G.R. No. L-29059 December 15, 1987 Eugenio Angeles declared that "before the effectivity of Rep.
ngeles declared that "before the effectivity of Rep. Act No. 1299,
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS,
respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as
modified on appeal by the Supreme Court on February 27, 1965, the Commissioner
of Internal Revenue was ordered to refund to the Cebu Portland Cement Company
the amount of P 359,408.98, representing overpayments of ad valorem taxes on
cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration filed by both the
petitioner and the private respondent, the latter moved for a writ of execution to
enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the private respondent
had an outstanding sales tax liability to which the judgment debt had already been
credited. In fact, it was stressed, there was still a balance owing on the sales taxes in
the amount of P 4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the
alleged sales tax liability of the private respondent was still being questioned and
therefore could not be set-off against the refund. 4
In his petition to review the said resolution, the Commissioner of Internal Revenue
claims that the refund should be charged against the tax deficiency of the private
respondent on the sales of cement under Section 186 of the Tax Code. His position is
that cement is a manufactured and not a mineral product and therefore not exempt
from sales taxes. He adds that enforcement of the said tax deficiency was properly
effected through his power of distraint of personal property under Sections 316 and
318 5 of the said Code and, moreover, the collection of any national internal revenue
tax may not be enjoined under Section 305, 6 subject only to the exception prescribed
in Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also
denies that the sales tax assessments have already prescribed because the prescriptive
period should be counted from the filing of the sales tax returns, which had not yet
been done by the private respondent.
For its part, the private respondent disclaims liability for the sales taxes, on the
ground that cement is not a manufactured product but a mineral product. 8 As such, it
was exempted from sales taxes under Section 188 of the Tax Code after the
effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland
Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here Justice
amending Section 246 of the National Internal Revenue Code, cement was taxable as
a manufactured product under Section 186, in connection with Section 194(4) of the
said Code," thereby implying that it was not considered a manufactured product
afterwards. Also, the alleged sales tax deficiency could not as yet be enforced against
it because the tax assessment was not yet final, the same being still under protest and
still to be definitely resolved on the merits. Besides, the assessment had already
prescribed, not having been made within the reglementary five-year period from the
filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private respondent for
the reason that cement has always been considered a manufactured product and not a
mineral product. This matter was extensively discussed and categorically resolved in
Commissioner of Internal Revenue v. Republic Cement Corporation, 11 decided on
August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the
pertinent cases, declared for a unanimous Court:
From all the foregoing cases, it is clear that cement qua
cement was never considered as a mineral product within
the meaning of Section 246 of the Tax Code,
notwithstanding that at least 80% of its components are
minerals, for the simple reason that cement is the product
of a manufacturing process and is no longer the mineral
product contemplated in the Tax Code (i.e.; minerals
subjected to simple treatments) for the purpose of
imposing the ad valorem tax.
What has apparently encouraged the herein respondents to
maintain their present posture is the case of Cebu Portland
Cement Co. v. Collector of Internal Revenue, L-20563,
Oct. 29, 1968 (28 SCRA 789) penned by Justice Eugenio
Angeles. For some portions of that decision give the
impression that Republic Act No. 1299, which amended
Section 246, reclassified cement as a mineral product that
was not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that
reliance on the decision penned by Justice Angeles is
misplaced. The said decision is no authority for the
proposition that after the enactment of Republic Act No.
1299 in 1955 (defining mineral product as things with at
least 80% mineral content), cement became a 'mineral
product," as distinguished from a "manufactured product,"
and therefore ceased to be subject to sales tax. It was not
 necessary for the Court to so rule. It was enough for the
Court to say in effect that even assuming Republic Act No.
1299 had reclassified cement was a mineral product, the
reclassification could not be given retrospective
application (so as to justify the refund of sales taxes paid
before Republic Act 1299 was adopted) because laws
operate prospectively only, unless the legislative intent to
the contrary is manifest, which was not so in the case of
Republic Act 1266. [The situation would have been
different if the Court instead had ruled in favor of refund,
in which case it would have been absolutely necessary (1)
to make an unconditional ruling that Republic Act 1299
re-classified cement as a mineral product (not subject to
sales tax), and (2) to declare the law retroactive, as a basis
for granting refund of sales tax paid before Republic Act
1299.]
In any event, we overrule the CEPOC decision of October
29, 1968 (G.R. No. L-20563) insofar as its
pronouncements or any implication therefrom conflict
with the instant decision.
The above views were reiterated in the resolution 12 denying reconsideration of the
said decision, thus:
The nature of cement as a "manufactured product" (rather
than a "mineral product") is well-settled. The issue has
repeatedly presented itself as a threshold question for
determining the basis for computing the ad valorem
mining tax to be paid by cement Companies. No
pronouncement was made in these cases that as a
"manufactured product" cement is subject to sales tax
because this was not at issue.
The decision sought to be reconsidered here referred to
the legislative history of Republic Act No. 1299 which
introduced a definition of the terms "mineral" and
"mineral products" in Sec. 246 of the Tax Code. Given the
legislative intent, the holding in the CEPOC case (G.R.
No. L-20563) that cement was subject to sales tax prior to
the effectivity •f Republic Act No. 1299 cannot be
construed to mean that, after the law took effect, cement
ceased to be so subject to the tax. To erase any and all
misconceptions that may have been spawned by reliance
on the case of Cebu Portland Cement Co. v. Collector of
Internal Revenue, L-20563, October 29, 1968 (28 SCRA
789) penned by Justice Eugenio Angeles, the Court has
expressly overruled it insofar as it may conflict with the
decision of August 10, 1983, now subject of these
motions for reconsideration.
On the question of prescription, the private respondent claims that the five-year
reglementary period for the assessment of its tax liability started from the time it
filed its gross sales returns on June 30, 1962. Hence, the assessment for sales taxes
made on January 16, 1968 and March 4, 1968, were already out of time. We disagree.
This contention must fail for what CEPOC filed was not the sales returns required in
Section 183(n) but the ad valorem tax returns required under Section 245 of the Tax
Code. As Justice Irene R. Cortes emphasized in the aforestated resolution:
In order to avail itself of the benefits of the five-year
prescription period under Section 331 of the Tax Code,
the taxpayer should have filed the required return for the
tax involved, that is, a sales tax return. (Butuan Sawmill,
Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16
SCRA 277). Thus CEPOC should have filed sales tax
returns of its gross sales for the subject periods. Both
parties admit that returns were made for the ad valorem
mining tax. CEPOC argues that said returns contain the
information necessary for the assessment of the sales tax.
The Commissioner does not consider such returns as
compliance with the requirement for the filing of tax
returns so as to start the running of the five-year
prescriptive period.
We agree with the Commissioner. It has been held in
Butuan Sawmill Inc. v. CTA, supra, that the filing of an
income tax return cannot be considered as substantial
compliance with the requirement of filing sales tax returns,
in the same way that an income tax return cannot be
considered as a return for compensating tax for the
purpose of computing the period of prescription under Sec.
331. (Citing Bisaya Land Transportation Co., Inc. v.
Collector of Internal Revenue, G.R. Nos. L-12100 and L-
11812, May 29, 1959). There being no sales tax returns
filed by CEPOC, the statute of stations in Sec. 331 did not
begin to run against the government. The assessment
made by the Commissioner in 1968 on CEPOC's cement
sales during the period from July 1, 1959 to December 31,
1960 is not barred by the five-year prescriptive period.
Absent a return or when the return is false or fraudulent,
the applicable period is ten (10) days from the discovery
of the fraud, falsity or omission. The question in this case
 is: When was CEPOC's omission to file tha return deemed
discovered by the government, so as to start the running
of said period? 13

The argument that the assessment cannot as yet be enforced because it is still being
contested loses sight of the urgency of the need to collect taxes as "the lifeblood of
the government." If the payment of taxes could be postponed by simply questioning
their validity, the machinery of the state would grind to a halt and all government
functions would be paralyzed. That is the reason why, save for the exception already
noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of

tax. — No court shall have authority to grant an
injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by this Code.

It goes without saying that this injunction is available not only when the assessment
is already being questioned in a court of justice but more so if, as in the instant case,
the challenge to the assessment is still-and only-on the administrative level. There is
all the more reason to apply the rule here because it appears that even after crediting
of the refund against the tax deficiency, a balance of more than P 4 million is still
due from the private respondent.

To require the petitioner to actually refund to the private respondent the amount of
the judgment debt, which he will later have the right to distrain for payment of its
sales tax liability is in our view an Idle ritual. We hold that the respondent Court of
Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in
CTA Case No. 786 is SET ASIDE, without any pronouncement as to costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Paras and Gancayco, JJ., concur.

G.R. Nos. 89898-99 October 1, 1990
MUNICIPALITY OF MAKATI, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. SALVADOR P. DE
GUZMAN, JR., as Judge RTC of Makati, Branch CXLII ADMIRAL
FINANCE CREDITORS CONSORTIUM, INC., and SHERIFF SILVINO R.
PASTRANA, respondents.
Defante & Elegado for petitioner.
Roberto B. Lugue for private respondent Admiral Finance Creditors' Consortium,
Inc.
RESOLUTION
CORTÉS, J.:
The present petition for review is an off-shoot of expropriation proceedings initiated
by petitioner Municipality of Makati against private respondent Admiral Finance
Creditors Consortium, Inc., Home Building System & Realty Corporation and one
Arceli P. Jo, involving a parcel of land and improvements thereon located at Mayapis
St., San Antonio Village, Makati and registered in the name of Arceli P. Jo under
TCT No. S-5499.
It appears that the action for eminent domain was filed on May 20, 1986, docketed as
Civil Case No. 13699. Attached to petitioner's complaint was a certification that a
bank account (Account No. S/A 265-537154-3) had been opened with the PNB
Buendia Branch under petitioner's name containing the sum of P417,510.00, made
pursuant to the provisions of Pres. Decree No. 42. After due hearing where the
parties presented their respective appraisal reports regarding the value of the property,
respondent RTC judge rendered a decision on June 4, 1987, fixing the appraised
value of the property at P5,291,666.00, and ordering petitioner to pay this amount
minus the advanced payment of P338,160.00 which was earlier released to private
respondent.
After this decision became final and executory, private respondent moved for the
issuance of a writ of execution. This motion was granted by respondent RTC judge.
After issuance of the writ of execution, a Notice of Garnishment dated January 14,
1988 was served by respondent sheriff Silvino R. Pastrana upon the manager of the
PNB Buendia Branch. However, respondent sheriff was informed that a "hold code"
was placed on the account of petitioner. As a result of this, private respondent filed a
motion dated January 27, 1988 praying that an order be issued directing the bank to
deliver to respondent sheriff the amount equivalent to the unpaid balance due under
the RTC decision dated June 4, 1987.
Petitioner filed a motion to lift the garnishment, on the ground that the manner of
payment of the expropriation amount should be done in installments which the
respondent RTC judge failed to state in his decision. Private respondent filed its
opposition to the motion.
Pending resolution of the above motions, petitioner filed on July 20, 1988 a
"Manifestation" informing the court that private respondent was no longer the true
and lawful owner of the subject property because a new title over the property had
been registered in the name of Philippine Savings Bank, Inc. (PSB) Respondent RTC
judge issued an order requiring PSB to make available the documents pertaining to
its transactions over the subject property, and the PNB Buendia Branch to reveal the
amount in petitioner's account which was garnished by respondent sheriff. In
compliance with this order, PSB filed a manifestation informing the court that it had
consolidated its ownership over the property as mortgagee/purchaser at an
extrajudicial foreclosure sale held on April 20, 1987. After several conferences, PSB
and private respondent entered into a compromise agreement whereby they agreed to
divide between themselves the compensation due from the expropriation proceedings.
Respondent trial judge subsequently issued an order dated September 8, 1988 which:
(1) approved the compromise agreement; (2) ordered PNB Buendia Branch to
immediately release to PSB the sum of P4,953,506.45 which corresponds to the
balance of the appraised value of the subject property under the RTC decision dated
June 4, 1987, from the garnished account of petitioner; and, (3) ordered PSB and
private respondent to execute the necessary deed of conveyance over the subject
property in favor of petitioner. Petitioner's motion to lift the garnishment was denied.
Petitioner filed a motion for reconsideration, which was duly opposed by private
respondent. On the other hand, for failure of the manager of the PNB Buendia
Branch to comply with the order dated September 8, 1988, private respondent filed
two succeeding motions to require the bank manager to show cause why he should
not be held in contempt of court. During the hearings conducted for the above
motions, the general manager of the PNB Buendia Branch, a Mr. Antonio Bautista,
informed the court that he was still waiting for proper authorization from the PNB
head office enabling him to make a disbursement for the amount so ordered. For its
part, petitioner contended that its funds at the PNB Buendia Branch could neither be
garnished nor levied upon execution, for to do so would result in the disbursement of
public funds without the proper appropriation required under the law, citing the case
of Republic of the Philippines v. Palacio [G.R. No. L-20322, May 29, 1968, 23
SCRA 899].
Respondent trial judge issued an order dated December 21, 1988 denying petitioner's
motion for reconsideration on the ground that the doctrine enunciated in Republic v.
Palacio did not apply to the case because petitioner's PNB Account No. S/A 265-
537154-3 was an account specifically opened for the expropriation proceedings of
the subject property pursuant to Pres. Decree No. 42. Respondent RTC judge
likewise declared Mr. Antonio Bautista guilty of contempt of court for his
inexcusable refusal to obey the order dated September 8, 1988, and thus ordered his
arrest and detention until his compliance with the said order.
Petitioner and the bank manager of PNB Buendia Branch then filed separate petitions
for certiorari with the Court of Appeals, which were eventually consolidated. In a
decision promulgated on June 28, 1989, the Court of Appeals dismissed both
petitions for lack of merit, sustained the jurisdiction of respondent RTC judge over
the funds contained in petitioner's PNB Account No. 265-537154-3, and affirmed his
authority to levy on such funds.
Its motion for reconsideration having been denied by the Court of Appeals, petitioner
now files the present petition for review with prayer for preliminary injunction.
On November 20, 1989, the Court resolved to issue a temporary restraining order
enjoining respondent RTC judge, respondent sheriff, and their representatives, from
enforcing and/or carrying out the RTC order dated December 21, 1988 and the writ
of garnishment issued pursuant thereto. Private respondent then filed its comment to
the petition, while petitioner filed its reply.
Petitioner not only reiterates the arguments adduced in its petition before the Court
of Appeals, but also alleges for the first time that it has actually two accounts with
the PNB Buendia Branch, to wit:
xxx xxx xxx
(1) Account No. S/A 265-537154-3 — exclusively for the
expropriation of the subject property, with an outstanding balance
of P99,743.94.
(2) Account No. S/A 263-530850-7 — for statutory obligations
and other purposes of the municipal government, with a balance of
P170,098,421.72, as of July 12, 1989.
xxx xxx xxx
[Petition, pp. 6-7; Rollo, pp. 11-12.]
Because the petitioner has belatedly alleged only in this Court the existence of two
bank accounts, it may fairly be asked whether the second account was opened only
for the purpose of undermining the legal basis of the assailed orders of respondent
RTC judge and the decision of the Court of Appeals, and strengthening its reliance
on the doctrine that public funds are exempted from garnishment or execution as
enunciated in Republic v. Palacio [supra.] At any rate, the Court will give petitioner
the benefit of the doubt, and proceed to resolve the principal issues presented based
on the factual circumstances thus alleged by petitioner.
Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for
expropriation proceedings it had initiated over the subject property, petitioner poses
no objection to the garnishment or the levy under execution of the funds deposited
therein amounting to P99,743.94. However, it is petitioner's main contention that
inasmuch as the assailed orders of respondent RTC judge involved the net amount of
P4,965,506.45, the funds garnished by respondent sheriff in excess of P99,743.94,
which are public funds earmarked for the municipal government's other statutory
obligations, are exempted from execution without the proper appropriation required
under the law.
There is merit in this contention. The funds deposited in the second PNB Account
No. S/A 263-530850-7 are public funds of the municipal government. In this
jurisdiction, well-settled is the rule that public funds are not subject to levy and
execution, unless otherwise provided for by statute [Republic v. Palacio, supra.; The
Commissioner of Public Highways v. San Diego, G.R. No. L-30098, February 18,
1970, 31 SCRA 616]. More particularly, the properties of a municipality, whether
real or personal, which are necessary for public use cannot be attached and sold at
execution sale to satisfy a money judgment against the municipality. Municipal
revenues derived from taxes, licenses and market fees, and which are intended
primarily and exclusively for the purpose of financing the governmental activities
and functions of the municipality, are exempt from execution [See Viuda De Tan
Toco v. The Municipal Council of Iloilo, 49 Phil. 52 (1926): The Municipality of
Paoay, Ilocos Norte v. Manaois, 86 Phil. 629 (1950); Municipality of San Miguel,
Bulacan v. Fernandez, G.R. No. 61744, June 25, 1984, 130 SCRA 56]. The
foregoing rule finds application in the case at bar. Absent a showing that the
municipal council of Makati has passed an ordinance appropriating from its public
funds an amount corresponding to the balance due under the RTC decision dated
June 4, 1987, less the sum of P99,743.94 deposited in Account No. S/A 265-537154-
3, no levy under execution may be validly effected on the public funds of petitioner
deposited in Account No. S/A 263-530850-7.
Nevertheless, this is not to say that private respondent and PSB are left with no legal
recourse. Where a municipality fails or refuses, without justifiable reason, to effect
payment of a final money judgment rendered against it, the claimant may avail of the
remedy of mandamus in order to compel the enactment and approval of the
necessary appropriation ordinance, and the corresponding disbursement of municipal
funds therefor [See Viuda De Tan Toco v. The Municipal Council of Iloilo, supra;
Baldivia v. Lota, 107 Phil. 1099 (1960); Yuviengco v. Gonzales, 108 Phil. 247
(1960)].
In the case at bar, the validity of the RTC decision dated June 4, 1987 is not disputed
by petitioner. No appeal was taken therefrom. For three years now, petitioner has
enjoyed possession and use of the subject property notwithstanding its inexcusable
failure to comply with its legal obligation to pay just compensation. Petitioner has
benefited from its possession of the property since the same has been the site of
Makati West High School since the school year 1986-1987. This Court will not
condone petitioner's blatant refusal to settle its legal obligation arising from
expropriation proceedings it had in fact initiated. It cannot be over-emphasized that,
within the context of the State's inherent power of eminent domain,
 . . . [j]ust compensation means not only the correct determination
of the amount to be paid to the owner of the land but also the
payment of the land within a reasonable time from its taking.
Without prompt payment, compensation cannot be considered
"just" for the property owner is made to suffer the consequence of
being immediately deprived of his land while being made to wait
for a decade or more before actually receiving the amount
necessary to cope with his loss [Cosculluela v. The Honorable
Court of Appeals, G.R. No. 77765, August 15, 1988, 164 SCRA
393, 400. See also Provincial Government of Sorsogon v. Vda. de
Villaroya, G.R. No. 64037, August 27, 1987, 153 SCRA 291].

The State's power of eminent domain should be exercised within the bounds of fair
play and justice. In the case at bar, considering that valuable property has been taken,
the compensation to be paid fixed and the municipality is in full possession and
utilizing the property for public purpose, for three (3) years, the Court finds that the
municipality has had more than reasonable time to pay full compensation.

WHEREFORE, the Court Resolved to ORDER petitioner Municipality of Makati to

immediately pay Philippine Savings Bank, Inc. and private respondent the amount of
P4,953,506.45. Petitioner is hereby required to submit to this Court a report of its
compliance with the foregoing order within a non-extendible period of SIXTY (60)
DAYS from the date of receipt of this resolution.

The order of respondent RTC judge dated December 21, 1988, which was rendered
in Civil Case No. 13699, is SET ASIDE and the temporary restraining order issued
by the Court on November 20, 1989 is MADE PERMANENT.

SO ORDERED.
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue
correctly disallowed the P75,000.00 deduction claimed by private respondent Algue
as legitimate business expenses in its income tax returns. The corollary issue is
whether or not the appeal of the private respondent from the decision of the Collector
of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic
corporation engaged in engineering, construction and other allied activities, received
a letter from the petitioner assessing it in the total amount of P83,183.85 as
delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue
flied a letter of protest or request for reconsideration, which letter was stamp
received on the same day in the office of the petitioner. 2 On March 12, 1965, a
warrant of distraint and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless.
Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was
finally informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be served. 5
Sixteen days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to
Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the
decision or ruling challenged.7 It is true that as a rule the warrant of distraint and levy
is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the
said request deemed rejected." 10 But there is a special circumstance in the case at bar
that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's
notice of assessment, it filed its letter of protest. This was apparently not taken into
account before the warrant of distraint and levy was issued; indeed, such protest
could not be located in the office of the petitioner. It was only after Atty. Guevara
gave the BIR a copy of the protest that it was, if at all, considered by the tax
authorities. During the intervening period, the warrant was premature and could
therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private
respondent was not pro forma and was based on strong legal considerations. It thus
had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was received, viz.,
January 14, 1965. The period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied rejection of the said protest
and the warrant was finally served on it. Hence, when the appeal was filed on April
23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business expense.
The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that
the said amount had been legitimately paid by the private respondent for actual
services rendered. The payment was in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the
Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to
the decision of the respondent court rejecting this assertion. 13 In fact, as the said
court found, the amount was earned through the joint efforts of the persons among
whom it was distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell
its land, factories and oil manufacturing process. Pursuant to such authority, Alberto
Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment Corporation, inducing
other persons to invest in it.14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC
properties.15 For this sale, Algue received as agent a commission of P126,000.00, and
it was from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon. 17 The Court of
Tax Appeals also found, after examining the evidence, that no distribution of
dividends was involved.18
The petitioner claims that these payments are fictitious because most of the payees
are members of the same family in control of Algue. It is argued that no indication
was made as to how such payments were made, whether by check or in cash, and
there is not enough substantiation of such payments. In short, the petitioner suggests
a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary
deduction.
We find that these suspicions were adequately met by the private respondent when
its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that
the payments were not made in one lump sum but periodically and in different
amounts as each payee's need arose. 19 It should be remembered that this was a
family corporation where strict business procedures were not applied and immediate
issuance of receipts was not required. Even so, at the end of the year, when the books
were to be closed, each payee made an accounting of all of the fees received by him
or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be
informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development
Co. to the private respondent was P125,000.00. 21 After deducting the said fees,
Algue still had a balance of P50,000.00 as clear profit from the transaction. The
amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from
the formation of the Vegetable Oil Investment Corporation to the actual purchase by
it of the Sugar Estate properties. This finding of the respondent court is in accord
with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income
there shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the
ordinary and necessary expenses paid or incurred in carrying on
any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of
compensation payments is whether they are reasonable and are, in
fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as
the purchase price of services, is not deductible. (a) An ostensible
salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having
few stockholders, Practically all of whom draw salaries. If in such
a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close
relationship to the stockholdings of the officers of employees, it
would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings
upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18,
325.)
It is worth noting at this point that most of the payees were not in the regular employ
of Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to
prove the validity of the claimed deduction. In the present case, however, we find
that the onus has been discharged satisfactorily. The private respondent has proved
that the payment of the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent businessmen to venture in
an experimental enterprise and involve themselves in a new business requiring
millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of one's hard earned income
to the taxing authorities, every person who is able to must contribute his share in the
running of the government. The government for its part, is expected to respond in the
form of tangible and intangible benefits intended to improve the lives of the people
and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate,
as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner
was filed on time with the respondent court in accordance with Rep. Act No. 1125.
And we also find that the claimed deduction by the private respondent was permitted
under the Internal Revenue Code and should therefore not have been disallowed by
the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED

in toto, without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

[G.R. No. 122480. April 12, 2000]
BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
PANGANIBAN, J.:
If the State expects its taxpayers to observe fairness and honesty in paying their taxes,
so must it apply the same standard against itself in refunding excess payments. When
it is undisputed that a taxpayer is entitled to a refund, the State should not invoke
technicalities to keep money not belonging to it. No one, not even the State, should
enrich oneself at the expense of another.
The Case
Before us is a Petition for Review assailing the March 31, 1995 Decision of the
Court of Appeals1 (CA) in CA-GR SP No. 34240, which affirmed the December 24,
1993 Decision2 of the Court of Tax Appeals (CTA). The CA disposed as follows:
"WHEREFORE, foregoing premises considered, the petition is
hereby DISMISSED for lack of merit." 3
On the other hand, the dispositive portion of the CTA Decision affirmed by the CA
reads as follows:
"WHEREFORE, in [view of] all the foregoing, Petitioners claim
for refund is hereby DENIED and this Petition for Review is
DISMISSED for lack of merit."4
Also assailed is the November 8, 1995 CA Resolution 5 denying reconsideration.
The Facts
The facts of this case were summarized by the CA in this wise:
"This case involves a claim for tax refund in the amount of
P112,491.00 representing petitioners tax withheld for the year
1989.
In its Corporate Annual Income Tax Return for the year 1989, the
following items are reflected:
Income.............................P1,017,931,831.00
Deductions........................P1,026,218,791.00
Net Income (Loss).................(P8,286,960.00)
Taxable Income (Loss).............P8,286,960.00
Less:
1988 Tax Credit...............P185,001.00
1989 Tax Credit...............P112,491.00
TOTAL AMOUNT......................P297,492.00
REFUNDABLE
"It appears from the foregoing 1989 Income Tax Return that
petitioner had a total refundable amount of P297,492 inclusive of
the P112,491.00 being claimed as tax refund in the present case.
However, petitioner declared in the same 1989 Income Tax Return
that the said total refundable amount of P297,492.00 will be
applied as tax credit to the succeeding taxable year.
"On October 11, 1990, petitioner filed a written claim for refund in
the amount of P112,491.00 with the respondent Commissioner of
Internal Revenue alleging that it did not apply the 1989 refundable
amount of P297,492.00 (including P112,491.00) to its 1990
Annual Income Tax Return or other tax liabilities due to the
alleged business losses it incurred for the same year.
"Without waiting for respondent Commissioner of Internal
Revenue to act on the claim for refund, petitioner filed a petition
for review with respondent Court of Tax Appeals, seeking the
refund of the amount of P112,491.00.
"The respondent Court of Tax Appeals dismissed petitioners
petition on the ground that petitioner failed to present as evidence
 its Corporate Annual Income Tax Return for 1990 to establish the
fact that petitioner had not yet credited the amount of P297,492.00
(inclusive of the amount P112,491.00 which is the subject of the
present controversy) to its 1990 income tax liability. "Petitioner
filed a motion for reconsideration, however, the same was denied
by respondent court in its Resolution dated May 6, 1994."6
As earlier noted, the CA affirmed the CTA. Hence, this Petition. 7
Ruling of the Court of Appeals
In affirming the CTA, the Court of Appeals ruled as follows:
"It is incumbent upon the petitioner to show proof that it has not
credited to its 1990 Annual income Tax Return, the amount of
P297,492.00 (including P112,491.00), so as to refute its previous
declaration in the 1989 Income Tax Return that the said amount
will be applied as a tax credit in the succeeding year of 1990.
Having failed to submit such requirement, there is no basis to grant
the claim for refund. x x x
"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. In other words, the burden of proof rests upon the
taxpayer to establish by sufficient and competent evidence its
entitlement to the claim for refund."8
Issue
In their Memorandum, respondents identify the issue in this wise:
"The sole issue to be resolved is whether or not petitioner is
entitled to the refund of P112,491.00, representing excess
creditable withholding tax paid for the taxable year 1989."9
The Courts Ruling
The Petition is meritorious.
Main Issue: Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for the year 1989 and
was thus entitled to a refund amounting to P112,491. Pursuant to Section 6910 of the
1986 Tax Code which states that a corporation entitled to a refund may opt either (1)
to obtain such refund or (2) to credit said amount for the succeeding taxable year,
petitioner indicated in its 1989 Income Tax Return that it would apply the said
amount as a tax credit for the succeeding taxable year, 1990. Subsequently, petitioner
informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a
tax refund, instead of applying it as a tax credit. When no action from the BIR was
forthcoming, petitioner filed its claim with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner
declared in its 1989 Income Tax Return that it would apply the excess withholding
tax as a tax credit for the following year, the Tax Court held that petitioner was
presumed to have done so. The CTA and the CA ruled that petitioner failed to
overcome this presumption because it did not present its 1990 Return, which would
have shown that the amount in dispute was not applied as a tax credit. Hence, the CA
concluded that petitioner was not entitled to a tax refund.
We disagree with the Court of Appeals. As a rule, the factual findings of the
appellate court are binding on this Court. This rule, however, does not apply where,
inter alia, the judgment is premised on a misapprehension of facts, or when the
appellate court failed to notice certain relevant facts which if considered would
justify a different conclusion.11 This case is one such exception.

In the first place, petitioner presented evidence to prove its claim that it did not apply
the amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo,
the manager of petitioners accounting department, testified to this fact. It likewise
presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioners
vice-president, stating that the amount of P112,491 "has not been and/or will not be
automatically credited/offset against any succeeding quarters income tax liabilities
for the rest of the calendar year ending December 31, 1990." Also presented were the
quarterly returns for the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioners claim. In
fact, it presented no evidence at all. Because it ought to know the tax records of all
taxpayers, the CIR could have easily disproved petitioners claim. To repeat, it did not
do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to
petitioners Motion for Reconsideration filed before the CTA. 12 A final adjustment
return shows whether a corporation incurred a loss or gained a profit during the
taxable year. In this case, that Return clearly showed that petitioner incurred
P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in
dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return. It did not even file
an opposition to petitioners Motion and the 1990 Final Adjustment Return attached
thereto. In denying the Motion for Reconsideration, however, the CTA ignored the
said Return. In the same vein, the CA did not pass upon that significant document.
True, strict procedural rules generally frown upon the submission of the Return after
the trial. The law creating the Court of Tax Appeals, however, specifically provides
that proceedings before it "shall not be governed strictly by the technical rules of
evidence."13 The paramount consideration remains the ascertainment of truth. Verily,
the quest for orderly presentation of issues is not an absolute. It should not bar courts
from considering undisputed facts to arrive at a just determination of a controversy.
In the present case, the Return attached to the Motion for Reconsideration clearly
showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA
and the CTA, petitioner could not have applied the amount as a tax credit. In failing
to consider the said Return, as well as the other documentary evidence presented
during the trial, the appellate court committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a just
determination of every action. They are tools designed to facilitate the attainment of
justice.14 But there can be no just determination of the present action if we ignore, on
grounds of strict technicality, the Return submitted before the CTA and even before
this Court.15 To repeat, the undisputed fact is that petitioner suffered a net loss in
1990; accordingly, it incurred no tax liability to which the tax credit could be applied.
Consequently, there is no reason for the BIR and this Court to withhold the tax
refund which rightfully belongs to the petitioner.
Public respondents maintain that what was attached to petitioners Motion for
Reconsideration was not the final adjustment Return, but petitioners first two
quarterly returns for 1990.16 This allegation is wrong. An examination of the records
shows that the 1990 Final Adjustment Return was attached to the Motion for
Reconsideration. On the other hand, the two quarterly returns for 1990 mentioned by
respondent were in fact attached to the Petition for Review filed before the CTA.
Indeed, to rebut respondents specific contention, petitioner submitted before us its
Surrejoinder, to which was attached the Motion for Reconsideration and Exhibit "A"
thereof, the Final Adjustment Return for 1990.17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA, to a
Decision rendered by the Tax Court in CTA Case No. 4897, involving its claim for
refund for the year 1990. In that case, the Tax Court held that "petitioner suffered a
net loss for the taxable year 1990 x x x." 18 Respondent, however, urges this Court not undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have
to take judicial notice of the said case.19 applied the amount claimed as tax credits.

As a rule, "courts are not authorized to take judicial notice of the contents of the
records of other cases, even when such cases have been tried or are pending in the
same court, and notwithstanding the fact that both cases may have been heard or are
actually pending before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of
matters ought to be known to judges because of their judicial functions. In this case,
the Court notes that a copy of the Decision in CTA Case No. 4897 was attached to
the Petition for Review filed before this Court. Significantly, respondents do not
claim at all that the said Decision was fraudulent or nonexistent. Indeed, they do not
even dispute the contents of the said Decision, claiming merely that the Court cannot
take judicial notice thereof.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities
and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding
citizens. If the State expects its taxpayers to observe fairness and honesty in paying
their taxes, so must it apply the same standard against itself in refunding excess
payments of such taxes. Indeed, the State must lead by its own example of honor,
dignity and uprightness.
WHEREFORE, the Petition is herebyGRANTEDand the assailed Decision and
Resolution of the Court of Appeals REVERSED and SETASIDE. The Commissioner
of Internal Revenue is ordered to refund to petitioner the amount of P112,491 as
excess creditable taxes paid in 1989. No costs.

To our mind, respondents reasoning underscores the weakness of their case. For if SO ORDERED.
they had really believed that petitioner is not entitled to a tax refund, they could have
easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that Melo, (Chairman), Purisima, and Gonzaga-Reyes, JJ., concur.
respondents opted not to assail the fact appearing therein -- that petitioner suffered a Vitug, J., abroad, on official business.
net loss in 1990 in the same way that it refused to controvert the same fact
established by petitioners other documentary exhibits.

In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioners
case. It is merely one more bit of information showing the stark truth: petitioner did
not use its 1989 refund to pay its taxes for 1990.

Finally, respondents argue that tax refunds are in the nature of tax exemptions and
are to be construed strictissimi juris against the claimant. Under the facts of this case,
we hold that petitioner has established its claim. Petitioner may have failed to strictly
comply with the rules of procedure; it may have even been negligent. These
circumstances, however, should not compel the Court to disregard this cold,
G.R. No. L-68252 May 26, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP
AGENCIES INC., and COURT OF TAX APPEALS, respondents.
PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is
entitled to a refund or tax credit for amounts representing pre-payment of income and
common carrier's taxes under the National Internal Revenue Code, section 24 (b) (2),
as amended.1
Private respondent is a foreign corporation represented in the Philippines by
Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel
M/V Gardenia. In December 1980, NASUTRA2 chartered M/V Gardenia to load
16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr.
Edilberto Lising, the operations supervisor of Soriamont Agency, 4 paid the required
income and common carrier's taxes in the respective sums of FIFTY-NINE
THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE
CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED
NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE
CENTAVOS (P107,142.75) based on the expected gross receipts of the vessel. 5
Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for
loading. On January 10, 1981, NASUTRA and private respondent's agent mutually
agreed to have the vessel sail for Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as erroneous since
no receipt was realized from the charter agreement, private respondent instituted a
claim for tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND
ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS
(P107,142.75) before petitioner Commissioner of Internal Revenue on March 23,
1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private
respondent filed a petition for review6 before public respondent Court of Tax
Appeals.
Petitioner contested the petition. As special and affirmative defenses, it alleged the
following: that taxes are presumed to have been collected in accordance with law;
that in an action for refund, the burden of proof is upon the taxpayer to show that
taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said
burden is fatal to the action for refund; and that claims for refund are construed
strictly against tax claimants.7
After trial, respondent tax court decided in favor of the private respondent. It held:
It has been shown in this case that 1) the petitioner has
complied with the mentioned statutory requirement by
having filed a written claim for refund within the two-year
period from date of payment; 2) the respondent has not
issued any deficiency assessment nor disputed the
correctness of the tax returns and the corresponding
amounts of prepaid income and percentage taxes; and 3)
the chartered vessel sailed out of the Philippine port with
absolutely no cargo laden on board as cleared and
certified by the Customs authorities; nonetheless 4)
respondent's apparent bit of reluctance in validating the
legal merit of the claim, by and large, is tacked upon the
"examiner who is investigating petitioner's claim for
refund which is the subject matter of this case has not yet
submitted his report. Whether or not respondent will
present his evidence will depend on the said report of the
examiner." (Respondent's Manifestation and Motion dated
September 7, 1982). Be that as it may the case was
submitted for decision by respondent on the basis of the
pleadings and records and by petitioner on the evidence
presented by counsel sans the respective memorandum.
An examination of the records satisfies us that the case
presents no dispute as to relatively simple material facts.
The circumstances obtaining amply justify petitioner's
righteous indignation to a more expeditious action.
Respondent has offered no reason nor made effort to
submit any controverting documents to bash that patina of
legitimacy over the claim. But as might well be, towards
the end of some two and a half years of seeming impotent
anguish over the pendency, the respondent Commissioner
of Internal Revenue would furnish the satisfaction of
ultimate solution by manifesting that "it is now his turn to
present evidence, however, the Appellate Division of the
BIR has already recommended the approval of petitioner's
claim for refund subject matter of this petition. The
examiner who examined this case has also recommended
the refund of petitioner's claim. Without prejudice to
withdrawing this case after the final approval of
petitioner's claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9, 1983 Session of
the Court) We need not fashion any further issue into an
apparently settled legal situation as far be it from a
comedy of errors it would be too much of a stretch to hold
and deny the refund of the amount of prepaid income and
 common carrier's taxes for which petitioner could no
longer be made accountable.
On August 3, 1984, respondent court denied petitioner's motion for reconsideration,
hence, this petition for review on certiorari.
Petitioner now contends: (1) private respondent has the burden of proof to support its
claim of refund; (2) it failed to prove that it did not realize any receipt from its
charter agreement; and (3) it suppressed evidence when it did not present its charter
agreement.
We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b) (2) of the National
Internal Revenue Code which at that time provides as follows:
A corporation organized, authorized, or existing under the
laws of any foreign country, engaged in trade or business
within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income
derived in the preceding taxable year from all sources
within the Philippines: Provided, however, That
international carriers shall pay a tax of two and one-half
per cent (2 1/2%) on their gross Philippine billings:
"Gross Philippine Billings" include gross revenue realized
from uplifts anywhere in the world by any international
carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess
baggage or mail, provided the cargo or mail originates
from the Philippines. The gross revenue realized from the
said cargo or mail include the gross freight charge up to
final destination. Gross revenue from chartered flights
originating from the Philippines shall likewise form part
of "Gross Philippine Billings" regardless of the place or
payment of the passage documents . . . . .
Pursuant to this provision, a resident foreign corporation engaged in the transport of
cargo is liable for taxes depending on the amount of income it derives from sources
within the Philippines. Thus, before such a tax liability can be enforced the taxpayer
must be shown to have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a claim for
exemption8 and should be construed in strictissimi juris against the taxpayer.9
Likewise, there can be no disagreement with petitioner's stance that private
respondent has the burden of proof to establish the factual basis of its claim for tax
refund.
The pivotal issue involves a question of fact — whether or not the private respondent
was able to prove that it derived no receipts from its charter agreement, and hence is
entitled to a refund of the taxes it pre-paid to the government.
The respondent court held that sufficient evidence has been adduced by the private
respondent proving that it derived no receipt from its charter agreement with
NASUTRA. This finding of fact rests on a rational basis, and hence must be
sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V
"Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load and
returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance
Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo
while Exhibit "F" is the Certification by the Officer-in-Charge, Export Division of
the Bureau of Customs Iloilo. The correctness of the contents of these documents
regularly issued by officials of the Bureau of Customs cannot be doubted as indeed,
they have not been contested by the petitioner. The records also reveal that in the
course of the proceedings in the court a quo, petitioner hedged and hawed when its
turn came to present evidence. At one point, its counsel manifested that the BIR
examiner and the appellate division of the BIR have both recommended the approval
of private respondent's claim for refund. The same counsel even represented that the
government would withdraw its opposition to the petition after final approval of
private respondents' claim. The case dragged on but petitioner never withdrew its
opposition to the petition even if it did not present evidence at all. The insincerity of
petitioner's stance drew the sharp rebuke of respondent court in its Decision and for
good reason. Taxpayers owe honesty to government just as government owes
fairness to taxpayers.
In its last effort to retain the money erroneously prepaid by the private respondent,
petitioner contends that private respondent suppressed evidence when it did not
present its charter agreement with NASUTRA. The contention cannot succeed. It
presupposes without any basis that the charter agreement is prejudicial evidence
against the private respondent. 10 Allegedly, it will show that private respondent
earned a charter fee with or without transporting its supposed cargo from Iloilo to
Japan. The allegation simply remained an allegation and no court of justice will
regard it as truth. Moreover, the charter agreement could have been presented by
petitioner itself thru the proper use of a subpoena duces tecum. It never did either
because of neglect or because it knew it would be of no help to bolster its position. 11
For whatever reason, the petitioner cannot take to task the private respondent for not
presenting what it mistakenly calls "suppressed evidence."
We cannot but bewail the unyielding stance taken by the government in refusing to
refund the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED
FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75)
erroneously prepaid by private respondent. The tax was paid way back in 1980 and
despite the clear showing that it was erroneously paid, the government succeeded in
delaying its refund for fifteen (15) years. After fifteen (15) long years and the
expenses of litigation, the money that will be finally refunded to the private
respondent is just worth a damaged nickel. This is not, however, the kind of success
the government, especially the BIR, needs to increase its collection of taxes. Fair
deal is expected by our taxpayers from the BIR and the duty demands that BIR
should refund without any unreasonable delay what it has erroneously collected. Our
ruling in Roxas v. Court of Tax Appeals12 is apropos to recall:

The power of taxation is sometimes called also the power

to destroy. Therefore it should be exercised with caution
to minimize injury to the proprietary rights of a taxpayer.
It must be exercised fairly, equally and uniformly, lest the
tax collector kill the "hen that lays the golden egg." And,
in order to maintain the general public's trust and
confidence in the Government this power must be used
justly and not treacherously.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated
September 15, 1983, is AFFIRMED in toto. No costs.

SO ORDERED.

Narvasa, C.J., Regalado and Mendoza, JJ., concur.

