formal deman letter and the corresponding
assessment notices demanding the payment of deficiency taxes, including surcharges and
interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. The
deficiency assessment was imposed on petitioners health care agreement with the members of
its health care program pursuant to Section 185 of the 1997 Tax Code. Petitioner protested the
assessment in a letter dated February 23, 2000. As respondent did not act on the protest,
petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered
a decision, ordering the petitioner to PAY the deficiency VAT amounting to P22,054,831.75
inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the
1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from
January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No.
[231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is
ORDERED to DESIST from collecting the said DST deficiency tax. Respondent appealed the
CTA decision to the (CA) insofar as it cancelled the DST assessment. He claimed that
petitioners health care agreement was a contract of insurance subject to DST under Section
185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision which held that petitioners health care
agreement was in the nature of a non-life insurance contract subject to DST. Respondent is
ordered to pay the deficiency Documentary Stamp Tax. Petitioner moved for reconsideration
but the CA denied it.
 QUEZON CITY vs. ABS-CBN BROADCASTING CORPORATION - Local
Franchise Tax

FACTS:
ABS-CBN was granted a franchise which provides that it shall pay a 3% franchise tax and
the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof. It
thus filed a complaint against the imposition of local franchise tax.

ISSUE:
Does the in lieu of all taxes provision in ABS-CBNs franchise exempt it from payment of
the local franchise tax?

HELD:
NO. The right to exemption from local franchise tax must be clearly established beyond
reasonable doubt and cannot be made out of inference or implications.

The uncertainty over whether the in lieu of all taxes provision pertains to exemption from
local or national taxes, or both, should be construed against Respondent who has the burden to
prove that it is in fact covered by the exemption claimed. Furthermore, the in lieu of all
taxes clause in Respondents franchise has become ineffective with the abolition of the
franchise tax on broadcasting companies with yearly gross receipts exceeding P10 million as
they are now subject to the VAT.

QUEZON CITY vs. ABS-CBN G.R. No. 166408, October 6, 2008)

Facts: Petitioner City Government of Quezon City is a local government unit
duly organized and existing by virtue of Republic Act (R.A.) No.537,
otherwise known as the Revised Charter of QuezonCity. Petitioner City
Treasurer of Quezon City is primarily responsible for the imposition and
collection of taxes within the territorial jurisdiction of Quezon City. ABS-CBN
was granted the franchise to install and operate radio and television
broadcasting stations in the Philippines under R.A. No.7966. ABS-CBN had
been paying local franchise tax imposed by Quezon City. However, in view of
the provision in R.A. No. 9766 that it shall pay a franchise tax x xx in lieu of
all taxes, the corporation developed the opinion that it is not liable to pay the
local franchise tax imposed by Quezon City. ABS-CBN filed a written claim
for refund for local franchise tax paid to Quezon City for 1996and for the first
quarter of 1997. For failure to obtain any response from the Quezon City
Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City
seeking the declaration of nullity of the imposition of local franchise tax by the
Taxation Case
City Government of Quezon City for being unconstitutional. The RTC
rendered judgment declaring as invalid the imposition on and collection from
ABS-CBN of local franchise tax and ordered the refund of all payments
made. The City of Quezon and its Treasurer filed a motion for
reconsideration which was subsequently denied by the RTC. Thus, appeal
was made to the CA. The CA dismissed the petition of Quezon City and its
Treasurer. According to the appellate court, the issues raised were purely
legal questions cognizable only by the Supreme Court.
ISSUE: Whether or not the phrase "in lieu of all taxes" indicated in the
franchise of the respondent appellee (Section 8 of RA 7966) serves to
exempt it from the payment of the local franchise tax imposed by the
petitioners-appellants.
HELD: NO
The "in lieu of all taxes" provision in its franchise does not exempt
ABS-CBN from payment of local franchise tax.
The present controversy essentially boils down to a dispute between the
inherent taxing power of Congress and the delegated authority to tax of local
governments under the 1987 Constitution and effected under the LGC of
1991.Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's
franchise does not expressly exempt it from payment of local franchise tax.
They contend that a tax exemption cannot be created by mere implication
and that one who claims tax exemptions must be able to justify his claim by
clearest grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the
lifeblood of the nation. Thus, statutes granting tax exemptions are
construed stricissimi juris against the taxpayer and liberally in favor of the
taxing authority. A claim of tax exemption must be clearly shown and based
on language in law too plain to be mistaken. Otherwise stated, taxation is the
rule, exemption is the exception.The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered by the exemption so
claimed.The basis for the rule on strict construction to statutory provisions
granting tax exemptions or deductions is to minimize differential treatment
and foster impartiality, fairness and equality of treatment among
taxpayers. He who claims an exemption from his share of common burden
must justify his claim that the legislature intended to exempt him by
unmistakable terms. For exemptions from taxation are not favored in law, nor
are they presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It has been held
that "exemptions are never presumed, the burden is on the claimant to
Taxation Case
establish clearly his right to exemption and cannot be made out of inference
or implications but must be laid beyond reasonable doubt. In other words,
since taxation is the rule and exemption the exception, the intention to make
an exemption ought to be expressed in clear and unambiguous terms.
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent
to three (3) percent of all gross receipts of the radio/television business
transacted under the franchise and the franchise tax shall be "in lieu of all
taxes" on the franchise or earnings thereof.The "in lieu of all taxes" provision
in the franchise of ABS-CBN does not expressly provide what kind of taxes
ABS-CBN is exempted from. It is not clear whether the exemption would
include both local, whether municipal, city or provincial, and national tax.
What is clear is that ABS-CBN shall be liable to pay three (3) percent
franchise tax and income taxes under Title II of the NIRC. But whether the "in
lieu of all taxes provision" would include exemption from local tax is not
unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be
clearly established and cannot be made out of inference or implications but
must be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu of
all taxes" provision should be construed against ABS-CBN. ABS-CBN has
the burden to prove that it is in fact covered by the exemption so claimed.
ABS-CBN miserably failed in this regard.
ABS-CBN cites several cases to support its claim that that the "in lieu of all
taxes" clause includes exemption from all taxes.However, a review of the
case laws reveals that the grantees' respective franchises expressly exempt
them from municipal and provincial taxes and ABS-CBN's franchise did not
embody an exemption similar to those cases. Too, the franchise failed to
specify the taxing authority from whose jurisdiction the taxing power is
withheld, whether municipal, provincial, or national. In fine, since ABS-CBN
failed to justify its claim for exemption from local franchise tax, by a grant
expressed in terms "too plain to be mistaken" its claim for exemption for local
franchise tax must fail.
 Delpher Trades v. IAC Gr. 69259