G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING
AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS,
respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING
AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS,
respondents.
Gadioma Law Offices for respondents.
REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having
originated from the same factual antecedents generating the claims for tax credit of
private respondents, the same were consolidated by resolution of this Court dated
May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and
Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract
with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation
licensed to engage in business in the Philippines, for purposes of the projected
expansion of the productive capacity of the former's mines in Toledo, Cebu. Under
said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of
$20,000,000.00, United States currency, for the installation of a new concentrator for
copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper
concentrates produced from said machine for a period of fifteen (15) years. It was
contemplated that $9,000,000.00 of said loan was to be used for the purchase of the
concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan
(Eximbank for short) obviously for purposes of its obligation under said contract. Its
loan application was approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at
about the same time as the approval of its loan for ¥2,880,000,000.00 from a
consortium of Japanese banks. The total amount of both loans is equivalent to
$20,000,000.00 in United States currency at the then prevailing exchange rate. The
records in the Bureau of Internal Revenue show that the approval of the loan by
Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the
amount as a loan to Atlas and as a consideration for importing copper concentrates
from Atlas, and that Mitsubishi had to pay back the total amount of loan by
September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made
by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The
corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld
pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue
Code, as amended by Presidential Decree No. 131, and duly remitted to the
Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the
sum of P1,971,595.01 be applied against their existing and future tax liabilities.
Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision
that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest
in the claim for tax credit in favor of Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private
respondents filed a petition for review with respondent court, docketed therein as
CTA Case No. 2801. 5 The petition was grounded on the claim that Mitsubishi was a
mere agent of Eximbank, which is a financing institution owned, controlled and
financed by the Japanese Government. Such governmental status of Eximbank, if it
may be so called, is the basis for private repondents' claim for exemption from
paying the tax on the interest payments on the loan as earlier stated. It was further
claimed that the interest payments on the loan from the consortium of Japanese
banks were likewise exempt because said loan supposedly came from or were
financed by Eximbank. The provision of the National Internal Revenue Code relied
upon is Section 29 (b) (7) (A), 6 which excludes from gross income:
(A) Income received from their investments in the Philippines in
loans, stocks, bonds or other domestic securities, or from
interest on their deposits in banks in the Philippines by (1)
foreign governments, (2) financing institutions owned,
controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established by
governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6,
1977 but was later reset upon manifestation of petitioner that the claim for tax credit
of the alleged erroneous payment was still being reviewed by the Appellate Division
of the Bureau of Internal Revenue. The records show that on November 16, 1976, the
said division recommended to petitioner the approval of private respondent's claim.
However, before action could be taken thereon, respondent court scheduled the case
for hearing on September 30, 1977, during which trial private respondents presented
their evidence while petitioner submitted his case on the basis of the records of the
Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to
grant a tax credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the
tax court held that petitioner admitted the material averments of private respondents
when he supposedly prayed "for judgment on the pleadings without off-spring proof
as to the truth of his allegations." 8 Furthermore, the court declared that all papers
and documents pertaining to the loan of ¥4,320,000,000.00 obtained by Mitsubishi
from Eximbank show that this was the same amount given to Atlas. It also observed
that the money for the loans from the consortium of private Japanese banks in the
sum of ¥2,880,000,000.00 "originated" from Eximbank. From these, respondent
court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi
acting as a mere "arranger or conduit through which the loans flowed from the
creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining &
Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner
interposed an appeal to this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding
15% tax on the amount of P439,167.95 on the P2,927,789.06 interest payments for
the years 1977 and 1978 was withheld and remitted to the Government. Atlas again
filed a claim for tax credit with the petitioner, repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of
Tax Appeals docketed as CTA Case No. 3015. Petitioner filed his answer thereto on
August 14, 1979, and, in a letter to private respondents dated November 12, 1979,
denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent
court rendered judgment ordering the petitioner to credit Atlas the aforesaid amount
of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied by
respondent court in a resolution dated September 7, 1987. A notice of appeal was
filed on September 22, 1987 by petitioner with respondent court and a petition for
review was filed with this Court on December 19, 1987. Said later case is now before
us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the
loans extended to Atlas by Mitsubishi is excludible from gross income taxation
pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from
withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a
mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No.
2801 that petitioner should be deemed to have admitted the allegations of the private
respondents when it submitted the case on the basis of the pleadings and records of
the bureau. There is nothing to indicate such admission on the part of petitioner nor
can we accept respondent court's pronouncement that petitioner did not offer to prove
the truth of its allegations. The records of the Bureau of Internal Revenue relevant to
the case were duly submitted and admitted as petitioner's supporting evidence.
Additionally, a hearing was conducted, with presentation of evidence, and the
findings of respondent court were based not only on the pleadings but on the
evidence adduced by the parties. There could, therefore, not have been a judgment on
the pleadings, with the theorized admissions imputed to petitioner, as mistakenly
held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are
entitled to the highest respect and can only be disturbed on appeal if they are not
supported by substantial evidence or if there is a showing of gross error or abuse on
the part of the tax court. 11 Thus, ordinarily, we could give due consideration to the
holding of respondent court that Mitsubishi is a mere agent of Eximbank.
Compelling circumstances obtaining and proven in these cases, however, warrant a
departure from said general rule since we are convinced that there is a
misapprehension of facts on the part of the tax court to the extent that its conclusions
are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct
or inferential reference to Eximbank whatsoever. The agreement is strictly between
Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper
concentrates. From the categorical language used in the document, one prestation
was in consideration of the other. The specific terms and the reciprocal nature of
their obligations make it implausible, if not vacuous to give credit to the cavalier
assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all
that Mitsubishi stated in its loan application with the former was that the amount
being procured would be used as a loan to and in consideration for importing copper
concentrates from Atlas. 12 Such an innocuous statement of purpose could not have
been intended for, nor could it legally constitute, a contract of agency. If that had
been the purpose as respondent court believes, said corporations would have
specifically so stated, especially considering their experience and expertise in
financial transactions, not to speak of the amount involved and its purchasing value
in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to
give weight to the following arguments of petitioner:
The nature of the above contract shows that the same is not just a
simple contract of loan. It is not a mere creditor-debtor relationship.
It is more of a reciprocal obligation between ATLAS and
MITSUBISHI where the latter shall provide the funds in the
installation of a new concentrator at the former's Toledo mines in
Cebu, while ATLAS in consideration of which, shall sell to
MITSUBISHI, for a term of 15 years, the entire copper concentrate
that will be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to
MITSUBISHI within the specified term was the consideration of
the granting of the amount of $20 million to ATLAS.
MITSUBISHI, in order to fulfill its part of the contract, had to
obtain funds. Hence, it had to secure a loan or loans from other
sources. And from what sources, it is immaterial as far as ATLAS
in concerned. In this case, MITSUBISHI obtained the $20 million
from the EXIMBANK, of Japan and the consortium of Japanese
banks financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own
independent capacity as a private entity and not as a conduit of the
consortium of Japanese banks or the EXIMBANK of Japan. While
the loans were secured by MITSUBISHI primarily "as a loan to
and in consideration for importing copper concentrates from
ATLAS," the fact remains that it was a loan by EXIMBANK of
Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of
Japan was a distinct and separate contract from that entered into by
MITSUBISHI and ATLAS. Surely, in the latter contract, it is not
EXIMBANK, that was intended to be benefited. It is
MITSUBISHI which stood to profit. Besides, the Loan and Sales
Contract cannot be any clearer. The only signatories to the same
were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK,
of Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction,
well-settled is the rule that when a contract of loan is completed,
the money ceases to be the property of the former owner and
becomes the sole property of the obligor (Tolentino and Manio vs.
Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20
million from EXIMBANK, of Japan, said amount ceased to be the
property of the bank and became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT
EXIMBANK, is the sole creditor of ATLAS, the former being the
owner of the $20 million upon completion of its loan contract with
EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI
is therefore entirely different from the interest income paid by
MITSUBISHI to EXIMBANK, of Japan. What was the subject of
the 15% withholding tax is not the interest income paid by
MITSUBISHI to EXIMBANK, but the interest income earned by
MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is
complete in itself, does not appear to be suppletory or collateral to another contract
and is, therefore, not to be distorted by other considerations aliunde. The application
for the loan was approved on May 20, 1970, or more than a month after the contract
between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under
the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to
and in consideration for importing copper concentrates from Atlas, but all that this
proves is the justification for the loan as represented by Mitsubishi, a standard
banking practice for evaluating the prospects of due repayment. There is nothing
wrong with such stipulation as the parties in a contract are free to agree on such
lawful terms and conditions as they see fit. Limiting the disbursement of the amount
borrowed to a certain person or to a certain purpose is not unusual, especially in the
case of Eximbank which, aside from protecting its financial exposure, must see to it
that the same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's
charter prevents it from making loans except to Japanese individuals and
corporations. We are not impressed. Not only is there a failure to establish such
submission by adequate evidence but it posits the unfair and unexplained imputation
that, for reasons subject only of surmise, said financing institution would deliberately
circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to
Eximbank, assuming the truth thereof, is too tenuous and conjectural to support the
proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the
interest payments may also be logically viewed as an arrangement in paying
Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by
Eximbank and Mitsubishi as to the manner or procedure for the payment of the
latter's obligation is their own concern. It should also be noted that Eximbank's loan
to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis
contract with Atlas merely states that the "interest on the amount of the loan shall be
the actual cost beginning from and including other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations,
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 burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed, which
onus petitioners have failed to discharge. Significantly, private respondents are not
even among the entities which, under Section 29 (b) (7) (A) of the tax code, are
entitled to exemption and which should indispensably be the party in interest in this
case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a
supposed "broad, pragmatic analysis" alone without substantial supportive evidence,
lest governmental operations suffer due to diminution of much needed funds. Nor
can we close this discussion without taking cognizance of petitioner's warning, of
pervasive relevance at this time, that while international comity is invoked in this
case on the nebulous representation that the funds involved in the loans are those of a
foreign government, scrupulous care must be taken to avoid opening the floodgates
to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic securities with private
foreign entities, which in turn will negotiate independently with their governments,
could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801
and 3015, dated April 18, 1980 and January 15, 1981, respectively, are hereby
REVERSED and SET ASIDE.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.
[G.R. No. 112024. January 28, 1999]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolutioni of the Court of Appeals dated
September 22, 1993, affirming the Decisionii and Resolutioniiiof the Court of Tax
Appeals which denied the claims of the petitioner for tax refund and tax credits, and
disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is
DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993
and its resolution dated July 20, 1993, are hereby AFFIRMED intoto.
SO ORDERED.iv
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax
for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed
beyond the reglementary period. The 1986 claim for refund amounting to
P234,077.69 is likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The petition for review is
dismissed for lack of merit.
SO ORDERED.v
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial
banking corporation duly organized under Philippine laws, filed its quarterly income
tax returns for the first and second quarters of 1985, reported profits, and paid the
total income tax of P5,016,954.00. The taxes due were settled by applying PBComs
tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax
Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1, 615,253.00,
respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual
Income Tax Returns for the year-ended December 31, 1985, it declared a net loss of
P25,317,228.00, thereby showing no income tax liability. For the succeeding year,
ending December 31, 1986, the petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding creditable taxes
of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue,
among others, for a tax credit of P5,016,954.00 representing the overpayment of
taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable
taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in
1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue,
petitioner instituted a Petition for Review on November 18, 1988 before the Court of
Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled:
Philippine Bank of Communications vs. Commissioner of Internal Revenue.
The losses petitioner incurred as per the summary of petitioners claims for
refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are
as follows:
1985 1986
Net Income (P25,317,228.00) (P14,129,602.00)
(Loss)
Tax Due NIL NIL
Quarterly tax
Payments Made 5,016,954.00 ---
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax P5,299,749.50* P234,077.69
Payments ============== ==============
*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five
centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset,
denied the request of petitioner for a tax refund or credit in the sum amount of
P5,299,749.95, on the ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioners claim for refund in 1986 amounting to
P234,077.69 was likewise denied on the assumption that it was automatically
credited by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs
decision but the same was denied due course for lack of merit. vi
Thereafter, PBCom filed a petition for review of said decision and resolution of
the CTA with the Court of Appeals. However on September 22, 1993, the Court of
Appeals affirmed intoto the CTAs resolution dated July 20, 1993. Hence this petition
now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom -- which relied in good faith on the formal
assurances of BIR in RMC No. 7-85 and did not immediately file with
the CTA a petition for review asking for the refund/tax credit of its
1985-86 excess quarterly income tax payments -- can be prejudiced by
the subsequent BIR rejection, applied retroactively, of its assurances in
RMC No. 7-85 that the prescriptive period for the refund/tax credit of
excess quarterly income tax payments is not two years but ten (10).vii
II. Whether the Court of Appeals seriously erred in affirming the CTA
decision which denied PBComs claim for the refund of P234,077.69
income tax overpaid in 1986 on the mere speculation, without proof,
that there were taxes due in 1987 and that PBCom availed of tax-
crediting that year.viii
Simply stated, the main question is: Whether or not the Court of Appeals erred
in denying the plea for tax refund or tax credits on the ground of prescription, despite
petitioners reliance on RMC No. 7-85, changing the prescriptive period of two years
to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by
prescription relying on the applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax Code and that taxpayers
may claim refund or tax credits for the excess quarterly income tax with the BIR
within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of
the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT
OF EXCESS CORPORATE INCOME TAX
RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of Revenue
Regulations Nos. 10-77 which provide:
xxx xxx xxx
It has been observed, however, that because of the excess tax payments,
corporations file claims for recovery of overpaid income tax with the Court of Tax
Appeals within the two-year period from the date of payment, in accordance with
Sections 292 and 295 of the National Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the judicial right of the corporation to claim
the refund or tax credit.
It should be noted, however, that this is not a case of erroneously or illegally
paid tax under the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the
refund of the overpaid income tax or claim for automatic tax credit. To insure prompt
action on corporate annual income tax returns showing refundable amounts arising
from overpaid quarterly income taxes, this Office has promulgated Revenue
Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in
processing said returns. Under these procedures, the returns are merely pre-audited
which consist mainly of checking mathematical accuracy of the figures of the return.
After which, the refund or tax credit is granted, and, this procedure was adopted to
facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the
Court of Tax Appeals in order to preserve the right to claim refund or tax
credit within the two-year period. As already stated, actions hereon by the Bureau
are immediate after only a cursory pre-audit of the income tax returns. Moreover, a
taxpayer may recover from the Bureau of Internal Revenue excess income tax paid
under the provisions of Section 86 of the Tax Code within 10 years from the date of
payment considering that it is an obligation created by law (Article 1144 of the Civil
Code).ix (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position
contrary to its declared circular if it would result to injustice to taxpayers. Citing
ABS-CBN Broadcasting Corporation vs. Court of Tax Appealsx petitioner claims that
rulings or circulars promulgated by the Commissioner of Internal Revenue have no
retroactive effect if it would be prejudicial to taxpayers. In ABS-CBN case, the Court
held that the government is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or where there has been a
misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code
explicitly provides for this rule as follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayers except in the following
cases:
a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of
Internal Revenue;
b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the
ruling is based;
c) where the taxpayer acted in bad faith.
 Respondent Commissioner of Internal Revenue, through the Solicitor General,
argues that the two-year prescriptive period for filing tax cases in court concerning
income tax payments of Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April 15 following the
close of the calendar year. As precedents, respondent Commissioner cited cases
which adhered to this principle, to wit: ACCRA Investments Corp. vs. Court of
Appeals, et al.,xi and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al..xii
Respondent Commissioner also states that since the Final Adjusted Income Tax
Return of the petitioner for the taxable year 1985 was supposed to be filed on April
15, 1986, the latter had only until April 15, 1988 to seek relief from the court.
Further, respondent Commissioner stresses that when the petitioner filed the case
before the CTA on November 18, 1988, the same was filed beyond the time fixed by
law, and such failure is fatal to petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the matter,
we find that, contrary to the petitioners contention, the relaxation of revenue
regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive
period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary
purpose is to generate funds for the State to finance the needs of the citizenry and to
advance the common weal.xiii Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered with as little as
possible.xiv
From the same perspective, claims for refund or tax credit should be exercised
within the time fixed by law because the BIR being an administrative body enforced
to collect taxes, its functions should not be unduly delayed or hampered by incidental
matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec.
229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding
for the recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or
proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner wrongfully collected, until
a claim for refund or credit has been duly filed with the Commissioner; but such suit
or proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of
two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment; Provided however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax, before
any suit in CTA is commenced. The two-year prescriptive period provided, should be
computed from the time of filing the Adjustment Return and final payment of the tax
for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance
Co.,xv this Court explained the application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from
the time that the refund is ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. x x x As we have earlier said
in the TMX Sales case, Sections 68, xvi 69, xvii and 70 xviii on Quarterly Corporate
Income Tax Payment and Section 321 should be considered in conjunction with it. xix
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims of excess
quarterly income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general interpretations
of tax laws) which are issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. xx Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony with, the law
they seek to apply and implement.xxi
In the case of People vs. Lim,xxii it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and
provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not
only inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No. 37-1 fixed no
period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the
part of Secretary of Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to
implement a law cannot go beyond the terms and provisions of the latter. x x x In
this connection, the attention of the technical men in the offices of Department Heads
who draft rules and regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they intended to implement, this
to avoid any possible misunderstanding or confusion as in the present case. xxiii
Further, fundamental is the rule that the State cannot be put in estoppel by the
mistakes or errors of its officials or agents. xxiv As pointed out by the respondent
courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of
Internal Revenue is an administrative interpretation which is not in harmony with
Sec. 230 of 1977 NIRC, for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so would, in effect,
amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after
promulgating RMC No. 7-85, is estopped by the principle of non-retroactivity of BIR
rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer
may recover the excess income tax paid within 10 years from date of payment
because this is an obligation created by law, was issued by the Acting Commissioner
of Internal Revenue. On the other hand, the decision, stating that the taxpayer should
still file a claim for a refund or tax credit and the corresponding petition for review
within the two-year prescription period, and that the lengthening of the period of
limitation on refund from two to ten years would be adverse to public policy and run
counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no application in the case at
bar because it was not the Commissioner of Internal Revenue who denied petitioners
claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied
(albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the
Commissioner of Internal Revenue is an administrative interpretation which is out of
harmony with or contrary to the express provision of a statute (specifically Sec. 230,
NIRC), hence, cannot be given weight for to do so would in effect amend the
statute.xxv
Article 8 of the Civil Code xxvi recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But administrative
decisions do not enjoy that level of recognition. A memorandum-circular of a bureau
head could not operate to vest a taxpayer with a shield against judicial action. For
there are no vested rights to speak of respecting a wrong construction of the law by
the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same. xxvii Moreover, the non-
retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in
this case because the nullity of RMC No. 7-85 was declared by respondent courts
and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as
repeatedly held by this Court, a claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against the taxpayer.xxviii
On the second issue, the petitioner alleges that the Court of Appeals seriously
erred in affirming CTAs decision denying its claim for refund of P 234,077.69 (tax
overpaid in 1986), based on mere speculation, without proof, that PBCom availed of
the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRCxxix (now Sec. 76 of the 1997 NIRC) provides that any
excess of the total quarterly payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form) its intention, whether to request
for a refund or claim for an automatic tax credit for the succeeding taxable year. To
ease the administration of tax collection, these remedies are in the alternative, and
the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of
Tax Appeals, after examining the adjusted final corporate annual income tax return
for taxable year 1986, found out that petitioner opted to apply for automatic tax
credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax
return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of
refund and tax credit are alternative.xxx
That the petitioner opted for an automatic tax credit in accordance with Sec. 69
of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a
finding of fact which we must respect. Moreover, the 1987 annual corporate tax
return of the petitioner was not offered as evidence to controvert said fact. Thus, we
are bound by the findings of fact by respondent courts, there being no showing of
gross error or abuse on their part to disturb our reliance thereon. xxxi
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Puno, Mendoza, and Buena, JJ., concur.
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue;
ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue;
TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue;
MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman,
Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance,
respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a
showing of its constitutional infirmity. The assailed provision further amends Section
21 of the National Internal Revenue Code of 1977, which provides for rates of tax on
citizens or residents on (a) taxable compensation income, (b) taxable net income, (c)
royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any
other monetary benefit from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in the net profits of
taxable partnership, (f) adjusted gross income. 2 Petitioner 3 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 taxpayers. 4 He
characterizes the above sction as arbitrary amounting to class legislation, oppressive
and capricious in character 5 For petitioner, therefore, there is a transgression of both
the equal protection and due process clauses 6 of the Constitution as well as of the
rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an
answer within 10 days from notice. Such an answer, after two extensions were
granted the Office of the Solicitor General, was filed on May 28, 1982. 8 The facts as
alleged were admitted but not the allegations which to their mind are "mere
arguments, opinions or conclusions on the part of the petitioner, the truth [for them]
being those stated [in their] Special and Affirmative Defenses." 9 The answer then
affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax.
The authorities and cases cited while correctly quoted or paraghraph do not support
petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The
reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas
which used to be left to private enterprise and initiative and which the government
was called upon to enter optionally, and only 'because it was better equipped to
administer for the public welfare than is any private individual or group of
individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet
the increasing social challenges of the times." 11 Hence the need for more revenues.
The power to tax, an inherent prerogative, has to be availed of to assure the
performance of vital state functions. It is the source of the bulk of public funds. To
praphrase a recent decision, taxes being the lifeblood of the government, their
prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of
sovereignty. It is the strongest of all the powers of of government." 13 It is, of course,
to be admitted that for all its plenitude 'the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits . Adversely affecting as it does
properly rights, both the due process and equal protection clauses inay properly be
invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall
that "the power to tax involves the power to destroy." 14 In a separate opinion in
Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate
remark characterized it as "a flourish of rhetoric [attributable to] the intellectual
fashion of the times following] a free use of absolutes." 16 This is merely to
emphasize that it is riot and there cannot be such a constitutional mandate. Justice
Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's
famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." 17 So it is in the
Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law
overrides any legislative or executive, act that runs counter to it. In any case
therefore where it can be demonstrated that the challenged statutory provision — as
petitioner here alleges — fails to abide by its command, then this Court must so
declare and adjudge it null. The injury thus is centered on the question of whether the
imposition of a higher tax rate on taxable net income derived from business or
profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A
mere allegation, as here. does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a
provision as void or its face, he has not made out a case. This is merely to adhere to
the authoritative doctrine that were the due process and equal protection clauses are
invoked, considering that they arc not fixed rules but rather broad standards, there is
a need for of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute
is so arbitrary that it finds no support in the Constitution. An obvious example is
where it can be shown to amount to the confiscation of property. That would be a
clear abuse of power. It then becomes the duty of this Court to say that such an
arbitrary act amounted to the exercise of an authority not conferred. That properly
calls for the application of the Holmes dictum. It has also been held that where the
assailed tax measure is beyond the jurisdiction of the state, or is not for a public
purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject
to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is
a denial of this constitutional mandate whether the assailed act is in the exercise of
the lice power or the power of eminent domain is to demonstrated that the
governmental act assailed, far from being inspired by the attainment of the common
weal was prompted by the spirit of hostility, or at the very least, discrimination that
finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in the privileges
conferred and the liabilities imposed. Favoritism and undue preference cannot be
allowed. For the principle is that equal protection and security shall be given to every
person under circumtances which if not Identical are analogous. If law be looked
upon in terms of burden or charges, those that fall within a class should be treated in
the same fashion, whatever restrictions cast on some in the group equally binding on
the rest." 20 That same formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of approximating the
Ideal of the laws benefits being available to all and the affairs of men being governed
by that serene and impartial uniformity, which is of the very essence of the Idea of
law. There is, however, wisdom, as well as realism in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is not a
disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of
the laws,' and laws are not abstract propositions. They do not relate to abstract units
A, B and C, but are expressions of policy arising out of specific difficulties, address
to the attainment of specific ends by the use of specific remedies. The Constitution 9. Nothing can be clearer, therefore, than that the petition is without merit,
does not require things which are different in fact or opinion to be treated in law as considering the (1) lack of factual foundation to show the arbitrary character of the
though they were the same." 21 Hence the constant reiteration of the view that assailed provision; 31 (2) the force of controlling doctrines on due process, equal
classification if rational in character is allowable. As a matter of fact, in a leading protection, and uniformity in taxation and (3) the reasonableness of the distinction
case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to between compensation and taxable net income of professionals and businessman
hold "at any rate, it is inherent in the power to tax that a state be free to select the certainly not a suspect classification,
subjects of taxation, and it has been repeatedly held that 'inequalities which result WHEREFORE, the petition is dismissed. Costs against petitioner.
from a singling out of one particular class for taxation, or exemption infringe no Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez,
constitutional limitation.'" 23 Jr., De la Fuente and Cuevas, JJ., concur.
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Teehankee, J., concurs in the result.
Constitution: "The rule of taxation shag be uniform and equitable." 24 This Plana, J., took no part.
requirement is met according to Justice Laurel in Philippine Trust Company v.
Yatco,25 decided in 1940, when the tax "operates with the same force and effect in
every place where the subject may be found. " 26 He likewise added: "The rule of
uniformity does not call for perfect uniformity or perfect equality, because this is
hardly attainable." 27 The problem of classification did not present itself in that case.
It did not arise until nine years later, when the Supreme Court held: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation, ... . 28 As clarified by
Justice Tuason, where "the differentiation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory within the meaning of this
clause and is therefore uniform." 29 There is quite a similarity then to the standard of
equal protection for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation."30
8. Further on this point. Apparently, what misled petitioner is his failure to take into
consideration the distinction between a tax rate and a tax base. There is no legal
objection to a broader tax base or taxable income by eliminating all deductible items
and at the same time reducing the applicable tax rate. Taxpayers may be classified
into different categories. To repeat, it. is enough that the classification must rest upon
substantial distinctions that make real differences. In the case of the gross income
taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of generalized
rules removing all deductible items for all taxpayers within the class and fixing a set
of reduced tax rates to be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically no overhead
expense, these taxpayers are e not entitled to make deductions for income tax
purposes because they are in the same situation more or less. On the other hand, in
the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not
be just then to disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis of gross income.
There is ample justification then for the Batasang Pambansa to adopt the gross
system of income taxation to compensation income, while continuing the system of
net income taxation as regards professional and business income.
G.R. Nos. L-49839-46 April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their
capacities as appointed and Acting Members of the CENTRAL BOARD OF
ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL
ROSARIO, RAUL C. FLORES, in their capacities as appointed and Acting
Members of the BOARD OF ASSESSMENT APPEALS of Manila; and
NICOLAS CATIIL in his capacity as City Assessor of Manila, respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.
PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the
Central Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L.
Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of Manila and City
Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of
Tax Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E,
"Jose Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros
Reyes v. City Assessor of Manila" upholding the classification and assessments
made by the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land
situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and
entirely occupied as dwelling sites by tenants. Said tenants were paying monthly
rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971,
the National Legislature enacted Republic Act No. 6359 prohibiting for one year
from its effectivity, an increase in monthly rentals of dwelling units or of lands on
which another's dwelling is located, where such rentals do not exceed three hundred
pesos (P300.00) a month but allowing an increase in rent by not more than 10%
thereafter. The said Act also suspended paragraph (1) of Article 1673 of the Civil
Code for two years from its effectivity thereby disallowing the ejectment of lessees
upon the expiration of the usual legal period of lease. On October 12, 1972,
Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the
prohibition to increase monthly rentals below P300.00 and by indefinitely
suspending the aforementioned provision of the Civil Code, excepting leases with a
definite period. Consequently, the Reyeses, petitioners herein, were precluded from
raising the rentals and from ejecting the tenants. In 1973, respondent City Assessor
of Manila re-classified and reassessed the value of the subject properties based on the
schedule of market values duly reviewed by the Secretary of Finance. The revision,
as expected, entailed an increase in the corresponding tax rates prompting petitioners
to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals.
They averred that the reassessments made were "excessive, unwarranted, inequitable,
confiscatory and unconstitutional" considering that the taxes imposed upon them
greatly exceeded the annual income derived from their properties. They argued that
the income approach should have been used in determining the land values instead of
the comparable sales approach which the City Assessor adopted (Rollo, pp. 9-10-A).
The Board of Tax Assessment Appeals, however, considered the assessments valid,
holding thus:
WHEREFORE, and considering that the appellants have failed to
submit concrete evidence which could overcome the presumptive
regularity of the classification and assessments appear to be in
accordance with the base schedule of market values and of the base
schedule of building unit values, as approved by the Secretary of
Finance, the cases should be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment
Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They
submitted, among others, the summary of the yearly rentals to show the income
derived from the properties. Respondent City Assessor, on the other hand, submitted
three (3) deeds of sale showing the different market values of the real property
situated in the same vicinity where the subject properties of petitioners are located.
To better appreciate the locational and physical features of the land, the Board of
Hearing Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the
owners nor their authorized representatives were present during the said ocular
inspection despite proper notices served them. It was found that certain parcels of
land were below street level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision,
the dispositive portion of which reads:
WHEREFORE, the appealed decision insofar as the valuation and
assessment of the lots covered by Tax Declaration Nos. (5835) PD-
5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-
1509, 146 and (1) PD-266, the appealed Decision is modified by
allowing a 20% reduction in their respective market values and
applying therein the assessment level of 30% to arrive at the
corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment
Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE
"COMPARABLE SALES APPROACH" METHOD IN FIXING
THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties
in question. Petitioners maintain that the "Income Approach" method would have
been more realistic for in disregarding the effect of the restrictions imposed by P.D.
20 on the market value of the properties affected, respondent Assessor of the City of
Manila unlawfully and unjustifiably set increased new assessed values at levels so
high and successive that the resulting annual real estate taxes would admittedly
exceed the sum total of the yearly rentals paid or payable by the dweller tenants
under P.D. 20. Hence, petitioners protested against the levels of the values assigned
to their properties as revised and increased on the ground that they were arbitrarily
excessive, unwarranted, inequitable, confiscatory and unconstitutional (Rollo, p. 10-
A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its
decision that the income approach is used in determining land values in some
vicinities, it maintains that when income is affected by some sort of price control, the
same is rejected in the consideration and study of land values as in the case of
properties affected by the Rent Control Law for they do not project the true market
value in the open market (Rollo, p. 21). Thus, respondents opted instead for the
"Comparable Sales Approach" on the ground that the value estimate of the properties
predicated upon prices paid in actual, market transactions would be a uniform and a
more credible standards to use especially in case of mass appraisal of properties
(Ibid.). Otherwise stated, public respondents would have this Court completely
ignore the effects of the restrictions of P.D. No. 20 on the market value of properties
within its coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable methods of
appraisal for taxation purposes (The Law on Transfer and Business Taxation by
Hector S. De Leon, 1988 Edition). However, it is conceded that the propriety of one
as against the other would of course depend on several factors. Hence, as early as
1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No.
19297 (44 Phil. 383), it has been stressed that the assessors, in finding the value of
the property, have to consider all the circumstances and elements of value and must
exercise a prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of
taxation must not only be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of
property of the same class shall be taxed at the same rate (Churchill v. Concepcion,
34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or
progressive aspects of taxation required in the 1973 Charter (Fernando "The
Constitution of the Philippines", p. 221, Second Edition). Thus, the need to examine
closely and determine the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depending on the resources of the
person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the
powers of government. But for all its plenitude the power to tax is not unconfined as
there are restrictions. Adversely effecting as it does property rights, both the due
process and equal protection clauses of the Constitution may properly be invoked to
invalidate in appropriate cases a revenue measure. If it were otherwise, there would
be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves
the power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is
not the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v.
Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue,
139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it
can be shown to amount to confiscation of property. That would be a clear abuse of
power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification
for purposes of taxation but the government's act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions
not being different both in the privileges conferred and the liabilities imposed (Ibid.,
p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that
the first Fundamental Principle to guide the appraisal and assessment of real property
for taxation purposes is that the property must be "appraised at its current and fair
market value."
By no strength of the imagination can the market value of properties covered by P.D.
No. 20 be equated with the market value of properties not so covered. The former
has naturally a much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of
subject properties under the "comparable sales approach" were presented by the
public respondents, namely: (1) that the sale must represent a bonafide arm's length
transaction between a willing seller and a willing buyer and (2) the property must be
comparable property (Rollo, p. 27). Nothing can justify or support their view as it is
of judicial notice that for properties covered by P.D. 20 especially during the time in
question, there were hardly any willing buyers. As a general rule, there were no
takers so that there can be no reasonable basis for the conclusion that these properties
were comparable with other residential properties not burdened by P.D. 20. Neither
can the given circumstances be nonchalantly dismissed by public respondents as
imposed under distressed conditions clearly implying that the same were merely
temporary in character. At this point in time, the falsity of such premises cannot be
more convincingly demonstrated by the fact that the law has existed for around
twenty (20) years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance with
law as any arbitrariness will negate the very reason for government itself It is
therefore necessary to reconcile the apparently conflicting interests of the authorities
and the taxpayers so that the real purpose of taxations, which is the promotion of the
common good, may be achieved (Commissioner of Internal Revenue v. Algue Inc.,
et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are
burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and
P.D. 20) under the principle of social justice should not now be penalized by the
same government by the imposition of excessive taxes petitioners can ill afford and
eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach
would amount to only P10.00 per sq. meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed
decisions of public respondents are REVERSED and SET ASIDE; and (e) the
respondent Board of Assessment Appeals of Manila and the City Assessor of Manila
are ordered to make a new assessment by the income approach method to guarantee a
fairer and more realistic basis of computation (Rollo, p. 71).
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ.,
concur.
G.R. No. 115455 August 25, 1994 G.R. No. 115852 August 25, 1994
ARTURO M. TOLENTINO, petitioner, PHILIPPINE AIRLINES, INC., petitioner,
vs. vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL
INTERNAL REVENUE, respondents. REVENUE, respondents.
G.R. No. 115525 August 25, 1994 G.R. No. 115873 August 25, 1994
JUAN T. DAVID, petitioner, COOPERATIVE UNION OF THE PHILIPPINES, petitioners,
vs. vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of
OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as
Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as
REPRESENTATIVES, respondents. Secretary of Finance, respondents.
G.R. No. 115543 August 25, 1994 G.R. No. 115931 August 25, 1994
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and
petitioners, ASSOCIATION OF PHILIPPINE BOOK-SELLERS, petitioners,
vs. vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON.
COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue and HON.
BUREAU OF CUSTOMS, respondents. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of
G.R. No. 115544 August 25, 1994 Customs, respondents.
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; Arturo M. Tolentino for and in his behalf.
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE Donna Celeste D. Feliciano and Juan T. David for petitioners in G.R. No. 115525.
L. PAVIA; and OFELIA L. DIMALANTA, petitioners, Roco, Bunag, Kapunan, Migallos and Jardeleza for petitioner R.S. Roco.
vs. Villaranza and Cruz for petitioners in G.R. No. 115544.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Carlos A. Raneses and Manuel M. Serrano for petitioner in G.R. No. 115754.
Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Salonga, Hernandez & Allado for Freedon From Debts Coalition, Inc. & Phil. Bible
Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary Society.
of Finance, respondents. Estelito P. Mendoza for petitioner in G.R. No. 115852.
G.R. No. 115754 August 25, 1994 Panganiban, Benitez, Parlade, Africa & Barinaga Law Offices for petitioners in G.R.
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., No. 115873.
(CREBA), petitioner, R.B. Rodriguez & Associates for petitioners in G.R. No. 115931.
vs. Reve A.V. Saguisag for MABINI.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 August 25, 1994 MENDOZA, J.:
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME The value-added tax (VAT) is levied on the sale, barter or exchange of goods and
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM properties as well as on the sale or exchange of services. It is equivalent to 10% of
TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, the gross selling price or gross value in money of goods or properties sold, bartered
FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, or exchanged or of the gross receipts from the sale or exchange of services. Republic
JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance
FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. its administration by amending the National Internal Revenue Code.
("MABINI"), FREEDOM FROM DEBT COALITION, INC., PHILIPPINE These are various suits for certiorari and prohibition, challenging the
BIBLE SOCIETY, INC., and WIGBERTO TAÑADA, petitioners, constitutionality of Republic Act No. 7716 on various grounds summarized in the
vs. resolution of July 6, 1994 of this Court, as follows:
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE I. Procedural Issues:
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER A. Does Republic Act No. 7716 violate Art. VI, § 24 of
OF CUSTOMS, respondents. the Constitution?
 B. Does it violate Art. VI, § 26(2) of the Constitution?
C. What is the extent of the power of the Bicameral
Conference Committee?
II. Substantive Issues:
A. Does the law violate the following provisions in the
Bill of Rights (Art. III)?
1. §1
2. § 4
3. § 5
4. § 10
B. Does the law violate the following other provisions of
the Constitution?
1. Art. VI, § 28(1)
2. Art. VI, § 28(3)
These questions will be dealt in the order they are stated above. As will presently be
explained not all of these questions are judicially cognizable, because not all
provisions of the Constitution are self executing and, therefore, judicially enforceable.
The other departments of the government are equally charged with the enforcement
of the Constitution, especially the provisions relating to them.
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No. 7716, or the
Expanded Value-Added Tax Law, Congress violated the Constitution because,
although H. No. 11197 had originated in the House of Representatives, it was not
passed by the Senate but was simply consolidated with the Senate version (S. No.
1630) in the Conference Committee to produce the bill which the President signed
into law. The following provisions of the Constitution are cited in support of the
proposition that because Republic Act No. 7716 was passed in this manner, it did not
originate in the House of Representatives and it has not thereby become a law:
Art. VI, § 24: All appropriation, revenue or tariff bills,
bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in
the House of Representatives, but the Senate may propose
or concur with amendments.
Id., § 26(2): No bill passed by either House shall become
a law unless it has passed three readings on separate days,
and printed copies thereof in its final form have been
distributed to its Members three days before its passage,
except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment
thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and the yeas and nays
entered in the Journal.
It appears that on various dates between July 22, 1992 and August 31, 1993, several
bills 1 were introduced in the House of Representatives seeking to amend certain
provisions of the National Internal Revenue Code relative to the value-added tax or
VAT. These bills were referred to the House Ways and Means Committee which
recommended for approval a substitute measure, H. No. 11197, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED
TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE
AND ENHANCE ITS ADMINISTRATION,
AMENDING FOR THESE PURPOSES SECTIONS 99,
100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF
TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236,
237 AND 238 OF TITLE IX, AND REPEALING
SECTIONS 113 AND 114 OF TITLE V, ALL OF THE
NATIONAL INTERNAL REVENUE CODE, AS
AMENDED
The bill (H. No. 11197) was considered on second reading starting November 6,
1993 and, on November 17, 1993, it was approved by the House of Representatives
after third and final reading.
It was sent to the Senate on November 23, 1993 and later referred by that body to its
Committee on Ways and Means.
On February 7, 1994, the Senate Committee submitted its report recommending
approval of S. No. 1630, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED
TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE
AND ENHANCE ITS ADMINISTRATION,
AMENDING FOR THESE PURPOSES SECTIONS 99,
100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE
IV, 112 OF TITLE V, AND 236, 237, AND 238 OF
TITLE IX, AND REPEALING SECTIONS 113, 114 and
116 OF TITLE V, ALL OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES
It was stated that the bill was being submitted "in substitution of Senate Bill No.
1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197."
On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It
finished debates on the bill and approved it on second reading on March 24, 1994.
On the same day, it approved the bill on third reading by the affirmative votes of 13
of its members, with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference
committee which, after meeting four times (April 13, 19, 21 and 25, 1994),
recommended that "House Bill No. 11197, in consolidation with Senate Bill No.
1630, be approved in accordance with the attached copy of the bill as reconciled and
approved by the conferees."
The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE
VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES," was thereafter approved by the House of Representatives on April 27,
1994 and by the Senate on May 2, 1994. The enrolled bill was then presented to the
President of the Philippines who, on May 5, 1994, signed it. It became Republic Act
No. 7716. On May 12, 1994, Republic Act No. 7716 was published in two
newspapers of general circulation and, on May 28, 1994, it took effect, although its
implementation was suspended until June 30, 1994 to allow time for the registration
of business entities. It would have been enforced on July 1, 1994 but its enforcement
was stopped because the Court, by the vote of 11 to 4 of its members, granted a
temporary restraining order on June 30, 1994.
First. Petitioners' contention is that Republic Act No. 7716 did not "originate
exclusively" in the House of Representatives as required by Art. VI, §24 of the
Constitution, because it is in fact the result of the consolidation of two distinct bills,
H. No. 11197 and S. No. 1630. In this connection, petitioners point out that although
Art. VI, SS 24 was adopted from the American Federal Constitution, 2 it is notable in
two respects: the verb "shall originate" is qualified in the Philippine Constitution by
the word "exclusively" and the phrase "as on other bills" in the American version is
omitted. This means, according to them, that to be considered as having originated in
the House, Republic Act No. 7716 must retain the essence of H. No. 11197.
This argument will not bear analysis. To begin with, it is not the law — but the
revenue bill — which is required by the Constitution to "originate exclusively" in the
House of Representatives. It is important to emphasize this, because a bill originating
in the House may undergo such extensive changes in the Senate that the result may
be a rewriting of the whole. The possibility of a third version by the conference
committee will be discussed later. At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be produced. 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 Senate's 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.
The contention that the constitutional design is to limit the Senate's power in respect
of revenue bills in order to compensate for the grant to the Senate of the treaty-
ratifying power 3 and thereby equalize its powers and those of the House overlooks
the fact that the powers being compared are different. We are dealing here with the
legislative power which under the Constitution is vested not in any particular
chamber but in the Congress of the Philippines, consisting of "a Senate and a House
of Representatives." 4 The exercise of the treaty-ratifying power is not the exercise of
legislative power. It is the exercise of a check on the executive power. There is,
therefore, no justification for comparing the legislative powers of the House and of
the Senate on the basis of the possession of such nonlegislative power by the Senate.
The possession of a similar power by the U.S. Senate 5 has never been thought of as
giving it more legislative powers than the House of Representatives.
In the United States, the validity of a provision (§ 37) imposing an ad valorem tax
based on the weight of vessels, which the U.S. Senate had inserted in the Tariff Act
of 1909, was upheld against the claim that the provision was a revenue bill which
originated in the Senate in contravention of Art. I, § 7 of the U.S. Constitution. 6 Nor
is the power to amend limited to adding a provision or two in a revenue bill
emanating from the House. The U.S. Senate has gone so far as changing the whole of
bills following the enacting clause and substituting its own versions. In 1883, for
example, it struck out everything after the enacting clause of a tariff bill and wrote in
its place its own measure, and the House subsequently accepted the amendment. The
U.S. Senate likewise added 847 amendments to what later became the Payne-Aldrich
Tariff Act of 1909; it dictated the schedules of the Tariff Act of 1921; it rewrote an
extensive tax revision bill in the same year and recast most of the tariff bill of 1922. 7
Given, then, the power of the Senate to propose amendments, the Senate can propose
its own version even with respect to bills which are required by the Constitution to
originate in the House.
It is insisted, however, that S. No. 1630 was passed not in substitution of H. No.
11197 but of another Senate bill (S. No. 1129) earlier filed and that what the Senate
did was merely to "take [H. No. 11197] into consideration" in enacting S. No. 1630.
There is really no difference between the Senate preserving H. No. 11197 up to the
enacting clause and then writing its own version following the enacting clause
(which, it would seem, petitioners admit is an amendment by substitution), and, on
the other hand, separately presenting a bill of its own on the same subject matter. In
either case the result are two bills on the same subject.
Indeed, what the Constitution simply means is that the initiative for filing revenue,
tariff, or tax bills, bills authorizing an increase of the public debt, private bills and
bills of local application must come from the House of Representatives on the theory
that, elected as they are from the districts, the members of the House can be expected
to be more sensitive to the local needs and problems. On the other hand, the senators,
who are elected at large, are expected to approach the same problems from the
national perspective. Both views are thereby made to bear on the enactment of such
laws.
Nor does the Constitution prohibit the filing in the Senate of a substitute bill in
anticipation of its receipt of the bill from the House, so long as action by the Senate
as a body is withheld pending receipt of the House bill. The Court cannot, therefore,
understand the alarm expressed over the fact that on March 1, 1993, eight months
before the House passed H. No. 11197, S. No. 1129 had been filed in the Senate.
After all it does not appear that the Senate ever considered it. It was only after the
Senate had received H. No. 11197 on November 23, 1993 that the process of
legislation in respect of it began with the referral to the Senate Committee on Ways
and Means of H. No. 11197 and the submission by the Committee on February 7,
1994 of S. No. 1630. For that matter, if the question were simply the priority in the
time of filing of bills, the fact is that it was in the House that a bill (H. No. 253) to
amend the VAT law was first filed on July 22, 1992. Several other bills had been
filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was
only a substitute of those earlier bills.
Second. Enough has been said to show that it was within the power of the Senate to
propose S. No. 1630. We now pass to the next argument of petitioners that S. No.
1630 did not pass three readings on separate days as required by the Constitution 8
because the second and third readings were done on the same day, March 24, 1994.
But this was because on February 24, 1994 9 and again on March 22, 1994, 10 the
President had certified S. No. 1630 as urgent. The presidential certification dispensed
with the requirement not only of printing but also that of reading the bill on separate
days. The phrase "except when the President certifies to the necessity of its
immediate enactment, etc." in Art. VI, § 26(2) qualifies the two stated conditions
before a bill can become a law: (i) the bill has passed three readings on separate days
and (ii) it has been printed in its final form and distributed three days before it is
finally approved.
In other words, the "unless" clause must be read in relation to the "except" clause,
because the two are really coordinate clauses of the same sentence. To construe the
"except" clause as simply dispensing with the second requirement in the "unless"
clause (i.e., printing and distribution three days before final approval) would not only
violate the rules of grammar. It would also negate the very premise of the "except"
clause: the necessity of securing the immediate enactment of a bill which is certified
in order to meet a public calamity or emergency. For if it is only the printing that is
dispensed with by presidential certification, the time saved would be so negligible as
to be of any use in insuring immediate enactment. It may well be doubted whether
doing away with the necessity of printing and distributing copies of the bill three
days before the third reading would insure speedy enactment of a law in the face of
an emergency requiring the calling of a special election for President and Vice-
President. Under the Constitution such a law is required to be made within seven
days of the convening of Congress in emergency session. 11
That upon the certification of a bill by the President the requirement of three readings
on separate days and of printing and distribution can be dispensed with is supported
by the weight of legislative practice. For example, the bill defining the certiorari
jurisdiction of this Court which, in consolidation with the Senate version, became
Republic Act No. 5440, was passed on second and third readings in the House of
Representatives on the same day (May 14, 1968) after the bill had been certified by
the President as urgent. 12
There is, therefore, no merit in the contention that presidential certification dispenses
only with the requirement for the printing of the bill and its distribution three days
before its passage but not with the requirement of three readings on separate days,
also.
It is nonetheless urged that the certification of the bill in this case was invalid
because there was no emergency, the condition stated in the certification of a
"growing budget deficit" not being an unusual condition in this country.
It is noteworthy that no member of the Senate saw fit to controvert the reality of the
factual basis of the certification. To the contrary, by passing S. No. 1630 on second
and third readings on March 24, 1994, the Senate accepted the President's
certification. Should such certification be now reviewed by this Court, especially
when no evidence has been shown that, because S. No. 1630 was taken up on second
and third readings on the same day, the members of the Senate were deprived of the
time needed for the study of a vital piece of legislation?
The sufficiency of the factual basis of the suspension of the writ of habeas corpus or
declaration of martial law under Art. VII, § 18, or the existence of a national
emergency justifying the delegation of extraordinary powers to the President under
Art. VI, § 23(2), is subject to judicial review because basic rights of individuals may
be at hazard. But the factual basis of presidential certification of bills, which involves
doing away with procedural requirements designed to insure that bills are duly
considered by members of Congress, certainly should elicit a different standard of
review.
Petitioners also invite attention to the fact that the President certified S. No. 1630 and
not H. No. 11197. That is because S. No. 1630 was what the Senate was considering.
When the matter was before the House, the President likewise certified H. No. 9210
the pending in the House.
Third. Finally it is contended that the bill which became Republic Act No. 7716 is
the bill which the Conference Committee prepared by consolidating H. No. 11197
and S. No. 1630. It is claimed that the Conference Committee report included
provisions not found in either the House bill or the Senate bill and that these
provisions were "surreptitiously" inserted by the Conference Committee. Much is
made of the fact that in the last two days of its session on April 21 and 25, 1994 the
Committee met behind closed doors. We are not told, however, whether the
provisions were not the result of the give and take that often mark the proceedings of
conference committees.
Nor is there anything unusual or extraordinary about the fact that the Conference
Committee met in executive sessions. Often the only way to reach agreement on
conflicting provisions is to meet behind closed doors, with only the conferees present.
Otherwise, no compromise is likely to be made. The Court is not about to take the
suggestion of a cabal or sinister motive attributed to the conferees on the basis solely
of their "secret meetings" on April 21 and 25, 1994, nor read anything into the
incomplete remarks of the members, marked in the transcript of stenographic notes
by ellipses. The incomplete sentences are probably due to the stenographer's own
limitations or to the incoherence that sometimes characterize conversations. William
Safire noted some such lapses in recorded talks even by recent past Presidents of the
United States.
In any event, in the United States conference committees had been customarily held
in executive sessions with only the conferees and their staffs in attendance. 13 Only in
November 1975 was a new rule adopted requiring open sessions. Even then a
majority of either chamber's conferees may vote in public to close the meetings. 14
As to the possibility of an entirely new bill emerging out of a Conference Committee,
it has been explained:
Under congressional rules of procedure, conference
committees are not expected to make any material change
in the measure at issue, either by deleting provisions to
which both houses have already agreed or by inserting
new provisions. But this is a difficult provision to enforce.
Note the problem when one house amends a proposal
originating in either house by striking out everything
following the enacting clause and substituting provisions
which make it an entirely new bill. The versions are now
altogether different, permitting a conference committee to
draft essentially a new bill. . . . 15
The result is a third version, which is considered an "amendment in the nature of a
substitute," the only requirement for which being that the third version be germane to
the subject of the House and Senate bills. 16
Indeed, this Court recently held that it is within the power of a conference committee
to include in its report an entirely new provision that is not found either in the House
bill or in the Senate bill. 17 If the committee can propose an amendment consisting of
one or two provisions, there is no reason why it cannot propose several provisions,
collectively considered as an "amendment in the nature of a substitute," so long as
such amendment is germane to the subject of the bills before the committee. After all,
its report was not final but needed the approval of both houses of Congress to
become valid as an act of the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is thus without any basis.
18
Nonetheless, it is argued that under the respective Rules of the Senate and the House
of Representatives a conference committee can only act on the differing provisions
of a Senate bill and a House bill, and that contrary to these Rules the Conference
Committee inserted provisions not found in the bills submitted to it. The following
provisions are cited in support of this contention:
Rules of the Senate
Rule XII:
§ 26. In the event that the Senate does not agree with the
House of Representatives on the provision of any bill or
joint resolution, thedifferences shall be settled by a
conference committee of both Houses which shall meet
within ten days after their composition.
The President shall designate the members of the
conference committee in accordance with subparagraph
(c), Section 3 of Rule III.
Each Conference Committee Report shall contain a
detailed and sufficiently explicit statement of the changes
in or amendments to the subject measure, and shall be
signed by the conferees.
The consideration of such report shall not be in order
unless the report has been filed with the Secretary of the
Senate and copies thereof have been distributed to the
Members.
(Emphasis added)
Rules of the House of Representatives
Rule XIV:
§ 85. Conference Committee Reports. — In the event that
the House does not agree with the Senate on the
amendments to any bill or joint resolution, the differences
may be settled by conference committees of both
Chambers.
The consideration of conference committee reports shall
always be in order, except when the journal is being read,
while the roll is being called or the House is dividing on
any question. Each of the pages of such reports shall be
signed by the conferees. Eachreport shall contain a
detailed, sufficiently explicit statement of the changes in
or amendments to the subject measure.
The consideration of such report shall not be in order
unless copies thereof are distributed to the Members:
Provided, That in the last fifteen days of each session
period it shall be deemed sufficient that three copies of
the report, signed as above provided, are deposited in the
office of the Secretary General.
(Emphasis added)
To be sure, nothing in the Rules limits a conference committee to a consideration of
conflicting provisions. But Rule XLIV, § 112 of the Rules of the Senate is cited to
the effect that "If there is no Rule applicable to a specific case the precedents of the
Legislative Department of the Philippines shall be resorted to, and as a supplement of
these, the Rules contained in Jefferson's Manual." The following is then quoted from
the Jefferson's Manual:
The managers of a conference must confine themselves to
the differences committed to them. . . and may not include
subjects not within disagreements, even though germane
to a question in issue.
Note that, according to Rule XLIX, § 112, in case there is no specific rule applicable,
resort must be to the legislative practice. The Jefferson's Manual is resorted to only
as supplement. It is common place in Congress that conference committee reports
include new matters which, though germane, have not been committed to the
committee. This practice was admitted by Senator Raul S. Roco, petitioner in G.R.
No. 115543, during the oral argument in these cases. Whatever, then, may be
provided in the Jefferson's Manual must be considered to have been modified by the
legislative practice. If a change is desired in the practice it must be sought in
Congress since this question is not covered by any constitutional provision but is
only an internal rule of each house. Thus, Art. VI, § 16(3) of the Constitution
provides that "Each House may determine the rules of its proceedings. . . ."
This observation applies to the other contention that the Rules of the two chambers
were likewise disregarded in the preparation of the Conference Committee Report
because the Report did not contain a "detailed and sufficiently explicit statement of
changes in, or amendments to, the subject measure." The Report used brackets and
capital letters to indicate the changes. This is a standard practice in bill-drafting. We
cannot say that in using these marks and symbols the Committee violated the Rules
of the Senate and the House. Moreover, this Court is not the proper forum for the
enforcement of these internal Rules. To the contrary, as we have already ruled,
"parliamentary rules are merely procedural and with their observance the courts have
no concern." 19 Our concern is with the procedural requirements of the Constitution
for the enactment of laws. As far as these requirements are concerned, we are
satisfied that they have been faithfully observed in these cases.
Nor is there any reason for requiring that the Committee's Report in these cases must
have undergone three readings in each of the two houses. If that be the case, there
would be no end to negotiation since each house may seek modifications of the
compromise bill. The nature of the bill, therefore, requires that it be acted upon by
each house on a "take it or leave it" basis, with the only alternative that if it is not
approved by both houses, another conference committee must be appointed. But then
again the result would still be a compromise measure that may not be wholly
satisfying to both houses.
Art. VI, § 26(2) must, therefore, be construed as referring only to bills introduced for
the first time in either house of Congress, not to the conference committee report. For
if the purpose of requiring three readings is to give members of Congress time to
study bills, it cannot be gainsaid that H. No. 11197 was passed in the House after
three readings; that in the Senate it was considered on first reading and then referred
to a committee of that body; that although the Senate committee did not report out
the House bill, it submitted a version (S. No. 1630) which it had prepared by "taking
into consideration" the House bill; that for its part the Conference Committee
consolidated the two bills and prepared a compromise version; that the Conference
Committee Report was thereafter approved by the House and the Senate, presumably
after appropriate study by their members. We cannot say that, as a matter of fact, the
members of Congress were not fully informed of the provisions of the bill. The
allegation that the Conference Committee usurped the legislative power of Congress
is, in our view, without warrant in fact and in law.
Fourth. Whatever doubts there may be as to the formal validity of Republic Act No.
7716 must be resolved in its favor. Our cases 20 manifest firm adherence to the rule
that an enrolled copy of a bill is conclusive not only of its provisions but also of its
due enactment. Not even claims that a proposed constitutional amendment was
invalid because the requisite votes for its approval had not been obtained 21 or that
certain provisions of a statute had been "smuggled" in the printing of the bill 22 have
moved or persuaded us to look behind the proceedings of a coequal branch of the
government. There is no reason now to depart from this rule.
No claim is here made that the "enrolled bill" rule is absolute. In fact in one case 23
we "went behind" an enrolled bill and consulted the Journal to determine whether
certain provisions of a statute had been approved by the Senate in view of the fact
that the President of the Senate himself, who had signed the enrolled bill, admitted a
mistake and withdrew his signature, so that in effect there was no longer an enrolled
bill to consider.
But where allegations that the constitutional procedures for the passage of bills have
not been observed have no more basis than another allegation that the Conference
Committee "surreptitiously" inserted provisions into a bill which it had prepared, we
should decline the invitation to go behind the enrolled copy of the bill. To disregard
the "enrolled bill" rule in such cases would be to disregard the respect due the other
two departments of our government.
Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made
by the Philippine Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates
Art. VI, § 26(1) which provides that "Every bill passed by Congress shall embrace
only one subject which shall be expressed in the title thereof." It is contended that
neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL
transactions from the payment of the VAT and that this was made only in the
Conference Committee bill which became Republic Act No. 7716 without reflecting
this fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE- ADDED
TAX (VAT) SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND
FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
Among the provisions of the NIRC amended is § 103, which originally read:
§ 103. Exempt transactions. — The following shall be
exempt from the value-added tax:
....
(q) Transactions which are exempt under special laws or
international agreements to which the Philippines is a
signatory. Among the transactions exempted from the
VAT were those of PAL because it was exempted under
its franchise (P.D. No. 1590) from the payment of all
"other taxes . . . now or in the near future," in
consideration of the payment by it either of the corporate
income tax or a franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, § 103 of the NIRC now
provides:
§ 103. Exempt transactions. — The following shall be
exempt from the value-added tax:
....
(q) Transactions which are exempt under special laws,
except those granted under Presidential Decree Nos. 66,
529, 972, 1491, 1590. . . .
The effect of the amendment is to remove the exemption granted to PAL, as far as
the VAT is concerned.
The question is whether this amendment of § 103 of the NIRC is fairly embraced in
the title of Republic Act No. 7716, although no mention is made therein of P.D. No.
1590 as among those which the statute amends. We think it is, since the title states
that the purpose of the statute is to expand the VAT system, and one way of doing
this is to widen its base by withdrawing some of the exemptions granted before. To
insist that P.D. No. 1590 be mentioned in the title of the law, in addition to § 103 of
the NIRC, in which it is specifically referred to, would be to insist that the title of a
bill should be a complete index of its content.
The constitutional requirement that every bill passed by Congress shall embrace only
one subject which shall be expressed in its title is intended to prevent surprise upon
the members of Congress and to inform the people of pending legislation so that, if
they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not
know before that its exemption had been withdrawn, it is not because of any defect in
the title but perhaps for the same reason other statutes, although published, pass
unnoticed until some event somehow calls attention to their existence. Indeed, the
title of Republic Act No. 7716 is not any more general than the title of PAL's own
franchise under P.D. No. 1590, and yet no mention is made of its tax exemption. The
title of P.D. No. 1590 is:
AN ACT GRANTING A NEW FRANCHISE TO
PHILIPPINE AIRLINES, INC. TO ESTABLISH,
OPERATE, AND MAINTAIN AIR-TRANSPORT
SERVICES IN THE PHILIPPINES AND BETWEEN
THE PHILIPPINES AND OTHER COUNTRIES.
The trend in our cases is to construe the constitutional requirement in such a manner
that courts do not unduly interfere with the enactment of necessary legislation and to
consider it sufficient if the title expresses the general subject of the statute and all its
provisions are germane to the general subject thus expressed. 24
It is further contended that amendment of petitioner's franchise may only be made by
special law, in view of § 24 of P.D. No. 1590 which provides:
This franchise, as amended, or any section or provision
hereof may only be modified, amended, or repealed
expressly by a special law or decree that shall specifically
modify, amend, or repeal this franchise or any section or
provision thereof.
This provision is evidently intended to prevent the amendment of the franchise by
mere implication resulting from the enactment of a later inconsistent statute, in
consideration of the fact that a franchise is a contract which can be altered only by
consent of the parties. Thus in Manila Railroad Co. v.
Rafferty, 25 it was held that an Act of the U.S. Congress, which provided for the
payment of tax on certain goods and articles imported into the Philippines, did not
amend the franchise of plaintiff, which exempted it from all taxes except those
mentioned in its franchise. It was held that a special law cannot be amended by a
general law.
In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's
franchise (P.D. No. 1590) by specifically excepting from the grant of exemptions
from the VAT PAL's exemption under P.D. No. 1590. This is within the power of
Congress to do under Art. XII, § 11 of the Constitution, which provides that the grant
of a franchise for the operation of a public utility is subject to amendment, alteration
or repeal by Congress when the common good so requires.
II. SUBSTANTIVE ISSUES
A. Claims of Press
Freedom, Freedom of
Thought and
Religious Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit
organization of newspaper publishers established for the improvement of journalism
in the Philippines. On the other hand, petitioner in G.R. No. 115781, the Philippine
Bible Society (PBS), is a nonprofit organization engaged in the printing and
distribution of bibles and other religious articles. Both petitioners claim violations of
their rights under § § 4 and 5 of the Bill of Rights as a result of the enactment of the
VAT Law.
The PPI questions the law insofar as it has withdrawn the exemption previously
granted to the press under § 103 (f) of the NIRC. Although the exemption was
subsequently restored by administrative regulation with respect to the circulation
income of newspapers, the PPI presses its claim because of the possibility that the
exemption may still be removed by mere revocation of the regulation of the
Secretary of Finance. On the other hand, the PBS goes so far as to question the
Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance
has no power to grant tax exemption because this is vested in Congress and requires
for its exercise the vote of a majority of all its members 26 and (2) the Secretary's
duty is to execute the law.
§ 103 of the NIRC contains a list of transactions exempted from VAT. Among the
transactions previously granted exemption were:
(f) Printing, publication, importation or sale of books and
any newspaper, magazine, review, or bulletin which
appears at regular intervals with fixed prices for
subscription and sale and which is devoted principally to
the publication of advertisements.
Republic Act No. 7716 amended § 103 by deleting ¶ (f) with the result that print
media became subject to the VAT with respect to all aspects of their operations.
Later, however, based on a memorandum of the Secretary of Justice, respondent
Secretary of Finance issued Revenue Regulations No. 11-94, dated June 27, 1994,
exempting the "circulation income of print media pursuant to § 4 Article III of the
1987 Philippine Constitution guaranteeing against abridgment of freedom of the
press, among others." The exemption of "circulation income" has left income from
advertisements still subject to the VAT.
It is unnecessary to pass upon the contention that the exemption granted is beyond
the authority of the Secretary of Finance to give, in view of PPI's contention that
even with the exemption of the circulation revenue of print media there is still an
unconstitutional abridgment of press freedom because of the imposition of the VAT
on the gross receipts of newspapers from advertisements and on their acquisition of
paper, ink and services for publication. Even on the assumption that no exemption
has effectively been granted to print media transactions, we find no violation of press
freedom in these cases.
To be sure, we are not dealing here with a statute that on its face operates in the area
of press freedom. The PPI's claim is simply that, as applied to newspapers, the law
abridges press freedom. Even with due recognition of its high estate and its
importance in a democratic society, however, the press is not immune from general
regulation by the State. It has been held:
The publisher of a newspaper has no immunity from the
application of general laws. He has no special privilege to
invade the rights and liberties of others. He must answer
for libel. He may be punished for contempt of court. . . .
 Like others, he must pay equitable and nondiscriminatory
taxes on his business. . . . 27
The PPI does not dispute this point, either.
What it contends is that by withdrawing the exemption previously granted to print
media transactions involving printing, publication, importation or sale of newspapers,
Republic Act No. 7716 has singled out the press for discriminatory treatment and
that within the class of mass media the law discriminates against print media by
giving broadcast media favored treatment. We have carefully examined this
argument, but we are unable to find a differential treatment of the press by the law,
much less any censorial motivation for its enactment. If the press is now required to
pay a value-added tax on its transactions, it is not because it is being singled out,
much less targeted, for special treatment but only because of the removal of the
exemption previously granted to it by law. The withdrawal of exemption is all that is
involved in these cases. Other transactions, likewise previously granted exemption,
have been delisted as part of the scheme to expand the base and the scope of the
VAT system. The law would perhaps be open to the charge of discriminatory
treatment if the only privilege withdrawn had been that granted to the press. But that
is not the case.
The situation in the case at bar is indeed a far cry from those cited by the PPI in
support of its claim that Republic Act No. 7716 subjects the press to discriminatory
taxation. In the cases cited, the discriminatory purpose was clear either from the
background of the law or from its operation. For example, in Grosjean v. American
Press Co., 28 the law imposed a license tax equivalent to 2% of the gross receipts
derived from advertisements only on newspapers which had a circulation of more
than 20,000 copies per week. Because the tax was not based on the volume of
advertisement alone but was measured by the extent of its circulation as well, the law
applied only to the thirteen large newspapers in Louisiana, leaving untaxed four
papers with circulation of only slightly less than 20,000 copies a week and 120
weekly newspapers which were in serious competition with the thirteen newspapers
in question. It was well known that the thirteen newspapers had been critical of
Senator Huey Long, and the Long-dominated legislature of Louisiana respondent by
taxing what Long described as the "lying newspapers" by imposing on them "a tax
on lying." The effect of the tax was to curtail both their revenue and their circulation.
As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in
the guise of a tax to limit the circulation of information to which the public is entitled
in virtue of the constitutional guaranties." 29 The case is a classic illustration of the
warning that the power to tax is the power to destroy.
In the other case 30 invoked by the PPI, the press was also found to have been singled
out because everything was exempt from the "use tax" on ink and paper, except the
press. Minnesota imposed a tax on the sales of goods in that state. To protect the
sales tax, it enacted a complementary tax on the privilege of "using, storing or
consuming in that state tangible personal property" by eliminating the residents'
incentive to get goods from outside states where the sales tax might be lower. The
Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971,
however, the state legislature amended the tax scheme by imposing the "use tax" on
the cost of paper and ink used for publication. The law was held to have singled out
the press because (1) there was no reason for imposing the "use tax" since the press
was exempt from the sales tax and (2) the "use tax" was laid on an "intermediate
transaction rather than the ultimate retail sale." Minnesota had a heavy burden of
justifying the differential treatment and it failed to do so. In addition, the U.S.
Supreme Court found the law to be discriminatory because the legislature, by again
amending the law so as to exempt the first $100,000 of paper and ink used, further
narrowed the coverage of the tax so that "only a handful of publishers pay any tax at
all and even fewer pay any significant amount of tax." 31 The discriminatory purpose
was thus very clear.
More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held that a law
which taxed general interest magazines but not newspapers and religious,
professional, trade and sports journals was discriminatory because while the tax did
not single out the press as a whole, it targeted a small group within the press. What is
more, by differentiating on the basis of contents (i.e., between general interest and
special interests such as religion or sports) the law became "entirely incompatible
with the First Amendment's guarantee of freedom of the press."
These cases come down to this: that unless justified, the differential treatment of the
press creates risks of suppression of expression. In contrast, in the cases at bar, the
statute applies to a wide range of goods and services. The argument that, by
imposing the VAT only on print media whose gross sales exceeds P480,000 but not
more than P750,000, the law discriminates 33 is without merit since it has not been
shown that as a result the class subject to tax has been unreasonably narrowed. The
fact is that this limitation does not apply to the press along but to all sales. Nor is
impermissible motive shown by the fact that print media and broadcast media are
treated differently. The press is taxed on its transactions involving printing and
publication, which are different from the transactions of broadcast media. There is
thus a reasonable basis for the classification.
The cases canvassed, it must be stressed, eschew any suggestion that "owners of
newspapers are immune from any forms of ordinary taxation." The license tax in the
Grosjean case was declared invalid because it was "one single in kind, with a long
history of hostile misuse against the freedom of the
press." 34 On the other hand, Minneapolis Star acknowledged that "The First
Amendment does not prohibit all regulation of the press [and that] the States and the
Federal Government can subject newspapers to generally applicable economic
regulations without creating constitutional problems." 35
What has been said above also disposes of the allegations of the PBS that the
removal of the exemption of printing, publication or importation of books and
religious articles, as well as their printing and publication, likewise violates freedom
of thought and of conscience. For as the U.S. Supreme Court unanimously held in
Jimmy Swaggart Ministries v. Board of Equalization, 36 the Free Exercise of Religion
Clause does not prohibit imposing a generally applicable sales and use tax on the sale
of religious materials by a religious organization.
This brings us to the question whether the registration provision of the law, 37
although of general applicability, nonetheless is invalid when applied to the press
because it lays a prior restraint on its essential freedom. The case of American Bible
Society v. City of Manila 38 is cited by both the PBS and the PPI in support of their
contention that the law imposes censorship. There, this Court held that an ordinance
of the City of Manila, which imposed a license fee on those engaged in the business
of general merchandise, could not be applied to the appellant's sale of bibles and
other religious literature. This Court relied on Murdock v. Pennsylvania, 39 in which
it was held that, as a license fee is fixed in amount and unrelated to the receipts of the
taxpayer, the license fee, when applied to a religious sect, was actually being
imposed as a condition for the exercise of the sect's right under the Constitution. For
that reason, it was held, the license fee "restrains in advance those constitutional
liberties of press and religion and inevitably tends to suppress their exercise." 40
But, in this case, the fee in § 107, although a fixed amount (P1,000), is not imposed
for the exercise of a privilege but only for the purpose of defraying part of the cost of
registration. The registration requirement is a central feature of the VAT system. It is
designed to provide a record of tax credits because any person who is subject to the
payment of the VAT pays an input tax, even as he collects an output tax on sales
made or services rendered. The registration fee is thus a mere administrative fee, one
not imposed on the exercise of a privilege, much less a constitutional right.
For the foregoing reasons, we find the attack on Republic Act No. 7716 on the
ground that it offends the free speech, press and freedom of religion guarantees of
the Constitution to be without merit. For the same reasons, we find the claim of the
Philippine Educational Publishers Association (PEPA) in G.R. No. 115931 that the
increase in the price of books and other educational materials as a result of the VAT
would violate the constitutional mandate to the government to give priority to
education, science and technology (Art. II, § 17) to be untenable.
B. Claims of
Regressivity, Denial
of Due Process, Equal
Protection, and
Impairment
of Contracts
There is basis for passing upon claims that on its face the statute violates the
guarantees of freedom of speech, press and religion. The possible "chilling effect"
which it may have on the essential freedom of the mind and conscience and the need
to assure that the channels of communication are open and operating importunately
demand the exercise of this Court's power of review.
There is, however, 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:
"[W]hen 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." 41
Indeed, the absence of threat of immediate harm makes the need for judicial
intervention less evident and underscores the essential nature of petitioners' attack on
the law on the grounds of regressivity, denial of due process and equal protection and
impairment of contracts as a mere academic discussion of the merits of the law. For
the fact is that there have even been no notices of assessments issued to petitioners
and no determinations at the administrative levels of their claims so as to illuminate
the actual operation of the law and enable us to reach sound judgment regarding so
fundamental questions as those raised in these suits.
Thus, the broad argument against the VAT is that it is regressive and that it violates
the requirement that "The rule of taxation shall be uniform and equitable [and]
Congress shall evolve a progressive system of taxation." 42 Petitioners in G.R. No.
115781 quote from a paper, entitled "VAT Policy Issues: Structure, Regressivity,
Inflation and Exports" by Alan A. Tait of the International Monetary Fund, that
"VAT payment by low-income households will be a higher proportion of their
incomes (and expenditures) than payments by higher-income households. That is, the
VAT will be regressive." 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 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 43 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," as the Cooperative
Union of the Philippines (CUP) claims in G.R. No. 115873, 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.
At all events, our 1988 decision in Kapatiran 45 should have laid to rest the questions
now raised against the VAT. There similar arguments made against the original VAT
Law (Executive Order No. 273) were held to be hypothetical, with no more basis
than newspaper articles which this Court found to be "hearsay and [without]
evidentiary value." As Republic Act No. 7716 merely expands the base of the VAT
system and its coverage as provided in the original VAT Law, further debate on the
desirability and wisdom of the law should have shifted to Congress.
Only slightly less abstract but nonetheless hypothetical is the contention of CREBA
that the imposition of the VAT on the sales and leases of real estate by virtue of
contracts entered into prior to the effectivity of the law would violate the
constitutional provision that "No law impairing the obligation of contracts shall be
passed." It is enough to say that the parties to a contract cannot, through the exercise
of prophetic discernment, fetter the exercise of the taxing power of the State. For not
only are existing laws read into contracts in order to fix obligations as between
parties, but the reservation of essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The policy of protecting contracts
against impairment presupposes the maintenance of a government which retains
adequate authority to secure the peace and good order of society. 46
In truth, the Contract Clause has never been thought as a limitation on the exercise of
the State's power of taxation save only where a tax exemption has been granted for a
valid consideration. 47 Such is not the case of PAL in G.R. No. 115852, and we do
not understand it to make this claim. Rather, its position, as discussed above, is that
the removal of its tax exemption cannot be made by a general, but only by a specific,
law.
The substantive issues raised in some of the cases are presented in abstract,
hypothetical form because of the lack of a concrete record. We accept that this Court
does not only adjudicate private cases; that public actions by "non-Hohfeldian" 48 or
ideological plaintiffs are now cognizable provided they meet the standing
requirement of the Constitution; that under Art. VIII, § 1, ¶ 2 the Court has a "special
function" of vindicating constitutional rights. Nonetheless the feeling cannot be
escaped that we do not have before us in these cases a fully developed factual record
that alone can impart to our adjudication the impact of actuality 49 to insure that
decision-making is informed and well grounded. Needless to say, we do not have
power to render advisory opinions or even jurisdiction over petitions for declaratory
judgment. In effect we are being asked to do what the Conference Committee is
precisely accused of having done in these cases — to sit as a third legislative
chamber to review legislation.
We are told, however, that the power of judicial review is not so much power as it is
duty imposed on this Court by the Constitution and that we would be remiss in the
performance of that duty if we decline to look behind the barriers set by the principle
of separation of powers. Art. VIII, § 1, ¶ 2 is cited in support of this view:
Judicial power includes the duty of the courts of justice to
settle actual controversies involving rights which are
legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government.
To view the judicial power of review as a duty is nothing new. Chief Justice
Marshall said so in 1803, to justify the assertion of this power in Marbury v.
Madison:
It is emphatically the province and duty of the judicial
department to say what the law is. Those who apply the
rule to particular cases must of necessity expound and
interpret that rule. If two laws conflict with each other, the
courts must decide on the operation of each. 50
Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:
And when the judiciary mediates to allocate constitutional
boundaries, it does not assert any superiority over the
other departments; it does not in reality nullify or
invalidate an act of the legislature, but only asserts the
solemn and sacred obligation assigned to it by the
Constitution to determine conflicting claims of authority
under the Constitution and to establish for the parties in
an actual controversy the rights which that instrument
secures and guarantees to them. 51
This conception of the judicial power has been affirmed in several
cases 52 of this Court following Angara.
It does not add anything, therefore, to invoke this "duty" to justify this Court's
intervention in what is essentially a case that at best is not ripe for adjudication. That
duty must still be performed in the context of a concrete case or controversy, as Art.
VIII, § 5(2) clearly defines our jurisdiction in terms of "cases," and nothing but
"cases." That the other departments of the government may have committed a grave
abuse of discretion is not an independent ground for exercising our power. Disregard
of the essential limits imposed by the case and controversy requirement can in the
long run only result in undermining our authority as a court of law. For, as judges,
what we are called upon to render is judgment according to law, not according to
what may appear to be the opinion of the day.
_______________________________
In the preceeding pages we have endeavored to discuss, within limits, the validity of
Republic Act No. 7716 in its formal and substantive aspects as this has been raised in
the various cases before us. To sum up, we hold:
(1) That the procedural requirements of the Constitution have been complied with by
Congress in the enactment of the statute;
(2) That judicial inquiry whether the formal requirements for the enactment of
statutes — beyond those prescribed by the Constitution — have been observed is
precluded by the principle of separation of powers;
(3) That the law does not abridge freedom of speech, expression or the press, nor
interfere with the free exercise of religion, nor deny to any of the parties the right to
an education; and
(4) That, in view of the absence of a factual foundation of record, claims that the law
is regressive, oppressive and confiscatory and that it violates vested rights protected
under the Contract Clause are prematurely raised and do not justify the grant of
prospective relief by writ of prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.
Bidin, Quiason, and Kapunan, JJ., concur.
G.R. No. 168056 October 18, 2005
Agenda for Item No. 45
G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et
al. vs. The Hon. Executive Secretary Eduardo R. Ermita); G.R. No. 168207
(Aquilino Q. Pimentel, Jr., et al. vs. Executive Secretary Eduardo R. Ermita, et
al.); G.R. No. 168461 (Association of Pilipinas Shell Dealers, Inc., et al. vs. Cesar
V. Purisima, et al.); G.R. No. 168463 (Francis Joseph G. Escudero vs. Cesar V.
Purisima, et al); and G.R. No. 168730 (Bataan Governor Enrique T. Garcia, Jr.
vs. Hon. Eduardo R. Ermita, et al.)
RESOLUTION
For resolution are the following motions for reconsideration of the Court’s Decision
dated September 1, 2005 upholding the constitutionality of Republic Act No. 9337 or
the VAT Reform Act1:
1) Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et
al., on the following grounds:
A. THE DELETION OF THE "NO PASS ON PROVISIONS" FOR THE SALE OF
PETROLEUM PRODUCTS AND POWER GENERATION SERVICES
CONSTITUTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION ON THE PART OF THE BICAMERAL
CONFERENCE COMMITTEE.
B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL
IMPERATIVE ON EXCLUSIVE ORIGINATION OF REVENUE BILLS UNDER
§24, ARTICLE VI, 1987 PHILIPPINE CONSTITUTION.
C. REPUBLIC ACT NO. 9337’S STAND-BY AUTHORITY TO THE
EXECUTIVE TO INCREASE THE VAT RATE, ESPECIALLY ON ACCOUNT
OF THE EFFECTIVE RECOMMENDATORY POWER GRANTED TO THE
SECRETARY OF FINANCE, CONSTITUTES UNDUE DELEGATION OF
LEGISLATIVE AUTHORITY.
2) Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor
Enrique T. Garcia, Jr., with the argument that burdening the consumers with
significantly higher prices under a VAT regime vis-à-vis a 3% gross tax renders the
law unconstitutional for being arbitrary, oppressive and inequitable.
and
3) Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers,
Inc. in G.R. No. 168461, on the grounds that:
I. This Honorable Court erred in upholding the constitutionality of Section 110(A)(2)
and Section 110(B) of the NIRC, as amended by the EVAT Law, imposing
limitations on the amount of input VAT that may be claimed as a credit against
output VAT, as well as Section 114(C) of the NIRC, as amended by the EVAT Law,
requiring the government or any of its instrumentalities to withhold a 5% final
withholding VAT on their gross payments on purchases of goods and services, and
finding that the questioned provisions:
A. are not arbitrary, oppressive and consfiscatory as to amount to a deprivation of
property without due process of law in violation of Article III, Section 1 of the 1987
Philippine Constitution;
B. do not violate the equal protection clause prescribed under Article III, Section 1 of
the 1987 Philippine Constitution; and
C. apply uniformly to all those belonging to the same class and do not violate Article
VI, Section 28(1) of the 1987 Philippine Constitution.
II. This Honorable Court erred in upholding the constitutionality of Section 110(B)
of the NIRC, as amended by the EVAT Law, imposing a limitation on the amount of
input VAT that may be claimed as a credit against output VAT notwithstanding the
finding that the tax is not progressive as exhorted by Article VI, Section 28(1) of the
1987 Philippine Constitution.
Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.
Petitioners Escudero, et al., insist that the bicameral conference committee should
not even have acted on the no pass-on provisions since there is no disagreement
between House Bill Nos. 3705 and 3555 on the one hand, and Senate Bill No. 1950
on the other, with regard to the no pass-on provision for the sale of service for power
generation because both the Senate and the House were in agreement that the VAT
burden for the sale of such service shall not be passed on to the end-consumer. As to
the no pass-on provision for sale of petroleum products, petitioners argue that the
fact that the presence of such a no pass-on provision in the House version and the
absence thereof in the Senate Bill means there is no conflict because "a House
provision cannot be in conflict with something that does not exist."
Such argument is flawed. Note that the rules of both houses of Congress provide that
a conference committee shall settle the "differences" in the respective bills of each
house. Verily, the fact that a no pass-on provision is present in one version but
absent in the other, and one version intends two industries, i.e., power generation
companies and petroleum sellers, to bear the burden of the tax, while the other
version intended only the industry of power generation, transmission and distribution
to be saddled with such burden, clearly shows that there are indeed differences
between the bills coming from each house, which differences should be acted upon
by the bicameral conference committee. It is incorrect to conclude that there is no
clash between two opposing forces with regard to the no pass-on provision for VAT
on the sale of petroleum products merely because such provision exists in the House
version while it is absent in the Senate version. It is precisely the absence of such
provision in the Senate bill and the presence thereof in the House bills that causes the
conflict. The absence of the provision in the Senate bill shows the Senate’s
disagreement to the intention of the House of Representatives make the sellers of
petroleum bear the burden of the VAT. Thus, there are indeed two opposing forces:
on one side, the House of Representatives which wants petroleum dealers to be
saddled with the burden of paying VAT and on the other, the Senate which does not
see it proper to make that particular industry bear said burden. Clearly, such conflicts
and differences between the no pass-on provisions in the Senate and House bills had
to be acted upon by the bicameral conference committee as mandated by the rules of
both houses of Congress.
Moreover, the deletion of the no pass-on provision made the present VAT law more
in consonance with the very nature of VAT which, as stated in the Decision
promulgated on September 1, 2005, is a tax on spending or consumption, thus, the
burden thereof is ultimately borne by the end-consumer.
Escudero, et al., then claim that there had been changes introduced in the Rules of
the House of Representatives regarding the conduct of the House panel in a
bicameral conference committee, since the time of Tolentino vs. Secretary of
Finance2 to act as safeguards against possible abuse of authority by the House
members of the bicameral conference committee. Even assuming that the rule
requiring the House panel to report back to the House if there are substantial
differences in the House and Senate bills had indeed been introduced after Tolentino,
the Court stands by its ruling that the issue of whether or not the House panel in the
bicameral conference committee complied with said internal rule cannot be inquired
into by the Court. To reiterate, "mere failure to conform to parliamentary usage will
not invalidate the action (taken by a deliberative body) when the requisite number of
members have agreed to a particular measure." 3
Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the
constitutional imperative on exclusive origination of revenue bills under Section 24
of Article VI of the Constitution when the Senate introduced amendments not
connected with VAT.
The Court is not persuaded.
Article VI, Section 24 of the Constitution provides:
Sec. 24 All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in
the House of Representatives, but the Senate may propose or concur with
amendments.
Section 24 speaks of origination of certain bills from the House of Representatives
which has been interpreted in the Tolentino case as follows:
… To begin with, it is not the law — but the revenue bill — which is required by the
Constitution to "originate exclusively" in the House of Representatives. It is
important to emphasize this, because a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the
whole … At this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. 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
Senate's 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.
… Given, then, the power of the Senate to propose amendments, the Senate can
propose its own version even with respect to bills which are required by the
Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue,
tariff, or tax bills, bills authorizing an increase of the public debt, private bills and
bills of local application must come from the House of Representatives on the theory
that, elected as they are from the districts, the members of the House can be expected
to be more sensitive to the local needs and problems. On the other hand, the senators,
who are elected at large, are expected to approach the same problems from the
national perspective. Both views are thereby made to bear on the enactment of such
laws.4
Clearly, after the House bills as approved on third reading are duly transmitted to the
Senate, the Constitution states that the latter can propose or concur with amendments.
The Court finds that the subject provisions found in the Senate bill are within the
purview of such constitutional provision as declared in the Tolentino case.
The intent of the House of Representatives in initiating House Bill Nos. 3555 and
3705 was to solve the country’s serious financial problems. It was stated in the
respective explanatory notes that there is a need for the government to make
significant expenditure savings and a credible package of revenue measures. These
measures include improvement of tax administration and control and leakages in
revenues from income taxes and value added tax. It is also stated that one
opportunity that could be beneficial to the overall status of our economy is to review
existing tax rates, evaluating the relevance given our present conditions. Thus, with
these purposes in mind and to accomplish these purposes for which the house bills
were filed, i.e., to raise revenues for the government, the Senate introduced
amendments on income taxes, which as admitted by Senator Ralph Recto, would
yield about ₱10.5 billion a year.
Moreover, since the objective of these house bills is to raise revenues, the increase in
corporate income taxes would be a great help and would also soften the impact of
VAT measure on the consumers by distributing the burden across all sectors instead
of putting it entirely on the shoulders of the consumers.
As to the other National Internal Revenue Code (NIRC) provisions found in Senate
Bill No. 1950, i.e., percentage taxes, franchise taxes, amusement and excise taxes,
these provisions are needed so as to cushion the effects of VAT on consumers. As we
said in our decision, certain goods and services which were subject to percentage tax
and excise tax would no longer be VAT exempt, thus, the consumer would be
burdened more as they would be paying the VAT in addition to these taxes. Thus,
there is a need to amend these sections to soften the impact of VAT. The Court finds
no reason to reverse the earlier ruling that the Senate introduced amendments that are
germane to the subject matter and purposes of the house bills.
Petitioners Escudero, et al., also reiterate that R.A. No. 9337’s stand- by authority to
the Executive to increase the VAT rate, especially on account of the
recommendatory power granted to the Secretary of Finance, constitutes undue
delegation of legislative power. They submit that the recommendatory power given
to the Secretary of Finance in regard to the occurrence of either of two events using
the Gross Domestic Product (GDP) as a benchmark necessarily and inherently
required extended analysis and evaluation, as well as policy making.
There is no merit in this contention. The Court reiterates that in making his
recommendation to the President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the President or even her
subordinate. He is acting as the agent of the legislative department, to determine and
declare the event upon which its expressed will is to take effect. The Secretary of
Finance becomes the means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to gather data and
information and has a much broader perspective to properly evaluate them. His
function is to gather and collate statistical data and other pertinent information and
verify if any of the two conditions laid out by Congress is present. Congress granted
the Secretary of Finance the authority to ascertain the existence of a fact, namely,
whether by December 31, 2005, the value-added tax collection as a percentage of
GDP of the previous year exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1½%). If either of these two instances has occurred, the Secretary
of Finance, by legislative mandate, must submit such information to the President.
Then the 12% VAT rate must be imposed by the President effective January 1, 2006.
Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process
can go forward.There is no undue delegation of legislative power but only of the
discretion as to the execution of a law. This is constitutionally permissible. Congress
did not delegate the power to tax but the mere implementation of the law. The intent
and will to increase the VAT rate to 12% came from Congress and the task of the
President is to simply execute the legislative policy. That Congress chose to use the
GDP as a benchmark to determine economic growth is not within the province of the
Court to inquire into, its task being to interpret the law.
With regard to petitioner Garcia’s arguments, the Court also finds the same to be
without merit. As stated in the assailed Decision, the Court recognizes the burden
that the consumers will be bearing with the passage of R.A. No. 9337. But as was
also stated by the Court, it cannot strike down the law as unconstitutional simply
because of its yokes. The legislature has spoken and the only role that the Court
plays in the picture is to determine whether the law was passed with due regard to the
mandates of the Constitution. Inasmuch as the Court finds that there are no
constitutional infirmities with its passage, the validity of the law must therefore be
upheld.
Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their
arguments in the petition, citing this time, the dissertation of Associate Justice Dante
O. Tinga in his Dissenting Opinion.
The glitch in petitioners’ arguments is that it presents figures based on an event that
is yet to happen. Their illustration of the possible effects of the 70% limitation, while
seemingly concrete, still remains theoretical. Theories have no place in this case as
the Court must only deal with an existing case or controversy that is
appropriate or ripe for judicial determination, not one that is conjectural or
merely anticipatory.5 The Court will not intervene absent an actual and substantial
controversy admitting of specific relief through a decree conclusive in nature, as
distinguished from an opinion advising what the law would be upon a hypothetical
state of facts.6
The impact of the 70% limitation on the creditable input tax will ultimately depend
on how one manages and operates its business. Market forces, strategy and acumen
will dictate their moves. With or without these VAT provisions, an entrepreneur who
does not have the ken to adapt to economic variables will surely perish in the
competition. The arguments posed are within the realm of business, and the solution
lies also in business.
Petitioners also reiterate their argument that the input tax is a property or a property
right. In the same breath, the Court reiterates its finding that it is not a property or a
property right, and a VAT-registered person’s entitlement to the creditable input tax
is a mere statutory privilege.
Petitioners also contend that even if the right to credit the input VAT is merely a
statutory privilege, it has already evolved into a vested right that the State cannot
remove.
As the Court stated in its Decision, the right to credit the input tax is a mere creation
of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at
every level of distribution are not recoverable from the taxes payable. With the
advent of Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it
was only then that the crediting of the input tax paid on purchase or importation of
goods and services by VAT-registered persons against the output tax was established.
This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform
Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law can limit. It should be
stressed that a person has no vested right in statutory privileges.7
The concept of "vested right" is a consequence of the constitutional guaranty of due
process that expresses a present fixed interest which in right reason and natural
justice is protected against arbitrary state action; it includes not only legal or
equitable title to the enforcement of a demand but also exemptions from new
obligations created after the right has become vested. Rights are considered vested
when the right to enjoyment is a present interest, absolute, unconditional, and perfect
or fixed and irrefutable.8 As adeptly stated by Associate Justice Minita V. Chico-
Nazario in her Concurring Opinion, which the Court adopts, petitioners’ right to the
input VAT credits has not yet vested, thus –
It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers’
input VAT credits were inexistent – they were unrecognized and disallowed by law.
The petroleum dealers had no such property called input VAT credits. It is only
rational, therefore, that they cannot acquire vested rights to the use of such input
VAT credits when they were never entitled to such credits in the first place, at least,
not until Rep. Act No. 9337.
My view, at this point, when Rep. Act No. 9337 has not yet even been implemented,
is that petroleum dealers’ right to use their input VAT as credit against their output
VAT unlimitedly has not vested, being a mere expectancy of a future benefit and
being contingent on the continuance of Section 110 of the National Internal Revenue
Code of 1997, prior to its amendment by Rep. Act No. 9337.
The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of
note, to wit:
Moreover, there is no vested right in generally accepted accounting principles. These
refer to accounting concepts, measurement techniques, and standards of presentation