Facts: The Pacheco sisters owned a property s!"se#!ently the

heirs o$ the Pacheco sisters sold the land to the petitioner
corporation in e%chan&e $or shares o$ stoc'.Iss!e: ()* heirs o$
the Pacheco is &!ilty o$ ta% evasion "y ta'in& re$!&e in the ta%
"ene+ts o$ a corporation.,eld: *o- since estate plannin& is an
ac'nowled&ed le&al eans to decrease the ao!nt o$ what
otherwise co!ld "e the heir/s ta%es or to alto&ether avoid the

28. DELPHER TRADES CORPORATIONvs. IAC

G.R. No. L-69259 January 26, 1988

Facts: Delfin Pacheco and sister Pelagia were the owners of a parcel
of land in Polo (now Valenzuela). On April 3, 1974, they leased to
Construction Components International Inc. the property and
providing for a right of first refusal should it decide to buy the said
property.

Construction Components International, Inc. assigned its rights and

obligations under the contract of lease in favor of Hydro Pipes
Philippines, Inc. with the signed conformity and consent of Delfin and
Pelagia. In 1976, a deed of exchange was executed between lessors
Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the Pachecos conveyed to the latter the leased
property together with another parcel of land also located in Malinta
Estate, Valenzuela for 2,500 shares of stock of defendant corporation
with a total value of P1.5M.

On the ground that it was not given the first option to buy the leased
property pursuant to the proviso in the lease agreement, respondent
Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of the lot.

Issue: WON the Deed of Exchange of the properties executed by the

Pachecos and the Delpher Trades Corporation on the other was meant
to be a contract of sale which, in effect, prejudiced the Hydro Phil's
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right of first refusal over the leased property included in the "deed of
exchange," The "Deed of Exchange" of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of sale.
Held: No, by their ownership of the 2,500 no par shares of stock, the There was no transfer of actual ownership interests by the Pachecos to
Pachecos have control of the corporation. Their equity capital is 55% a third party. The Pacheco family merely changed their ownership
as against 45% of the other stockholders, who also belong to the same from one form to another. The ownership remained in the same
family group. In effect, the Delpher Trades Corporation is a business hands. Hence, the private respondent has no basis for its claim of a
conduit of the Pachecos. What they really did was to invest their light of first refusal
properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time
save on inheritance taxes.

Taxation Case