in a company’s financial statements, and are not rooted in laws of nature, as are the
laws of physical science, for these are merely developed and continually modified by
local and international regulatory accounting bodies. To state otherwise and
recognize such asset account as a vested right is to limit the taxing power of the State.
Unlimited, plenary, comprehensive and supreme, this power cannot be unduly
restricted by mere creations of the State.
More importantly, the assailed provisions of R.A. No. 9337 already involve
legislative policy and wisdom. So long as there is a public end for which R.A. No.
9337 was passed, the means through which such end shall be accomplished is for the
legislature to choose so long as it is within constitutional bounds. As stated in
Carmichael vs. Southern Coal & Coke Co.:
If the question were ours to decide, we could not say that the legislature, in adopting
the present scheme rather than another, had no basis for its choice, or was arbitrary
or unreasonable in its action. But, as the state is free to distribute the burden of a tax
without regard to the particular purpose for which it is to be used, there is no warrant
in the Constitution for setting the tax aside because a court thinks that it could have
distributed the burden more wisely. Those are functions reserved for the legislature. 9
WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH
FINALITY. The temporary restraining order issued by the Court is LIFTED.
SO ORDERED.
G.R. Nos. L-21633-34 June 29, 1967
COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF
CUSTOMS, petitioners,
vs.
BOTELHO SHIPPING CORPORATION and GENERAL SHIPPING CO.,
INC., respondents.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete and F. Malate, Jr. for petitioners.
Claudio Teehankee and Leocadio de Asis for respondents.
CONCEPCION, C.J.:
Appeal by the Government from a decision of the Court of Tax Appeals, reversing of
the decisions of the Commissioner of Internal Revenue and the Commissioner of
Customs, in Cases No. 956 and 957 of said Court, holding Botelho Shipping
Corporation and General Shipping Co., Inc. — hereinafter referred to collectively as
the Buyers — liable for the payment of the sum of P483,433.00 and P494,824.00,
respectively, as compensating taxes on the vessels "M/S Maria Rosello" and "M/S
General Lim."
On August 30, 1960, the Reparations Commission of the Philippines — hereinafter
referred to as the Commission — and Botelho Shipping Corporation — hereinafter
referred to as Botelho — entered into a "Contract of Conditional Purchase and Sale
of Reparations Goods," whereby the former agreed to sell to Botelho for
P6,798,888.88 the vessel "M/S Maria Rosello," procured by the Commission from
Japan, pursuant to the provisions of the Philippine-Japanese Reparations Agreement
of May 9, 1956. On September 19, 1960, the Commission signed a similar contract
with General Shipping Co., Inc. — hereinafter referred to as General Shipping — for
the sale thereto of "M/S General Lim" at the price of P6,951,666.66. Both
agreements, couched in identical terms, except as to price, stipulated that:
a) The Reparations Commission "retains title to and ownership of the above
described vessel until it is fully paid for." (Exh. "A", p. 2, both cases)
b) The stipulated purchase price of the M/S MARIA ROSELLO was to be
paid by Botelho to the Commission under a deferred payment plan in 10
equal yearly installments of P717,333.49, bearing 3% interest per annum,
beginning August 31, 1962 and August 31 of every year thereafter until the
year 1972, while the purchase price of the M/S GENERAL LIM was to be
paid by General Shipping to the Commission under a deferred payment plan
in 10 equal yearly installments of P723,132.68, bearing 3% interest per
annum beginning September 30 of every year until the year 1972. (Exhs. 9,
p. 4 and A-2, both cases) (See Respondents' brief, p. 4.)
Delivered in Japan to its respective buyers, acting on behalf of the Commission, the
vessels, upon their departure from Tokyo, on the maiden trip thereof to the
Philippines, were issued, by the Philippine Vice-Consul in said city, provisional
certificates of Philippine registry in the name of the Commission, so that the vessels
could proceed to the Philippines and secure therein the respective final registration
document.
Upon arrival at the port of Manila, the Buyer filed the corresponding applications for
registration of the vessels, but, the Bureau of Customs placed the same under custody
and refused to give due course to said applications, unless the aforementioned sums
of P483,433 and P494,824 be paid as compensating tax. As the Commissioner of
Customs refused to reconsider the stand taken by his office, the Buyers
simultaneously filed with the Court of Tax Appeals their respective petitions for
review, against the Commissioner of Customs and the Commissioner of Internal
Revenue — hereinafter referred to collectively as Appellants — with urgent motion
for suspension of the collection of said tax. After a joint hearing on this motion, the
same was, on October 31, 1960, granted by the Tax Court, upon the sum of a
P500,000.00 bond by each one of the Buyers.
On June 17, 1961, while these cases were pending trial in said Court, Republic Act
No. 3079 amended Republic Act No. 1789 — the Original Reparations Act, under
which the aforementioned contracts with the Buyers had been executed — by
exempting buyers of reparations goods acquired from the Commission, from liability
for the compensating tax. Moreover, section 20 of Republic Act No. 3079, provides:
x x x This Act shall take effect upon its approval, except that the
amendment contained in Section seven hereof relating to the requirements
of procurement orders including the requirement of down payment by
private applicant end-users shall not apply to procurement orders already
duty issued and verified at the time of the passage of this amendatory Act,
and except further that the amendment contained in Section ten relating to
the insurance of the reparations goods by the end-users upon delivery shall
apply also to goods covered by contracts already entered into by the
Commission and end-user prior to the approval of this amendatory Act as
well as goods already delivered to the end-user, and except further that the
amendments contained in Sections eleven and twelve hereof relating to the
terms of installment payments on capital goods disposed of to private
parties, and the execution of a performance bond before delivery of
reparations goods, shall not apply to contracts for the utilization of
reparations goods already entered into by the Commission and the end-users
prior to the approval of this amendatory Act: Provided, That any end-user
may apply for the renovation of his utilization contract with the
Commission in order to avail of any provision of this amendatory Act which
is more favorable to an applicant end-user than has heretofore been granted
in like manner and to the same extent as an end-user filing his application
after the approval of this amendatory Act, and the Commission may agree to
such renovation on condition that the end-user shall voluntarily assume all
the new obligations provided for in this amendatory Act.
Invoking the provisions of this section 20, the Buyers applied, therefore, for the
renovation of their utilizations contracts with the Commission, which granted the
application, and, then, filed with the Tax Court, their supplemental petitions for
review. Subsequently, the parties submitted Stipulations of Fact and, after a joint trial,
at which they introduced additional evidence, said Court rendered the appealed
decision, reversing the decisions herein Appellants, and declared said Buyers exempt
from the compensating tax sought to be assessed against the vessels aforementioned.
Hence, these appeals by the Government G.R. No. L-21633 refers to the case as
regards "M/S Maria Rosello," whereas "M/S General Lim" is the subject-matter of
G.R. No. L-21634.
It seems clear that, under Republic Act No. 1789 — pursuant to which the contracts
of Conditional Purchase and Sale in question had been executed — the vessels "M/S
Maria Rosello" and "M/S General Lim" were subject to compensating tax. Indeed,
Section 14 of said Act provides that "reparations goods obtained by private parties
shall be exempt only from the payment of customs duties, consular fees and the
special import tax." Although this Section was amended by R.A. No. 3079, to
include the compensating tax" among the exemptions enumerated therein, such
amendment took place, not only after the contracts involved in these appeals had
been perfected and partly consummated, but, also, after the corresponding
compensating tax had become due and payment thereof demanded by Appellants
herein. It is, moreover, obvious that said additional exemption should not and cannot
be given retroactive operation, in the absence of a manifest intent of Congress to do
this effect. The issue in the cases at bar hinges on whether or not such intent is clear.
Appellants maintain the negative, upon the ground that a tax exemption must be clear
and explicit; that there is no express provision for the retroactivity of the exemption,
established by Republic Act No. 3079, from the compensating tax; that the favorable
provisions, which are referred to in section 20 thereof, cannot include the exemption
from compensating tax; and, that Congress could not have intended any retroactive
exemption, considering that the result thereof would be prejudicial to the
Government.
The inherent weakness of the last ground becomes manifest when we consider that, if
true, there could be no tax exemption of any kind whatsoever, even if Congress
should wish to create one, because every such exemption implies a waiver of the
right to collect what otherwise would be due to the Government, and, in this sense, is
prejudicial thereto. In fact, however, tax exemptions may and do exist, such as the
one prescribed in section 14 of Republic Act No. 1789, as amended by Republic Act
No. 3079, which, by the way, is "clear and explicit," thus, meeting the first ground of
appellant's contention. It may not be amiss to add that no tax exemption — like any
other legal exemption or exception — is given without any reason therefor. In much
the same way as other statutory commands, its avowed purpose is some public
benefit or interest, which the law-making body considers sufficient to offset the
monetary loss entitled in the grant of the exemption. Indeed, section 20 of Republic
Act No. 3079 exacts a valuable consideration for the retroactivity of its favorable
provisions, namely, the voluntary assumption, by the end-user who bought
reparations goods prior to June 17, 1961 of "all the new obligations provided for in"
said Act.
The argument adduced in support of the third ground is that the view adopted by the
Tax Court would operate to grant exemption to particular persons, the Buyers herein.
It should be noted, however, that there is no constitutional injunction against granting
tax exemptions to particular persons. In fact, it is not unusual to grant legislative
franchises to specific individuals or entities, conferring tax exemptions thereto. What
the fundamental law forbids is the denial of equal protection, such as through
unreasonable discrimination or classification.1äwphï1.ñët
Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the
compensating tax, not particular persons, but persons belonging to a particular class.
Indeed, appellants do not assail the constitutionality of said section 14, insofar as it
grants exemptions to end-users who, after the approval of Republic Act No. 3079, on
June 17, 1961, purchased reparations goods procured by the Commission. From the
viewpoint of Constitutional Law, especially the equal protection clause, there is no
difference between the grant of exemption to said end-users, and the extension of the
grant to those whose contracts of purchase and sale mere made before said date,
under Republic Act No. 1789.
It is true that Republic Act No. 3079 does not explicitly declare that those who
purchased reparations goods prior to June 17, 1961, are exempt from the
compensating tax. It does not say so, because they do not really enjoy such
exemption, unless they comply with the proviso in Section 20 of said Act, by
applying for the renovation of their respective utilization contracts, "in order to avail
of any provision of the Amendatory Act which is more favorable" to the applicant. In
other words, it is manifest, from the language of said section 20, that the same
intended to give such buyers the opportunity to be treated "in like manner and to the
same extent as an end-user filing his application after this approval of this
Amendatory Act." Like the "most-favored-nation-clause" in international agreements,
the aforementioned section 20 thus seeks, not to discriminate or to create an
exemption or exception, but to abolish the discrimination, exemption or exception
that would otherwise result, in favor of the end-user who bought after June 17, 1961
and against one who bought prior thereto. Indeed, it is difficult to find a substantial
justification for the distinction between the one and the other. As correctly held by
the Tax Court in Philippine Ace Lines, Inc. v. Commissioner of Internal Revenue
(C.T.A. Nos. 964 and 984, January 25, 1963), and reiterated in the cases under
consideration:
x x x In providing that the favorable provision of Republic Act No. 3079
shall be available to applicants for renovation of their utilization contracts,
on condition that said applicants shall voluntarily assume all the new
obligations provided in the new law, the law intends to place persons who
acquired reparations goods before the enactment of the amendatory Act on
the same footing as those who acquire reparations goods after its enactment.
This is so because of the provision that once an application for renovation
of a utilization contract has been approved, the favorable provisions of said
Act shall be available to the applicant "in like manner and to the same
extent, as an end-user filing his application alter the approval of this
amendatory Act." To deny exemption from compensating tax to one whose
utilization contract has been renovated, while granting the exemption to one
who files an application for acquisition of reparations goods after the
approval of the new law, would be contrary to the express mandate of the
new law, that they both be subject to the same privileges in like manner and
to the same extent. It would be manifest distortion of the literal meaning and
purpose of the new law.
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed in
toto, without any pronouncement as to costs. It is so ordered.
G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U.
ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A.
CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and
BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE
and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL
REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No.
109289, the constitutionality of Republic Act No. 7496, also commonly known as
the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions
of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93,
promulgated by public respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation
of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) — Every bill passed by the
Congress shall embrace only one subject which shall be
expressed in the title thereof.
Article VI, Section 28(1) — The rule of taxation shall be
uniform and equitable. The Congress shall evolve a
progressive system of taxation.
Article III, Section 1 — No person shall be deprived of . . .
property without due process of law, nor shall any person
be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-
93, argue that public respondents have exceeded their rule-making authority in
applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the
Court's directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act
No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified
Net Income Taxation Scheme for the Self-Employed (c) Telecommunications, electricity, fuel, light and water;
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. (d) Business rentals;
109289). (e) Depreciation;
The full text of the title actually reads: (f) Contributions made to the Government and accredited
An Act Adopting the Simplified Net Income Taxation relief organizations for the rehabilitation of calamity
Scheme For The Self-Employed and Professionals stricken areas declared by the President; and
Engaged In The Practice of Their Profession, Amending (g) Interest paid or accrued within a taxable year on loans
Sections 21 and 29 of the National Internal Revenue Code, contracted from accredited financial institutions which
as Amended. must be proven to have been incurred in connection with
The pertinent provisions of Sections 21 and 29, so referred to, of the National the conduct of a taxpayer's profession, trade or business.
Internal Revenue Code, as now amended, provide: For individuals whose cost of goods sold and direct costs
Sec. 21. Tax on citizens or residents. — are difficult to determine, a maximum of forty per cent
xxx xxx xxx (40%) of their gross receipts shall be allowed as
(f) Simplified Net Income Tax for the Self-Employed deductions to answer for business or professional
and/or Professionals Engaged in the Practice of Profession. expenses as the case may be.
— A tax is hereby imposed upon the taxable net income On the basis of the above language of the law, it would be difficult to accept
as determined in Section 27 received during each taxable petitioner's view that the amendatory law should be considered as having now
year from all sources, other than income covered by adopted a gross income, instead of as having still retained the net income, taxation
paragraphs (b), (c), (d) and (e) of this section by every scheme. The allowance for deductible items, it is true, may have significantly been
individual whether reduced by the questioned law in comparison with that which has prevailed prior to
a citizen of the Philippines or an alien residing in the the amendment; limiting, however, allowable deductions from gross income is
Philippines who is self-employed or practices his neither discordant with, nor opposed to, the net income tax concept. The fact of the
profession herein, determined in accordance with the matter is still that various deductions, which are by no means inconsequential,
following schedule: continue to be well provided under the new law.
Not over P10,000 3% Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent
Over P10,000 P300 + 9% log-rolling legislation intended to unite the members of the legislature who favor any
but not over P30,000 of excess over P10,000 one of unrelated subjects in support of the whole act, (b) to avoid surprises or even
Over P30,000 P2,100 + 15% fraud upon the legislature, and (c) to fairly apprise the people, through such
but not over P120,00 of excess over P30,000 publications of its proceedings as are usually made, of the subjects of legislation. 1
Over P120,000 P15,600 + 20% The above objectives of the fundamental law appear to us to have been sufficiently
but not over P350,000 of excess over P120,000 met. Anything else would be to require a virtual compendium of the law which could
Over P350,000 P61,600 + 30% not have been the intendment of the constitutional mandate.
of excess over P350,000 Petitioner intimates that Republic Act No. 7496 desecrates the constitutional
Sec. 29. Deductions from gross income. — In computing requirement that taxation "shall be uniform and equitable" in that the law would now
taxable income subject to tax under Sections 21(a), 24(a), attempt to tax single proprietorships and professionals differently from the manner it
(b) and (c); and 25 (a)(1), there shall be allowed as imposes the tax on corporations and partnerships. The contention clearly forgets,
deductions the items specified in paragraphs (a) to (i) of however, that such a system of income taxation has long been the prevailing rule
this section: Provided, however, That in computing even prior to Republic Act No. 7496.
taxable income subject to tax under Section 21 (f) in the Uniformity of taxation, like the kindred concept of equal protection, merely requires
case of individuals engaged in business or practice of that all subjects or objects of taxation, similarly situated, are to be treated alike both
profession, only the following direct costs shall be in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371).
allowed as deductions: Uniformity does not forfend classification as long as: (1) the standards that are used
(a) Raw materials, supplies and direct labor; therefor are substantial and not arbitrary, (2) the categorization is germane to achieve
(b) Salaries of employees directly engaged in activities in the legislative purpose, (3) the law applies, all things being equal, to both present and
the course of or pursuant to the business or practice of future conditions, and (4) the classification applies equally well to all those
their profession;
belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. MR. ALBANO, Now Mr. Speaker, I
PAGCOR, 197 SCRA 52). would like to get the correct impression
What may instead be perceived to be apparent from the amendatory law is the of this bill. Do we speak here of
legislative intent to increasingly shift the income tax system towards the schedular individuals who are earning, I mean,
approach2 in the income taxation of individual taxpayers and to maintain, by and who earn through business enterprises
large, the present global treatment3 on taxable corporations. We certainly do not view and therefore, should file an income tax
this classification to be arbitrary and inappropriate. return?
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in MR. PEREZ. That is correct, Mr.
the process, what he believes to be an imbalance between the tax liabilities of those Speaker. This does not apply to
covered by the amendatory law and those who are not. With the legislature primarily corporations. It applies only to
lies the discretion to determine the nature (kind), object (purpose), extent (rate), individuals.
coverage (subjects) and situs (place) of taxation. This court cannot freely delve into (See Deliberations on H. B. No. 34314, August 6, 1991,
those matters which, by constitutional fiat, rightly rest on legislative judgment. Of 6:15 P.M.; Emphasis ours).
course, where a tax measure becomes so unconscionable and unjust as to amount to Other deliberations support this position,
confiscation of property, courts will not hesitate to strike it down, for, despite all its to wit:
plenitude, the power to tax cannot override constitutional proscriptions. This stage, MR. ABAYA . . . Now, Mr. Speaker,
however, has not been demonstrated to have been reached within any appreciable did I hear the Gentleman from Batangas
distance in this controversy before us. say that this bill is intended to increase
Having arrived at this conclusion, the plea of petitioner to have the law declared collections as far as individuals are
unconstitutional for being violative of due process must perforce fail. The due concerned and to make collection of
process clause may correctly be invoked only when there is a clear contravention of taxes equitable?
inherent or constitutional limitations in the exercise of the tax power. No such MR. PEREZ. That is correct, Mr.
transgression is so evident to us. Speaker.
G.R. No. 109446 (Id. at 6:40 P.M.; Emphasis ours).
The several propositions advanced by petitioners revolve around the question of In fact, in the sponsorship speech of Senator Mamintal
whether or not public respondents have exceeded their authority in promulgating Tamano on the Senate version of the SNITS, it is
Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496. categorically stated, thus:
The questioned regulation reads: This bill, Mr. President, is not
Sec. 6. General Professional Partnership — The general applicable to business corporations or to
professional partnership (GPP) and the partners partnerships; it is only with respect to
comprising the GPP are covered by R. A. No. 7496. Thus, individuals and professionals.
in determining the net profit of the partnership, only the (Emphasis ours)
direct costs mentioned in said law are to be deducted from The Court, first of all, should like to correct the apparent misconception that general
partnership income. Also, the expenses paid or incurred professional partnerships are subject to the payment of income tax or that there is a
by partners in their individual capacities in the practice of difference in the tax treatment between individuals engaged in business or in the
their profession which are not reimbursed or paid by the practice of their respective professions and partners in general professional
partnership but are not considered as direct cost, are not partnerships. The fact of the matter is that a general professional partnership, unlike
deductible from his gross income. an ordinary business partnership (which is treated as a corporation for income tax
The real objection of petitioners is focused on the administrative interpretation of purposes and so subject to the corporate income tax), is not itself an income taxpayer.
public respondents that would apply SNIT to partners in general professional The income tax is imposed not on the professional partnership, which is tax exempt,
partnerships. Petitioners cite the pertinent deliberations in Congress during its but on the partners themselves in their individual capacity computed on their
enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. distributive shares of partnership profits. Section 23 of the Tax Code, which has not
Perez, minority floor leader of the House of Representatives, in the latter's privilege been amended at all by Republic Act 7496, is explicit:
speech by way of commenting on the questioned implementing regulation of public Sec. 23. Tax liability of members of general professional
respondents following the effectivity of the law, thusly: partnerships. — (a) Persons exercising a common
profession in general partnership shall be liable for
 income tax only in their individual capacity, and the share
in the net profits of the general professional partnership to
which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and
the tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income
of the partnership, each partner —
(1) Shall take into account separately
his distributive share of the partnership's
income, gain, loss, deduction, or credit
to the extent provided by the pertinent
provisions of this Code, and
(2) Shall be deemed to have elected the
itemized deductions, unless he declares
his distributive share of the gross
income undiminished by his share of the
deductions.
There is, then and now, no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through
partnership (whether registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax and the final tax on
passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the
same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to
consider Republic Act No. 7496 as an entirely independent, not merely as an
amendatory, piece of legislation. The view can easily become myopic, however,
when the law is understood, as it should be, as only forming part of, and subject to,
the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all
embracing term used in the Tax Code, and it practically covers all persons who
derive taxable income. The law, in levying the tax, adopts the most comprehensive
tax situs of nationality and residence of the taxpayer (that renders citizens, regardless
of residence, and resident aliens subject to income tax liability on their income from
all sources) and of the generally accepted and internationally recognized income
taxable base (that can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources). In the process, the Code classifies
taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3)
Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to
corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt
partnerships." Ordinarily, partnerships, no matter how created or organized, are
subject to income tax (and thus alluded to as "taxable partnerships") which, for
purposes of the above categorization, are by law assimilated to be within the context
of, and so legally contemplated as, corporations. Except for few variances, such as
in the application of the "constructive receipt rule" in the derivation of income, the
income tax approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the discussions in Congress
during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for income tax
purposes. A general professional partnership is such an example.4 Here, the partners
themselves, not the partnership (although it is still obligated to file an income tax
return [mainly for administration and data]), are liable for the payment of income tax
in their individual capacity computed on their respective and distributive shares of
profits. In the determination of the tax liability, a partner does so as an individual,
and there is no choice on the matter. In fine, under the Tax Code on income taxation,
the general professional partnership is deemed to be no more than a mere mechanism
or a flow-through entity in the generation of income by, and the ultimate distribution
of such income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the
above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual
income taxpayers on their non-compensation income. There is no evident intention
of the law, either before or after the amendatory legislation, to place in an unequal
footing or in significant variance the income tax treatment of professionals who
practice their respective professions individually and of those who do it through a
general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
G.R. No. 88291 June 8, 1993
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary,
Office of the President, HON. VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum
Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this
matter of indirect tax exemption of the private respondent National Power
Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision
We promulgated on May 31, 19911 petitioner Ernesto Maceda asks this Court to
reconsider said Decision. Lest We be criticized for denying due process to the
petitioner. We have decided to take a second look at the issues. In the process, a
hearing was held on July 9, 1992 where all parties presented their respective
arguments. Etched in this Court's mind are the paradoxical claims by both petitioner
and private respondents that their respective positions are for the benefit of the
Filipino people.
I and guarantee loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or
A Chronological review of the relevant NPC laws, specially with respect to its tax
exemption provisions, at the risk of being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the
National Power Corporation, a public corporation, mainly to develop hydraulic
power from all water sources in the Philippines.2 The sum of P250,000.00 was
appropriated out of the funds in the Philippine Treasury for the purpose of organizing
the NPC and conducting its preliminary work.3 The main source of funds for the
NPC was the flotation of bonds in the capital markets4 and these bonds
. . . issued under the authority of this Act shall be exempt
from the payment of all taxes by the Commonwealth of
the Philippines, or by any authority, branch, division or
political subdivision thereof and subject to the provisions
of the Act of Congress, approved March 24, 1934,
otherwise known as the Tydings McDuffle Law, which
facts shall be stated upon the face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds
needed for the initial operations of the NPC and reiterating the provision of the
flotation of bonds as soon as the first construction of any hydraulic power project
was to be decided by the NPC Board.6 The provision on tax exemption in relation to
the issuance of the NPC bonds was neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing the provision on the
payment of the bond's principal and interest in "gold coins" but adding that payment
could be made in United States dollars.7 The provision on tax exemption in relation
to the issuance of the NPC bonds was neither amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the
Philippines to guarantee, absolutely and unconditionally, as primary obligor, the
payment of any and all NPC loans.8 He was also authorized to contract on behalf of
the NPC with the International Bank for Reconstruction and Development (IBRD)
for NPC loans for the accomplishment of NPC's corporate objectives9 and for the
reconstruction and development of the economy of the country. 10 It was expressly
stated that:
Any such loan or loans shall be exempt from taxes, duties,
fees, imposts, charges, contributions and restrictions of
the Republic of the Philippines, its provinces, cities and
municipalities. 11
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the
first time, to incur other types of indebtedness, aside from indebtedness incurred by
flotation of bonds. 12 As to the pertinent tax exemption provision, the law stated as
follows:
To facilitate payment of its indebtedness, the National
Power Corporation shall be exempt from all taxes, duties,
fees, imposts, charges, and restrictions of the Republic of
the Philippines, its provinces, cities and municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside
from the IBRD, the President of the Philippines was authorized to negotiate, contract
any other international financial institution. 14 The tax provision for repayment of
these loans, as stated in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax
exemption for real estate taxes. As enacted, the law states as follows:
To facilitate payment of its indebtedness, the National
Power Corporation shall be exempt from all taxes, except
real property tax, and from all duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines,
its provinces, cities, and municipalities.15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to
be funded by the increased indebtedness 16 should bear the National Economic
Council's stamp of approval. The tax exemption provision related to the payment of
this total indebtedness was not amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign
loans NPC was authorized to incur to US$100,000,000.00 from the
US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax provision related to the
repayment of these loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to
December 31, 2000. 18 All laws or provisions of laws and executive orders contrary
to said R.A. No. 2058 were expressly repealed. 19
On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public
corporation into a stock corporation with an authorized capital stock of
P100,000,000.00 divided into 1,000.000 shares having a par value of P100.00 each,
with said capital stock wholly subscribed to by the Government. 20 No tax exemption
was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned
authorized capital stock to P250,000,000.00 with the increase to be wholly
subscribed by the Government. 21 No tax provision was incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased
again to P300,000,000.00, the increase to be wholly subscribed by the Government.
No tax provision was incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC,
C.A. No. 120, as amended. Declared as primary objectives of the nation were:
Declaration of Policy. — Congress hereby declares that (1)
the comprehensive development, utilization and
conservation of Philippine water resources for all
beneficial uses, including power generation, and (2) the
total electrification of the Philippines through the
development of power from all sources to meet the needs
of industrial development and dispersal and the needs of
rural electrification are primary objectives of the nation
which shall be pursued coordinately and supported by all
 instrumentalities and agencies of the government,
including the financial institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8
(a) (Authority to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur
Foreign Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as
follows:
The bonds issued under the authority of this subsection
shall be exempt from the payment of all taxes by the
Republic of the Philippines, or by any authority, branch,
division or political subdivision thereof which facts shall
be stated upon the face of said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section
8(b), states as follows:
The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and
other charges thereon, as well as the importation of
machinery, equipment, materials and supplies by the
Corporation, paid from the proceeds of any loan, credit or
indebtedeness incurred under this Act, shall also be
exempt from all taxes, fees, imposts, other charges and
restrictions, including import restrictions, by the Republic
of the Philippines, or any of its agencies and political
subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395,
which declares the non-profit character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and shall devote all
its returns from its capital investment, as well as excess
revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is
hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts,
charges costs and service fees in any court or
administrative proceedings in which it may be a party,
restrictions and duties to the Republic of the Philippines,
its provinces, cities, and municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes
to be paid to the National Government, its provinces,
cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and
advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts and all other
charges its provinces, cities, municipalities and other
government agencies and instrumentalities, on all
petroleum products used by the Corporation in the
generation, transmission, utilization, and sale of electric
power. 26
On November 7, 1972, Presidential Decree No. 40 was
issued declaring that the electrification of the entire
country was one of the primary concerns of the country.
And in connection with this, it was specifically stated that:
The setting up of transmission line grids and the
construction of associated generation facilities in Luzon,
Mindanao and major islands of the country, including the
Visayas, shall be the responsibility of the National Power
Corporation (NPC) as the authorized implementing
agency of the State. 27
xxx xxx xxx
It is the ultimate objective of the State for the NPC to own
and operate as a single integrated system all generating
facilities supplying electric power to the entire area
embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to
enable it to fulfill its role under aforesaid P.D. No. 40. Its authorized capital stock
was raised to P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a
maximum of P3,000,000,000.00 at any one time, 30 and the NPC was authorized to
borrow a total of US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these foreign loans states as follows:
The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and
other charges thereon, as well as the importation of
machinery, equipment, materials, supplies and services,
by the Corporation, paid from the proceeds of any loan,
credit or indebtedness incurred under this Act, shall also
be exempt from all direct and indirect taxes, fees, imposts,
other charges and restrictions, including import
restrictions previously and presently imposed, and to be
imposed by the Republic of the Philippines, or any of its
agencies and political subdivisions. 32 (Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:
(a) From the payment of all taxes, duties, fees, imposts,
charges and restrictions to the Republic of the Philippines,
its provinces, cities, municipalities and other government
agencies and instrumentalities including the taxes, duties,
fees, imposts and other charges provided for under the
Tariff and Customs Code of the Philippines, Republic Act
Numbered Nineteen Hundred Thirty-Seven, as amended,
 and as further amended by Presidential Decree No. 34
dated October 27, 1972, and Presidential Decree No. 69,
dated November 24, 1972, and costs and service fees in
any court or administrative proceedings in which it may
be a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other
charges imposed directly or indirectly by the Republic of
the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all
petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric
power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the
NPC's sale of electricity to its different customers. 34 No tax exemption provision
was amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be
appropriated annually to cover the unpaid subscription of the Government in the
NPC authorized capital stock, which amount would be taken from taxes accruing to
the General Funds of the Government, proceeds from loans, issuance of bonds,
treasury bills or notes to be issued by the Secretary of Finance for this particular
purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for
generation and transmission facilities which includes
nuclear power generation, the present capitalization of
National Power Corporation (NPC) and the ceilings for
domestic and foreign borrowings are deemed insufficient;
36
xxx xxx xxx
(I)n the application of the tax exemption provisions of the
Revised Charter, the non-profit character of NPC has not
been fully utilized because of restrictive interpretation of
the taxing agencies of the government on said provisions;
37
xxx xxx xxx
(I)n order to effect the accelerated expansion program and
attain the declared objective of total electrification of the
country, further amendments of certain sections of
Republic Act No. 6395, as amended by Presidential
Decrees Nos. 380, 395 and 758, have become imperative;
38
Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic
indebtedness ceiling was increased to P12,000,000,000.00, 40 the total foreign loan
ceiling was raised to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was
amended to read as follows:
The Corporation shall be non-profit and shall devote all
its returns from its capital investment as well as excess
revenues from its operation, for expansion. To enable the
Corporation to pay to its indebtedness and obligations and
in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from
the payment of all forms of taxes, duties, fees, imposts as
well as costs and service fees including filing fees, appeal
bonds, supersedeas bonds, in any court or administrative
proceedings. 42
II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos.
882, 1177, 1931 and Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of
NPC with regard to imports as follows:
WHEREAS, importations by certain government agencies,
including government-owned or controlled corporation,
are exempt from the payment of customs duties and
compensating tax; and
WHEREAS, in order to reduce foreign exchange
spending and to protect domestic industries, it is
necessary to restrict and regulate such tax-free
importations.
NOW THEREFORE, I, FERDINAND E. MARCOS,
President of the Philippines, by virtue of the powers
vested in me by the Constitution, and do hereby decree
and order the following:
Sec. 1. All importations of any government agency,
including government-owned or controlled corporations
which are exempt from the payment of customs duties and
internal revenue taxes, shall be subject to the prior
approval of an Inter-Agency Committee which shall
insure compliance with the following conditions:
(a) That no such article of local manufacture are available
in sufficient quantity and comparable quality at
reasonable prices;
(b) That the articles to be imported are directly and
actually needed and will be used exclusively by the
grantee of the exemption for its operations and projects or
in the conduct of its functions; and
(c) The shipping documents covering the importation are
in the name of the grantee to whom the goods shall be
delivered directly by customs authorities.
xxx xxx xxx
 Sec. 3. The Committee shall have the power to regulate
and control the tax-free importation of government
agencies in accordance with the conditions set forth in
Section 1 hereof and the regulations to be promulgated to
implement the provisions of this Decree. Provided,
however, That any government agency or government-
owned or controlled corporation, or any local
manufacturer or business firm adversely affected by any
decision or ruling of the Inter-Agency Committee may
file an appeal with the Office of the President within ten
days from the date of notice thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . ..
and all similar provisions of all general and special laws
and decrees are hereby amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and
implement a National Budget that is an instrument of
national development, reflective of national objectives,
strategies and plans. The budget shall be supportive of
and consistent with the socio-economic development plan
and shall be oriented towards the achievement of explicit
objectives and expected results, to ensure that funds are
utilized and operations are conducted effectively,
economically and efficiently. The national budget shall be
formulated within a context of a regionalized government
structure and of the totality of revenues and other receipts,
expenditures and borrowings of all levels of government-
owned or controlled corporations. The budget shall
likewise be prepared within the context of the national
long-term plan and of a long-term budget program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or controlled corporations,
shall pay income taxes, customs duties and other taxes and fees are imposed under
revenues laws: provided, that organizations otherwise exempted by law from the
payment of such taxes/duties may ask for a subsidy from the General Fund in the
exact amount of taxes/duties due: provided, further, that a procedure shall be
established by the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as both revenue and
expenditure of the General Fund. 44
The law also declared that —
[A]ll laws, decrees, executive orders, rules and
regulations or parts thereof which are inconsistent with
the provisions of the Decree are hereby repealed and/or
modified accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found
itself in after the Aquino assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already
expressly repealed the grant of tax privileges to any
government-owned or controlled corporation and all other
units of government; 46
and since there was a
. . . need for government-owned or controlled
corporations and all other units of government enjoying
tax privileges to share in the requirements of development,
fiscal or otherwise, by paying the duties, taxes and other
charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general law to the
contrary notwithstanding, all exemptions from the
payment of duties, taxes, fees, imposts and other charges
heretofore granted in favor of government-owned or
controlled corporations including their subsidiaries, are
hereby withdrawn.
Sec. 2. The President of the Philippines and/or the
Minister of Finance, upon the recommendation of the
Fiscal Incentives Review Board created under Presidential
Decree No. 776, is hereby empowered to restore, partially
or totally, the exemptions withdrawn by Section 1 above,
any applicable tax and duty, taking into account, among
others, any or all of the following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation to the
revenue generation effort;
3) The nature of the activity in which the corporation is
engaged in; or
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as
well as all other laws, decrees, executive orders,
administrative orders, rules, regulations or parts thereof
which are inconsistent with this Decree are hereby
repealed, amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct
presidential restoration or grant of tax exemption to other government and private
entities without benefit of review by the Fiscal Incentives Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955
issued on June 11, 1984 and October 14, 1984,
respectively, withdrew the tax and duty exemption
privileges, including the preferential tax treatment, of
government and private entities with certain exceptions,
 in order that the requirements of national economic
development, in terms of fiscals and other resources, may
be met more adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption
privileges were restored by the Fiscal Incentives Review
Board (FIRB), a number of affected entities, government
and private, had their tax and duty exemption privileges
restored or granted by Presidential action without benefit
or review by the Fiscal Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be
better provided where necessary by explicit subsidy and
budgetary support rather than tax and duty exemption
privileges if only to improve the fiscal monitoring aspects
of government operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or special law to the
contrary notwithstanding, all tax and duty incentives
granted to government and private entities are hereby
withdrawn, except:
a) those covered by the non-impairment clause of the
Constitution;
b) those conferred by effective internation agreement to
which the Government of the Republic of the Philippines
is a signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment pursuant to
Presidential Decree No. 1789, as
amended;
(ii) the Export Processing Zone
Authority, pursuant to Presidential
Decree No. 66 as amended;
(iii) the Philippine Veterans Investment
Development Corporation Industrial
Authority pursuant to Presidential
Decree No. 538, was amended.
d) those enjoyed by the copper mining industry pursuant
to the provisions of Letter of Instructions No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as
amended;
(ii) the National Internal Revenue Code,
as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as
amended;
f) those approved by the President upon
the recommendation of the Fiscal
Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under
Presidential Decree No. 776, as amended, is hereby
authorized to:
a) restore tax and/or duty exemptions withdrawn
hereunder in whole or in part;
b) revise the scope and coverage of tax and/or duty
exemption that may be restored;
c) impose conditions for the restoration of tax and/or duty
exemption;
d) prescribe the date of period of effectivity of the
restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a
complete system for the grant of subsidies to deserving
beneficiaries, in lieu of or in combination with the
restoration of tax and duty exemptions or preferential
treatment in taxation, indicating the source of funding
therefor, eligible beneficiaries and the terms and
conditions for the grant thereof taking into consideration
the international commitment of the Philippines and the
necessary precautions such that the grant of subsidies
does not become the basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the
Fiscal Incentives Review Board shall take into account
any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue
generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and regulations
or parts thereof inconsistent with this Executive Order are
hereby repealed or modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules
and regulations, to be issued by the Ministry of Finance. 49 Said rules and regulations
were promulgated and published in the Official Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50
in the Official Gasetter, 51 which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic approach that all would-be
lawyers, learn in their TAXATION I course, which fro convenient reference, is as
follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear the burden:
a. Direct Tax — the where the person supposed to pay the
tax really pays it. WITHOUT transferring the burden to
someone else.
Examples: Individual income tax, corporate income tax,
transfer taxes (estate tax, donor's tax), residence tax,
immigration tax
b. Indirect Tax — that where the tax is imposed upon
goods BEFORE reaching the consumer who ultimately
pays for it, not as a tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes (specific tax,
percentage taxes, (VAT) and the tariff and customs
indirect taxes (import duties, special import tax and other
dues) 52
IV
To simply matter, the issues raised by petitioner in his motion for reconsideration can
be reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
V its returns from its capital investment as well as excess
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as
the phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No.
6395, as amended by P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has been the lawmaker's
intention that the NPC was to be completely tax exempt from all forms of taxes —
direct and indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to
finance its operations upon its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any
loans obtained were to be completely tax exempt.
After the NPC was authorized to borrow from other sources of funds — aside
issuance of bonds — it was again specifically exempted from all types of taxes "to
facilitate payment of its indebtedness." Even when the ceilings for domestic and
foreign borrowings were periodically increased, the tax exemption privileges of the
NPC were maintained.
NPC's tax exemption from real estate taxes was, however, specifically withdrawn by
Rep. Act No. 987, as above stated. The exemption was, however, restored by R.A.
No. 6395.
Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax
exemptions allowed NPC. Its section 13(d) is the starting point of this bone of
contention among the parties. For easy reference, it is reproduced as follows:
[T]he Corporation is hereby declared exempt:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts and all other
charges imposed by the Republic of the Philippines, its
provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products
used by the Corporation in the generation, transmission,
utilization, and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now
reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other
charges imposed directly or indirectly by the Republic of
the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all
petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric
power. (Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very
simple paragraph as follows:
The Corporation shall be non-profit and shall devote all
revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from
the payment of ALL FORMS OF taxes, duties, fees,
imposts as well as costs and service fees including filing
fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. (Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential Decree Nos.
380
and 938 were issued by one man, acting as such the
Executive and Legislative. 53
xxx xxx xxx
[S]ince both presidential decrees were made by the same
person, it would have been very easy for him to retain the
same or similar language used in P.D. No. 380 P.D. No.
938 if his intention were to preserve the indirect tax
exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no
matter what his fault were. It should be noted that section 13, R.A. No. 6395,
provided for tax exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations
and projects;
13(d) : petroleum products used in generation of electric
power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF
TAXES, ETC.,", included 13(a) under the "as well as" clause and added PNOC
subsidiaries as qualified for tax exemptions.
This is the only conclusion one can arrive at if he has read all the NPC laws in the
order of enactment or issuance as narrated above in part I hereof. President Marcos
must have considered all the NPC statutes from C.A. No. 120 up to its latest
amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up 55 with a
very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be enable to pay its
indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic
indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time.
The NPC must be and has to be exempt from all forms of taxes if this goal is to be
achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be
remembered that to pay the government share in its capital stock P.D. No. 758 was
issued mandating that P200 Million would be appropriated annually to cover the said
unpaid subscription of the Government in NPC's authorized capital stock. And
significantly one of the sources of this annual appropriation of P200 million is TAX
MONEY accruing to the General Fund of the Government. It does not stand to
reason then that former President Marcos would order P200 Million to be taken
partially or totally from tax money to be used to pay the Government subscription in
the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on the
other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c)
and (d) into the phrase "All FORMS OF" is supported by the fact that he did not do
the same for the tax exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as
follows:
The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and
other charges thereon, as well as the importation of
machinery, equipment, materials and supplies by the
Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt
from all taxes, fees, imposts, other charges and
restrictions, including import restrictions, by the Republic
of the Philippines, or any of its agencies and political
subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness contracted this
subsection and the payment of the principal, interest and
other charges thereon, as well as the importation of
machinery, equipment, materials, supplies and services,
by the Corporation, paid from the proceeds of any loan,
credit or indebtedness incurred under this Act, shall also
be exempt from all direct and indirect taxes, fees, imposts,
other charges and restrictions, including import
restrictions previously and presently imposed, and to be
imposed by the Republic of the Philippines, or any of its
agencies and political subdivisions. 58 (Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in
Section 8 (b), R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the
subject matter of this particular Section 8 (b) had to do only with loans and
machinery imported, paid for from the proceeds of these foreign loans, THERE WAS
NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption
stood as is — with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege
extended to "taxes, fees, imposts, other charges . . . to be imposed" in the future —
surely, an indication that the lawmakers wanted the NPC to be exempt from ALL
FORMS of taxes — direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for
both direct and indirect taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to
rationalize government receipts and expenditures by formulating and implementing a
National Budget. 60 The NPC, being a government owned and controlled corporation
had to be shed off its tax exemption status privileges under P.D. No. 1177. It was,
however, allowed to ask for a subsidy from the General Fund in the exact amount of
taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free
importation privileges. It allowed, however, NPC to appeal said repeal with the
Office of the President and to avail of tax-free importation privileges under its
Section 1, subject to the prior approval of an Inter-Agency Committed created by
virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of
the State, was allowed to continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of
the abolition of NPC's tax exemption privileges by P.D. No. 1177 61 only in his
Common Reply/Comment to private Respondents' "Opposition" and "Comment" to
Motion for Reconsideration, four (4) months AFTER the motion for Reconsideration
had been filed. During oral arguments heard on July 9, 1992, he proceeded to discuss
this tax exemption withdrawal as explained by then Secretary of Justice Vicente
Abad Santos in opinion No. 133 (S '77). 62 A careful perusal of petitioner's senate
Blue Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield
any mention of said P.D. No. 1177's effect on NPC's tax exemption privileges. 63
Applying by analogy Pulido vs. Pablo, 64 the court declares that the matter of P.D.
No. 1177 abolishing NPC's tax exemption privileges was not seasonably invoked 65
by the petitioner.
Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the
NPC tax exemption privileges as this statute has been reiterated twice in P.D. No.
1931. The express repeal of tax privileges of any government-owned or controlled
corporation (GOCC). NPC included, was reiterated in the fourth whereas clause of
P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177,
being inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal
Incentives Revenue Board was tasked with recommending the partial or total
restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC asked for the subsidy
contemplated in Section 23, P.D. No. 1177. Considering, however, that under
Section 16 of P.D. No. 1177, NPC had to submit to the Office of the President its
request for the P200 million mandated by P.D. No. 758 to be appropriated annually
by the Government to cover its unpaid subscription to the NPC authorized capital
stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to
the Office of the President its internal operating budget for review due to capital
inputs of the government (P.D. No. 758) and to the national government's guarantee
of the domestic and foreign indebtedness of the NPC, it is clear that NPC was
covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted to exempt GOCC's
that suddenly found themselves having to pay taxes. It will be noted that Section 23,
P.D. No. 1177, mandated that the Secretary of Finance and the Commissioner of the
Budget had to establish the necessary procedure to accomplish the tax payment/tax
subsidy scheme of the Government. In effect, NPC, did not put any cash to pay any
tax as it got from the General Fund the amounts necessary to pay different revenue
collectors for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177 on July 30,
1977, the NPC lost all its duty and tax exemptions,
whether direct or indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No. 1931, issued
on June 11, 1984. This is evident from sections 1 and 2 of
said P.D. No. 1931, which reads:
"Section 1. The provisions of special or
general law to the contrary
notwithstanding, all exemptions from
the payment of duties, taxes, fees,
imports and other charges heretofore
granted in favor of government-owned
or controlled corporations including
their subsidiaries are hereby
withdrawn."
Sec. 2. The President of the Philippines
and/or the Minister of Finance, upon the
recommendation of the Fiscal
Incentives Review Board created under
P.D. No. 776, is hereby empowered to
restore partially or totally, the
exemptions withdrawn by section 1
above. . . .
Hence, P.D. No. 1931 did not have any effect or did it
change NPC's status. Since it had already lost all its tax
exemptions privilege with the issuance of P.D. No. 1177
seven (7) years earlier or on July 30, 1977, there were no
tax exemptions to be withdrawn by section 1 which could
later be restored by the Minister of Finance upon the
recommendation of the FIRB under Section 2 of P.D. No.
1931. Consequently, FIRB resolutions No. 10-85, and 1-
86, were all illegally and validly issued since FIRB acted
beyond their statutory authority by creating and not
merely restoring the tax exempt status of NPC. The same
is true for FIRB Res. No. 17-87 which restored NPC's tax
exemption under E.O. No. 93 which likewise abolished all
duties and tax exemptions but allowed the President upon
recommendation of the FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same
or substantially the same terms the provisions of the act or
acts so revised and consolidated, the revision and
consolidation shall be taken to be a continuation of the
former act or acts, although the former act or acts may be
expressly repealed by the revised and consolidated act;
and all rights
and liabilities under the former act or acts are preserved
and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first
half of Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all
GOCC's said Section 1, P.D. No. 1931 was deemed to be a continuation of the first
half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No.
177, on the subsidy scheme for former tax exempt GOCCs had been expressly
repealed by Section 2 with its institution of the FIRB recommendation of partial/total
restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the
same NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC
could no longer obtain a subsidy for the taxes it had to pay. It could, however, under
P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it did,
and the same were granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as
approved by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and
1-86 were both legally and validly issued by the FIRB pursuant to P.D. No. 1931.
FIRB did not created NPC's tax exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931 was illegally issued under
the now rather infamous Amendment No. 6 70 as there was no showing that President
Marcos' encroachment on legislative prerogatives was justified under the then
prevailing condition that he could legislate "only if the Batasang Pambansa 'failed or
was unable to act inadequately on any matter that in his judgment required
immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then President Marcos could issue decrees
not only when the Interim Batasang Pambansa failed or was unable to act adequately
on any matter for any reason that in his (Marcos') judgment required immediate
action, but also when there existed a grave emergency or a threat or thereof. It must
be remembered that said Presidential Decree was issued only around nine (9) months
after the Philippines unilaterally declared a moratorium on its foreign debt payments
72
as a result of the economic crisis triggered by loss of confidence in the government
brought about by the Aquino assassination. The Philippines was then trying to
reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had
a US$ 2.1 billion white elephant of a Bataan Nuclear Power Plant on its back. 75
From all indications, it must have been this grave emergency of a debt rescheduling
which compelled Marcos to issue P.D. No. 1931, under his Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law granting a tax
exemption shall be passed without the concurrence of a majority of all the members
of the Batasang Pambansa" 77 does not apply as said P.D. No. 1931 was not passed
by the Interim Batasang Pambansa but by then President Marcos under His
Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President Marcos under his
Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this
time, President Aquino. Its section 2 allowed the NPC to apply for the restoration of
its tax exemption privileges. The same was granted under FIRB Resolution No. 17-
87 78 dated June 24, 1987 which restored NPC's tax exemption privileges effective,
starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79
There is no indication, however, from the records of the case whether or not similar
approvals were given by then President Marcos for FIRB Resolutions Nos. 10-85
and 1- 86. This has led some quarters to believe that a "travesty of justice" might
have occurred when the Minister of Finance approved his own recommendation as
Chairman of the Fiscal Incentives Review Board as what happened in Zambales
Chromate vs. Court of Appeals 80 when the Secretary of Agriculture and Natural
Resources approved a decision earlier rendered by him when he was the Director of
Mines, 81 and in Anzaldo vs. Clave 82 where Presidential Executive Assistant Clave
affirmed, on appeal to Malacañang, his own decision as Chairman of the Civil
Service Commission. 83
Upon deeper analysis, the question arises as to whether one can talk about "due
process" being violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved
by the Minister of Finance when the same were recommended by him in his capacity
as Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining
groups and scientist-doctors, respectively. Thus, there was a need for procedural due
process to be followed.
In the case of the tax exemption restoration of NPC, there is no other comparable
entity — not even a single public or private corporation — whose rights would be
violated if NPC's tax exemption privileges were to be restored. While there might
have been a MERALCO before Martial Law, it is of public knowledge that the
MERALCO generating plants were sold to the NPC in line with the State policy that
NPC was to be the State implementing arm for the electrification of the entire
country. Besides, MERALCO was limited to Manila and its environs. And as of
1984, there was no more MERALCO — as a producer of electricity — which could
have objected to the restoration of NPC's tax exemption privileges.
It should be noted that NPC was not asking to be granted tax exemption privileges
for the first time. It was just asking that its tax exemption privileges be restored. It is
for these reasons that, at least in NPC's case, the recommendation and approval of
NPC's tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done
by the same person acting in his dual capacities as Chairman of the Fiscal Incentives
Review Board and Minister of Finance, respectively, do not violate procedural due
process.
While as above-mentioned, FIRB Resolution No. 17-87 was approved by President
Aquino on October 5, 1987, the view has been expressed that President Aquino, at
least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB,
which was allegedly not a delegate of the legislature, the power delegated to her
thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was exercising both
Executive and Legislative powers. Thus, there was no power delegated to her, rather
it was she who was delegating her power. She delegated it to the FIRB, which, for
purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not
sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the
policy to be carried out 85 and it fixed the standard to which the delegate had to
conform in the performance of his functions, 86 both qualities having been enunciated
by this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax exemption privileges
restored from June 11, 1984 up to the present.
VII
The next question that projects itself is — who pays the tax?
The answer to the question could be gleamed from the manner by which the
Commissaries of the Armed Forces of the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and
their defendants but groceries and other goods free of all taxes and duties if bought
from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable specific,
ad valorem and other taxes on the goods earmarked for AFP Commissaries as an
added cost of operation and distribute it over the total units of goods sold as it would
any other cost. Thus, even the ordinary supermarket buyer probably pays for the
specific, ad valorem and other taxes which theses suppliers do not charge the AFP
Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies
have to absorb the taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of
Justice renders an opinion, 90 wherein he stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the National Power
Corporation from "all taxes, duties, fees, imposts, charges,
and restrictions of the Republic of the Philippines and its
provinces, cities, and municipalities." This exemption is
broad enough to include all taxes, whether direct or
indirect, which the National Power Corporation may be
required to pay, such as the specific tax on petroleum
products. That it is indirect or is of no amount [should be
of no moment], for it is the corporation that ultimately
pays it. The view which refuses to accord the exemption
because the tax is first paid by the seller disregards
realities and gives more importance to form than to
substance. Equity and law always exalt substance over
from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly
but not so grudgingly as knowledge that many
impositions taxpayers have to pay are in the nature of
indirect taxes. To limit the exemption granted the
National Power Corporation to direct taxes
notwithstanding the general and broad language of the
statue will be to thwrat the legislative intention in giving
exemption from all forms of taxes and impositions
without distinguishing between those that are direct and
those that are not. (Emphasis supplied)
In view of all the foregoing, the Court rules and declares that the oil companies
which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker
fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of
such taxation is expected to be passed on through the channels of commerce to the
user or consumer of the goods sold. Because, however, the NPC has been exempted
from both direct and indirect taxation, the NPC must beheld exempted from
absorbing the economic burden of indirect taxation. This means, on the one hand,
that the oil companies which wish to sell to NPC absorb all or part of the economic
burden of the taxes previously paid to BIR, which could they shift to NPC if NPC
did not enjoy exemption from indirect taxes. This means also, on the other hand, that
the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil
which represents all or part of the taxes previously paid by the oil companies to BIR.
If NPC nonetheless purchases such oil from the oil companies — because to do so
may be more convenient and ultimately less costly for NPC than NPC itself
importing and hauling and storing the oil from overseas — NPC is entitled to be
reimbursed by the BIR for that part of the buying price of NPC which verifiably
represents the tax already paid by the oil company-vendor to the BIR.
It should be noted at this point in time that the whole issue of who WILL pay these
indirect taxes HAS BEEN RENDERED moot and academic by E.O. No. 195 issued
on June 16, 1987 by virtue of which the ad valorem tax rate on bunker fuel oil was
reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION 128 OF
THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED BY REVISING THE EXCISE TAX RATES
OF CERTAIN PETROLEUM PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National
Internal Revenue Code, as amended, is hereby amended
to read as follows:
Par. (b) — For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on
similar fuel oils having more or less the same generating
power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.
Done in the city of Manila, this 17th day of June, in the
year of Our Lord, nineteen hundred and eighty-seven.
(Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry
about who is going to bear the economic burden of the ad valorem taxes. What this
Court will now dispose of are petitioner's complaints that some indirect tax money
has been illegally refunded by the Bureau of Internal Revenue to the NPC and that
more claims for refunds by the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in
favor of the NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously
paid specific and ad valorem taxes during the period from October 31, 1984 to April
27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC
did not have indirect tax exemptions with the enactment of P.D. No. 938. As We
have already ruled otherwise, the only questions left are whether NPC Is entitled to a
tax refund for the tax component of the price of the bunker fuel oil purchased from
Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded
the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when
the BIR issues its letter authority to the NPC authorizing it to withdraw tax-free
bunker fuel oil from the oil companies pursuant to FIRB Resolution No. 10-85. 92
Since the tax exemption restoration was retroactive to June 11, 1984 there was a
need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the
BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the
period above indicated and had billed NPC correspondingly. 93 It should be noted
that the NPC, in its letter-claim dated September 11, 1985 to the Commissioner of
the Bureau of Internal Revenue DID NOT CATEGORICALLY AND
UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as part of the
bunker fuel oil price it purchased from Caltex (Phils) Inc. 94
The law governing recovery of erroneously or illegally, collected taxes is section 230
of the National Internal Revenue Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or illegally collected.
— No suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to
have been excessive or in any Manner wrongfully
collected. until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or
sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun
after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause
that may arise after payment; Provided, however, That the
Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears
clearly, to have been erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the
Commissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax
exemption.
Petitioner, however, asks Us to restrain the Commissioner from acting favorably on
NPC's claim for P410.580,000.00 which represents specific and ad valorem taxes
paid by the oil companies to the BIR from June 11, 1984 to the early part of 1986. 96
A careful examination of petitioner's pleadings and annexes attached thereto does not
reveal when the alleged claim for a P410,580,000.00 tax refund was filed. It is only
stated In paragraph No. 2 of the Deed of Assignment 97 executed by and between
NPC and Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim
with the Bureau of Internal Revenue amounting to
P442,887,716.16. P58.020,110.79 of which is due to
Assignor's oil purchases from the Assignee (Caltex [Phils.]
Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot
restrain the BIR from refunding said amount because of Our ruling that NPC has
both direct and indirect tax exemption privileges. Neither can We order the BIR to
refund said amount to NPC as there is no pending petition for review on certiorari of
a suit for its collection before Us. At any rate, at this point in time, NPC can no
longer file any suit to collect said amount EVEN IF lt has previously filed a claim
with the BIR because it is time-barred under Section 230 of the National Internal
Revenue Code of 1977. as amended, which states:
In any case, no such suit or proceeding shall be begun
after the expiration of two years from the date of payment
of the tax or penalty REGARDLESS of any supervening
cause that may arise after payment. . . . (Emphasis
supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that
payment by NPC for the amount of P410,580,000.00 had been made on said date. it
is clear that more than two (2) years had already elapsed from said date. At the same
time, We should note that there is no legal obstacle to the BIR granting, even without
a suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim
had been made seasonably, and assuming the amounts covered had actually been
paid previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of
petitioner is hereby DENIED for lack of merit and the decision of this Court
promulgated on May 31, 1991 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Feliciano, Bidin, Regalado, Romero, Bellosillo and Melo, JJ., concur.
G.R. No. L-14264 April 30, 1963
RAYMUNDO B. TAN, JOSE ESGUERRA, ROMAN ABASTILLAS,
ANTONIO QUEBRADO, ROMAN AGNES, ELISEO AMANDY, NICOLAS
SOTOMAYOR, INESTORIO TORRENUEVA and FELIPE TIOSAN,
plaintiffs-appellees,
vs.
THE MUNICIPALITY OF PAGBILAO, ELIAS PORNOBI as Municipal
Mayor of Pagbilao and CEFERINO CAPARROS as Municipal Treasurer of
Pagbilao, defendants-appellants.
Jose D. Villena for plaintiffs-appellees.
Claro M. Recto for defendants-appellants.
PAREDES, J.:
Defendant municipal corporation was the owner and operator of a wharf (Exhs. E &
F). On May 31, 1956, the municipal council of defendant municipality enacted
Ordinance No. 11, series of 1956, imposing certain charges and/or fees on articles or
merchandises landed upon, or loaded from the said wharf and on the strip of
shoreline adjacent thereto, measuring 300 meters. The plaintiffs, who were fishermen,
merchants and proprietors of Padre Burgos, Quezon, had to pass Pagbilao in order to
bring their goods consisting of fish, charcoal, copra, firewood and other merchandise
to Lucena. The merchandise were transported in bancas or motor boats from Padre
Burgos and unloaded on the Pagbilao wharf or on the shoreline, from where they
were brought to Lucena by trucks.
Pursuant to the Ordinance, defendant municipality required plaintiffs to pay the
charges and fees, which they did under protest. On January 7, 1957, alleging that the
Ordinance was ultra vires, in that the fees prescribed therein partake of the nature of
import or export taxes, in the guise of wharfage or rental fees, the plaintiffs,
instituted an action, with the CFI of Quezon Province, praying:
(1) That the said Municipal ordinance be declared null and void and of no
legal effect; and
(2) Ordering the defendants, jointly and severally, to pay the plaintiffs the
sum of P1,800.00 for fees collected and paid under protest.
Defendants answering the complaint, interposed the following special defenses:
1) that the fees collected at the wharf are intended for and actually being
exclusively utilized in the repair, improvement, and maintenance of the
same;
2) that the municipality has made material and additional construction to
date, and if the revenues raised from these fees are sufficient, the wharf is
intended to be lengthened along the 300 meters distance by the river;
3) the presence, day and night, of a municipal employee or of a policeman
at the wharf, has resulted in the prevailing peace, order, and security of
cargoes, vessels, and of the operators therein;
4) the municipality also maintains a 300 candle power kerosene lantern at
the wharf.
As counterclaim, defendants asked the payment of P6.00, for twelve
truckloads of full-length bamboos, loaded on a vessel at the wharf for which
no payment had been made, in spite of repeated demands. The court a quo
rendered the following judgment:
xxx xxx xxx
In the light of the foregoing, the Court is therefore of the opinion that
Ordinance No. 11, Series of 1956, of defendant Municipality of Pagbilao,
Quezon, is null and void for having been enacted without lawful authority ....
xxx xxx xxx
WHEREFORE, judgment is hereby rendered ordering defendant
municipality of PagbiIao, Quezon, to pay to plaintiff Raymundo B. Tan the
amount of P774.25, with legal interest thereon from the filing of the
complaint, that is, from 4 February 1957, and dismissing defendants'
counterclaim against plaintiffs, with the parties bearing their own costs.
The above judgment is now before Us on appeal by the defendants, urging a reversal
thereof on seven counts, which converge on the following legal issues:
1) whether the defendant municipality can validly enact the ordinance in
question and collect the charges contained therein; and
2) whether plaintiff Tan is entitled to a refund of the fees paid to the
defendant municipality.
Appellants contend that aside from the general powers of the council to enact
ordinances and make regulations (Sec. 2238 of the Administrative Code),certain
provisions of said Code authorizes a municipality to establish a wharf and collect
wharfage fees, as compensation for its use, to wit —
SEC. 2242. Certain legislative powers of mandatory character.— It shall be
the duty of the municipal council, conformably with law:
xxx xxx xxx
(e) To regulate the construction, care, and use of streets, sidewalks, canals,
wharves and piers of the municipality, and prevent and remove obstacles
and encroachment on the same.
SEC. 2318. Municipal ferries, wharves, markets, etc. — A municipal
council shall have authority to acquire or establish municipal ferries,
wharves, markets, slaughterhouses, pounds, and cemeteries. Public utilities
thus owned by the municipality may be conducted by the municipal
authorities upon stipulated return to private parties.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without prejudice
to the parties adducing other evidence to prove their case not covered by
this stipulation of facts. 1äwphï1.ñët
SEC. 2320. Establishment of certain public utilities by private parties under
license.— Where provision is not made by a municipal council, pursuant to
the provisions of the next two preceding sections hereof, for maintaining or
conducting ferries, wharves, markets, or slaughterhouses requisite for the
needs of the municipality, the council shall have authority, in its discretion,
to let the privilege of establishing and maintaining such utilities to private
parties by license granted upon such terms as shall be fixed by the
council ....
Aside from the above provisions, Executive Order No. 255, dated April 1, 1940,
states:
(6) Collection of berthing fees at municipal ports.-Municipalities may collect
berthing fees at municipal ports, pursuant to the provisions of section two thousand
three hundred eighteen (2318) of the Revised Administrative Code, not to exceed
those specified in paragraph (3) hereof, provided that such collection shall be
credited to a special fund and used only for the maintenance and improvement of the
port at which the collections are made.
Appellants further contended that the wharfage fees which section 3(t), of
Commonwealth Act No. 472, prohibits a municipality from collecting, are customs
charges levied in connection with the exportation or importation of goods abroad,
through ports of entry, as contemplated in the Tariff and Customs Code, but not the
ordinary wharfage rentals which a municipality may collect for the use of its wharf,
in relation to local trade and local products.
On the other hand, the appellees maintain that the appellant municipality was devoid
one right to pass the ordinance in question, since the Revised Administrative Code
also prohibits the imposition of tax on any goods or merchandise carried into or out
of the municipality. Section 2287 thereof, provides —
SEC. 2287. Fundamental principles governing municipal taxation. — ... It
shall not be in the power of the council to impose a tax in any form
whatever upon goods and merchandise carried into the municipality, or out
of the same, and any attempt to impose an import or export tax upon such
goods in the guise of an unreasonable charge for wharfage, use of bridges or
otherwise shall be void.
Moreover, any power granted by the Administrative Code to municipalities
had been impliedly repealed or withdrawn by Commonwealth Act No. 472,
the pertinent portions of which read —
SEC. 3. It shall be beyond the power of the municipal council and
municipal district council to impose the following taxes, charges and fees:
xxx xxx xxx
Customs duties, registration, wharfage, tonnage and other kinds of customs
fees, charges and duties.
In the light of the legal provisions applicable, We are of the opinion that the
ordinance in question, is ultra vires, and hence, null and void. The ordinance calls for
a specific tax. It charges a specific sum, ranging from one centavo and up, by the
head or number, and requires no assessment beyond a listing and classification of the
objects to be charged..
A tax which imposes a specific sum by the head or number, or some
standard weight or measurement, and which requires no assessment beyond
a listing and classification of the objects to be taxed is specific tax. (We Wa
Yu v. City of Lipa, G.R. No. L-9167, Sept. 27, 1956)
Aside from being a specific tax, its nature as wharfage fee is also clear from the
import of the ordinance, specifically paragraph 1, which recites -.
PANGKAT 1.— Ang lahat na mayari o tagapangasiwa ng mga sasakyan sa
pantalang bayan, ay dapat magbigay-alam sa kinauukulang katiwala ng pamahalaan,
upang maisaayos ang pagdaung, pagbaba at pagsakay ng mga kargamentos at iba
pa.
The phraseology of the above paragraph points to the fact that the charges collected
pursuant thereto, correspond to the words "berthing, unloading and loading of
cargoes or merchandise" which fall under the category of wharfage fees. The change
or the designation of the said fees as "rental of municipal property" did not change
their basic character as "wharfage fees". Being a specific tax, the municipality has no
right to impose the same, for taxation is an attribute of sovereignty which municipal
corporation do not enjoy (Santo Lumber Co., et al v. City of Cebu, et al., L-10196,
Jan. 22, 1958; 54 O.G. 5327; Saldana v. City of Iloilo, L-10470, June 26, 1958). It
shall not be in the power of the council to impose a tax in any form whatever upon
goods and merchandise carried into the municipality or out of the same, and any
attempt to impose such tax in the guise of wharfage fee or charge is void (Sec. 2287,
Rev. Adm. Code). And being wharfage fee (Phil. Sugar Central v. Coll. of Customs,
51 Phil. 131), it is likewise beyond the power of the municipal council and municipal
district council to impose (Sec. 3, Comm. Act No. 472, supra).
In the case at bar, aside from the fact that the right of the municipality to collect
wharfage fees is doubtful for, at most, its claim is based merely by inference,
implications and deductions, which have no place in the interpretation of the power
to tax of a municipal corporation (Icard v. City Council of Baguio, et al., 46 Off.
Gaz., Suppl. No. 11, p. 320; Medina, et al. v. City of Baguio, 48 Off. Gaz., 11, p.
4729) no less than two Secretaries of the Department of Justice, (Secretaries Jose
Abad Santos & Bengzon) expressed the opinion that, "in view of section 3,
paragraph (t), Commonwealth Act No. 472, which expressly forbids municipalities
from imposing wharfage fees, a municipal ordinance levying wharfage or berthing
fees is illegal and void, ... (Opinion No. 373, series of 1940 and No. 165, series of
1951). Opinions and rulings of officials of the government called upon to execute or
implement administrative laws command much respect and weight (Regalado v.
Yulo, 61 Phil. 173; Grapilon v. Mun. Council of Carigara, L-12347, May 30, 1961)
It should be noted that previous to the ordinance in question (No. 11), ordinance No.
9 was enacted by the same municipal council, providing for "wharfage fees" for
goods and merchandise only. But because the Provincial Board ruled the to be null
and void, because the prescribed fees were unreasonable and were obviously export
or import taxes in the guise of wharfage fees which are contrary to the provisions of
section 2287 of the Administrative Code, the municipal council of Pagbilao enacted
Ordinance No. 11, providing for the wharfage of boats and vessels and of goods and
merchandise; and while it fixed the fees or charges for loading and unloading goods
and merchandise, it did not state the berthing fees for boats and vessels carrying the
goods, all of which go to show that the council wanted only to impose specific tax on
the goods and merchandise, which was the same objective it had, when the annulled
Ordinance No. 9 was promulgated.
The question as to whether or not the charges paid should be returned, must be
answered in the affirmative. Not only were the payments made under protest, but
they were also collected under an invalid ordinance. In a number of cases, We have
ruled that monies collected under invalid acts or tax laws are refundable, even if the
payments were voluntary (East Asiatic Co., Ltd. v. City of Davao, L-16253, Aug. 21,
1962).
It is insinuated that invalidating the ordinance would leave the municipality with no
means to defray the expenses for operation, repair and maintenance of the wharf in
question. It would seem, however, that the municipality will not be absolutely
helpless and hopeless, for there is always some remedy somewhere, and those
indicated in sections 2318 and 2320 of the Adm. Code, (supra) may be availed of.
IN VIEW OF ALL THE FOREGOING, we find that the decision appealed from is in
conformity with the law and jurisprudence on the matter. The same should be, as it is
hereby affirmed, in all respects. No costs.
G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and
UBALDO CARBONELL, in his capacity as National Treasurer, defendants-
appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or regulatory
fees?
This question has been brought before this Court in the past. The parties are, in effect,
asking for a re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court
of Appeals in a case where the then Court of First Instance of Rizal dismissed the
portion-about complaint for refund of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo
F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the
Land Transportation and Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the laws
of the Philippines and engaged in the air transportation business under a legislative
franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its
franchise, PAL is exempt from the payment of taxes. The pertinent provision of the
franchise provides as follows:
Section 13. In consideration of the franchise and rights
hereby granted, the grantee shall pay to the National
Government during the life of this franchise a tax of two
per cent of the gross revenue or gross earning derived by
the grantee from its operations under this franchise. Such
tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied,
established or collected by any municipal, provincial or
national automobiles, Provided, that if, after the audit of
the accounts of the grantee by the Commissioner of
Internal Revenue, a deficiency tax is shown to be due, the
deficiency tax shall be payable within the ten days from
the receipt of the assessment. The grantee shall pay the
tax on its real property in conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956)
PAL has, since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a
regulation requiring all tax exempt entities, among them PAL to pay motor vehicle
registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The
appellant thus paid, under protest, the amount of P19,529.75 as registration fees of its
motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May 19,1971,
to Commissioner Edu demanding a refund of the amounts paid, invoking the ruling
in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt by
virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in
Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the
effect that motor vehicle registration fees are regulatory exceptional. and not revenue
measures and, therefore, do not come within the exemption granted to PAL? under
its franchise. Hence, PAL filed the complaint against Land Transportation
Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the
Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No.
Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI
Carbonell in his capacity as National Treasurer, filed a motion to dismiss alleging
that the complaint states no cause of action. In support of the motion to dismiss,
defendants repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc.,
(supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They
contended that while Act 4271 exempts PAL from the payment of any tax except two
per cent on its gross revenue or earnings, it does not exempt the plaintiff from paying
regulatory fees, such as motor vehicle registration fees. The resolution of the motion
to dismiss was deferred by the Court until after trial on the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's
complaint "moved by the later ruling laid down by the Supreme Court in the case or
Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL
appealed to the Court of Appeals which certified the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra)
cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main points
of contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay
was imposed by Section 8 of the Revised Motor Vehicle
Law (Republic Act No. 587 [1950]). Its heading speaks of
"registration fees." The term is repeated four times in the
body thereof. Equally so, mention is made of the "fee for
registration." (Ibid., Subsection G) A subsection starts
with a categorical statement "No fees shall be charged."
(lbid., Subsection H) The conclusion is difficult to resist
therefore that the Motor Vehicle Act requires the payment
not of a tax but of a registration fee under the police
power. Hence the incipient, of the section relied upon by
defendant-appellee under the Back Pay Law, It is not held
liable for a tax but for a registration fee. It therefore
cannot make use of a backpay certificate to meet such an
obligation.
 Any vestige of any doubt as to the correctness of the
above conclusion should be dissipated by Republic Act
No. 5448. ([1968]. Section 3 thereof as to the imposition
of additional tax on privately-owned passenger
automobiles, motorcycles and scooters was amended by
Republic Act No. 5470 which is (sic) approved on May
30, 1969.) A special science fund was thereby created and
its title expressly sets forth that a tax on privately-owned
passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its
Section 3 which clearly specifies the" Philippine
tax."(Cooley to be paid as distinguished from the
registration fee under the Motor Vehicle Act. There
cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier
legislation could by subdivision the point be susceptible
of the interpretation that a tax rather than a fee was levied.
What is thus most apparent is that where the legislative
body relies on its authority to tax it expressly so states,
and where it is enacting a regulatory measure, it is equally
exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on
the other hand, held:
The charges prescribed by the Revised Motor Vehicle
Law for the registration of motor vehicles are in section 8
of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they
really are. For not the name but the object of the charge
determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for
purposes of regulation and inspection and are for that
reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a
charge fixed by statute for the service to be person,-When
by an officer, where the charge has no relation to the
value of the services performed and where the amount
collected eventually finds its way into the treasury of the
branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on
Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that
the expenditures of the Motor Vehicle Office are but a
small portion—about 5 per centum—of the total
collections from motor vehicle registration fees. And as
proof that the money collected is not intended for the
expenditures of that office, the law itself provides that all
such money shall accrue to the funds for the construction
and maintenance of public roads, streets and bridges. It is
thus obvious that the fees are not collected for regulatory
purposes, that is to say, as an incident to the enforcement
of regulations governing the operation of motor vehicles
on public highways, for their express object is to provide
revenue with which the Government is to discharge one of
its principal functions—the construction and maintenance
of public highways for everybody's use. They are
veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself
now regards those fees as taxes, for it provides that "no
other taxes or fees than those prescribed in this Act shall
be imposed," thus implying that the charges therein
imposed—though called fees—are of the category of
taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of
Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than
those prescribed in this Act shall be
imposed for the registration or operation
or on the ownership of any motor
vehicle, or for the exercise of the
profession of chauffeur, by any
municipal corporation, the provisions of
any city charter to the contrary
notwithstanding: Provided, however,
That any provincial board, city or
municipal council or board, or other
competent authority may exact and
collect such reasonable and equitable
toll fees for the use of such bridges and
ferries, within their respective
jurisdiction, as may be authorized and
approved by the Secretary of Public
Works and Communications, and also
for the use of such public roads, as may
be authorized by the President of the
Philippines upon the recommendation
of the Secretary of Public Works and
Communications, but in none of these
cases, shall any toll fee." be charged or
collected until and unless the approved
schedule of tolls shall have been posted
levied, in a conspicuous place at such
toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised
Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and
Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the
Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D.
Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and
remained unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.—Twenty per
centum of the money collected under the provisions of
this Act shall accrue to the road and bridge funds of the
different provinces and chartered cities in proportion to
the centum shall during the next previous year and the
remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the
construction and maintenance of national and provincial
roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public
Works and Communications for projects recommended
by the Director of Public Works in the different provinces
and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. Collected—Monies
collected under the provisions of this Act shall be
deposited in a special trust account in the National
Treasury to constitute the Highway Special Fund, which
shall be apportioned and expended in accordance with the
provisions of the" Philippine Highway Act of 1935.
"Provided, however, That the amount necessary to
maintain and equip the Land Transportation Commission
but not to exceed twenty per cent of the total collection
during one year, shall be set aside for the purpose. (As
amended by RA 64-67, approved August 6, 1971).
It appears clear from the above provisions that the legislative intent and purpose
behind the law requiring owners of vehicles to pay for their registration is mainly to
raise funds for the construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. On the other
hand, the Philippine Rabbit case mentions a presumption arising from the use of the
term "fees," which appears to have been favored by the legislature to distinguish fees
from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which
reads:
Sec. 13. Payment of taxes upon registration.—No original
registration of motor vehicles subject to payment of taxes,
customs s duties or other charges shall be accepted unless
proof of payment of the taxes due thereon has been
presented to the Commission.
referring to taxes other than those imposed on the registration, operation or
ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument
of regulation, As stated by a former presiding judge of the Court of Tax Appeals and
writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose.
regulation. License fees are changes. looked to as a source
of revenue as well as a means of regulation (Sonzinky v.
U.S., 300 U.S. 506) This is true, for example, of
automobile license fees. Isabela such case, the fees may
properly be regarded as taxes even though they also serve
as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and
substantial purposes, then the exaction is properly called a
tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley
on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97
Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These
exactions are sometimes called regulatory taxes. (See
Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S.
Internal Revenue Code of 1954, which classify taxes on
tobacco and alcohol as regulatory taxes.) (Umali,
Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on
Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is
the case of motor vehicle registration fees. The conclusions become inescapable in
view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same
provision appears as Section 591-593). in the Land Transportation code. It is patent
therefrom that the legislators had in mind a regulatory tax as the law refers to the
imposition on the registration, operation or ownership of a motor vehicle as a "tax or
fee." Though nowhere in Rep. Act 4136 does the law specifically state that the
imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration
or operation or on the ownership of any motor vehicle, or for the exercise of the
profession of chauffeur ..." making the intent to impose a tax more apparent. Thus,
even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where
the law could have referred to an original tax and not one in addition to the tax
already imposed on the registration, operation, or ownership of a motor vehicle under
Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep.
Act 4136 also speaks of other "fees," such as the special permit fees for certain types
of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11).
These are not to be understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes
like the motor vehicle registration fee and chauffers' license fee. Such fees are to go
into the expenditures of the Land Transportation Commission as provided for in the instrumentalities owned or controlled by
last proviso of see. 61, aforequoted. the government, including the
It is quite apparent that vehicle registration fees were originally simple exceptional. Government Service Insurance System
intended only for rigidly purposes in the exercise of the State's police powers. Over and the Social Security System but
the years, however, as vehicular traffic exploded in number and motor vehicles excluding educational institutions, shall
became absolute necessities without which modem life as we know it would stand pay such rate of tax upon their taxable
still, Congress found the registration of vehicles a very convenient way of raising net income as are imposed by this
much needed revenues. Without changing the earlier deputy. of registration section upon associations or
payments as "fees," their nature has become that of "taxes." corporations engaged in a similar
In view of the foregoing, we rule that motor vehicle registration fees as at present business or industry. "
exacted pursuant to the Land Transportation and Traffic Code are actually taxes An examination of Section 24 of the Tax Code as
intended for additional revenues. of government even if one fifth or less of the amended shows clearly that the law intended all corporate
amount collected is set aside for the operating expenses of the agency administering taxpayers to pay income tax as provided by the statute.
the program. There can be no doubt as to the power of Congress to
May the respondent administrative agency be required to refund the amounts stated repeal the earlier exemption it granted. Article XIV,
in the complaint of PAL? Section 8 of the 1935 Constitution and Article XIV,
The answer is NO. Section 5 of the Constitution as amended in 1973
The claim for refund is made for payments given in 1971. It is not clear from the expressly provide that no franchise shall be granted to any
records as to what payments were made in succeeding years. We have ruled that individual, firm, or corporation except under the condition
Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax that it shall be subject to amendment, alteration, or repeal
exemptions Of corporate taxpayers found in legislative franchises similar to that by the legislature when the public interest so requires.
invoked by PAL in this case. There is no question as to the public interest involved.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. The country needs increased revenues. The repealing
(G.R. No. 615)." July 11, 1985), this Court ruled: clause is clear and unambiguous. There is a listing of
Under its original franchise, Republic Act No. 21); entities entitled to tax exemption. The petitioner is not
enacted in 1957, petitioner Radio Communications of the covered by the provision. Considering the foregoing, the
Philippines, Inc., was subject to both the franchise tax and Court Resolved to DENY the petition for lack of merit.
income tax. In 1964, however, petitioner's franchise was The decision of the respondent court is affirmed.
amended by Republic Act No. 41-42). to the effect that its Any registration fees collected between June 27, 1968 and April 9, 1979, were
franchise tax of one and one-half percentum (1-1/2%) of correctly imposed because the tax exemption in the franchise of PAL was repealed
all gross receipts was provided as "in lieu of any and all during the period. However, an amended franchise was given to PAL in 1979.
taxes of any kind, nature, or description levied, Section 13 of Presidential Decree No. 1590, now provides:
established, or collected by any authority whatsoever, In consideration of the franchise and rights hereby granted,
municipal, provincial, or national from which taxes the the grantee shall pay to the Philippine Government during
grantee is hereby expressly exempted." The issue raised to the lifetime of this franchise whichever of subsections (a)
this Court now is the validity of the respondent court's and (b) hereunder will result in a lower taxes.)
decision which ruled that the exemption under Republic (a) The basic corporate income tax
Act No. 41-42). was repealed by Section 24 of Republic based on the grantee's annual net
Act No. 5448 dated June 27, 1968 which reads: taxable income computed in accordance
"(d) The provisions of existing special with the provisions of the Internal
or general laws to the contrary Revenue Code; or
notwithstanding, all corporate taxpayers (b) A franchise tax of two per cent (2%)
not specifically exempt under Sections of the gross revenues. derived by the
24 (c) (1) of this Code shall pay the grantees from all specific. without
rates provided in this section. All distinction as to transport or
corporations, agencies, or nontransport corporations; provided that
 with respect to international airtransport
service, only the gross passengers, mail,
and freight revenues. from its outgoing
flights shall be subject to this law.
The tax paid by the grantee under either of the above
alternatives shall be in lieu of all other taxes, duties,
royalties, registration, license and other fees and charges
of any kind, nature or description imposed, levied,
established, assessed, or collected by any municipal, city,
provincial, or national authority or government, agency,
now or in the future, including but not limited to the
following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration,
license, acquisition, and transfer of airtransport equipment,
motor vehicles, and all other personal or real property of
the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259,
April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in
the earlier law. PAL is now exempt from the payment of any tax, fee, or other charge
on the registration and licensing of motor vehicles. Such payments are already
included in the basic tax or franchise tax provided in Subsections (a) and (b) of
Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation Franchising and
Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other
charge on the registration and licensing of the petitioner's motor vehicles from April
9, 1979 as provided in Presidential Decree No. 1590.
SO ORDERED.
G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil
Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.
CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's
claims for refund of overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as
part of its ordinary and necessary business expenses, the amount it had spent for
drilling and exploration of its petroleum concessions. This claim was disallowed by
the respondent Commissioner of Internal Revenue on the ground that the expenses
should be capitalized and might be written off as a loss only when a "dry hole"
should result. ESSO then filed an amended return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of several of its oil wells.
Also claimed as ordinary and necessary expenses in the same return was the amount
of P340,822.04, representing margin fees it had paid to the Central Bank on its profit
remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing
the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the
period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The
deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by
ESSO to the Central Bank on its profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax
credit of P221,033.00 representing its overpayment on its income tax for 1959 and
paying under protest the additional amount of P213,201.92. On August 13, 1964, it
claimed the refund of P39,787.94 as overpayment on the interest on its deficiency
income tax. It argued that the 18% interest should have been imposed not on the total
deficiency of P367,944.00 but only on the amount of P146,961.00, the difference
between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the
entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims
of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding
that the margin fees paid to the Central Bank could not be considered taxes or
allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
contending that the margin fees were deductible from gross income either as a tax or
as an ordinary and necessary business expense. It also claimed an overpayment of its
tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that
even if the amount paid as margin fees were not legally deductible, there was still an
overpayment by P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and
P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This
portion of the decision was appealed by the CIR but was affirmed by this Court in
Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on
April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for
the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That
is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize
the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates
measure, the margin fees paid by the petitioner to the Central Bank on its profit
remittances to its New York head office should be deductible from ESSO's gross
income under Sec. 30(c) of the National Internal Revenue Code. This provides that
all taxes paid or accrued during or within the taxable year and which are related to
the taxpayer's trade, business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and
legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less
than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This
was a revenue measure formally proposed by President Carlos P. Garcia to Congress
as part of, and in order to balance, the budget for 1959-1960. It was enacted by
Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the measure was one of
the major sources of revenue used to finance the ordinary operating expenditures of
the government. It was, moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established
principles, pointed out that —
We are not unmindful of the rule that opinions expressed in debates, actual
proceedings of the legislature, steps taken in the enactment of a law, or the history of
the passage of the law through the legislature, may be resorted to as an aid in the
interpretation of a statute which is ambiguous or of doubtful meaning. The courts
may take into consideration the facts leading up to, coincident with, and in any way
connected with, the passage of the act, in order that they may properly interpret the
legislative intent. But it is also well-settled jurisprudence that only in extremely
doubtful matters of interpretation does the legislative history of an act of Congress
become important. As a matter of fact, there may be no resort to the legislative
history of the enactment of a statute, the language of which is plain and unambiguous,
since such legislative history may only be resorted to for the purpose of solving
doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held
that a margin fee is not a tax but an exaction designed to curb the excessive demands
upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through
Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange
control or restriction designed to discourage imports and
encourage exports, and ultimately, 'curtail any excessive
demand upon the international reserve' in order to
stabilize the currency. Originally adopted to cope with
balance of payment pressures, exchange restrictions have
come to serve various purposes, such as limiting non-
essential imports, protecting domestic industry and when
combined with the use of multiple currency rates
providing a source of revenue to the government, and are
in many developing countries regarded as a more or less
inevitable concomitant of their economic development
programs. The different measures of exchange control or
restriction cover different phases of foreign exchange
transactions, i.e., in quantitative restriction, the control is
on the amount of foreign exchange allowable. In the case
of the margin levy, the immediate impact is on the rate of
foreign exchange; in fact, its main function is to control
the exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For a
member nation is not supposed to alter its exchange rate
(at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature,
the margin levy is part of the rate of exchange as fixed by
the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange
and hence should not form part of the exchange rate, suffice it to state that We have
already held the contrary for the reason that a tax is levied to provide revenue for
government operations, while the proceeds of the margin fee are applied to
strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v.
Central Bank,3 the same idea was expressed, though in connection with a different
levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an
export tax. A tax is a levy for the purpose of providing
revenue for government operations, while the proceeds of
the 20% retention, as we have seen, are applied to
strengthen the Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its
police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless
be considered necessary and ordinary business expenses and therefore still deductible
from its gross income. The fees were paid for the remittance by ESSO as part of the
profits to the head office in the Unites States. Such remittance was an expenditure
necessary and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code
reading as follows:
SEC. 30. Deductions from gross income in computing net
income there shall be allowed as deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for
salaries or other compensation for personal services
actually rendered; traveling expenses while away from
home in the pursuit of a trade or business; and rentals or
other payments required to be made as a condition to the
continued use or possession, for the purpose of the trade
or business, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity.
 (2) Expenses allowable to non-resident alien individuals
and foreign corporations. — In the case of a non-resident
alien individual or a foreign corporation, the expenses
deductible are the necessary expenses paid or incurred in
carrying on any business or trade conducted within the
Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the
law allows. As previously adverted to, the law allowing
expenses as deduction from gross income for purposes of
the income tax is Section 30(a) (1) of the National
Internal Revenue which allows a deduction of 'all the
ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business.' An
item of expenditure, in order to be deductible under this
section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where
it is axiomatic that to be deductible as a business expense,
three conditions are imposed, namely: (1) the expense
must be ordinary and necessary, (2) it must be paid or
incurred within the taxable year, and (3) it must be paid or
incurred in carrying on a trade or business. In addition,
not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an
item of expense is ordinary and necessary does not justify
its deduction.
While it is true that there is a number of decisions in the
United States delving on the interpretation of the terms
'ordinary and necessary' as used in the federal tax laws, no
adequate or satisfactory definition of those terms is
possible. Similarly, this Court has never attempted to
define with precision the terms 'ordinary and necessary.'
There are however, certain guiding principles worthy of
serious consideration in the proper adjudication of
conflicting claims. Ordinarily, an expense will be
considered 'necessary' where the expenditure is
appropriate and helpful in the development of the
taxpayer's business. It is 'ordinary' when it connotes a
payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. The term
'ordinary' does not require that the payments be habitual
or normal in the sense that the same taxpayer will have to
make them often; the payment may be unique or non-
recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right
to a deduction depends in each case on the particular facts
and the relation of the payment to the type of business in
which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the
determination. Assuming that the expenditure is ordinary
and necessary in the operation of the taxpayer's business,
the answer to the question as to whether the expenditure is
an allowable deduction as a business expense must be
determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of
the work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not
err when it held on this issue as follows:
Considering the foregoing test of what constitutes an
ordinary and necessary deductible expense, it may be
asked: Were the margin fees paid by petitioner on its
profit remittance to its Head Office in New York
appropriate and helpful in the taxpayer's business in the
Philippines? Were the margin fees incurred for purposes
proper to the conduct of the affairs of petitioner's branch
in the Philippines? Or were the margin fees incurred for
the purpose of realizing a profit or of minimizing a loss in
the Philippines? Obviously not. As stated in the Lopez
case, the margin fees are not expenses in connection with
the production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the
disposition of said incomes; expenses for the remittance
of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its
Head Office in New York which is already another
distinct and separate income taxpayer.
xxx
Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New
York, which is a separate and distinct income taxpayer
from the branch in the Philippines, for its disposal abroad,
it can never be said therefore that the margin fees were
appropriate and helpful in the development of petitioner's
business in the Philippines exclusively or were incurred
 for purposes proper to the conduct of the affairs of
petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively. If at all, the margin fees were
incurred for purposes proper to the conduct of the
corporate affairs of Standard Vacuum Oil Company in
New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was
made in furtherance of its own trade or business. The petitioner merely presumed
that all corporate expenses are necessary and appropriate in the absence of a showing
that they are illegal or ultra vires. This is error. The public respondent is correct
when it asserts that "the paramount rule is that claims for deductions are a matter of
legislative grace and do not turn on mere equitable considerations ... . The taxpayer
in every instance has the burden of justifying the allowance of any deduction
claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its head
office, cannot now claim this as an ordinary and necessary expense paid or incurred
in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's
claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED,
with costs against the petitioner.
SO ORDERED.
G.R. No. 96266 July 18, 1991
ERNESTO M. MACEDA, petitioner,
vs.
ENERGY REGULATORY BOARD, CALTEX (Philippines), INC., PILIPINAS
SHELL PETROLEUM CORPORATION AND PETRON CORPORATION,
respondents.
G.R. No. 96349 July 18, 1991
EUGENIO O. ORIGINAL, IRENEO N. AARON, JR., RENE LEDESMA,
ROLANDO VALLE, ORLANDO MONTANO, STEVE ABITANG, NERI
JINON, WILFREDO DELEONIO, RENATO BORRO, RODRIGO DE VERA,
ALVIN BAYUANG, JESUS MELENDEZ, NUMERIANO CAJILIG JR.,
RUFINO DE LA CRUZ AND JOVELINO G. TIPON, petitioners,
vs.
ENERGY REGULATORY BOARD, CALTEX (Philippines), INC., PILIPINAS
SHELL PETROLEUM CORPORATION AND PETRON CORPORATION,
respondents.
G.R. No. 96284 July 18,1991
CEFERINO S. PAREDES, JR., petitioner,
vs.
ENERGY REGULATORY BOARD, CALTEX (Philippines), INC., PILIPINAS
SHELL, INC. AND PETROPHIL CORPORATION, respondents.
RESOLUTION
MEDIALDEA, J.:
In G.R. No. 96266, petitioner Maceda seeks nullification of the Energy Regulatory
Board (ERB) Orders dated December 5 and 6, 1990 on the ground that the hearings
conducted on the second provisional increase in oil prices did not allow him
substantial cross-examination, in effect, allegedly, a denial of due process.
The facts of the case are as follows:
Upon the outbreak of the Persian Gulf conflict on August 2, 1990, private
respondents oil companies filed with the ERB their respective applications on oil
price increases (docketed as ERB Case Nos. 90-106, 90-382 and 90-384,
respectively).
On September 21, 1990, the ERB issued an order granting a provisional increase of
P1.42 per liter. Petitioner Maceda filed a petition for Prohibition on September 26,
1990 (E. Maceda v. ERB, et al., G.R. No. 95203), seeking to nullify the provisional
increase. We dismissed the petition on December 18, 1990, reaffirming ERB's
authority to grant provisional increase even without prior hearing, pursuant to Sec. 8
of E.O. No. 172, clarifying as follows:
What must be stressed is that while under Executive Order No. 172,
a hearing is indispensable, it does not preclude the Board from
ordering, ex-parte, a provisional increase, as it did here, subject to
its final disposition of whether or not: (1) to make it permanent; (2)
to reduce or increase it further; or (3) to deny the application.
Section 3, paragraph (e) is akin to a temporary restraining order or
a writ of preliminary attachment issued by the courts, which are
given ex-parte and which are subject to the resolution of the main
case.
Section 3, paragraph (e) and Section 8 do not negate each other, or
otherwise, operate exclusively of the other, in that the Board may
resort to one but not to both at the same time. Section 3(e) outlines
the jurisdiction of the Board and the grounds for which it may
decree a price adjustment, subject to the requirements of notice and
hearing. Pending that, however, it may order, under Section 8, an
authority to increase provisionally, without need of a hearing,
subject to the final outcome of the proceeding. The Board, of
course, is not prevented from conducting a hearing on the grant of
provisional authority-which is of course, the better procedure —
however, it cannot be stigmatized later if it failed to conduct one.
(pp. 129-130, Rollo) (Emphasis supplied)
In the same order of September 21, 1990, authorizing provisional increase, the ERB
set the applications for hearing with due notice to all interested parties on October 16,
1990. Petitioner Maceda failed to appear at said hearing as well as on the second
hearing on October 17, 1990.
To afford registered oppositors the opportunity to cross-examine the witnesses, the
ERB set the continuation of the hearing to October 24, 1990. This was postponed to
November 5, 1990, on written notice of petitioner Maceda.
On November 5, 1990, the three oil companies filed their respective motions for
leave to file or admit amended/supplemental applications to further increase the
prices of petroleum products.
The ERB admitted the respective supplemental/amended petitions on November 6,
1990 at the same time requiring applicants to publish the corresponding Notices of
Public Hearing in two newspapers of general circulation (p. 4, Rollo and Annexes
"F" and "G," pp. 60 and 62, Rollo).
Hearing for the presentation of the evidence-in-chief commenced on November 21,
1990 with ERB ruling that testimonies of witnesses were to be in the form of
Affidavits (p. 6, Rollo). ERB subsequently outlined the procedure to be observed in
the reception of evidence, as follows:
CHAIRMAN FERNANDO:
Well, at the last hearing, applicant Caltex presented its evidence-
in-chief and there is an understanding or it is the Board's wish that
for purposes of good order in the presentation of the evidence
considering that these are being heard together, we will defer the
cross-examination of applicant Caltex's witness and ask the other
applicants to present their evidence-in-chief so that the oppositors
win have a better Idea of what an of these will lead to because as I
mentioned earlier, it has been traditional and it is the intention of
the Board to act on these applications on an industry-wide basis,
whether to accept, reject, modify or whatever, the Board win do it
on an industry wide basis, so, the best way to have (sic) the
oppositors and the Board a clear picture of what the applicants are
asking for is to have all the evidence-in-chief to be placed on
record first and then the examination will come later, the cross-
examination will come later. . . . (pp. 5-6, tsn., November 23, 1990,
ERB Cases Nos. 90-106, 90382 and 90-384). (p. 162, Rollo)
Petitioner Maceda maintains that this order of proof deprived him of his right to
finish his cross-examination of Petron's witnesses and denied him his right to cross-
examine each of the witnesses of Caltex and Shell. He points out that this relaxed
procedure resulted in the denial of due process.
We disagree. The Solicitor General has pointed out:
. . . The order of testimony both with respect to the examination of
the particular witness and to the general course of the trial is within
the discretion of the court and the exercise of this discretion in
permitting to be introduced out of the order prescribed by the rules
is not improper (88 C.J.S. 206-207).
Such a relaxed procedure is especially true in administrative bodies,
such as the ERB which in matters of rate or price fixing is
considered as exercising a quasi-legislative, not quasi-judicial,
function As such administrative agency, it is not bound by the
strict or technical rules of evidence governing court proceedings
(Sec. 29, Public Service Act; Dickenson v. United States, 346, U.S.
389, 98 L. ed. 132, 74 S. St. 152). (Emphasis supplied)
In fact, Section 2, Rule I of the Rules of Practice and Procedure
Governing Hearings Before the ERB provides that —
These Rules shall govern pleadings, practice and procedure before
the Energy Regulatory Board in all matters of inquiry, study,
hearing, investigation and/or any other proceedings within the
jurisdiction of the Board. However, in the broader interest of
justice, the Board may, in any particular matter, except itself from
these rules and apply such suitable procedure as shall promote the
objectives of the Order.
(pp. 163-164, Rollo)
Petitioner Maceda also claims that there is no substantial evidence on record to
support the provisional relief.
We have, in G.R. Nos. 95203-05, previously taken judicial notice of matters and
events related to the oil industry, as follows:
. . . (1) as of June 30, 1990, the OPSF has incurred a deficit of P6.1
Billion; (2) the exchange rate has fallen to P28.00 to $1.00; (3) the
country's balance of payments is expected to reach $1 Billion; (4)
our trade deficit is at P2.855 Billion as of the first nine months of
the year.
. . . (p. 150, Rollo)
The Solicitor General likewise commented:
Among the pieces of evidence considered by ERB in the grant of
the contested provisional relief were: (1) certified copies of bins of
lading issued by crude oil suppliers to the private respondents; (2)
reports of the Bankers Association of the Philippines on the peso-
dollar exchange rate at the BAP oil pit; and (3) OPSF status reports
of the Office of Energy Affairs. The ERB was likewise guided in
the determination of international crude oil prices by traditional
authoritative sources of information on crude oil and petroleum
products, such as Platt's Oilgram and Petroleum Intelligence
Weekly. (p. 158, Rollo)
Thus, We concede ERB's authority to grant the provisional increase in oil price, as
We note that the Order of December 5, 1990 explicitly stated:
in the light, therefore, of the rise in crude oil importation costs,
which as earlier mentioned, reached an average of $30.3318 per
barrel at $25.551/US $ in September-October 1990; the huge
OPSF deficit which, as reported by the Office of Energy Affairs,
has amounted to P5.7 Billion (based on filed claims only and net of
the P5 Billion OPSF) as of September 30, 1990, and is estimated to
further increase to over P10 Billion by end December 1990; the
decision of the government to discontinue subsidizing oil prices in
view of inflationary pressures; the apparent inadequacy of the
proposed additional P5.1 Billion government appropriation for the
OPSF and the sharp drop in the value of the peso in relation to the
US dollar to P28/US $, this Board is left with no other recourse but
 to grant applicants oil companies further relief by increasing the Premium Gasoline 6.9600
prices of petroleum products sold by them. (p. 161, Rollo) Regular Gasoline 6.3900
Petitioner Maceda together with petitioner Original (G.R. No. 96349) also claim that Avturbo 4.9950
the provisional increase involved amounts over and above that sought by the Kerosene 1.4100
petitioning oil companies. Diesel Oil 1.4100
The Solicitor General has pointed out that aside from the increase in crude oil prices, Fuel Oil/Feedstock 0.2405
all the applications of the respondent oil companies filed with the ERB covered LPG 1.2200
claims from the OPSF. Asphalt 2.5000
We shall thus respect the ERB's Order of December 5, 1990 granting a provisional Thinner 2.5000
price increase on petroleum products premised on the oil companies' OPSF claims, In G.R. No. 96349, petitioner Original additionally claims that if the price increase
crude cost peso differentials, forex risk for a subsidy on sale to NPC (p. 167, Rollo), will be used to augment the OPSF this will constitute illegal taxation. In the Maceda
since the oil companies are "entitled to as much relief as the fact alleged constituting case, (G.R. Nos. 95203-05, supra) this Court has already ruled that "the Board Order
the course of action may warrant," (Javellana v. D.O. Plaza Enterprises, Inc., G.R. authorizing the proceeds generated by the increase to be deposited to the OPSF is not
No. L-28297, March 30, 1970, 32 SCRA 261 citing Rosales v. Reyes, 25 Phil. 495; an act of taxation but is authorized by Presidential Decree No. 1956, as amended by
Aguilar v. Rubiato, 40 Phil. 470) as follows: Executive Order No. 137.
Per Liter The petitions of E.O. Original et al. (G.R. No. 96349) and C.S. Povedas, Jr. (G.R. No.
Weighted 96284), insofar as they question the ERB's authority under Sec. 8 of E.O. 172, have
Petron Shell Caltex Average become moot and academic.
Crude Cost P3.11 P3.6047 P2.9248 P3.1523 We lament Our helplessness over this second provisional increase in oil price. We
Peso Cost have stated that this "is a question best judged by the political leadership" (G.R. Nos.
Diffn'l 2.1747 1.5203 1.5669 1.8123 95203-05, G.R. Nos. 95119-21, supra). We wish to reiterate Our previous
Forex Risk pronouncements therein that while the government is able to justify a provisional
Fee -0.1089 -0,0719 -0.0790 -0.0896 increase, these findings "are not final, and it is up to petitioners to demonstrate that
Subsidy on the present economic picture does not warrant a permanent increase."
Sales to NPC 0.1955 0.0685 0.0590 0.1203 In this regard, We also note the Solicitor General's comments that "the ERB is not
Total Price averse to the idea of a presidential review of its decision," except that there is no law
Increase at present authorizing the same. Perhaps, as pointed out by Justice Padilla, our
Applied for P59.3713 P5.1216 P4.4717 P4.9954 lawmakers may see the wisdom of allowing presidential review of the decisions of
Less: September 21 Price the ERB since, despite its being a quasi-judicial body, it is still "an administrative
Relief body under the Office of the President whose decisions should be appealed to the
Actual Price Increase P1.42 President under the established principle of exhaustion of administrative remedies,"
Actual Tax Reduction: especially on a matter as transcendental as oil price increases which affect the lives
Ad Valorem Tax of almost an Filipinos.
(per Sept. 1, 1990 ACCORDINGLY, the petitions are hereby DISMISSED.
price build-up) P1.3333 SO ORDERED.
Specific Tax (per Narvasa, Melencio-Herrera, Feliciano, Gancayco, Bidin, Griño-Aquino and
Oct. 5, 1990 price Regalado, JJ., concur.
build-up) .6264 .7069 2.1269 Davide, J., concurs in the result.
Net Price Increase Fernan, C.J., took no part.
Applied for 2.8685
Nonetheless, it is relevant to point out that on December 10, 1990, the ERB, in
response to the President's appeal, brought back the increases in Premium and
Regular gasoline to the levels mandated by the December 5, 1990 Order (P6.9600 G.R. No. L-47245 December 9, 1977
and P6.3900, respectively), as follows: GUALBERTO J. DELA LLANA, petitioner,
Product In Pesos Per Liter vs.
OPSF THE COMMISSION ON ELECTIONS, THE COMMISSION ON AUDIT,
THE SECRETARY OF FINANCE and THE BUDGET COMMISSIONER,
respondents.
RESOLUTION
CASTRO, C.J.:
Considering the allegations, issues presented, and arguments adduced (a) in what the
petitioner has denominated as a "Petition for Prohibition or Declaratory Relief," (b)
in the Solicitor General's Comment on the petition, and (c) at the hearing on
November 24, 1977, the Court Resolved NOT to give due course to the petition and
to DISMISS the same, for the reasons hereunder set forth.
(1) The question to be submitted to the people in the December 17, 1977 referendum
which reads, "Do you vote that President Ferdinand E. Marcos continue in office as
incumbent President and be Prime Minister after the organization of the Interim
Batasang Pambansa as provided for in Amendment No. 3 of the 1976 Amendments
to the Constitution?," is in neither the nature nor the form of an amendment. The
holding of the referendum will not result in an indirect amendment to Amendment
No. 3 to the Constitution which provides that "The incumbent President of the
Philippines shall be the Prime Minister and he shall continue to exercise all his
powers even after the interim Batasang Pambansa is organized and ready to
discharge its functions and likewise he shall continue to exercise his powers and
prerogatives under the Nineteen Hundred and Thirty Five Constitution and the
powers vested in the President and the Prime Minister under this Constitution."
Presidential Decree No. 1229 which calls for the December 17, 1977 referendum
cannot therefore be said to suffer from any constitutional infirmity. If the people vote
"yes," Amendment No. 3 will merely be reaffirmed and reinforced. If the people vote
"no," the incumbent President, heeding "the will" of the people, will - as he has
categorically announced - resign; in such situation, he will be merely exercising the
prerogative, inherent in all public officials, to resign. In either case the Constitution,
as it now reads, will remain unaltered.
(2) The matter of whether or not the holding of the December 17, 1977 referendum is
unnecessary because the people, on several occasions, had already expressed their
assent to the incumbent President's continuance in office and their approval of his
programs of government, is a political and non-justiciable question, involving as it
does the wisdom, no more and no less, of the decision to call for a referendum. The
power to determine when a referendum should be called and what matter is
important for referral to the people, resides in the political branch of the Government,
the exercise of which involves consideration of a multitude of factors political, social,
economic, etc. - normally outside the periphery of competence of the courts.
(3) The call for the referendum is explicitly authorized by Amendment No. 7 of the
Constitution which in part provides that "Referenda conducted thru the barangays
and under the supervision of the Commission on Elections may be called at any time
the government deems it necessary to ascertain the will of the people regarding any
important matter whether of national or local interest." If, pursuant to this grant of
power, the President decides, as he has decided, to consult with the people and
submit himself to a vote of confidence in a referendum because he deems it
important to do so, he cannot be constitutionally faulted. His action would also be in
full accord with the spirit of Section 1, Article XIII of the Constitution, which states
that public office is a public trust and that public officers shall remain accountable to
the people.
It is clear from the above that the petition does not pose any question of sufficient
importance or significance to warrant the further intention of the Court.
The dismissal of the instant petition is immediately executory.
Ordinance must be upheld pursuant to the broad authority conferred upon
municipalities by Commonwealth Act No. 472, approved on June 16, 1939, which
was the prevailing law when the Ordinance was enacted (Procter & Gamble Trading
Co. vs. Municipality of Medina, 43 SCRA 130 11972]). Section 1 thereof reads:
Section 1. A municipal council or municipal district council shall
have the authority to impose municipal license taxes upon persons
engaged in any occupation or business, or exercising privileges in
the municipality or municipal district, by requiring them to secure
licenses at rates fixed by the municipal council, or municipal
district council, and to collect fees and charges for services
rendered by the municipality or municipal district and shall
otherwise have power to levy for public local purposes, and for
school purposes, including teachers' salaries, just and uniform
taxes other than percentage taxes and taxes on specified articles.
Under the foregoing provision, a municipality is authorized to impose three kinds of
licenses: (1) a license for regulation of useful occupation or enterprises; (2) license
for restriction or regulation of non-useful occupations or enterprises; and (3) license
for revenue. 4 It is thus unnecessary, as plaintiff would have us do, to determine
whether the subject storage fee is a tax for revenue purposes or a license fee to
reimburse defendant Municipality for service of supervision because defendant
Municipality is authorized not only to impose a license fee but also to tax for revenue
purposes.
The storage fee imposed under the question Ordinance is actually a municipal license
tax or fee on persons, firms and corporations, like plaintiff, exercising the privilege
of storing copra in a bodega within the Municipality's territorial jurisdiction. For the
term "license tax" has not acquired a fixed meaning. It is often used indiseriminately
to designate impositions exacted for the exercise of various privileges. In many
instances, it refers to revenue-raising exactions on privileges or activities. 5
Not only is the imposition of the storage fee authorized by the general grant of
authority under section 1 of CA No. 472. Neither is the storage fee in question
prohibited nor beyond the power of the municipal councils and municipal district
councils to impose, as listed in section 3 of said CA No. 472. 6
Moreover, the business of buying and selling and storing copra is property the
subject of regulation within the police power granted to municipalities under section
2238 of the Revised Administrative Code or the "general welfare clause", which we
quote hereunder:
Section 2238. General power of council to enact ordinances and
make regulations. — The municipal council shall enact such
ordinances and make such regulations, not repugnant to law, as
 may be necessary to carry into effect and discharge the powers and
duties conferred upon it by law and such as shall seem necessary
and proper to provide for the health and safety, promote the
prosperity, improve the morals, peace, good order, comfort, and
convenience of the municipality and the inhabitants thereof, and
for the protection of property therein.
For it has been held that a warehouse used for keeping or storing copra is an
establishment likely to endanger the public safety or likely to give rise to
conflagration because the oil content of the copra when ignited is difficult to put
under control by water and the use of chemicals is necessary to put out the fire. 7 And
as the Ordinance itself states, all exportable copra deposited within the municipality
is "part of the surveillance and lookout of municipal authorities.
Plaintiff's argument that the imposition of P0.10 per 100 kilos of copra stored in a
bodega within defendant's territory is beyond the cost of regulation and surveillance
is not well taken. As enunciated in the case of Victorias Milling Co. vs. Municipality
of Victorias, supra.
The cost of regulation cannot be taken as a gauge, if the
municipality really intended to enact a revenue ordinance. For, 'if
the charge exceeds the expense of issuance of a license and costs
of regulation, it is a tax'. And if it is, and it is validly imposed, 'the
rule that license fees for regulation must bear a reasonable relation
to the expense of the regulation has no application'.
Municipal corporations are allowed wide discretion in determining the rates of
imposable license fees even in cases of purely police power measures. In the absence
of proof as to municipal conditions and the nature of the business being taxed as well
as other factors relevant to the issue of arbitrariness or unreasonableness of the
questioned rates, Courts will go slow in writing off an Ordinance. 8 In the case at bar,
appellant has not sufficiently shown that the rate imposed by the questioned
Ordinance is oppressive, excessive and prohibitive.
Plaintiff's averment that the Ordinance, even if presumed valid, is inapplicable to it
because it is not engaged in the business or occupation of buying or selling of copra
but is only storing copra in connection with its main business of manufacturing soap
and other similar products, and that to be compelled to pay the storage fees would
amount to double taxation, does not inspire assent. The question of whether appellant
is engaged in that business or not is irrelevant because the storage fee, as previously
mentioned, is an imposition on the privilege of storing copra in a bodega within
defendant municipality by persons, firms or corporations. Section 1 of the Ordinance
in question does not state that said persons, firms or corporations should be engaged
in the business or occupation of buying or selling copra. Moreover, by plaintiff's own
admission that it is a consolidated corporation with its trading company, it will be
hard to segregate the copra it uses for trading from that it utilizes for manufacturing.
Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance
in question does not amount to double taxation. For double taxation to exist, the
same property must be taxed twice, when it should be taxed but once. Double
taxation has also been defined as taxing the same person twice by the same
jurisdiction for the same thing. 9 Surely, a tax on plaintiff's products is different from
a tax on the privilege of storing copra in a bodega situated within the territorial
boundary of defendant municipality.
Plaintiff's further contention that the storage fee imposed by the Ordinance is actually
intended to be an export tax, which is expressly prohibited by section 2287 of the
Revised Administrative Code, is without merit. Said provision reads as follows:
Section 2287 ...
It shall not be in the power of the municipal council to impose a
tax in any form whatever upon goods and merchandise carried into
the municipality, or out of the same, and any attempt to impose an
import or export tax upon such goods in the guise of an
unreasonable charge for wharfage use of bridges or otherwise,
shall be void.
xxx xxx xxx
We have held that only where there is a clear showing that what is being taxed is an
export to any foreign country would the prohibition come into play. 10 When the
Ordinance itself speaks of "exportable" copra, the meaning conveyed is not
exclusively export to a foreign country but shipment out of the municipality. The
storage fee impugned is not a tax on export because it is imposed not only upon
copra to be exported but also upon copra sold and to be used for domestic purposes if
stored in any warehouse in the Municipality and the weight thereof is 100 kilos or
more. 11
Thus finding the Ordinance in question to be valid, legal and enforceable, we find it
unnecessary to discuss the ascribed error that the Court a quo erred in declaring that
appellant had not paid the taxes under protest.
However, we find merit in plaintiff's contention that the lower Court erred in ruling
that its action has prescribed under Article 1149 of the Civil Code, which provides
for a period of five years for all actions whose periods are not fixed in that Code. The
case of Municipality of Opon vs. Caltex Phil., 12 is authority for the view that the
period for prescription of actions to recover municipal license taxes is six years
under Article 1145(2) of the Civil Code. Thus, plaintiff's action brought within six
years from the time the right of action first accrued in 1958 has not yet prescribed.
WHEREFORE, affirming the judgment appealed, from, we sustain the validity of
Ordinance No. 4, Series of 1957, of defendant Municipality of Jagna Bohol, under
the laws then prevailing.
Costs against plaintiff-appellant.
SO ORDERED.
 SECTION 1. — Every person, association or corporation operating
-6606335 500.00
a lumber mill and/or lumber yard within the territory of the City of
May 14, 1958 E-2941534 1,190.92 Butuan shall pay to the City a tax of two fifths (P.004) centavo for
every board foot of lumber sawn manufactured and/or produced
TOTAL P2,982.11 (regardless of group). The tax shall be paid within the first twenty
(20), days of the following month. If the tax is not paid within the
thereby leaving still unpaid the amount of P33,570.73, pursuant to
time herein prescribed, there shall be added to the unpaid amount a
assessment;
surcharge of ten per centum (10%) every month of fractional part
8. That among the payments stated in the next preceding paragraph,
thereof, but in no case shall the total surcharge exceed twenty-five
only the last payment — that made on May 14, 1958 in the amount
per centum (25%).
of P1,190.92 was made under protest;
SECTION 2. — It shall be the duty of every person, association or
9. That defendants have repeatedly demanded from plaintiff
corporation operating a lumber mill to submit to the City Treasurer
payment of the aforesaid taxes, claiming that such have been long
within the first fifteen (15) days of every month a sworn statement
due and payable under the provisions of Ordinance No. 5, as
of the number of board feet sawn manufactured or produced by it
amended, but plaintiff refused and still refuses to make payments
during the preceding month.
up to the present, except those mentioned in paragraph 7 of this
falls within the provisions of paragraph 5, Section 15 of Republic Act No. 523,
Stipulation of Facts;
which empowers the municipal board of the City of Butuan:
10. That, on the other hand, plaintiff since May 1958 has
To tax, fix the license fee for, regulate the business and fix the
demanded that defendants cease and desist from enforcing the
location of, match factories, blacksmith shops, foundries, steam
provisions of Ordinance No. 5, as amended, but defendants refused
boilers, lumber mills and lumber yards, shipyards, the storage and
to comply with said plaintiff's demand;
sale of gunpowder, tar pitch, resin coal, oil, gasoline, benzine
11. That there is no question of fact involved in this case and that
turpentine, hemp, cotton, nitroglycerine, petroleum, or any of the
the only legal question for this Court to decide and resolve is: (1)
products thereof, and of all other highly combustible or explosive
whether or not Ordinance No. 5, as amended is valid and legal and
materials and other establishments likely to endanger the public
that whether or not the plaintiff's corporation is legally bound to
safety or give rise to conflagrations or explosions, and subject to
pay the taxes provided for in said ordinance in question; and (2)
the rules and regulations incured by the Director of Health in
whether or not payments made without protest in case of a decision
accordance with law, tanneries renderies, tallow chandeleries,
in favor of the plaintiff is subject to reimbursement.
embalmers, and funeral parlors, bone factories and soap factories.
PRAYER
Appellee contends that the questioned ordinance imposes a tax, not on lumber mills
WHEREFORE, the parties herein respectfully pray this Honorable
and lumber yards, but on the sawn-manufactured and/or produced lumber, which are
Court to approve the aforegoing Stipulation of Facts and to make it
forest products and not found among the taxable items enumerated in the law above
the basis for a decision on the issues raised by the pleadings.
quoted, thus rendering said ordinance null and void. It argues further that, even under
It is further respectfully prayed that both parties be granted thirty
the latest amendment — Ordinance No. 49, series of 1954, which purports to impose
(30) days from receipt of notice of approval of the foregoing
the tax not on lumber sold but on lumber sawn manufactured and/or produced — the
Stipulation of Facts within which to file simultaneously their
ordinance is ultra vires because par. (p) Section 15 of the Charter of the City of
respective memoranda, and fifteen (15) days from receipt of the
Butuan (quoted above), authorizes a tax only on lumber mills and lumber yards,
other party's memorandum within which to file a reply thereto, and
which obviously does not include the power to impose a tax on sawn manufactured
thereafter, the case shall be deemed submitted for decision.
or produced lumber.
On February 28, 1961, the lower court rendered the appealed judgment which
Upon the other hand, appellants maintain that the tax in question is a license or
appellants seeks to have Us reverse, claiming that the lower court erred in holding (a)
privilege tax on the business of lumber mills or lumber yards imposed by appellant
that the tax imposed by said Ordinance No. 5, as amended, is a sales tax on the sawn
city in the exercise of its police power under Section 15 of its Charter.
manufactured or produced lumber, which are forest products, and in further ruling (b)
The title given to the original ordinance in question was "An ordinance imposing a
that said ordinance was ultra vires and, therefore, null and void.
tax on the sales of lumber". Section 1 thereof made the tax collectible on "every
The principal issue to be resolved is whether Ordinance No. 5, as originally approved
board foot of lumber sold" by every person, association or corporation operating a
or as later amended, the pertinent part of which reads as follows:
lumber mill within the territory of the City of Butuan, while Section 4 expressly
AN ORDINANCE IMPOSING A TAX ON LUMBER MILLS
exempted lumber mills from the payment of the quarterly sales tax provided for in
Section 3, Article 11 of Ordinance No. 47, Series of 1949.
The above would seem to be sufficient to show that the tax imposed is and was really
intended to be on lumber sold and not a tax on, or, license fee for the privilege of
operating a lumber mill and/or a lumber yard.
The amendatory ordinances did not change the nature of the tax imposed by the
original. Ordinance No. 9 simply changed the title of the latter so as to make it read
as an ordinance imposing a tax on the "produce of lumber mills"; Ordinance No. 10,
while entitled as one imposing a tax on lumber mills made the tax collectible on
"every board foot of lumber, regardless of group, sawn manufactured or produced,
etc."; Ordinance No. 47, in turn, made the tax collectible on "every board foot of
lumber sold and/or shipped"; Ordinance No. 49, while changing again the title of the
original ordinance so as to make it read as "An ordinance imposing a tax on lumber
mills", also required the tax to be paid "for every board foot of lumber sawn
manufactured and/or produced, etc."
The clear implication from the original as well as the amendatory ordinances is that
the tax imposed is one on lumber sold, manufactured, sawn or produced by parties
duly licensed to engage in said trade or business. As the lower court said — and this
we quote with approval. —
The intent of Ordinance No. 5 to tax the sale of lumber is clear and
unmistakable. The subsequent ordinances Nos. 9, 10, 47 and 49,
Exhs. B, C, D, and E respectively, being all amendatory, naturally
did not alter the essence or spirit of the basic ordinance. This is
evident, if we consider that section 4 of the original ordinance
which exempts lumber mills from the of quarterly sales tax, as
provided in an earlier ordinance was never repealed and instead
was carried over and continued to be in force until the latest
amendment.
Moreover, the tax thus levied is virtually one on "forest products" since
manufactured or sawn lumber is so considered under the provisions of Section 263,
National Internal Revenue Code, which is embraced in Chapter V thereof entitled
"Charges on Forest Products", as construed by Section VI, Regulation No. 85,
Department of Finance. Municipal corporations are prohibited from imposing
charges of taxes of such nature (Commonwealth Act No. 472, Section 3; Republic
Act No. 2264).
Appellants' claim that the questioned tax is one on business or a privilege tax for the
operation of a lumber mill or a lumber yard is without merit.
The character or nature of a tax is determined not by the title of the act or ordinance
imposing it but by its operation, practical results and incidents (Dawson vs.
Distilleries, etc., 255 U.S. 288, 65 L. Ed. 638; Association of Customs Brokers, Inc.,
et al. vs. The Municipal Board, et al., G.R. No. L-4376, May 22, 1953).
Neither the original ordinance in question nor the amendatory ones show that the tax
provided for therein is imposed by reason of the enjoyment of the privilege to engage
in a particular trade or business. Neither do they provide that payment thereof is a
condition precedent to the enjoyment of such privilege or that its non-payment would
result in the cancellation of any previous license granted. The only consequence of
its non-payment appears to be the imposition of a surcharge or liability to suffer the
penal sanctions prescribed in Section 3 of the original ordinance. These
circumstances lead Us to the conclusion that the questioned tax cannot be considered
as one imposed upon a party for engaging in the business of operating a lumber mill
or a lumber yard.
We likewise find to be unmeritorious appellants' contention that the power of the
City of Butuan to tax lumber mills and lumber yards includes the power to tax the
sale, production, sawing and/or manufacture of lumber by them. The rule is well-
settled that municipal corporations, unlike sovereign states, are clothed with no
power of taxation; that its charter or a statute must clearly show an intent to confer
that power or the municipal corporation cannot assume and exercise it, and that any
such power granted must be construed strictly, any doubt or ambiguity arising out
from the terms of the grant to be resolved against the municipality. (Cu Unjieng vs.
Patstone 42 Phil. 818; Vega, et al. vs. Municipal Board, etc., 50 O.G. No. 6,p. 2456)
Lastly, appellants' contention that appellee had no cause of action because it does not
appear that the taxes sought to be recovered were paid under protest is also untenable.
The present action involves only the recovery of the sum of Pl,190.92 which was
paid under protest (paragraph 8, Stipulation of Facts, p. 53, Record on Appeal).
IN VIEW OF ALL THE FOREGOING, the appealed decision is hereby affirmed,
with costs.
G.R. No. L-30727 July 15, 1975
THE CITY OF OZAMIZ, Represented by THE CITY MAYOR, MUNICIPAL
BOARD, CITY TREASURER, and CITY AUDITOR, petitioner-appellant,
vs.
SERAPIO S. LUMAPAS and HONORABLE GERONIMO R.
MARAVE, respondents-appellees.
Assistant City Fiscal Artemio C. Engracia for petitioner-appellant.
Francisco D. Boter for respondents-appellees.
ANTONIO, J.:
Appeal by certiorari from the decision, dated March 18, 1969, of respondent Judge
Geronimo R. Marave, of the Court of First Instance of Misamis Occidental, Branch
II, Ozamiz City, declaring Ordinance No. 466, series of 1964, of the Municipal
Board of the City of Ozamiz, null and void (Civil Case No. OZ-159), and ordering
petitioner to return to respondent Serapio S. Lumapas the sum of P1,243.00,
representing the amount collected as parking fees, by virtue of the ordinance, without
costs.
The facts of this case, which are not disputed, are as follows:
Respondent Serapio S. Lumapas is an operator of transportation buses for passengers
and cargoes, under the name of Romar Line, with Ozamiz City and Pagadian,
Zamboanga del Sur, as terminal points, by virtue of a certificate of public
convenience issued to him by the Public Service Commission. On September 15,
1964, the Municipal Board of Ozamiz City enacted the following:
ORDINANCE NO. 466
AN ORDINANCE IMPOSING PARKING FEES FOR EVERY
MOTOR VEHICLE PARKED ON ANY PORTION OF THE
EXISTING PARKING SPACE IN THE CITY OF OZAMIZ. Be it
ordained by the Municipal Board of the City of Ozamiz, that:
SECTION 1 — There is hereby imposed parking fees for all motor
vehicles parked on any portion of the duly designated parking
areas in the City of Ozamiz;
SECTION 2. — Motor Vechicles' as used in this ordinance shall be
construed to mean all vehicles run by engine whether the same is
offered for passengers or for cargoes of whatever kind or nature;
SECTION 3. — The word "Parking" as used in this ordinance shall
be construed to mean, when a motor vehicle of whatever kind is
stopped on any portion of the existing parking areas for the
purpose of loading and unloading passengers or cargoes;
SECTION 4. — For purposes of the fee hereinabove provided, the
following schedule of rates collectible daily from the conductor,
driver, operator and/or owner must be observed:
For Passenger
(a) Passenger Bus ........................................................................
P1.00
(b) Weapon Carrier, Baby Bus & others of similar nature ..... .70
(c) Pick Up, Jeepneys, PU Cars and others of similar
nature .................................................................................................
...................... .50
For Cargoes
(a) Cargo Trucks ..........................................................................
1.00
(b) Pick Up, Jeeps, Jeepneys, Weapon Carriers & Others of
similar
nature .................................................................................................
..................... .70
SECTION 5. — That the City Treasurer or his authorized
representative is hereby empowered to collect the herein parking
fees using any form of official receipt he may devise, from the
conductor, driver, operator and/or owner of the motor vehicles
parked in said designated parking areas;
SECTION 6. — Any person or persons, violating any provision of
this ordinance shall, upon conviction thereof, be punished by an
imprisonment of not less than two (2) months nor more than six (6)
months, or by a fine in the sum of not less than P100.00 but not
more than P400.00 or both such fine and imprisonment at the
discretion of the Court;
SECTION 7. — This ordinance shall take effect immediately upon
its approval.
Enacted, September 15, 1964,
Approved, October 7, 1964.1
After approval of the above-quoted ordinance, the City of Ozamiz began collecting
the prescribed parking' fees and collected from respondent-appellee Serapio S.
Lumapas, who had paid under protest, the parking fees at One Peso (P1.00) for each
of his buses, from October 1964 to January 1967, or an aggregate amount of
P1,259.002 for which official receipts were issued by petitioner.
About four (4) years later, or on January 11, 1968, respondent Serapio S. Lumapas
filed a complaint, dated August 3, 19673 against the City of Ozamiz, represented by
the City Mayor, Municipal Board, City Treasurer, and City Auditor, with the Court
of First instance of Misamis Occidental, Branch II (Civil Case No. OZ-159), for
recovery of parking fees, alleging, among others, that said Ordinance No. 466 is ulta
vires, and praying that judgment be issued (1) nullifying Ordinance No. 466, series
of 1964, and (2) ordering the Municipal Board to appropriate the amount of
P1,459.00 for the reimbursement of P1,259.00 he had paid as parking fees, plus
P200.00 as attorney's fees.
On January 25, 1968, petitioner filed its answer, with affirmative defenses 4 to which
respondent-appellee Serapio S. Lumapas filed his reply, dated January 30, 1968. 5
On January 3, 1969, the parties, through their respective counsel, filed the following:
STIPULATION OF FACTS
COME NOW the plaintiff and the defendants, through their
respective counsel, and unto this Honorable Court respectfully
submit this stipulation of facts, to wit:
(1) That the area enclosed in red pencil in the sketch is a market
site of the City of Ozamiz which holds the same in its proprietary
character as evidenced by Tax Declaration No. 51234. This area is
for public use.
(2) That the Zulueta Street is now extended up to the end of the
market site passing a row of tiendas up to the end marked "toilet"
in the sketch plan of market site when the market building was
constructed in 1969;
(3) That on the right side near the row of tiendas and near the toilet
and marked with series of x's and where the buses of plaintiff were
parking waiting for passengers going to the south;
(4) That this space marked "rig parking" in the sketch plan marked
"x" has been designated by City Ordinance No. 233 as a parking
place marked Exhibit "2";
(5) That the defendant City Government has been collecting
parking fees and issued corresponding official receipts to the
plaintiff for each unit belonging to the plaintiff every time it left
Ozamiz City from said parking place but once a day at one peso
per unit;
(6) That the total amount of parking fees collected from the
plaintiff by the defendant is P1,243.00 as per official receipts
actually counted in the presence of both parties;
(7) That the plaintiff made a demand for the reimbursement of the
total amount collected from 1964 to 1967 and this demand was
 received on September 1, 1967, by the City Treasurer and that the
City Treasurer replied by first indorsement dated September 11,
1967, asking for reference and verification; and
(8) That in reply to said first indorsement, the plaintiff sent a letter
to the City Treasurer dated January 18, 1967, citing cases in
support of the demand, and in answer to that letter, the City
Treasurer in his communication dated January 11, 1968, flatly
denied payment of the demand.
(9) That the parties will file their respective memoranda within
twenty days from today.
WHEREFORE, it is respectfully prayed of this Honorable Court
that judgment be rendered based upon this stipulation of facts after
the parties shall have submitted their respective memoranda or
after the lapse of twenty days from today.
Ozamiz City, December 27, 1968.6
On the basis of the foregoing Stipulation of Facts, and of the court's finding, after an
ocular inspection of the parking area designated by Ordinance No. 286, series of
1956,7 superseding Ordinance No. 234, series of 1953, that it is a municipal street,
although part of the public market, said court rendered judgment on March 18, 1969
declaring that such parking fee is in the nature of toll fees for the use of public road
and made in violation of Section 59[b] of Republic Act No. 4136 (Land
Transportation and Traffic Code), there being no prior approval therefor by the
President of the Philippines upon recommendation of the Secretary of Public Works
and Communications (now Public Works). Hence, the present appeal by certiorari.
Petitioner now contends that the lower court erred: (1) in declaring Ordinance No.
466, series of 1964, of Ozamiz City, null and void; (2) in considering parking fees as
road tolls under Section 59[b] of Republic Act No. 4136; (3) in declaring the parking
area as a public street and not the patrimonial property of the city; and (4) in ordering
the reimbursement of parking fees paid by respondent-appellee.
Decisive of this controversy is whether the Municipal Board of the City of Ozamiz,
herein petitioner-appellant, had the power to enact said Ordinance No. 466.
Petitioner-appellant, in maintaining the affirmative view, contends: (1)that the
ordinance is valid for the fees collected thereunder are in the nature of property
rentals for the use of parking spaces belonging to the City in its proprietary character,
as evidenced by Tax Declaration No. 51234, and are authorized by Section 2308 (f)
of the Revised Administrative Code, 8(2) that Section 15 (y) of the Charter of
Ozamiz City (Republic Act No. 321) 9 also authorizes the Municipal Board to
regulate the use of streets which carries with it the power to impose fees for its
implementation; (3) that, pursuant to such power, the Municipal Board passed said
Ordinance No. 234, the purpose of which is to minimize accidents, to avoid
congestion of traffic, to enable the passengers to know the exact time of the
departure of trucks and, for this purpose, the Municipal Board provided for parking
areas for which the City has to have funds for the implementation of the purposes
abovestated; (4) that Section 2 of the Local Autonomy Law (Republic Act No.
2264)likewise empowers the local governments to impose taxes and fees, except
those that are enumerated therein, and parking fee is not among the exceptions: and
(5) that the word "toll" connotes the act of passing along the road and the collection
of toll fees may not be imposed unless approved by the President of the Philippines
upon the recommendation of the Secretary of Public Works, pursuant to Section 59[b]
of Republic Act No. 4136; whereas the word "parking" implies a stationary condition
and the parking fees provided for in Ordinance No. 466 is for the privilege of using
the designated parking area, which is owned by the City of Ozamiz, as its
patrimonial property.
On the other hand, respondent-appellee insists (1) that Ozamiz City has no power to
impose parking fees on motor vehicles parked on Zulueta Street, which is property
for public use and, as such, Ordinance No. 466 imposing such fees is null and void;
(2) that granting arguendo that Zulueta Street is part of the City's public market site,
its conversion into a street removes it from its category as patrimonial property to
one for public use; 10 (3) that the use of Zulueta Street as a parking place is only
incidental to the free passage of motor vehicles for, as soon as the buses are loaded
with passengers, the vehicles start their journey to their respective destinations and
pay the toll clerk at a station about one hundred; (100) feet ahead along Zulueta
Street before they are allowed to get out of the City and as such, the prohibition to
impose taxes or fees embodied in Section 59[b] of Republic. Act No. 4136 applies to
this case; (4) that Section 2308[f] of the Revised Administrative Code providing that
the "proceeds on income from the ... use or management of property lawfully held by
the municipality" accrue to the municipality, does not grant, either expressly or by
implication, to the municipality, the power to impose such tax, (5) that Section 15[y]
of the Charter of Ozamiz City (Republic Act No. 321) which authorizes the City,
among others, "to regulate the use of a street," does not empower the City to impose
parking fees; besides, said section contains a proviso, i.e., "except as otherwise
provided by law", which, in this case, is Republic Act No. 4136; and (6) that, since
the power to impose parking fees is not among those conferred by the Local
Autonomy Act on local government, said City cannot, therefore, impose such
parking fees.
After the filing of its brief, or on December 10, 1969, the petitioner- appellant,
through its counsel, First Assistant City Fiscal Artemio C. Engracia, filed the
following Manifestation, dated November 27, 1969, praying that the decision of the
lower court be reversed in view of the approval by the President of the Philippines
upon the recommendation of the Secretary of Public Works of the ordinance in
question that validates the same, to wit:
1. That the decision of the lower court, marked Annex "E" of the
petition, declaring Ordinance No. 466, series of 1964, of Ozamiz
City, marked Annex "G" of the petition, null and void is based on
the non-compliance with the provisions of Section 59[b] of
Republic Act No. 4136, otherwise known as The Land
Transportation Law, which requires the approval by the President
of the Philippines upon the recommendation of the Secretary of
Public Works of such kind of ordinance..
2. That the President of the Philippines has now approved the
Ordinance in question. A certified copy of said approval is
hereunder quoted.
 xxx xxx xxx
4th Indorsement
Manila, September 26, 1969
Respectfully returned to the Mayor, City of Ozamiz, hereby
approving, as recommended in the 3rd indorsement hereon of the
Secretary of Public Works and Communications, Ordinance No.
466, series of 1964, of that city, entitled: "AN ORDINANCE
IMPOSING PARKING FEES FOR EVERY MOTOR VEHICLE
PARKED ON ANY PORTION OF THE EXISTING PARKING
SPACE IN THE OZAMIZ."
By Authority of the President:
(Sgd.) FLORES BAYOT
Assistant Executive Secretary
3. That the approval by the President of the Philippines is based
upon the recommendation of the Secretary of Public Works. A
certified copy of said recommendation is hereunder reproduced:
3rd Indorsement
June 3, 1969
Respectfully forwarded to His Excellency, the President of the
Philippines, Malacañang, recommending favorable action, in view
of the representations herein made, on the within letter dated
March 21, 1969 of Mayor Hilarion A. Ramiro, Ozamiz City,
requesting approval No. 466, series of 1964, passed by the
Municipal Board, same city regarding the collection of fees for the
privilege of parking vehicles in the lots privately-owned by said
City.
(Sgd.) ANTONIO V. RAQUIZA
Secretary
4. That the action of the Secretary of Public Works is based upon
the findings of the Commissioner of the Land Transportation
Commission. A certified copy of the same is herein reproduced:
xxx xxx xxx
2nd Indorsement
May 16, 1969
Respectfully returned to the Honorable Secretary, Department of
Public Works and Communications, Manila, with the statement
that this Commission interposes no objection on the approval of
Ordinance No. 466, series of 1964, of Ozamiz City, considering
that the schedule of rate collectible from the conductor, driver,
operator and/or owner as stated under Section 4 thereof appears to
be reasonable.
It may be stated in this connection that on the Decision of the CFI
of Misamis Occidental, Branch II, dated March 18, 1969 under
Civil Case No. OZ(159), the said Ordinance was declared null and
void for failure to comply with the provisions of Section 59[b] of R.
A. 4136, regarding the required "approval by the President of the
Philippines upon recommendation of the Secretary of Public
Works and Communications."
(Sgd.) ROMEO F. EDU
Commissioner
The rule is well-settled that municipal corporations, being mere creatures of the law,
have only such powers as are expressly granted to them and those which are
necessarily implied or incidental to the exercise thereof, and the power to tax is
inherent upon the State and it can only be exercised by Congress, unless delegated or
conferred by it to a municipal corporation. As such, said corporation has only such
powers as the legislative department may have deemed fit to grant. By reason of the
limited powers of local governments and the nature thereof, said powers are to be
construed strictissimi juris and any doubt or ambiguity arising out of the terms used
in granting said powers must be construed against the municipality. 11
The implied powers which a municipal corporation possesses and can exercise are
only those necessarily incident to the powers expressly conferred. Inasmuch as a city
has no power, except by delegation from Congress, in order to enable it to impose a
tax or license fee, the power must be expressly granted or be necessarily implied in,
or incident to, the powers expressly conferred upon the city.
Under Sec. 15[Y] of the Ozamiz City Charter (Rep. Act No. 321), the municipal
board has the power "... to regulate the use of streets, avenues, alleys, sidewalks,
wharves, piers, parks, cemeteries and other public places; ...", and in subsection [nn]
of the same section 15, the authority "To enact all ordinances it may deem necessary
and proper for the sanitation and safety, the furtherance of prosperity and the
promotion of the morality, peace, good order, comfort, convenience, and general
welfare of the city and its inhabitants, and such others as may be necessary to carry
into effect and discharge the powers and duties conferred by this Charter ..." By this
express legislative grant of authority, police power is delegated to the municipal
corporation to be exercised as a governmental function for municipal purposes.
It is, therefore, patent that the City of Ozamiz has been clothed with full power to
control and regulate its streets for the purpose of promoting the public health, safety
and welfare. Indeed, municipal power to regulate the use of streets is a delegation of
the police power of the national government, and in the exercise of such power, a
municipal corporation can make all necessary and desirable regulations which are
reasonable and manifestly in the interest of public safety and convenience.
By virtue of the aforecited statutory grant of authority, the City of Ozamiz can
regulate the time, place, manner of parking in the streets and public places. It is,
however, insisted that the ordinance did not charge a parking fee but a toll fee for the
use of the street. It is true that the term " parking" ordinarily implies "something
more than a mere temporary and momentary stoppage at a curb for the purpose of
loading or unloading passengers or merchandize; it involves the idea of using a
portion of the street as storage space for an automobile." 12
In the case at bar, the TPU buses of respondent-appellee Sergio S. Lumapas stopped
on the extended portion of Zulueta Street beside the public market (Exhibit "X-1" of
Exhibit "X", Development Plan for Ozamiz Market Site),and that as soon as the
buses were loaded, they proceeded to the station, about one hundred (100) feet away
from the parking area, where a toll clerk of the City collected the "Parking" fee of
P1.00 per bus once a day, before said buses were allowed to proceed to their
destination.
Section 3 of the questioned Ordinance No. 466 defines the word "'parking' to mean
the stoppage of a motor vehicle of whatever kind on any portion of the
existing parking areas for the purpose of loading and unloading passengers or
cargoes." 13 (Emphasis supplied.)
The word "toll" when used in connection with highways has been defined as a duty
imposed on goods and passengers travelling public roads. 14 The toll for use of a toll
road is for its use in travelling thereon, not for its use as a parking place for
vehicles. 15
It is not pretended, however, that the public utility vehicles are subject to the
payment, if they pass without stopping thru the aforesaid sections of Zulueta Street.
Considering that the public utility vehicles are only charged the fee when said
vehicles stop on "any portion of the existing parking areas for the purpose of loading
or unloading passengers or cargoes", the fees collected are actually in the nature of
parking fees and not toll fees for the use of Zulueta Street. This is clear from the
Stipulation of Facts which shows that fees were not exacted for mere passage thru
the street but for stopping in the designated parking areas therein to unload or load
passengers or cargoes. It was not, therefore a toll fee for the use of public roads,
within the context of Section 59[b] of Republic Act No. 4136, which requires the
authorization of the President of the Philippines.
As adverted to above, the Municipal Board of Ozamiz City is expressly granted by
its Charter the power to regulate the use of its streets. The ordinance in question
appears to have been enacted in pursuance of this grant. The parking fee imposed is
minimal in amount, the maximum being only P1.00 a day for each passenger bus and
P1.00 for each cargo truck, the rates being lower for smaller types of vehicles. This
indicates that its purpose is not for revenue but for regulation. Moreover, it is
undeniable that by designating a specific place wherein passenger and freight
vehicles may load and unload passengers and cargoes, benefits are accorded to the
city's residents in the form of increased safety and convenience arising from the
decongestion of traffic.
Undoubtedly the city may impose a fee sufficient in amount to include the expense
of issuing the license and the cost of necessary inspection or police surveillance
connected with the business or calling licensed.
The fees charged in the case at bar are undeniably to cover the expenses for
supervision, inspection and control, to ensure the smooth flow of traffic in the
environs of the public market, and for the safety and convenience of the public.
WHEREFORE, the appealed decision is hereby reversed and Ordinance No. 466,
series of 1964 declared valid. No pronouncement as to costs.
Fernando (Chairman), Barredo, Aquino and Concepcion Jr., JJ., concur.
G.R. No. L-47252 April 18, 1941
THE APOSTOLIC PREFECT OF THE MOUNTAIN
PROVINCE, demandante-apelante,
vs.
EL TESORERO DE LA CIUDAD DE BAGUIO, demandado-apelado.
Sres. Cavanna, Jasmines y Tianco en representacion del apelante.
El Procurador General en representacion del apelado.
IMPERIAL, J.:
El demandante ejercito esta accion para recobrar del demandado la suma de
P1,019.37 que pago bajo protesta como contribucion especial sobre sus propiedades
en la Ciudad de Baguio, correspondiente al año 1937. Apelo de la sentencia del
Juzgado de Primera Instancia de dicha ciudad que sobreseyo su demanda, sin costas.
Las partes sometieron el asunto mediante la siguiente estipulacion parcial de hechos:
1.º La demandante es un corporacion unipersonal de caracter religioso,
organizada de acuerdo con las leye de Filipinas, con residencia en la ciudad
de Baguio;
2.º El demandado es un functionario publico de la ciudad de Baguio y actua
como tesorero y colector de dicha ciudad;
3.º Que el demandado exigio y cobro de la demandante el 25 de junio de
1937 la suma de Mil diez y nueve pesos con treinta y siete centimos
(P1,019.37), moneda filipina, en virtud de las disposiciones de la Ordenanza
No. 137, tal como ha sido reformada y enmendada por las Ordenanzas No.
263, 277, 283, 297, 311, 325, 348, 367, 387, 419, 471, 45, 455, 466, 512,
552, 591, 592, y Resolucion del Consejo de la Ciudad de Baguio No. 10 de
fecha 22 de enero de 1918. Todas las referidas ordenanzas, asi como la
resolucion No. 10, serie de 1918, se hacen partes integrantes de este
convenio.
4.º Que el pago hecho por la demandante de p1,019.37 corresponde al año
1937 y se hizo bajo protesta formulada en carta fechada el 25 de junio de
1937 en la que se expuso los motivos de la portesta y se pidio la resolucion
favorable de la protesta y la devolucion de la cantidad pagada;
5.º Que el demandado denego la protesta;
6.º Los terrenos afectados con el pago de P1,019.37 son terrenos de la
propiedad de la propiedad de la demandante dedicados al culto y enseñanza
durante el año 1937 y en años anteriores;
7.º Que la Ciudad de Baguio construyo de acuerdo con las ordenanzas arriba
citadas en el parrafo 2.º de esta estipulacion un sistema de desague y
alcantarillado;
8.º Que la demandante vino pagando en años anteriores a 1937, sin protesta,
las sumas que la ciudad exigia de acuerdo con las ordenanzas y referidas; y
por primera vez protesto el año 1937, protesta que es objeto de este litigio;
9.º Que se incluyo en la Ordenanza No. 137 una relacion de las propiedades
avaluadas en la ciudad de Baguio y esa relacion se hizo parte de la
Ordenanza No. 137 y fue llamada y convertida en "SPECIAL
ASSESSMENT LIST, CITY OF BAGUIO", a los efectos de la referida
ordenanza y que las propiedades afectadas en el pago protesta de la
demandante estaban y estan incluidas en dicha lista y no han sido excluidas
hasta el presente por virtud de ninguna ordenanza posterior a la No. 137;
 10.º Que la construccion del sistema de desague y alcantarillado ha
beneficiado y esta beneficiando directa y especialmente a todos los
propietarios cuyos lotes y terrenos estan incluidos en la "SPECIAL
ASSESSMENT LIST, CITY OF BAGUIO" inclusive los terrenos de la aqui
demandante afectados en dicha lista y en el pago bajo protest y que este
sistema de desague y alcantarillado ha promovido la limpieza y condicion
sanitaria de los terrenos de la referida lista.
11.º Que las partes se reservan el derecho de practicar pruebas adicionales.
El apelante sostiene en sus señalamientos de error las siguientes proposiciones: (1)
que sus propiedades inmuebles y sus mojoras en la Ciudad de Baguio por hallarse
exceptuadas de pago de todo impuesto por la Constitucion y por las leyes vigentes
deben estar igualmente exentas del pago de la contribucion especial que le ha
cobrado el apelado y el ha pagado bajo protesta; (2) que la Ordenanza No. 137 y sus
enmiendas, bajo las cuales la contribucion especial se ha cobrado, excluyen de sus
disposiciones sus propiedades exenas del pago de todo impuesto; (3) que en el
supuesto de que las citadas ordenanzas no excluyen sus propiedades del pago de la
contribucion especial, las mismas son nulas e ineficaces; y (4) que en el supuesto de
que las mencionadas ordenanzas fuesen legales el apelado, como Tesorero de la
Ciudad de Baguio, cobro ilegalmente la la contribucion especial que el apelante pago
bajo protesta, por la razon de que en la fecha del pago el apelante ya habia satisfecho
su participacion en los gastos del sistema de desague y alcantarillado que ocasiono la
imposicion de la contribucion especial.
La primera proposicion envuelve la cuestion de si las propiedades sobre las cuales se
cobro la contribucion especial estan efectivamente exentas de dicho pago. La
contribucion expecial se cobro por el apelado en virtud de las disposiciones de los
articulos 2 y 5 de la Ordenanza No. 137 que proveen:
It having heretofore been ascertained that said work will benefit each and all
owners or possessors or property subject to taxation situated, lying and
being within the corporate limits of the City, it is hereby declared that
benefit will accrue from said work to each and all said persons, and said
persons shall pay a compensation for said benefit.
The City Assessor having heretofore compiled from the City Assessment
and Valuation aforesaid and certified to the City Treasurer a list containing
and setting forth the total amount of property within the corporate limits of
the City subject to assessment and levy for the purposes in this Ordinance
recited, the total amount of properties individually owned and possessed,
and the name of each individual owner and possessor, the rate per centum,
to wit: ONE PER CENTUM ad valorem of said total value which is
necessary for the purposes set forth in Section III hereof, is hereby made the
amount to be paid individually by each owner or possessor as his share, and
the above-mentioned list is hereby made part hereof and named "SPECIAL
ASSESSMENT LIST," and said list is hereby declared to be, and made the
City official list and basis for assessing, levying and collecting the rate of
compensation aforesaid from the above-referred owners and possessors, and
each owner or possessor is required to, and shall pay the amount in said list
stated as his individual share to the City Treasurer on or after the first of
March and not later than June 30th, 1914.
El apelante sostien que sus propiedades estan exentas del pago de la contribucion
especial tanto por lo que dispone el articulo 2 de la Ordenanza No. 137 como por lo
que estatuve el articulo 14, (3), Titulo VI, de la Constitucion de Filipinas que se lee
como sigue:
(3) Los cementarios, iglesias, parroquias y conventos adheridos a estas, y
todos los terrenos, edificios y mejoras usados exclusivamente para fines
religiosos, caritativos o educacionales, estaran exentos de tributacion.
Se alega que segun el articulo 2 de la Ordenanza No. 137 solamente deben pagar la
contribucion especial las propiedades que no estan exentes del pago de un impuesto
y que de acuerdo con el precepto constitucional citado las propiedades del apelante
se hallan exceptuadas del pago de la contribucion especial por hallarse dedicadas a
fines religiosos. Esta pretension requiere que se resuelva, en primer termino, si la
contribucion especial impuesta por la Ordenanza No. 13 es un impuesto en su
acepcion legal. Es una regla bien establecida en materia de impuesto que las
contribuciones espeicales que se crean y cobran para amortizar gastos extraodinarios
que ocasionan obras, como el sistema de desague y alcantarillado, que benefician de
un modo especial a los habitantes no es un impuesto en su sentido legal. Segun la
ordenanza la contribucion especial que se cobro a las propiedades situadas en la
Ciudad de Baguio, se creo para amortizar los gastos extraordinarios que ocasiono el
sistema de desague y alcantarillado que se construyo, obra que beneficio de modo
especial a todos los propietarior se la ciudad. El Juez Cooley, al trazar la distincion
entre impuestos y contribuciones especiales en su tratado sobre impuestos, se expresa
en estos terminos:
While the word "tax" in its broad meaning, includes both general taxes and
special assessments, and in a general sense a tax is an assessment, and an
assessment is a tax, yet there is a recognized distinction between them in
that assessment is confined to local impositions upon property for the
payment of the cost of public improvements in its immediate vicinity and
levied with reference to special benefits to the property assessed. The
differences between a special assessment and a tax are that (1) a special
assessment can be levied only on land; (2) a special assessment cannot (at
least in most states) be made a personal liability of the person assessed; (3)
a special assessment is based wholly on benefits; and (4) a special
assessment is exceptional both as to time and locality. The imposition of a
charge on all property, real and personal, in a prescribed area, is a tax and
not an assessment, although the purpose is to make a local improvement on
a street or highway. A charge imposed only on property owners benefited is
a special assessment rather than a tax notwithstanding the statute calls it a
tax.
Si la contribucion especial que se cobro al apelante no es estrictamente hablando un
impuesto de cuyo pago esta exento el mismo, es evidente que ni bajo la ordenanza ni
la Constitucion el referido apelante esta exeptuado del pago de la contribucion
especial.
Ademas, de acuerdo con la estipulacion de hechos, el apelante no puede invocar con
exito la exencion establecida por la Constitucion porque no se ha admitido ni
probado que sus porpiedades que pagaron la contribucion especial se usaban
exclusivamente para fines religiosos. Cierto que se estipulo que las propiedades
estaban dedicadas a fines religiosos, mas, no se convino ni se probo que semejante
uso era exclusivo, pudiendo por tanto ocurrir que las propiedades a mas de estar
dedicadas a fines religiosos se destinaran y usaran igualmente a otros fines no
religiosos.
En cuanto a la validez de l a Ordenanza No. 137 y sus enmiendas, es innegable que
la Ciudad de Baguio esta autorizada por el articulo 8 (1) de la Ley No. 1963, hoy
articulo 2553 (1) del Codigo Administrativo Revisado, para crear la contribucion
especial discutida con el fin de amortizar los gatos ocasionados por el sistema de
desague y alcantarillado que se construyo para el beneficio de todos los habitantes de
la mencionada ciudad.
La ultama pretension del apelante es que suponiendo validas la Ordenanza No. 137 y
sus enmiendas el no esta ya obligado a pagar contribucion especial en vista de que ya
satisfizo en años anteriores a 1937 la parte alicuota que le correspondio de dicha
contribucion especial. La pretension es equalmente infundada, porque resulta del
Exhibit 1 que el costo del sistema de desague y alcantarillado asciende a
P502,750.75 y la ciudad solo cobro por contribucion especial hasta el año 1937 la
suma de P291,290.08; resultando que el costo del sistema, en el año 1937, no estaba
aun totalmente satisfecho.
Hallandose ajustada a derecho la sentencia recurrida, se confirma la misma en todas
sus partes, con las costas de esta instancia al apelante. Asi se ordena.
Avanceña, Pres., Diaz, Laurel, y Horrilleno, MM., estan conformes.
G.R. No. 73705 August 27, 1987
VICTORIAS MILLING CO., INC., petitioner,
vs.
OFFICE OF THE PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and
PHILIPPINE PORTS AUTHORITY, respondents.
PARAS, J.:
This is a petition for review on certiorari of the July 27, 1984 Decision of the Office
of the Presidential Assistant For Legal Affairs dismissing the appeal from the
adverse ruling of the Philippine Ports Authority on the sole ground that the same was
filed beyond the reglementary period.
On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority
(PPA for short) wrote petitioner Victorias Milling Co., requiring it to have its
tugboats and barges undergo harbor formalities and pay entrance/clearance fees as
well as berthing fees effective May 1, 1981. PPA, likewise, requiring petitioner to
secure a permit for cargo handling operations at its Da-an Banua wharf and remit 10%
of its gross income for said operations as the government's share.
To these demands, petitioner sent two (2) letters, both dated June 2, 1981, wherein it
maintained that it is exempt from paying PPA any fee or charge because: (1) the
wharf and an its facilities were built and installed in its land; (2) repair and
maintenance thereof were and solely paid by it; (3) even the dredging and
maintenance of the Malijao River Channel from Guimaras Strait up to said private
wharf are being done by petitioner's equipment and personnel; and (4) at no time has
the government ever spent a single centavo for such activities. Petitioner further
added that the wharf was being used mainly to handle sugar purchased from district
planters pursuant to existing milling agreements.
In reply, on November 3, 1981, PPA Iloilo sent petitioner a memorandum of PPA's
Executive Officer, Maximo Dumlao, which justified the PPA's demands. Further
request for reconsideration was denied on January 14, 1982.
On March 29, 1982, petitioner served notice to PPA that it is appealing the case to
the Court of Tax Appeals; and accordingly, on March 31, 1982, petitioner filed a
Petition for Review with the said Court, entitled "Victorias Milling Co., Inc. v.
Philippine Ports Authority," and docketed therein as CTA Case No. 3466.
On January 10, 1984, the Court of Tax Appeals dismissed petitioner's action on the
ground that it has no jurisdiction. It recommended that the appeal be addressed to the
Office of the President.
On January 23, 1984, petitioner filed a Petition for Review with this Court, docketed
as G.R. No. 66381, but the same was denied in a Resolution dated February 29, 1984.
On April 2, 1984, petitioner filed an appeal with the Office of the President, but in a
Decision dated July 27, 1984 (Record, p. 22), the same was denied on the sole
ground that it was filed beyond the reglementary period. A motion for
Reconsideration was filed, but in an Order dated December 16, 1985, the same was
denied (ibid., pp. 3-21): Hence, the instant petition.
The Second Division of this Court, in a Resolution dated June 2, 1986, resolved to
require the respondents to comment (ibid., p. 45); and in compliance therewith, the
Solicitor General filed his Comment on June 4, 1986 (Ibid., pp. 50-59).
In a Resolution of July 2, 1986, petitioner was required to file a reply (Ibid., p. 61)
but before receipt of said resolution, the latter filed a motion on July 1, 1986 praying
that it be granted leave to file a reply to respondents' Comment, and an extension of
time up to June 30, 1986 within which to file the same. (Ibid., p. 62).
On July 18, 1986, petitioner filed its reply to respondents' Comment (Ibid., pp. 68-
76).
The Second Division of this Court, in a Resolution dated August 25, 1986, resolved
to give due course to the petition and to require the parties to file their respective
simultaneous memoranda (Ibid., p. 78).
On October 8, 1986, the Solicitor General filed a Manifestation and Rejoinder,
stating, among others, that respondents are adopting in toto their Comment of June 3,
1986 as their memorandum; with the clarification that the assailed PPA
Administrative Order No. 13-77 was duly published in full in the nationwide
circulated newspaper, "The Times Journal", on November 9,1977 (ibid., pp. 79-81).
The sole legal issue raised by the petitioner is —
WHETHER OR NOT THE 30-DAY PERIOD FOR APPEAL UNIDER SECTION
131 OF PPA ADMINISTRATIVE ORDER NO. 13-77 WAS TOLLED BY THE
PENDENCY OF THE PETITIONS FILED FIRST WITH THE COURT OF TAX
APPEALS, AND THEN WITH THIS HONORABLE TRIBUNAL.
The instant petition is devoid of merit.
Petitioner, in holding that the recourse first to the Court of Tax Appeals and then to
this Court tolled the period to appeal, submits that it was guided, in good faith, by
considerations which lead to the assumption that procedural rules of appeal then
enforced still hold true. It contends that when Republic Act No. 1125 (creating the
Court of Tax Appeals) was passed in 1955, PPA was not yet in existence; and under
the said law, the Court of Tax Appeals had exclusive appellate jurisdiction over
appeals from decisions of the Commissioner of Customs regarding, among others,
customs duties, fees and other money charges imposed by the Bureau under the
Tariff and Customs Code. On the other hand, neither in Presidential Decree No. 505,
creating the PPA on July 11, 1974 nor in Presidential Decree No. 857, revising its
charter (said decrees, among others, merely transferred to the PPA the powers of the
Bureau of Customs to impose and collect customs duties, fees and other money
charges concerning the use of ports and facilities thereat) is there any provision
governing appeals from decisions of the PPA on such matters, so that it is but
reasonable to seek recourse with the Court of Tax Appeals. Petitioner, likewise,
contends that an analysis of Presidential Decree No. 857, shows that the PPA is
vested merely with corporate powers and duties (Sec. 6), which do not and can not
include the power to legislate on procedural matters, much less to effectively take
away from the Court of Tax Appeals the latter's appellate jurisdiction.
These contentions are untenable for while it is true that neither Presidential Decree
No. 505 nor Presidential Decree No. 857 provides for the remedy of appeal to the
Office of the President, nevertheless, Presidential Decree No. 857 empowers the PPA
to promulgate such rules as would aid it in accomplishing its purpose. Section 6 of
the said Decree provides —
Sec. 6. Corporate Powers and Duties —
a. The corporate duties of the Authority shall be:
xxx xxx xxx
(III) To prescribe rules and regulations,
procedures, and guidelines governing the
establishment, construction, maintenance, and
operation of all other ports, including private
ports in the country.
xxx xxx xxx
Pursuant to the aforequoted provision, PPA enacted Administrative Order No. 13-77
precisely to govern, among others, appeals from PPA decisions. It is now finally
settled that administrative rules and regulations issued in accordance with law, like
PPA Administrative Order No. 13-77, have the force and effect of law (Valerio vs.
Secretary of Agriculture and Natural Resources, 7 SCRA 719; Antique Sawmills, Inc.
vs. Zayco, et al., 17 SCRA 316; and Macailing vs. Andrada, 31 SCRA 126), and are
binding on all persons dealing with that body.
As to petitioner's contention that Administrative Order No. 13-77, specifically its
Section 131, only provides for appeal when the decision is adverse to the government,
worth mentioning is the observation of the Solicitor General that petitioner misleads
the Court. Said Section 131 provides —
Sec. 131. Supervisory Authority of General Manager and PPA
Board. — If in any case involving assessment of port charges, the
Port Manager/OIC renders a decision adverse to the government,
such decision shall automatically be elevated to, and reviewed by,
the General Manager of the authority; and if the Port Manager's
decision would be affirmed by the General Manager, such decision
shall be subject to further affirmation by the PPA Board before it
shall become effective; Provided, however, that if within thirty (30)
days from receipt of the record of the case by the General Manager,
no decision is rendered, the decision under review shall become
final and executory; Provided further, that any party aggrieved by
the decision of the General Manager as affirmed by the PPA Board
may appeal said decision to the Office of the President within
thirty (30) days from receipt of a copy thereof.(Emphasis supplied).
From a cursory reading of the aforequoted provision, it is evident that the above
contention has no basis.
As to petitioner's allegation that to its recollection there had been no prior publication
of said PPA Administrative Order No. 13-77, the Solicitor General correctly pointed
out that said Administrative Order was duly published in full in the nationwide
newspaper, "The Times Journal", on November 9,1977.
Moreover, it must be stated that as correctly observed by the Solicitor General, the
facts of this case show that petitioner's failure to appeal to the Office of the President
on time stems entirely from its own negligence and not from a purported ignorance
of the proper procedural steps to take. Petitioner had been aware of the rules
governing PPA procedures. In fact, as embodied in the December 16, 1985 Order of
the Office of the President, petitioner even assailed the PPA's rule making powers at
the hearing before the Court of Tax Appeals.
It is axiomatic that the right to appeal is merely a statutory privilege and may be
exercised only in the manner and in accordance with the provision of law (United
CMC Textile Workers Union vs. Clave, 137 SCRA 346, citing the cases of Bello vs.
Fernando, 4 SCRA 138; Aguila vs. Navarro, 55 Phil. 898; and Santiago vs.
Valenzuela, 78 Phil. 397).
Furthermore, even if petitioner's appeal were to be given due course, the result would
still be the same as it does not present a substantially meritorious case against the
PPA.
Petitioner maintains and submits that there is no basis for the PPA to assess and
impose the dues and charges it is collecting since the wharf is private, constructed
and maintained at no expense to the government, and that it exists primarily so that
its tugboats and barges may ferry the sugarcane of its Panay planters.
As correctly stated by the Solicitor General, the fees and charges PPA collects are
not for the use of the wharf that petitioner owns but for the privilege of navigating in
public waters, of entering and leaving public harbors and berthing on public streams
or waters. (Rollo, pp. 056-057).
In Compañia General de Tabacos de Filipinas vs. Actg. Commissioner of Customs
(23 SCRA 600), this Court laid down the rule that berthing charges against a vessel
are collectible regardless of the fact that mooring or berthing is made from a private
pier or wharf. This is because the government maintains bodies of water in navigable
condition and it is to support its operations in this regard that dues and charges are
imposed for the use of piers and wharves regardless of their ownership.
As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the
Presidential Decree No. 857 authorized the PPA "To levy dues, rates, or charges for
the use of the premises, works, appliances, facilities, or for services provided by or
belonging to the Authority, or any organization concerned with port operations."
This 10% government share of earnings of arrastre and stevedoring operators is in
the nature of contractual compensation to which a person desiring to operate arrastre
service must agree as a condition to the grant of the permit to operate.
PREMISES CONSIDERED, the instant petition is hereby DISMISSED.
SO ORDERED.
G.R. No. L-13912 September 30, 1960
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CONSUELO L. VDA. DE PRIETO, respondent.
Office of the Solicitor General Edilberto Barot, Solicitor F.R. Rosete and Special
Atty. B. Gatdula, Jr. for petitioner.
Formilleza and Latorre for respondent.
GUTIERREZ DAVID, J.:
This is an appeal from a decision of the Court of tax Appeals reversing the decision
of the Commissioner of Internal Revenue which held herein respondent Consuelo L.
Vda. de Prieto liable for the payment of the sum of P21,410.38 as deficiency income
tax, plus penalties and monthly interest.
The case was submitted for decision in the court below upon a stipulation of facts,
which for brevity is summarized as follows: On December 4, 1945, the respondent
conveyed by way of gifts to her four children, namely, Antonio, Benito, Carmen and
Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50.
After the filing of the gift tax returns on or about February 1, 1954, the petitioner
Commissioner of Internal Revenue appraised the real property donated for gift tax
purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift
tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by
respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on
account of deliquency. This sum of P55,978.65 was claimed as deduction, among
others, by respondent in her 1954 income tax return. Petitioner, however, disallowed
the claim and as a consequence of such disallowance assessed respondent for 1954
the total sum of P21,410.38 as deficiency income tax due on the aforesaid
P55,978.65, including interest up to March 31, 1957, surcharge and compromise for
the late payment.
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year. It is here
conceded that the interest paid by respondent was in consequence of the late payment
of her donor's tax, and the same was paid within the year it is sought to be declared.
The only question to be determined, as stated by the parties, is whether or not such
interest was paid upon an indebtedness within the contemplation of section 30 (b) (1)
of the Tax Code, the pertinent part of which reads:
SEC. 30 Deductions from gross income. — In computing net income there
shall be allowed as deductions —
xxx xxx xxx
(b) Interest:
(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or
carry obligations the interest upon which is exempt from taxation as income
under this Title.
The term "indebtedness" as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as an
unconditional and legally enforceable obligation for the payment of
money.1awphîl.nèt(Federal Taxes Vol. 2, p. 13,019, Prentice-Hall, Inc.; Merten's
Law of Federal Income Taxation, Vol. 4, p. 542.) Within the meaning of that
definition, it is apparent that a tax may be considered an indebtedness. As stated by
this Court in the case of Santiago Sambrano vs. Court of Tax Appeals and Collector
of Internal Revenue (101 Phil., 1; 53 Off. Gaz., 4839) —
Although taxes already due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be considered as such.
The term "debt" is properly used in a comprehensive sense as embracing not
merely money due by contract but whatever one is bound to render to
another, either for contract, or the requirement of the law. (Camben vs.Fink
Coule and Coke Co. 61 LRA 584)
Where statute imposes a personal liability for a tax, the tax becomes, at least
in a board sense, a debt. (Idem).
A tax is a debt for which a creditor's bill may be brought in a proper case.
(State vs. Georgia Co., 19 LRA 485).
It follows that the interest paid by herein respondent for the late payment of her
donor's tax is deductible from her gross income under section 30(b) of the Tax Code
above quoted.
The above conclusion finds support in the established jurisprudence in the United
States after whose laws our Income Tax Law has been patterned. Thus, under sec.
23(b) of the Internal Revenue Code of 1939, as amended 1 , which contains similarly
worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest
on taxes is interest on indebtedness and is deductible. (U.S. vs. Jaffray, 306 U.S. 276.
See also Lustig vs. U.S., 138 F. Supp. 870; Commissioner of Internal
Revenue vs. Bryer, 151 F. 2d 267, 34 AFTR 151; Penrose vs. U.S. 18 F. Supp. 413,
18 AFTR 1289; Max Thomas Davis, et al. vs. Commissioner of Internal Revenue, 46
U.S. Boared of Tax Appeals Reports, p. 663, citing U.S. vs. Jaffray, 6 Tax Court of
United States Reports, p. 255; Armour vs. Commissioner of Internal Revenue, 6 Tax
Court of the United States Reports, p. 359; The Koppers Coal Co. vs. Commissioner
of Internal Revenue, 7 Tax Court of United States Reports, p. 1209;
Toy vs. Commissioner of Internal Revenue; Lucas vs. Comm., 34 U.S. Board of Tax
Appeals Reports, 877; Evens and Howard Fire Brick Co. vs. Commissioner of
Internal Revenue, 3 Tax Court of United States Reports, p. 62). The rule applies even
though the tax is nondeductible. (Federal Taxes, Vol. 2, Prentice Hall, sec. 163,
13,022; see also Merten's Law of Federal Income Taxation, Vol. 5, pp. 23-24.)
To sustain the proposition that the interest payment in question is not deductible for
the purpose of computing respondent's net income, petitioner relies heavily on
section 80 of Revenue Regulation No. 2 (known as Income Tax Regulation)
promulgated by the Department of Finance, which provides that "the word `taxes'
means taxes proper and no deductions should be allowed for amounts representing
interest, surcharge, or penalties incident to delinquency." The court below, however,
held section 80 as inapplicable to the instant case because while it implements
sections 30(c) of the Tax Code governing deduction of taxes, the respondent
taxpayer seeks to come under section 30(b) of the same Code providing for
deduction of interest on indebtedness. We find the lower court's ruling to be correct.
Contrary to petitioner's belief, the portion of section 80 of Revenue Regulation No. 2
under consideration has been part and parcel of the development to the law on
deduction of taxes in the United States. (See Capital Bldg. and Loan
Assn. vs. Comm., 23 BTA 848. Thus, Mertens in his treatise says: "Penalties are to
be distinguished from taxes and they are not deductible under the heading of
taxs." . . . Interest on state taxes is not deductible as taxes." (Vol. 5, Law on Federal
Income Taxation, pp. 22-23, sec. 27.06, citing cases.) This notwithstanding, courts in
that jurisdiction, however, have invariably held that interest on deficiency taxes are
deductible, not as taxes, but as interest. (U.S. vs. Jaffray, et al., supra; see also
Mertens, sec. 26.09, Vol. 4, p. 552, and cases cited therein.) Section 80 of Revenue
Regulation No. 2, therefore, merely incorporated the established application of the
tax deduction statute in the United States, where deduction of "taxes" has always
been limited to taxes proper and has never included interest on delinquent taxes,
penalties and surcharges.
To give to the quoted portion of section 80 of our Income Tax Regulations the
meaning that the petitioner gives it would run counter to the provision of section
30(b) of the Tax Code and the construction given to it by courts in the United States.
Such effect would thus make the regulation invalid for a "regulation which operates
to create a rule out of harmony with the statute, is a mere nullity." (Lynch vs. Tilden
Produce Co., 265 U.S. 315; Miller vs. U.S., 294 U.S. 435.) As already stated, section
80 implements only section 30(c) of the Tax Code, or the provision allowing
deduction of taxes, while herein respondent seeks to be allowed deduction under
section 30(b), which provides for deduction of interest on indebtedness.
In conclusion, we are of the opinion and so hold that although interest payment for
delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and
section 80 of the Income Tax Regulations, the taxpayer is not precluded thereby from
claiming said interest payment as deduction under section 30(b) of the same Code.
In view of the foregoing, the decision sought to be reviewed is affirmed, without
pronouncement as to costs.
Bengzon, Bautista Angelo, Labrador, Barrera, Paredes, and Dizon, JJ., concur.
Paras, C. J., Concepcion, and Reyes, J.B.L., JJ., concur in the result.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT
OF APPEALS CENTRAL VEGETABLE MANUFACTURING CO.,
INC., and THE COURT OF TAX APPEALS, respondents.
DECISION
PURISIMA, J.:
Before the Court is a Petition for Review on Certiorari from the judgment of
the Court of Appeals affirming in toto the decision of the Court of Tax Appeals
which required the Commissioner of Internal Revenue to credit the sales taxes paid
by Central Vegetable Oil Manufacturing Co., Inc. (CENVOCO) on containers and
packaging materials of its milled products, against the deficiency miller's tax due
thereon for the year 1986.
As culled in the decision of the Court of Tax Appeals, the undisputed facts are,
as follows:
"Petitioner (private respondent CENVOCO herein) is a manufacturer of edible and
coconut/coprameal cake and such other coconut related oil subject to the miller's tax
of 3%. Petitioner also manufactures lard, detergent and laundry soap subject to the
sales tax of 10%.
In 1986, petitioner purchased a specified number of containers and packaging
materials for its edible oil from its suppliers and paid the sales tax due thereon.
After an investigation conducted by respondent's Revenue Examiner, Assessment
Notice No. FAS-B-86-88-001661-001664 dated April 22, 1988 was issued against
petitioner for deficiency miller's tax in the total amount of P1,575,514.70 x x x .
On June 29, 1988, petitioner filed with respondent a letter dated June 27, 1988
requesting for reconsideration of the above deficiency miller's tax assessments,
contending that the final provision of Section 168 of the Tax Code does not apply to
sales tax paid on containers and packaging materials, hence, the amount paid therefor
should have been credited against the miller's tax assessed against it. Again, thru
letter dated September 28, 1988, petitioner reiterated its request for reconsideration.
On November 17, 1988, respondent wrote CENVOCO, the full text of which letter
reads
November 17, 1988
Central Vegetable Oil
Manufacturing Co. Inc.
P.O. Box 2816
Manila
Attention: Mr. James Chua
President
Gentlemen:
We have received your letter of September 28, 1988, relative to our assessment
against your company in the amount of P1,575,514.75, as deficiency miller's tax for
the year 1986.
Section 168 of the Tax Code provides that sales, miller's or excise taxes paid on raw
materials or supplies used in the milling process shall not be allowed against the
miller's tax due. You contend that since packaging materials are not used in the
milling process then, the sales taxes paid thereon should be allowed as a credit
against the miller's tax due because they do not fall within the scope of the
prohibition.
It is our position, however, that since the law specifically does not allow taxes paid
on the raw materials or supplies used in the milling process as a credit against the
miller's tax due, with more reason should the sales taxes paid on materials not used in
the milling process be allowed as a credit against the miller's tax due. There is no
provision of law which allows such a credit-to-be made.
In view of the above, we are reiterating the assessment referred to above. We request
that you make payment immediately so that this case may be considered closed and
terminated.
Very truly yours,
(SGD) EUFRACIO D. SANTOS
Deputy Commissioner
(CA Decision, pp.31-33 Rollo)
Dissatisfied with the adverse action taken by the BIR, CENVOCO filed a
petition for review with the Court of Tax Appeals, which came out with a decision,
dated December 3, 1990, in favor of CENVOCO, disposing, thus:
"WHEREFORE, in view of the foregoing, petitioner Central Vegetable Oil
Manufacturing Co., Inc., is not liable for deficiency miller's tax for the year 1986 in
the amount of P1,575,514.70.
No pronouncement as to costs.
SO ORDERED." (Rollo, p. 53)
Appealed to the Court of Appeals, the said decision was affirmed in
toto. (Rollo, p. 38)
The Court of Appeals adopted the reasons cited and ratiocination by the Court
of Tax Appeals for allowing the sales tax paid by CENVOCO on the containers and
packaging materials of its millled products to be credited against the miller's tax due
thereon, viz -
"The main issue in this case is whether or not respondent CENVOCO is liable for
deficiency miller's tax for the year 1986 in the amount of P1,575,514.70. This in turn
hinges on whether or not containers and packaging materials are raw materials used
in the milling process within the contemplation of the final proviso of Section 168 of
the National Internal Revenue Code, which reads:
'Provided, finally, that credit for any sales, miller's or excise taxes paid on raw
materials or supplies used in the milling process shall not be allowed against the
miller's tax due, except in the case of a proprietor or operator of a refined sugar
factory as provided hereunder.'
xxx xxx xxx
"xxx We agree with respondent Court that containers and packages cannot be
considered "raw materials" utilized in the milling process. In arriving at the
conclusion, respondent Court quoted with approval the reasons cited by CENVOCO,
as follows:
'FIRST; The raw materials used by Cenvoco in manufacturing edible oil are copra
and/or coconut oil. In other words, the term "used" in the final proviso of Section 168
of the NIRC refers or is strictly confined to "raw materials" or supplies fed, supplied
or put into the apparatus, equipment, machinery or its adjuncts that cause or execute
the milling process. On the other hand, the containers, such as tin cans, and/or
packages are not used or fed into the milling machinery nor were ever intended for
conversion to form part of the finished product, i.e., refined coconut/edible
oil. Consequently, it would be absurd to say that said containers and packages are
"used in the milling process", for the process involves "grinding, crushing, stamping,
cutting, shaping or polishing". (See THE DICTIONARY, by TIME, COPYRIGHT
1974, p. 444) x x x
'SECOND; Petitioner's interpretation of the term raw materials is contrary to law and
jurisprudence. Thus, raw materials as used in the definition of " manufacture",
denotes materials from which final product is made (Black's Law Dictionary, 4th ed.
citing State vs. Hennessy Co., 71 Mont. 301, 230, p. 64, 65). And consistent with
said definition, Revenue Regulations Nos. 2-86 and 11-86 [effective January 1, 1986
and August 1, 1986, respectively] which govern the filing of quarterly percentage tax
returns and payment thereof under the provisions, inter alia, of Section 168 of the
NIRC, define raw materials or material, to wit:
Any article which when used in the MANUFACTURE of another article becomes a
homogenous part thereof, such that it can no longer be identified in its original state
nor may be removed therefrom without destroying or rendering useless the finished
article to which it has been merged, mixed or dissolved. x x x'
"Tested in the light of the foregoing statutory definition, it is evident that containers
and packages used by Cenvoco are not 'raw materials' and do not fall within the
purview of the final proviso of Section 168 of the NIRC. x x x As a coup de grace, it
is pertinent to note the case of Caltex (Phils.) Inc. vs. Manila Port Service (17 SCRA
1075) where the Supreme Court aptly defined containers and/or packages.
'x x x a package or a bundle made up for transportation; a packet; a bale; a parcel; or
that in which anything is packed: box, case, barrel, crate, etc. in which goods are
packed: a container.' (Underscoring Ours)
"The definition is an emphatic rejection of petitioner's construction that Cenvoco's
containers and packages are raw materials used in the milling process. x x x
"xxx Moreover, Section 168 of the Revenue Code expressly limits the articles
subject to percentage tax (miller's tax) to: 'rope, sugar, coconut oil, palm oil, cassava
flour or starch, desiccated coconuts, manufactured, processed or milled by them,
including the by-product of the raw materials, from which said articles are produced,
processed or manufactured'. x x x "
(CA Decision, Rollo pp. 34-36)
Hence, the petition under consideration, posing the issue:
WHETHER OR NOT THE SALES TAX PAID BY CENVOCO WHEN IT
PURCHASED CONTAINERS AND PACKAGING MATERIALS FOR ITS
MILLED PRODUCTS CAN BE CREDITED AGAINST THE DEFICIENCY
MILLER'S TAX DUE THEREON.
Resolution of the issue posited by the petitioner hinges on the proper
application of Section 168 of the then applicable National Internal Revenue Code,
particularly the last proviso of said section, which reads:
"Sec. 168. Percentage tax upon proprietors or operators of rope factories, sugar
centrals and mills, coconut oil mills, palm oil mills, casava mills and desiccated
coconut factories. Proprietors or operators of rope factories, sugar centrals and mills,
coconut oil mills, palm oil mills, cassava mills, and desiccated coconut factories,
shall pay a tax equivalent to three (3) percent of the gross value of money of all the
rope, sugar, coconut, oil, palm oil, cassava flour or starch, dessiccated coconut,
manufactured, processed or milled by them, including the by-product of the raw
materials, from which said articles are produced, processed or manufactured, such
tax to be based on the actual selling price or market value of these articles at the time
they leave the factory or mill warehouse: Provided, however, that this tax shall not
apply to rope, coconut oil, palm oil and the by-product of copra from which it is
produced or manufactured, and dessicated coconuts, if such rope, coconut oil, palm
oil, copra by-products and dessicated coconuts, shall be removed for exportation by
the proprietor of operator or the factory or mill himself, and are actually exported
without returning to the Philippines, whether in their original state or as an ingredient
or part of any manufactured article or product: Provided further, That where the
planter or the owner of the raw materials is the exporter of the aforementioned milled
or manufactured products, he shall be entitled to a tax credit of the miller's taxes
withheld by the proprietor or operator of the factory or mill, corresponding to the
quantity exported, which may be used against any internal revenue tax directly due
from him: and Provided, finally, That credit for any sales, miller's or excise taxes
paid on raw materials or supplies used in the milling process shall not be allowed
against the miller's tax due, except in the case of a proprietor or operator of a refined
sugar factory as provided hereunder." (underscoring supplied)
Notably, the law relied upon by the BIR Commissioner as the basis for not
allowing Cenvoco's tax credit is just a proviso of Section 168 of the old Tax
Code. The restriction in the said proviso, however, is limited only to sales, miller's or
excise taxes paid "on raw materials used in the milling process".
Under the rules of statutory construction, exceptions, as a general rule, should
be strictly but reasonably construed. They extend only so far as their language fairly
warrants, and all doubts should be resolved in favor of the general provisions rather
than the exception. Where a general rule is established by statute with exceptions, the
court will not curtail the former nor add to the latter by implication. x x x (Samson
vs. Court of Appeals, 145 SCRA 659 [1986]).
The exception provided for in Section 168 of the old Tax Code should thus be
strictly construed. Conformably, the sales, miller's and excise taxes paid on all other
materials (except on raw materials used in the milling process), such as the sales
taxes paid on containers and packaging materials of the milled products under
consideration, may be credited against the miller's tax due therefor.
It is a basic rule of interpretation that words and phrases used in the statute, in
the absence of a clear legislative intent to the contrary, should be given their plain,
ordinary and common usage or meaning. (Mustang Lumber Inc. v. CA, 257 SCRA
430 [1996] citing Ruben E. Agpalo, Statutory Construction, second ed. [1990], 131).
From the disquisition and rationalization aforequoted, containers and packaging
materials are certainly not raw materials. Cans and tetrakpaks are not used in the
manufacture of Cenvoco's finished products which are coconut, edible oil or
coprameal cake. Such finished products are packed in cans and tetrapaks.
Petitioner laments the pronouncement by the Court of Appeals that Deputy
Commissioner Eufracio Santos' 1988 ruling may not reverse Commissioner Ruben
Ancheta's favorable ruling on a similar claim of CENVOCO of October, 1984, which
reads in part:
"x x x This refers to your letter dated September 5, 1984 requesting that the 10%
sales tax paid on container cans purchased by you, be credited against the 2% (now
3%) miller's tax due on the refined coconut edible oil.
It is represented that you process copra and/or coconut oil and sell the refined edible
oil in cans; that said cans are purchased from can manufacturers who in turn bill to
you the price of the cans and the 10% tax paid thereon which are separately shown
on the invoice; and that the cost of the cans, including the 2% millier's tax is
computed.
In reply, I have the honor to inform you that your request is hereby granted. x x x
(Pacific Oxygen & Acetylene Co. vs. Commissioner, GR No. L-17708, April 30,
1965)." (Rollo p. 36)
According to petitioner, to hold, as what the Court of Appeals did, that a
reversal of the aforesaid ruling would be violative of the rule on non-retroactivity of
rulings of tax officials when prejudicial to the taxpayer (Section 278 of the old Tax
Code) would, in effect, create a perpetual exemption in favor of CENVOCO
although there may be subsequent changes in circumstances warranting a reversal.
This Court is mindful of the well-entrenched principle that the government is
never estopped from collecting taxes because of mistakes or errors on the part of its
agents, but this rule admits of exceptions in the interest of justice and fairplay. (ABS
CBN Broadcasting Corp. vs. Court of Tax Appeals, 108 SCRA 151 [1981]) More so
in the present case, where we discern no error in allowing the sales taxes paid by
CENVOCO on the containers and packages of its milled products, to be credited
against the deficiency miller's tax due thereon, for a proper application of the law.
It bears stressing that tax burdens are not to be imposed, nor presumed to be
imposed beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government. (The Province of Bulacan, et. al,
vs. Hon. CA, et. al., GR No. 126232, November 27, 1998; Republic vs. IAC, 196
SCRA 335[1991]; CIR vs. Firemen's Fund Ins. Co., 148 SCRA 315 (1987); CIR
vs. CA, 204 SCRA 182 [1991])
Then, too, it has been the long standing policy and practice of this Court to
respect conclusions arrived at by quasi-judicial agencies, especially the Court of Tax
Appeals which, by the nature of its functions, is dedicated exclusively to the study
and consideration of tax problems, and which has thus developed an expertise on the
subject, unless an abuse or improvident exercise of its authority is shown.Finding no
such abuse or improvident exercise of authority or discretion under the premises, the
decision of the Court of Appeals, affirming that of the Court of Tax Appeals, should
be upheld. (Commissioner of Internal Revenue vs. Court of Appeals, 204 SCRA 189
[1991])
WHEREFORE, the petition is hereby DISMISSED and the decision of the
Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.
PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax
Appeals in CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon
Oben, Commissioner, Bureau of Internal Revenue", denying the various claims for
tax refund; and the February 20, 1969 Resolution of the same court denying the
motion for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its
tugboats, imported various engine parts and other equipment for which it paid, under
protest, the assessed compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review
(Rollo, pp. 14-18) with the Court of Tax Appeals, docketed therein as CTA Case No.
1484, praying among others, that it be granted the refund of the amount of
P33,442.13. The Court of Tax Appeals, however, in a Decision dated October 21,
1969 (Ibid., pp. 22-27), denied the various claims for tax refund. The decretal portion
of the said decision reads:
WHEREFORE, finding petitioner's various claims for refund
amounting to P33,442.13 without sufficient legal justification, the
said claims have to be, as they are hereby, denied. With costs
against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid.,
pp. 28-34), but the same was denied in a Resolution dated February 20, 1969 (Ibid., p.
35). Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition
(Ibid., p. 40). Petitioner-appellant raised three (3) assignments of error, to wit:
I any claim for exemption from the tax statute should be strictly construed against the
The lower court erred in holding that the petitioner-appellant is
engaged in business as stevedore, the work of unloading and
loading of a vessel in port, contrary to the evidence on record.
II
The lower court erred in not holding that the business in which
petitioner-appellant is engaged, is part and parcel of the shipping
industry.
III
The lower court erred in not allowing the refund sought by
petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not petitioner's tugboats" can be
interpreted to be included in the term "cargo vessels" for purposes of the tax
exemption provided for in Section 190 of the National Internal Revenue Code, as
amended by Republic Act No. 3176.
Said law provides:
Sec. 190. Compensating tax. — ... And Provided further, That the
tax imposed in this section shall not apply to articles to be used by
the importer himself in the manufacture or preparation of articles
subject to specific tax or those for consignment abroad and are to
form part thereof or to articles to be used by the importer himself
as passenger and/or cargo vessel, whether coastwise or oceangoing,
including engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the term cargo
vessel under the tax exemption provisions of Section 190 of the Revenue Code, as
amended by Republic Act. No. 3176. He argues that in legal contemplation, the
tugboat and a barge loaded with cargoes with the former towing the latter for loading
and unloading of a vessel in part, constitute a single vessel. Accordingly, it concludes
that the engines, spare parts and equipment imported by it and used in the repair and
maintenance of its tugboats are exempt from compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's
"tugboats" are not "Cargo vessel" because they are neither designed nor used for
carrying and/or transporting persons or goods by themselves but are mainly
employed for towing and pulling purposes. As such, it cannot be claimed that the
tugboats in question are used in carrying and transporting passengers or cargoes as a
common carrier by water, either coastwise or oceangoing and, therefore, not within
the purview of Section 190 of the Tax Code, as amended by Republic Act No. 3176
(Brief for Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a high prerogative
of sovereignty, the relinquishment is never presumed and any reduction or
dimunition thereof with respect to its mode or its rate, must be strictly construed, and
the same must be coached in clear and unmistakable terms in order that it may be
applied." (84 C.J.S. pp. 659-800), More specifically stated, the general rule is that
taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA
469 [1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65
SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the importations in
question may be declared exempt from the compensating tax, it is indispensable that
the requirements of the amendatory law be complied with, namely: (1) the engines
and spare parts must be used by the importer himself as a passenger and/or cargo,
vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise or
oceangoing navigation (Decision, CTA Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic
Act No. 3176 limit tax exemption from the compensating tax to imported items to be
used by the importer himself as operator of passenger and/or cargo vessel (Ibid., p.
25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as
follows:
A tugboat is a strongly built, powerful steam or power vessel, used
for towing and, now, also used for attendance on vessel. (Webster
New International Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed primarily for
moving large ships to and from piers for towing barges and lighters
in harbors, rivers and canals. (Encyclopedia International Grolier,
Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat.
(Bouvier's Law Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall under the
categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of
statutory construction that where a provision of law speaks categorically, the need
for interpretation is obviated, no plausible pretense being entertained to justify non-
compliance. All that has to be done is to apply it in every case that falls within its
terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555
[1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted upon, following
another fundamental rule that statutes are to be construed in the light of purposes to
be achieved and the evils sought to be remedied (People v. Purisima etc., et al., L-
42050-66, 86 SCRA 544 [1978], it will be noted that the legislature in amending
Section 190 of the Tax Code by Republic Act 3176, as appearing in the records,
intended to provide incentives and inducements to bolster the shipping industry and
not the business of stevedoring, as manifested in the sponsorship speech of Senator
Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found
that no evidence was adduced by petitioner-appellant that tugboats are passenger
and/or cargo vessels used in the shipping industry as an independent business. On the
contrary, petitioner-appellant's own evidence supports the view that it is engaged as a
stevedore, that is, the work of unloading and loading of a vessel in port; and towing
of barges containing cargoes is a part of petitioner's undertaking as a stevedore. In
fact, even its trade name is indicative that its sole and principal business is
stevedoring and lighterage, taxed under Section 191 of the National Internal Revenue
Code as a contractor, and not an entity which transports passengers or freight for hire
which is taxed under Section 192 of the same Code as a common carrier by water
(Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to disturb the
findings and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion reached by an
agency such as the Court of Tax Appeals, which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or
improvident exercise of authority (Reyes v. Commissioner of Internal Revenue, 24
SCRA 199 [1981]), which is not present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of
the Court of Tax Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-31092 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX
APPEALS, respondents.
YAP, J.:
The question involved in this petition is whether respondent John Gotamco & Sons,
Inc. should pay the 3% contractor's tax under Section 191 of the National Internal
Revenue Code on the gross receipts it realized from the construction of the World
Health Organization office building in Manila.
The World Health Organization (WHO for short) is an international organization
which has a regional office in Manila. As an international organization, it enjoys
privileges and immunities which are defined more specifically in the Host
Agreement entered into between the Republic of the Philippines and the said
Organization on July 22, 1951. Section 11 of that Agreement provides, inter
alia, that "the Organization, its assets, income and other properties shall be: (a)
exempt from all direct and indirect taxes. It is understood, however, that the
Organization will not claim exemption from taxes which are, in fact, no more than
charges for public utility services; . . .
When the WHO decided to construct a building to house its own offices, as well as
the other United Nations offices stationed in Manila, it entered into a further
agreement with the Govermment of the Republic of the Philippines on November 26,
1957. This agreement contained the following provision (Article III, paragraph 2):
The Organization may import into the country materials and
fixtures required for the construction free from all duties and taxes
and agrees not to utilize any portion of the international reserves of
the Government.
Article VIII of the above-mentioned agreement referred to the Host Agreement
concluded on July 22, 1951 which granted the Organization exemption from all
direct and indirect taxes.
In inviting bids for the construction of the building, the WHO informed the bidders
that the building to be constructed belonged to an international organization with
diplomatic status and thus exempt from the payment of all fees, licenses, and taxes,
and that therefore their bids "must take this into account and should not include items
for such taxes, licenses and other payments to Government agencies."
The construction contract was awarded to respondent John Gotamco & Sons, Inc.
(Gotamco for short) on February 10, 1958 for the stipulated price of P370,000.00,
but when the building was completed the price reached a total of P452,544.00.
Sometime in May 1958, the WHO received an opinion from the Commissioner of the
Bureau of Internal Revenue stating that "as the 3% contractor's tax is an indirect tax
on the assets and income of the Organization, the gross receipts derived by
contractors from their contracts with the WHO for the construction of its new
building, are exempt from tax in accordance with . . . the Host Agreement."
Subsequently, however, on June 3, 1958, the Commissioner of Internal Revenue
reversed his opinion and stated that "as the 3% contractor's tax is not a direct nor an
indirect tax on the WHO, but a tax that is primarily due from the contractor, the same
is not covered by . . . the Host Agreement."
On January 2, 1960, the WHO issued a certification state 91 inter alia,:
When the request for bids for the construction of the World Health
Organization office building was called for, contractors were
informed that there would be no taxes or fees levied upon them for
their work in connection with the construction of the building as
this will be considered an indirect tax to the Organization caused
by the increase of the contractor's bid in order to cover these taxes.
This was upheld by the Bureau of Internal Revenue and it can be
stated that the contractors submitted their bids in good faith with
the exemption in mind.
The undersigned, therefore, certifies that the bid of John Gotamco
& Sons, made under the condition stated above, should be
exempted from any taxes in connection with the construction of the
World Health Organization office building.
On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand
to Gotamco demanding payment of P 16,970.40, representing the 3% contractor's tax
plus surcharges on the gross receipts it received from the WHO in the construction of
the latter's building.
Respondent Gotamco appealed the Commissioner's decision to the Court of Tax
Appeals, which after trial rendered a decision, in favor of Gotamco and reversed the
Commissioner's decision. The Court of Tax Appeal's decision is now before us for
review on certiorari.
In his first assignment of error, petitioner questions the entitlement of the WHO to
tax exemption, contending that the Host Agreement is null and void, not having been
ratified by the Philippine Senate as required by the Constitution. We find no merit in
this contention. While treaties are required to be ratified by the Senate under the
Constitution, less formal types of international agreements may be entered into by
the Chief Executive and become binding without the concurrence of the legislative
body. 1 The Host Agreement comes within the latter category; it is a valid and
binding international agreement even without the concurrence of the Philippine
Senate.
The privileges and immunities granted to the WHO under the Host Agreement have
been recognized by this Court as legally binding on Philippine authorities. 2
Petitioner maintains that even assuming that the Host Agreement granting tax
exemption to the WHO is valid and enforceable, the 3% contractor's tax assessed on
Gotamco is not an "indirect tax" within its purview. Petitioner's position is that the
contractor's tax "is in the nature of an excise tax which is a charge imposed upon the
performance of an act, the enjoyment of a privilege or the engaging in an
occupation. . . It is a tax due primarily and directly on the contractor, not on the
owner of the building. Since this tax has no bearing upon the WHO, it cannot be
deemed an indirect taxation upon it."
We agree with the Court of Tax Appeals in rejecting this contention of the petitioner.
Said the respondent court:
In context, direct taxes are those that are demanded from the very
person who, it is intended or desired, should pay them; while
indirect taxes are those that are demanded in the first instance from
one person in the expectation and intention that he can shift the
burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US
429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of
course payable by the contractor but in the last analysis it is the
owner of the building that shoulders the burden of the tax because
the same is shifted by the contractor to the owner as a matter of
self-preservation. Thus, it is an indirect tax. And it is an indirect
tax on the WHO because, although it is payable by the petitioner,
the latter can shift its burden on the WHO. In the last analysis it is
the WHO that will pay the tax indirectly through the contractor and
it certainly cannot be said that 'this tax has no bearing upon the
World Health Organization.
Petitioner claims that under the authority of the Philippine Acetylene Company
versus Commissioner of Internal Revenue, et al., 3 the 3% contractor's tax fans
directly on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals,
however, held that the said case is not controlling in this case, since the Host
Agreement specifically exempts the WHO from "indirect taxes." We agree.
The Philippine Acetylene case involved a tax on sales of goods which under the law
had to be paid by the manufacturer or producer; the fact that the manufacturer or
producer might have added the amount of the tax to the price of the goods did not
make the sales tax "a tax on the purchaser." The Court held that the sales tax must be
paid by the manufacturer or producer even if the sale is made to tax-exempt entities
like the National Power Corporation, an agency of the Philippine Government, and to
the Voice of America, an agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from "indirect taxes,"
contemplates taxes which, although not imposed upon or paid by the Organization
directly, form part of the price paid or to be paid by it. This is made clear in Section
12 of the Host Agreement which provides:
While the Organization will not, as a general rule, in the case of
minor purchases, claim exemption from excise duties, and from
taxes on the sale of movable and immovable property which form
 part of the price to be paid, nevertheless, when the Organization is sponsorships for its research activities from international
making important purchases for official use of property on which organizations, private foundations and government agencies.
such duties and taxes have been charged or are chargeable the On July 8, 1983, private respondent received from petitioner
Government of the Republic of the Philippines shall make Commissioner of Internal Revenue a demand letter dated June 3,
appropriate administrative arrangements for the remission or 1983, assessing private respondent the sum of P174,043.97 for
return of the amount of duty or tax. (Emphasis supplied). alleged deficiency contractor's tax, and an assessment dated June
The above-quoted provision, although referring only to purchases made by the WHO, 27, 1983 in the sum of P1,141,837 for alleged deficiency income
elucidates the clear intention of the Agreement to exempt the WHO from "indirect" tax, both for the fiscal year ended March 31, 1978. Denying said
taxation. tax liabilities, private respondent sent petitioner a letter-protest and
The certification issued by the WHO, dated January 20, 1960, sought exemption of subsequently filed with the latter a memorandum contesting the
the contractor, Gotamco, from any taxes in connection with the construction of the validity of the assessments.
WHO office building. The 3% contractor's tax would be within this category and On March 17, 1988, petitioner rendered a letter-decision canceling
should be viewed as a form of an "indirect tax" On the Organization, as the payment the assessment for deficiency income tax but modifying the
thereof or its inclusion in the bid price would have meant an increase in the assessment for deficiency contractor's tax by increasing the amount
construction cost of the building. due to P193,475.55. Unsatisfied, private respondent requested for a
Accordingly, finding no reversible error committed by the respondent Court of Tax reconsideration or reinvestigation of the modified assessment. At
Appeals, the appealed decision is hereby affirmed. the same time, it filed in the respondent court a petition for review
SO ORDERED. of the said letter-decision of the petitioner. While the petition was
pending before the respondent court, petitioner issued a final
decision dated August 3, 1988 reducing the assessment for
deficiency contractor's tax from P193,475.55 to P46,516.41,
G.R. No. 115349 April 18, 1997 exclusive of surcharge and interest.
COMMISSIONER OF INTERNAL REVENUE, petitioner, On July 12, 1993, the respondent court rendered the questioned
vs. decision which dispositively reads:
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO WHEREFORE, in view of the foregoing,
DE MANILA UNIVERSITY, respondents. respondent's decision is SET ASIDE. The
deficiency contractor's tax assessment in the
PANGANIBAN, J.: amount of P46,516.41 exclusive of surcharge and
In conducting researches and studies of social organizations and cultural values thru interest for the fiscal year ended March 31, 1978
its Institute of Philippine Culture, is the Ateneo de Manila University performing the is hereby CANCELED. No pronouncement as to
work of an independent contractor and thus taxable within the purview of then cost.
Section 205 of the National Internal Revenue Code levying a three percent SO ORDERED.
contractor's tax? This question is answer by the Court in the negative as it resolves Not in accord with said decision, petitioner has come to this Court via the
this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. present petition for review raising the following issues:
SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax 1) WHETHER OR NOT PRIVATE
Appeals. 3 RESPONDENT FALLS UNDER THE
The Antecedent Facts PURVIEW OF INDEPENDENT
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the CONTRACTOR PURSUANT TO SECTION
same being largely undisputed by the parties. 205 OF THE TAX CODE; and
Private respondent is a non-stock, non-profit educational institution 2) WHETHER OR NOT PRIVATE
with auxiliary units and branches all over the Philippines. One such RESPONDENT IS SUBJECT TO 3%
auxiliary unit is the Institute of Philippine Culture (IPC), which has CONTRACTOR'S TAX UNDER SECTION 205
no legal personality separate and distinct from that of private OF THE TAX CODE.
respondent. The IPC is a Philippine unit engaged in social science The pertinent portions of Section 205 of the National Internal Revenue Code, as
studies of Philippine society and culture. Occasionally, it accepts amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and
others. — A contractor's tax of threeper centum of the gross
receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent
contractors except persons, associations and
corporations under contract for embroidery and
apparel for export, as well as their agents and
contractors and except gross receipts of or from a
pioneer industry registered with the Board of
Investments under Republic Act No. 5186:
xxx xxx xxx
The term "independent contractors" include
persons (juridical or natural) not enumerated
above (but not including individuals subject to
the occupation tax under Section 12 of the Local
Tax Code) whose activity consists essentially of
the sale of all kinds of services for a fee
regardless of whether or not the performance of
the service calls for the exercise or use of the
physical or mental faculties of such contractors
or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that
private respondent is not an "independent contractor" within the
purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are
the following:
a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under
R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax
Code (under the old Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and
which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in
the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the
definition of an "independent contractor" and is not among the
aforementioned exceptions, private respondent is therefore subject
to the 3% contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of Internal
Revenue and affirmed the assailed decision of the Court of Tax Appeals. Unfazed,
petitioner now asks us to reverse the CA through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of
independent contractor pursuant to Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's
tax under Section 205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University,
through its auxiliary unit or branch — the Institute of Philippine Culture —
performing the work of an independent contractor and, thus, subject to the three
percent contractor's tax levied by then Section 205 of the National Internal Revenue
Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the
case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and
others. — A contractor's tax of threeper centum of the gross
receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry
registered with the Board of Investments under the provisions of
Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or
natural) not enumerated above (but not including individuals
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of
services for a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees.
The term "independent contractor" shall not include regional or
area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-
Pacific Region.
The term "gross receipts" means all amounts received by the prime
or principal contractor as the total contract price, undiminished by
 amount paid to the subcontractor, shall be excluded from the
taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent
Ateneo de Manila University "falls within the definition" of an independent
contractor and "is not one of those mentioned as excepted"; hence, it is properly a
subject of the three percent contractor's tax levied by the foregoing provision of
law. 6 Petitioner states that the "term 'independent contractor' is not specifically
defined so as to delimit the scope thereof, so much so that any person who . . .
renders physical and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's tax." 7 According to petitioner,
Ateneo has the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the
principles of tax exemption without first applying the well-settled doctrine of strict
interpretation in the imposition of taxes. It is obviously both illogical and impractical
to determine who are exempted without first determining who are covered by the
aforesaid provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict interpretation of
laws imposing taxes and other burdens on the populace, before asking Ateneo to
prove its exemption therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that "(a) statute will not be
construed as imposing a tax unless it does so clearly, expressly, and
unambiguously . . . (A) tax cannot be imposed without clear and express words for
that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax lawsand the provisions of a
taxing act are not to be extended by implication." 8 Parenthetically, in answering the
question of who is subject to tax statutes, it is basic that "in case of doubt, such
statutes are to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal Revenue Code
requires that the independent contractor be engaged in the business of selling its
services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of
Philippine Culture, it should be sufficiently proven that the private respondent is
indeed selling its services for a fee in pursuit of an independent business. And it is
only after private respondent has been found clearly to be subject to the provisions of
Sec. 205 that the question of exemption therefrom would arise. Only after such
coverage is shown does the rule of construction — that tax exemptions are to be
strictly construed against the taxpayer — come into play, contrary to petitioner's
position. This is the main line of reasoning of the Court of Tax Appeals in its
decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's Institute
of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in
a business apart from and independently of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is being
taxed," Petitioner Commissioner of Internal Revenue contends that "the tax is due on
its activity of conducting researches for a fee. The tax is due on the gross receipts
made in favor of IPC pursuant to the contracts the latter entered to conduct
researches for the benefit primarily of its clients. The tax is imposed on the exercise
of a taxable activity. . . . [T]he sale of services of private respondent is made under a
contract and the various contracts entered into between private respondent and its
clients are almost of the same terms, showing, among others, the compensation and
terms of payment." 11(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the
records do not show that Ateneo's IPC in fact contracted to sell its research services
for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax
Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining
in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare
contention that, indeed, contracts for sale of services were ever entered into by the
private respondent. As appropriately pointed out by the latter:
An examination of the Commissioner's Written Formal Offer of
Evidence in the Court of Tax Appeals shows that only the
following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit
Report
3 Adjustments to
Sales/Receipts
4 Letter-decision of BIR
Commissioner Bienvenido A.
Tan Jr.
None of the foregoing evidence even comes close to purport to be
contracts between private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the
" funds received by the Ateneo de Manila University are technically not a fee. They
may however fall as gifts or donations which are tax-exempt" as shown by private
respondent's compliance with the requirement of Section 123 of the National Internal
Revenue Code providing for the exemption of such gifts to an educational
institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an
"independent contractor".
For one, the established facts show that IPC, as a unit of the private
respondent, is not engaged in business. Undisputedly, private
respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being
carried out by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and culture. Since it
can only finance a limited number of IPC's research projects,
 private respondent occasionally accepts sponsorship for unfunded
IPC research projects from international organizations, private
foundations and governmental agencies. However, such
sponsorships are subject to private respondent's terms and
conditions, among which are, that the research is confined to
topics consistent with the private respondent's academic
agenda; that no proprietary or commercial purpose research is
done; and that private respondent retains not only the absolute
right to publish but also the ownership of the results of the
research conducted by the IPC. Quite clearly, the aforementioned
terms and conditions belie the allegation that private respondent is
a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock,
non-profit educational corporation. The fact that it accepted
sponsorship for IPC's unfunded projects is merely incidental. For,
the main function of the IPC is to undertake research projects
under the academic agenda of the private respondent. Moreover the
records do not show that in accepting sponsorship of research work,
IPC realized profits from such work. On the contrary, the evidence
shows that for about 30 years, IPC had continuously operated at a
loss, which means that sponsored funds are less than actual
expenses for its research projects. That IPC has been operating at a
loss loudly bespeaks of the fact that education and not profit is the
motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there is no
proof that part of such earnings or profits was ever distributed as
dividends to any stockholder, as in fact none was so distributed
because they accrued to the benefit of the private respondent which
is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine
Culture are not given in the concept of a fee or price in exchange for the performance
of a service or delivery of an object. Rather, the amounts are in the nature of an
endowment or donation given by IPC's benefactors solely for the purpose of
sponsoring or funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPC's terms and conditions. No
proprietary or commercial research is done, and IPC retains the ownership of the
results of the research, including the absolute right to publish the same. The
copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its
permission. 15 The amounts given to IPC, therefore, may not be deemed, it bears
stressing as fees or gross receipts that can be subjected to the three percent
contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of
Philippine Culture cannot be deemed either as a contract of sale or a contract of a
piece of work. "By the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate thing, and the other
to pay therefor a price certain in money or its equivalent." 16 By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil
Code "expressly makes the obligation to transfer ownership as an essential element
of the contract of sale, following modern codes, such as the German and the Swiss.
Even in the absence of this express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered
such transfer of ownership as the primary purpose of sale. Perez and Alguer follow
the same view, stating that the delivery of the thing does not mean a mere physical
transfer, but is a means of transmitting ownership. Transfer of title or an agreement
to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the
case of a contract for a piece of work, "the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain price or
compensation. . . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer
dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or
one for a piece of work, a transfer of ownership is involved and a party necessarily
walks away with an object. 19 In the case at bench, it is clear from the evidence on
record that there was no sale either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the research data obtained or the
results of research projects undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture
is done in pursuance of maintaining Ateneo's university status and not in the course
of an independent business of selling such research with profit in mind. This is clear
from a reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet,
among others, the following requirements before an application for
university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with a
competent qualified staff at least three graduate departments in
accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching,
scholarly publications and research activities published in its
school journal as well as their leadership activities in the
profession.
(f) The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of which
should be devoted to institutional development and research.
(emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards and
requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed
and not the Ateneo is patently erroneous because the former is not an independent
juridical entity that is separate and distinct form the latter.
Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by
the Court of Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body
specifically created for the purpose of reviewing tax cases. Through its expertise, it is
undeniably competent to determine the issue of whether" 21 Ateneo de Manila
University may be deemed a subject of the three percent contractor's tax "through the
evidence presented before it." Consequently, "as a matter of principle, this Court will
not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the
very nature of its function, dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority . . ." 22 This point becomes
more evident in the case before us where the findings and conclusions of both the
Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the decision of the
latter affirming that of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its research
activities at a huge deficit of P1,624,014.00 as shown in its statements of fund and
disbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila
University itself that had funded the research projects of the institute, and it was only
when Ateneo could no longer produce the needed funds that the institute sought
funding from outside. The testimony of Ateneo's Director for Accounting Services,
Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the university's
purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office
Manager of the Institute of Philippine Culture) that as far as grants
from sponsored research it is possible that the grant sometimes is
less than the actual cost. Will you please tell us in this case when
the actual cost is a lot less than the grant who shoulders the
additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university,
because a university has to have its own research institute. 24
So, why is it that Ateneo continues to operate and conduct researches through its
Institute of Philippine Culture when it undisputedly loses not an insignificant amount
in the process? The plain and simple answer is that private respondent is not a
contractor selling its services for a fee but an academic institution conducting these
researches pursuant to its commitments to education and, ultimately, to public
service. For the institute to have tenaciously continued operating for so long despite
its accumulation of significant losses, we can only agree with both the Court of Tax
Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for
undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the assailed
Decision of the Court of Appeals is hereby AFFIRMED in full.
SO ORDERED.
G.R. No. L-45355 January 12, 1990
THE PROVINCE OF MISAMIS ORIENTAL, represented by its
PROVINCIAL TREASURER, petitioner,
vs.
CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC.
(CEPALCO), respondent.
Jaime A. Chaves for petitioner.
Quiason, Makalintal, Barot & Torres for respondent.
GRIÑO-AQUINO, J.:
The issue in this case is a legal one: whether or not a corporation whose franchise
expressly provides that the payment of the "franchise tax of three per centum of the
gross earnings shall be in lieu of all taxes and assessments of whatever authority
upon privileges, earnings, income, franchise, and poles, wires, transformers, and
insulators of the grantee." (p. 20, Rollo), is exempt from paying a provincial
franchise tax.
Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted
a franchise on June 17, 1961 under Republic Act No. 3247 to install, operate and
maintain an electric light, heat and power system in the City of Cagayan de Oro and
its suburbs. Said franchise was amended on June 21, 1963 by R.A. No. 3570 which
added the municipalities of Tagoloan and Opol to CEPALCO's sphere of operation,
and was further amended on August 4, 1969 by R.A. No. 6020 which extended its
field of operation to the municipalities of Villanueva and Jasaan.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby granted, the
grantee shall pay a franchise tax equal to three per centum of the gross
earnings for electric current sold under this franchise, of which two per
centum goes into the National Treasury and one per centum goes into the
treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan and
Cagayan de Oro City, as the case may be: Provided, That the said franchise
tax of three per centum of the gross earnings shall be in lieu of all taxes and
assessments of whatever authority upon privileges
earnings, income, franchise, and poles, wires, transformers, and insulators
of the grantee from which taxes and assessments the grantee is hereby
expressly exempted. (Emphasis supplied.)
On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of
which provides:
 Sec. 9. Franchise Tax.—Any provision of special laws to the contrary
notwithstanding, the province may impose a tax on businesses enjoying
franchise, based on the gross receipts realized within its territorial
jurisdiction, at the rate of not exceeding one-half of one per cent of the gross
annual receipts for the preceding calendar year.
In the case of newly started business, the rate shall not exceed three
thousand pesos per year. Sixty per cent of the proceeds of the tax shall
accrue to the general fund of the province and forty per cent to the general
fund of the municipalities serviced by the business on the basis of the gross
annual receipts derived therefrom by the franchise holder. In the case of a
newly started business, forty per cent of the proceeds of the tax shall be
divided equally among the municipalities serviced by the business.
(Emphasis supplied.)
Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted
Provincial Revenue Ordinance No. 19, whose Section 12 reads:
Sec. 12. Franchise Tax.—There shall be levied, collected and paid on
businesses enjoying franchise tax of one-half of one per cent of their gross
annual receipts for the preceding calendar year realized within the territorial
jurisdiction of the province of Misamis Oriental. (p. 27, Rollo.)
The Provincial Treasurer of Misamis Oriental demanded payment of the provincial
franchise tax from CEPALCO. The company refused to pay, alleging that it is
exempt from all taxes except the franchise tax required by R.A. No. 6020.
Nevertheless, in view of the opinion rendered by the Provincial Fiscal, upon
CEPALCO's request, upholding the legality of the Revenue Ordinance, CEPALCO
paid under protest on May 27, 1974 the sum of P 4,276.28 and appealed the fiscal's
ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO.
On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75
adopting entirely the opinion of the Secretary of Justice.
On February 16, 1976, the Province filed in the Court of First Instance of Misamis
Oriental a complaint for declaratory relief praying, among others, that the Court
exercise its power to construe P.D. No. 231 in relation to the franchise of CEPALCO
(R.A. No. 6020), and to declare the franchise as having been amended by P.D. No.
231. The Court dismissed the complaint and ordered the Province to return to
CEPALCO the sum of P4,276.28 paid under protest.
The Province has appealed to this Court, alleging that the lower court erred in
holding that:
1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not
amended or repealed by P.D. No. 231;
2) the imposition of the provincial franchise tax on CEPALCO would subvert the
purpose of P.D. No. 231;
3) CEPALCO is exempt from paying the provincial franchise tax; and
4) petitioner should refund CEPALCO's tax payment of P4,276.28.
We find no merit in the petition for review.
There is no provision in P.D. No. 231 expressly or impliedly amending or repealing
Section 3 of R.A. No. 6020. The perceived repugnancy between the two statutes
should be very clear before the Court may hold that the prior one has been repealed
by the later, since there is no express provision to that effect (Manila Railroad Co. vs.
Rafferty, 40 Phil. 224). The rule is that a special and local statute applicable to a
particular case is not repealed by a later statute which is general in its terms,
provisions and application even if the terms of the general act are broad enough to
include the cases in the special law (id.) unless there is manifest intent to repeal or
alter the special law.
Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to
CEPALCO, while P.D. No. 231 is a general tax law. The presumption is that the
special statutes are exceptions to the general law (P.D. No. 231) because they pertain
to a special charter granted to meet a particular set of conditions and circumstances.
The franchise of respondent CEPALCO expressly exempts it from payment of "all
taxes of whatever authority" except the three per centum (3%) tax on its gross
earnings.
In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority" found in the franchise of the Visayan
Electric Company was held to exempt the company from payment of the 5% tax on
corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan
Electric Co. vs. David, 49 O.G. [No. 4] 1385).
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and
nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No.
1510) exempts the Manila Railroad from payment of internal revenue tax for its
importations of coal and oil under Act No. 2432 and the Amendatory Acts of the
Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act
No. 1497) justified the exemption of the Philippine Railway Company from payment
of the tax on its corporate franchise under Section 259 of the Internal Revenue Code,
as amended by R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal
Revenue, 91 Phil. 35).
Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light
and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of
the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA
231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company
when it was required to pay the corporate franchise tax under Section 259 of the
Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.
Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that
such exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee. As a charter is in the nature of a private
contract, the imposition of another franchise tax on the corporation by the local
authority would constitute an impairment of the contract between the government
and the corporation.
Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf
Electric Power Company which provided that the company shall pay:
tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of
any and all taxes . . . now or in the future . . . from which taxes . . . the
grantee is hereby expressly exempted and . . . no other tax . . . other than the
 franchise tax of 2% on the gross receipts as provided for in the original
franchise shall be collected.
exempts the company from paying the franchise tax under Section 259 of the
National Internal Revenue Code (Commissioner of Internal Revenue vs. Lingayen
Gulf Electric Power Co., Inc., G.R. No. 23771, August 4, 1988).
On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc.,
Guagua Electric Company, Inc. were subjected to the 5% tax on corporate franchise
under Section 259 of the Internal Revenue Code, as amended, because Act No. 667
of the Philippine Commission and the ordinance or resolutions granting their
respective franchises did not contain the "in-lieu-of-all-taxes" clause (Balanga Power
Plant Co. vs. Commissioner of Internal Revenue, G.R. No. L-20499, June 30, 1965;
Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967;
Guagua Electric Light vs. Collector of Internal Revenue, G.R. No. L-23611, April 24,
1967).
Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976,
has made it crystal clear that the franchise tax provided in the Local Tax Code (P.D.
No. 231, Sec. 9) may only be imposed on companies with franchises that do not
contain the exempting clause. Thus it provides:
The franchise tax imposed under local tax ordinance pursuant to Section 9
of the Local Tax Code, as amended, shall be collected from businesses
holding franchise but not from business establishments whose franchise
contain the "in-lieu-of-all-taxes-proviso".
Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not
applicable here because what the Government sought to impose on Meralco in that
case was not a franchise tax but a compensating tax on the poles, wires, transformers
and insulators which it imported for its use.
WHEREFORE, the petition for review is denied, and the decision of the Court of
First Instance is hereby affirmed in toto. No costs.
SO ORDERED.
G.R. No. 108358 January 20, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS
PHILIPPINES, INC. and THE HON. COURT OF TAX APPEALS, respondents.
VITUG, J.:
On 22 August 1986, during the period when the President of the Republic still
wielded legislative powers, Executive Order No. 41 was promulgated declaring a
one-time tax amnesty on unpaid income taxes, later amended to include estate and
donor's taxes and taxes on business, for the taxable years 1981 to 1985.
Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines, Inc.,
filed, in October 1986 and November 1986, its Tax Amnesty Return No. 34-F-
00146-41 and Supplemental Tax Amnesty Return No. 34-F-00146-64-B,
respectively, and paid the corresponding amnesty taxes due.
Prior to this availment, petitioner Commissioner of Internal Revenue, in a
communication received by private respondent on 13 August 1986, assessed the
latter deficiency income and business taxes for its fiscal years ended 30 September
1981 and 30 September 1982 in an aggregate amount of P1,410,157.71. The taxpayer
wrote back to state that since it had been able to avail itself of the tax amnesty, the
deficiency tax notice should forthwith be cancelled and withdrawn. The request was
denied by the Commissioner, in his letter of 22 November 1988, on the ground that
Revenue Memorandum Order No. 4-87, dated 09 February 1987, implementing
Executive Order No. 41, had construed the amnesty coverage to include only
assessments issued by the Bureau of Internal Revenue after the promulgation of the
executive order on 22 August 1986 and not to assessments theretofore made. The
invoked provisions of the memorandum order read:
TO: All Internal Revenue Officers and Others Concerned:
1.0. To give effect and substance to the immunity provisions of the
tax amnesty under Executive Order No. 41, as expanded by
Executive Order No. 64, the following instructions are hereby
issued:
xxx xxx xxx
1.02. A certification by the Tax Amnesty Implementation Officer
of the fact of availment of the said tax amnesty shall be a sufficient
basis for:
xxx xxx xxx
1.02.3. In appropriate cases, the cancellation/withdrawal
of assessment notices and letters of demand issued after August 21,
1986 for the collection of income, business, estate or donor's taxes
due during the same taxable years.1 (Emphasis supplied)
Private respondent appealed the Commissioner's denial to the Court of Tax Appeals.
Ruling for the taxpayer, the tax court said:
Respondent (herein petitioner Commissioner) failed to present any
case or law which proves that an assessment can withstand or
negate the force and effects of a tax amnesty. This burden of proof
on the petitioner (herein respondent taxpayer) was created by the
clear and express terms of the executive order's intention —
qualified availers of the amnesty may pay an amnesty tax in lieu of
said unpaid taxes which are forgiven (Section 2, Section 5,
Executive Order No. 41, as amended). More specifically, the plain
provisions in the statute granting tax amnesty for unpaid taxes for
the period January 1, 1981 to December 31, 1985 shifted the
burden of proof on respondent to show how the issuance of an
assessment before the date of the promulgation of the executive
order could have a reasonable relation with the objective periods of
the amnesty, so as to make petitioner still answerable for a tax
liability which, through the statute, should have been erased with
the proper availment of the amnesty.
 Additionally, the exceptions enumerated in Section 4 of Executive
Order No. 41, as amended, do not indicate any reference to an
assessment or pending investigation aside from one arising from
information furnished by an informer. . . . Thus, we deem that the
rule in Revenue Memorandum Order No. 4-87 promulgating that
only assessments issued after August 21, 1986 shall be abated by
the amnesty is beyond the contemplation of Executive Order No.
41, as amended.2
On appeal by the Commissioner to the Court of Appeals, the decision of the tax court
was affirmed. The appellate court further observed:
In the instant case, examining carefully the words used in
Executive Order No. 41, as amended, we find nothing which
justifies petitioner Commissioner's ground for denying respondent
taxpayer's claim to the benefits of the amnesty law. Section 4 of
the subject law enumerates, in no uncertain terms, taxpayers who
may not avail of the amnesty granted,. . . .
Admittedly, respondent taxpayer does not fall under any of the . . .
exceptions. The added exception urged by petitioner
Commissioner based on Revenue Memorandum Order No. 4-87,
further restricting the scope of the amnesty clearly amounts to an
act of administrative legislation quite contrary to the mandate of
the law which the regulation ought to implement.
xxx xxx xxx
Lastly, by its very nature, a tax amnesty, being a general pardon or
intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law, partakes of an absolute forgiveness or waiver
by the Government of its right to collect what otherwise would be
due it, and in this sense, prejudicial thereto, particularly to give tax
evaders, who wish to relent and are willing to reform a chance to
do so and thereby become a part of the new society with a clean
slate. (Republic vs. Intermediate Appellate Court. 196 SCRA 335,
340 [1991] citing Commissioner of Internal Revenue vs. Botelho
Shipping Corp., 20 SCRA 487) To follow [the restrictive
application of Revenue Memorandum Order No. 4-87 pressed by
petitioner Commissioner would be to work against the raison
d'etre of E.O. 41, as amended, i.e., to raise government revenues
by encouraging taxpayers to declare their untaxed income and pay
the tax due thereon. (E.O. 41, first paragraph)]3
In this petition for review, the Commissioner raises these related issues:
1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87,
PROMULGATED TO IMPLEMENT E.O. NO. 41, IS VALID;
2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN
QUESTION WERE EXTINGUISHED BY REASON OR PRIVATE
RESPONDENT'S AVAILMENT OF EXECUTIVE ORDER NO. 41 AS
AMENDED BY EXECUTIVE ORDER NO. 64;
3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME
THE PRESUMPTION OF VALIDITY OF ASSESSMENTS.4
The authority of the Minister of Finance (now the Secretary of Finance), in
conjunction with the Commissioner of Internal Revenue, to promulgate all needful
rules and regulations for the effective enforcement of internal revenue laws cannot be
controverted. Neither can it be disputed that such rules and regulations, as well as
administrative opinions and rulings, ordinarily should deserve weight and respect by
the courts. Much more fundamental than either of the above, however, is that all such
issuances must not override, but must remain consistent and in harmony with, the
law they seek to apply and implement. Administrative rules and regulations are
intended to carry out, neither to supplant nor to modify, the law.
The real and only issue is whether or not the position taken by the Commissioner
coincides with the meaning and intent of executive Order No. 41.
We agree with both the court of Appeals and court of Tax Appeals that Executive
Order No. 41 is quite explicit and requires hardly anything beyond a simple
application of its provisions. It reads:
Sec. 1. Scope of Amnesty. — A one-time tax amnesty covering
unpaid income taxes for the years 1981 to 1985 is hereby declared.
Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes to
avail himself of the tax amnesty shall, on or before October 31,
1986;
a) file a sworn statement declaring his net worth
as of December 31, 1985;
b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980
on record with the Bureau of Internal Revenue,
or if no such record exists, file a statement of
said net worth therewith, subject to verification
by the Bureau of Internal Revenue;
c) file a return and pay a tax equivalent to ten per
cent (10%) of the increase in net worth from
December 31, 1980 to December 31,
1985: Provided, That in no case shall the tax be
less than P5,000.00 for individuals and
P10,000.00 for judicial persons.
Sec. 3. Computation of Net Worth. — In computing the net worths
referred to in Section 2 hereof, the following rules shall govern:
a) Non-cash assets shall be valued at acquisition
cost.
b) Foreign currencies shall be valued at the rates
of exchange prevailing as of the date of the net
worth statement.
Sec. 4. Exceptions. — The following taxpayers may not avail
themselves of the amnesty herein granted:
a) Those falling under the provisions of
Executive Order Nos. 1, 2 and 14;
 b) Those with income tax cases already filed in
Court as of the effectivity hereof;
c) Those with criminal cases involving violations
of the income tax already filed in court as of the
effectivity filed in court as of the effectivity
hereof;
d) Those that have withholding tax liabilities
under the National Internal Revenue Code, as
amended, insofar as the said liabilities are
concerned;
e) Those with tax cases pending investigation by
the Bureau of Internal Revenue as of the
effectivity hereof as a result of information
furnished under Section 316 of the National
Internal Revenue Code, as amended;
f) Those with pending cases involving
unexplained or unlawfully acquired wealth
before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three
(Frauds, Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds and
Property) of the Revised Penal Code, as amended.
xxx xxx xxx
Sec. 9. The Minister of finance, upon the recommendation of the
Commissioner of Internal Revenue, shall promulgate the necessary
rules and regulations to implement this Executive Order.
xxx xxx xxx
Sec. 11. This Executive Order shall take effect immediately.
DONE in the City of Manila, this 22nd day of August in the year
of Our Lord, nineteen hundred and eighty-six.
The period of the amnesty was later extended to 05 December 1986 from 31 October
1986 by Executive Order No. 54, dated 04 November 1986, and, its coverage
expanded, under Executive Order No. 64, dated 17 November 1986, to include estate
and honors taxes and taxes on business.
If, as the Commissioner argues, Executive Order No. 41 had not been intended to
include 1981-1985 tax liabilities already assessed (administratively) prior to 22
August 1986, the law could have simply so provided in its exclusionary clauses. It
did not. The conclusion is unavoidable, and it is that the executive order has been
designed to be in the nature of a general grant of tax amnesty subject only to the
cases specifically excepted by it.
It might not be amiss to recall that the taxable periods covered by the amnesty
include the years immediately preceding the 1986 revolution during which time there
had been persistent calls, all too vivid to be easily forgotten, for civil disobedience,
most particularly in the payment of taxes, to the martial law regime. It should be
understandable then that those who ultimately took over the reigns of government
following the successful revolution would promptly provide for abroad, and not a
confined, tax amnesty.
Relative to the two other issued raised by the Commissioner, we need only quote
from Executive Order No. 41 itself; thus:
Sec. 6. Immunities and Privileges. — Upon full compliance with
the conditions of the tax amnesty and the rules and regulations
issued pursuant to this Executive order, the taxpayer shall enjoy the
following immunities and privileges:
a) The taxpayer shall be relieved of any income
tax liability on any untaxed income from January
1, 1981 to December 31, 1985, including
increments thereto and penalties on account of
the non-payment of the said tax. Civil, criminal
or administrative liability arising from the non-
payment of the said tax, which are actionable
under the National Internal Revenue Code, as
amended, are likewise deemed extinguished.
b) The taxpayer's tax amnesty declaration shall
not be admissible in evidence in all proceedings
before judicial, quasi-judicial or administrative
bodies, in which he is a defendant or respondent,
and the same shall not be examined, inquired or
looked into by any person, government official,
bureau or office.
c) The books of account and other records of the
taxpayer for the period from January 1, 1981 to
December 31, 1985 shall not be examined for
income tax purposes: Provided, That the
Commissioner of Internal Revenue may
authorize in writing the examination of the said
books of accounts and other records to verify the
validity or correctness of a claim for grant of any
tax refund, tax credit (other than refund on credit
of withheld taxes on wages), tax incentives,
and/or exemptions under existing laws.
There is no pretension that the tax amnesty returns and due payments made by the
taxpayer did not conform with the conditions expressed in the amnesty order.
WHEREFORE, the decision of the court of Appeals, sustaining that of the court of
Tax Appeals, is hereby AFFIRMED in toto. No costs.
SO ORDERED.
G.R. No. 88291 May 31, 1991
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary,
Office of the President; HON. VICENTE R. JAYME, in his capacity as
Secretary of the Department of Finance; HON. SALVADOR MISON, in his
capacity as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in his
capacity as Commissioner of Internal Revenue; NATIONAL POWER
CORPORATION; the FISCAL INCENTIVES REVIEW BOARD; Caltex
(Phils.) Inc.; Pilipinas Shell Petroleum Corporation; Philippine National Oil
Corporation; and Petrophil Corporation, respondents.
Villamor & Villamor Law Offices for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell Petroleum
Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.
GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders, rulings, and resolutions of
respondents Executive Secretary, Secretary of Finance, Commissioner of Internal
Revenue, Commissioner of Customs and the Fiscal Incentives Review Board FIRB
for exempting the National Power Corporation (NPC) from indirect tax and duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public
corporation to undertake the development of hydraulic power and the production of
power from other sources.1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption
privileges under—
Sec. 2. To facilitate payment of its indebtedness, the National Power
Corporation shall be exempt from all taxes, duties, fees, imposts, charges
and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities.
On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC
wherein Congress declared as a national policy the total electrification of the
Philippines through the development of power from all sources to meet the needs of
industrial development and rural electrification which should be pursued
coordinately and supported by all instrumentalities and agencies of the government,
including its financial institutions.2 The corporate existence of NPC was extended to
carry out this policy, specifically to undertake the development of hydro electric
generation of power and the production of electricity from nuclear, geothermal and
other sources, as well as the transmission of electric power on a nationwide
basis.3 Being a non-profit corporation, Section 13 of the law provided in detail the
exemption of the NPC from all taxes, duties, fees, imposts and other charges by the
government and its instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a)
and (d) of Republic Act No. 6395 by specifying, among others, the exemption of
NPC from such taxes, duties, fees, imposts and other charges imposed "directly or
indirectly," on all petroleum products used by NPC in its operation. Presidential
Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by
integrating the tax exemption in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption
privileges granted in favor of government-owned or controlled corporations
including their subsidiaries.4 However, said law empowered the President and/or the
then Minister of Finance, upon recommendation of the FIRB to restore, partially or
totally, the exemption withdrawn, or otherwise revise the scope and coverage of any
applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85
restoring the tax and duty exemption privileges of NPC from June 11, 1984 to June
30, 1985. On January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely
restoring the NPC tax and duty exemption privileges effective July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again withdrew all
tax and duty incentives granted to government and private entities which had been
restored under Presidential Decree Nos. 1931 and 1955 but it gave the authority to
FIRB to restore, revise the scope and prescribe the date of effectivity of such tax
and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and
duty exemption privileges effective March 10, 1987. On October 5, 1987, the
President, through respondent Executive Secretary Macaraig, Jr., confirmed and
approved FIRB Resolution No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for refunds
of taxes and duties originally paid by respondents Caltex, Petrophil and
Shell for specific and ad valorem taxes to the BIR; and for Customs duties
and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of
Customs on its crude oil importation.
Many of the factual statements are reproduced from the Senate Committee
on Accountability of Public Officers and Investigations (Blue Ribbon)
Report No. 474 dated January 12, 1989 and approved by the Senate on
April 21, 1989 (copy attached hereto as Annex "A") and are identified in
quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984
when P.D. No. 1931 was promulgated abolishing the tax exemptions of all
government-owned or-controlled corporations, the oil firms never paid
excise or specific and ad valorem taxes for petroleum products sold and
delivered to the NPC. This non-payment of taxes therefore spanned a period
of eight (8) years. (par. 23, p. 7, Annex "A")
During this period, the Bureau of Internal Revenue was not collecting
specific taxes on the purchases of NPC of petroleum products from the oil
companies on the erroneous belief that the National Power Corporation
(NPC) was exempt from indirect taxes as reflected in the letter of Deputy
Commissioner of Internal Revenue (DCIR) Romulo Villa to the NPC dated
October 29, 1980 granting blanket authority to the NPC to purchase
petroleum products from the oil companies without payment of specific tax
(copy of this letter is attached hereto as petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes on their
sales of oil products to NPC only after the promulgation of P.D. No. 1931
on June 11, 1984, withdrawing all exemptions granted in favor of
government-owned or-controlled corporations and empowering the FIRB to
recommend to the President or to the Minister of Finance the restoration of
the exemptions which were withdrawn. "Specifically, Caltex paid the total
amount of P58,020,110.79 in specific and ad valorem taxes for deliveries of
petroleum products to NPC covering the period from October 31, 1984 to
April 27, 1985." (par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included customs duty
without the tax portion. Beginning June 11, 1984, when P.D. 1931 was
promulgated abolishing NPC's tax exemptions, Caltex's billings to NPC
always included both duties and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5)
(par. 24, p, 7, Annex "A")
4. For the sales of petroleum products delivered to NPC during the period
from October, 1984 to April, 1985, NPC was billed a total of
P522,016,77.34 (sic) including both duties and taxes, the specific tax
component being valued at P58,020,110.79. (par. 25, p. 8, Annex "A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February
7, 1985, certified true copy of which is hereto attached as Annex "C",
restored the tax exemption privileges of NPC effective retroactively to June
11, 1984 up to June 30, 1985. The first paragraph of said resolution reads as
follows:
1. Effective June 11, 1984, the tax and duty exemption privileges
enjoyed by the National Power Corporation under C.A. No. 120, as
amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on September 11,
1985 with the BIR for a "refund of Specific Taxes paid on petroleum
products . . . in the total amount of P58,020,110.79. (par. 26, pp. 8-9, Annex
"A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy attached
as petitioner's Annex "D"), Acting BIR Commissioner Ruben Ancheta
declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC
to purchase petroleum products from the oil companies free of
specific and ad valorem taxes, during the period in question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985—The president of the NPC, Mr. Gabriel Itchon, wrote
Mr. Cesar Virata, Chairman of the FIRB (Annex "E"), requesting "the FIRB
to resolve conflicting rulings on the tax exemption privileges of the
National Power Corporation (NPC)." These rulings involve FIRB
Resolutions No. 1-84 and 10-85. (par. 40, p. 12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985,
Minister Cesar Virata confirmed the ruling of May 8, 1985 of Acting BIR
Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed
to Hanil Development Co., Ltd., a Korean contractor of NPC for its
infrastructure projects, certified true copy of which is attached hereto as
petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled:
In Reply please be informed that after a re-study of Section 13,
R.A. 6395, as amended by P.D. 938, this Office is of the opinion,
and so holds, that the scope of the tax exemption privilege enjoyed
by NPC under said section covers only taxes for which it is directly
liable and not on taxes which are only shifted to it. (Phil.
Acetylene vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since
contractor's tax is directly payable by the contractor, not by NPC,
your request for exemption, based on the stipulation in the
aforesaid contract that NPC shall assume payment of your
contractor's tax liability, cannot be granted for lack of legal basis."
(Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's exemption privileges covers (sic)
only taxes for which it is directly liable and does not cover taxes which are
only shifted to it or for indirect taxes. The BIR, through Ancheta, reversed
its previous position of May 8, 1985 adopted by Ancheta himself favoring
NPC's indirect tax exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986,
"addressed to Caltex (Annex "F"), the BIR Commissioner declared that
PAL's tax exemption is limited to taxes for which PAL is directly liable, and
that the payment of specific and ad valorem taxes on petroleum products is
a direct liability of the manufacturer or producer thereof". (par. 51, p. 15,
Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring
NPC's tax exemptions retroactively from July 1, 1985 to a indefinite period,
certified true copy of which is hereto attached as petitioner's Annex "H".
12. NPC's total refund claim was P468.58 million but only a portion
thereof i.e. the P58,020,110.79 (corresponding to Caltex) was approved and
released by way of a Tax Credit Memo (Annex "Q") dated July 7, 1986,
certified true copy of which [is) attached hereto as petitioner's Annex "F,"
which was assigned by NPC to Caltex. BIR Commissioner Tan approved
the Deed of Assignment on July 30, 1987, certified true copy of which is
hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15,
Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the
tax credit to Caltex in partial settlement of its outstanding obligations to the
latter while Caltex, in turn, would apply the assigned tax credit against its
specific tax payments for two (2) months. (per memorandum dated July 28,
1986 of DCIR Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the refund of the
P58.0 million tax credit assigned to Caltex, the NPC reiterated its request
for the release of the balance of its pending refunds of taxes paid by
respondents Petrophil, Shell and Caltex covering the period from June 11,
1984 to early part of 1986 amounting to P410.58 million. (The claim of the
first two (2) oil companies covers the period from June 11, 1984 to early
part of 1986; while that of Caltex starts from July 1, 1985 to early 1986).
This request was denied on August 18, 1986, under BIR Ruling 152-86
(certified true copy of which is attached hereto as petitioner's Annex "I").
The BIR ruled that NPC's tax free privilege to buy petroleum products
covered only the period from June 11, 1984 up to June 30, 1985. It further
declared that, despite FIRB No. 1-86, NPC had already lost its tax and duty
exemptions because it only enjoys special privilege for taxes for which it
is directly liable. This ruling, in effect, denied the P410 Million tax refund
application of NPC (par. 28, p. 9, Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986. Until
now the BIR has not resolved the motion. (Benigna, II 3, Oct. 17, 1988, p. 2;
Memorandum for the Complainant, Oct. 26, 1988, p. 15)." (par. 29, p. 9,
Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S.
Factoran, Jr., BIR Commissioner Tan, Jr. (certified true copy of which is
hereto attached and made a part hereof as petitioner's Annex "J"), reversed
his previous position and states this time that all deliveries of petroleum
products to NPC are tax exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted
Executive Order No. 93, entitled "Withdrawing All Tax and Duty Incentives,
Subject to Certain Exceptions, Expanding the Powers of the Fiscal
Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which
restored NPC's tax exemption privilege and included in the exemption
"those pertaining to its domestic purchases of petroleum and petroleum
products, and the restorations were made to retroact effective March 10,
1987, a certified true copy of which is hereto attached and made a part
hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoñez, Secretary of Justice,
issued Opinion No. 77, series of 1987, opining that "the power conferred
upon Fiscal Incentives Review Board by Section 2a (b), (c) and (d) of
Executive order No. 93 constitute undue delegation of legislative power and,
therefore, [are] unconstitutional," a copy of which is hereto attached and
made a part hereof as Petitioner's Annex "L."
19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a
Memorandum to the Chairman of the FIRB a certified true copy of which is
hereto attached and made a part hereof as petitioner's Annex "M,"
confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987,
allegedly pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary
Catalino Macaraig, who by letter dated May 2, 1988 asked him to rule "on
whether or not, as the law now stands, the National Power Corporation is
still exempt from taxes, duties . . . on its local purchases of . . . petroleum
products . . ." declared that "NPC under the provisions of its Revised
Charter retains its exemption from duties and taxes imposed on the
petroleum products purchased locally and used for the generation of
electricity," a certified true copy of which is attached hereto as petitioner's
Annex "N." (par. 30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up likewise with a confirmatory
letter dated June 1 5, 1988 but without the usual official form of "By the
Authority of the President," a certified true copy of which is hereto attached
and made a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the Executive
Secretary are based on the RESOLUTION No. 17-87 of FIRB restoring the
tax and duty exemption of the respondent NPC pertaining to its domestic
purchases of petroleum products (petitioner's Annex K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in its issue
of July 11, 1988 reported that the Office of the President and the
Department of Finance had ordered the BIR to refund the tax payments of
the NPC amounting to Pl.58 Billion which includes the P410 Million Tax
refund already rejected by BIR Commissioner Tan, Jr., in his BIR Ruling
No. 152-86. And in a letter dated July 28, 1988 of Undersecretary Marcelo
B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was
ordered released to NPC (par. 31, p. 1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and
Commissioner Tan requesting them to hold in abeyance the release of the
Pl.58 billion and await the outcome of the investigation in regard to Senate
Resolution No. 227," copies attached as Petitioner's Annexes "P" and "P-1 "
(par. 32, p. 10, Annex "A").
Reacting to this letter of the petitioner, Undersecretary Fernando wrote
Commissioner Tan of the BIR dated August, 1988 requesting him to hold in
abeyance the release of the tax refunds to NPC until after the termination of
the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and before
removal thereof from customs custody, the corresponding customs duties
and ad valorem taxes are paid. Bunker fuel oil is one of the petroleum
products processed from the crude oil; and same is sold to NPC. After the
sale, NPC applies for tax credit covering the duties and ad valorem
exemption under its Charter. Such applications are processed by the Bureau
of Customs and the corresponding tax credit certificates are issued in favor
of NPC which, in turn assigns it to the oil firm that imported the crude oil.
These certificates are eventually used by the assignee-oil firms in payment
of their other duty and tax liabilities with the Bureau of Customs. (par. 70, p.
19, Annex "A")
A lesser amount totalling P740 million, covering the period from 1985 to
the present, is being sought by respondent NPC for refund from the Bureau
of Customs for duties paid by the oil companies on the importation of crude
oil from which the processed products sold locally by them to NPC was
derived. However, based on figures submitted to the Blue Ribbon
Committee of the Philippine Senate which conducted an investigation on
this matter as mandated by Senate Resolution No. 227 of which the herein
petitioner was the sponsor, a much bigger figure was actually refunded to
NPC representing duties and ad valorem taxes paid to the Bureau of
Customs by the oil companies on the importation of crude oil from 1979 to
1985.
26. Meantime, petitioner, as member of the Philippine Senate introduced
P.S. Res. No. 227, entitled:
Resolution Directing the Senate Blue Ribbon Committee, In Aid of
Legislation, To conduct a Formal and Extensive Inquiry into the
Reported Massive Tax Manipulations and Evasions by Oil
Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and
Petrophil, Which Were Made Possible By Their Availing of the
Non-Existing Exemption of National Power Corporation (NPC)
from Indirect Taxes, Resulting Recently in Their Obtaining A Tax
Refund Totalling P1.55 Billion From the Department of Finance,
Their Refusal to Pay Since 1976 Customs Duties Amounting to
Billions of Pesos on Imported Crude Oil Purportedly for the Use of
the National Power Corporation, the Non-Payment of Surtax on
Windfall Profits from Increases in the Price of Oil Products in
August 1987 amounting Maybe to as Much as Pl.2 Billion Surtax
Paid by Them in 1984 and For Other Purposes.
27. Acting on the above Resolution, the Blue Ribbon Committee of the
Senate did conduct a lengthy formal inquiry on the matter, calling all parties
interested to the witness stand including representatives from the different
oil companies, and in due time submitted its Committee Report No. 474 . . .
— The Blue Ribbon Committee recommended the following courses of
action.
1. Cancel its approval of the tax refund of P58,020,110.70 to the
National Power Corporation (NPC) and its approval of Tax Credit
memo covering said amount (Annex "P" hereto), dated July 7,
1986, and cancel its approval of the Deed of Assignment (Annex
"Q" hereto) by NPC to Caltex, dated July 28, 1986, and collect
from Caltex its tax liabilities which were erroneously treated as
paid or settled with the use of the tax credit certificate that NPC
assigned to said firm.:
1.1. NPC did not have any indirect tax exemption since
May 27, 1976 when PD 938 was issued. Therefore, the
grant of a tax refund to NPC in the amount of P58 million
was illegal, and therefore, null and void. Such refund was
a nullity right from the beginning. Hence, it never
transferred any right in favor of NPC.
2. Stop the processing and/or release of Pl.58 billion tax refund to
NPC and/or oil companies on the same ground that the NPC, since
May 27, 1976 up to June 17, 1987 was never granted any indirect
tax exemption. So, the P1.58 billion represent taxes legally and
properly paid by the oil firms.
3. Start collection actions of specific or excise and ad
valorem taxes due on petroleum products sold to NPC from May
27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance of
EO 195).
B. For the Bureau of Customs (BOC) to do the following:
1. Start recovery actions on the illegal duty refunds or duty credit
certificates for purchases of petroleum products by NPC and allegedly
granted under the NPC charter covering the years 1978-1988 . . .
28. On March 30, 1989, acting on the request of respondent Finance
Secretary for clearance to direct the Bureau of Internal Revenue and of
Customs to proceed with the processing of claims for tax credits/refunds of
the NPC, respondent Executive Secretary rendered his ruling, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and,
accordingly, unless restrained by proper authorities, that department and/or its line-
tax bureaus may now proceed with the processing of the claims of the National
Power Corporation for duty and tax free exemption and/or tax credits/ refunds, if
there be any, in accordance with the ruling of that Department dated May 20,1988, as
confirmed by this Office on June 15, 1988 . . .5
Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ
of preliminary injunction and/or restraining order, praying among others that:
1. Upon filing of this petition, a temporary restraining order forthwith be
issued against respondent FIRB Executive Secretary Macaraig, and
Secretary of Finance Jayme restraining them and other persons acting for,
under, and in their behalf from enforcing their resolution, orders and ruling,
to wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's
Annex "K");
B. Memorandum-Order of the Office of the President dated
October 5, 1987 (petitioner's Annex "M");
C. Order of the Executive Secretary dated June 15, 1988
(petitioner's Annex "O");
D. Order of the Executive Secretary dated March 30, l989
(petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988
(petitioner's Annex "N").
2. Said temporary restraining order should also include respondent
Commissioners of Customs Mison and Internal Revenue Ong restraining
them from processing and releasing any pending claim or application by
respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a writ or
preliminary injunction against above-named respondents and all persons
acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the
respondents:
 A. Declaring that respondent NPC did not enjoy indirect tax exemption
privilege since May 27, 1976 up to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's
Annex "K");
2. Memorandum-Order of the Office of the President dated
October 5, 1987 (petitioner's Annex "M");
3. Order of the Executive Secretary dated June 15, 1988
(petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989
(petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's
Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC
representing tax refund for P58,020,110.79 (petitioner's Annex
"F");
7. Deed of Assignment of said tax credit memo to respondent
Caltex dated July 30, 1987 (petitioner's Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its
tax liabilities with the Bureau of Internal Revenue and
9. Illegal duty and tax refunds issued by the Bureau of Customs to
respondent NPC by way of tax credit certificates from 1979 up to
the present.
C. Declaring as illegal and null and void the pending claims for tax and duty
refunds by respondent NPC with the Bureau of Customs and the Bureau of
Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and Commissioner of
Internal Revenue from enforcing the abovequestioned resolution, orders and
ruling of respondents Executive Secretary, Secretary of Finance, and FIRB
by processing and releasing respondent NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as being null
and void the pending claims for refund of respondent NPC with the Bureau
of Customs covering the period from 1985 to the present; to cancel and
invalidate the illegal payment made by respondents Caltex, Shell and PNOC
by using the tax credit certificates assigned to them by NPC and to recover
from respondents Caltex, Shell and PNOC all the amounts appearing in said
tax credit certificates which were used to settle their duty and tax liabilities
with the Bureau of Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny as being
null and void the pending claims for refund of respondent NPC with the
Bureau of Internal Revenue covering the period from June 11, 1984 to June
17, 1987.
PETITIONER prays for such other relief and remedy as may be just and
equitable in the premises.6
The issues raised in the petition are the following:
To determine whether respondent NPC is legally entitled to the questioned
tax and duty refunds, this Honorable Court must resolve the following
issues:
Main issue—
Whether or not the respondent NPC has ceased to enjoy indirect tax and
duty exemption with the enactment of P.D. No. 938 on May 27, 1976 which
amended P.D. No. 380, issued on January 11, 1974.
Corollary issues—
1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985
which restored NPC's tax exemption privilege effective June 11, 1984 to
June 30, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986
restoring NPC's tax exemption privilege effective July 1, 1985 included the
restoration of indirect tax exemption to NPC and
2. Whether or not FIRB could validly and legally issue Resolution No. 17-
87 dated June 24, 1987 which restored NPC's tax exemption privilege
effective March 10, 1987; and if said Resolution was validly issued, the
nature and extent of the tax exemption privilege restored to NPC. 7
In a resolution dated June 6, 1989, the Court, without giving due course to the
petition, required respondents to comment thereon, within ten (10) days from notice.
The respondents having submitted their comment, on October 10, 1989 the Court
required petitioner to file a consolidated reply to the same. After said reply was filed
by petitioner on November 15, 1989 the Court gave due course to the petition,
considering the comments of respondents as their answer to the petition, and
requiring the parties to file simultaneously their respective memoranda within twenty
(20) days from notice. The parties having submitted their respective memoranda, the
petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the standing to challenge the
questioned orders and resolution.
In the petition it is alleged that petitioner is "instituting this suit in his capacity as a
taxpayer and a duly-elected Senator of the Philippines." Public respondent argues
that petitioner must show he has sustained direct injury as a result of the action and
that it is not sufficient for him to have a mere general interest common to all
members of the public.8
The Court however agrees with the petitioner that as a taxpayer he may file the
instant petition following the ruling in Lozada when it involves illegal expenditure of
public money. The petition questions the legality of the tax refund to NPC by way of
tax credit certificates and the use of said assigned tax credits by respondent oil
companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.
Assuming petitioner has the personality to file the petition, public respondents also
allege that the proper remedy for petitioner is an appeal to the Court of Tax Appeals
under Section 7 of R.A. No. 125 instead of this petition. However Section 11 of said
law provides—
Sec. 11. Who may appeal; effect of appeal—Any person, association or
corporation adversely affected by a decision or ruling of the Commissioner
of Internal Revenue, the Collector of Customs (Commissioner of Customs)
 or any provincial or City Board of Assessment Appeals may file an appeal
in the Court of Tax Appeals within thirty days after receipt of such decision
or ruling.
From the foregoing, it is only the taxpayer adversely affected by a decision or ruling
of the Commissioner of Internal Revenue, the Commissioner of Customs or any
provincial or city Board of Assessment Appeal who may appeal to the Court of Tax
Appeals. Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to compel the
Commissioner of Internal Revenue to impose a tax assessment not found by him to
be proper. It would be tantamount to a usurpation of executive functions. 9
Even in Meralco, this Court recognizes the situation when mandamus can control the
discretion of the Commissioners of Internal Revenue and Customs when the exercise
of discretion is tainted with arbitrariness and grave abuse as to go beyond statutory
authority.10
Public respondents then assert that a writ of prohibition is not proper as its function
is to prevent an unlawful exercise of jurisdiction11 or to prevent the oppressive
exercise of legal authority.12 Precisely, petitioner questions the lawfulness of the acts
of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this disposition, between a
direct tax and an indirect tax. A direct tax is a tax for which a taxpayer is directly
liable on the transaction or business it engages in. Examples are the custom duties
and ad valorem taxes paid by the oil companies to the Bureau of Customs for their
importation of crude oil, and the specific and ad valorem taxes they pay to the
Bureau of Internal Revenue after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift
the burden upon someone else ."13 For example, the excise and ad valorem taxes that
oil companies pay to the Bureau of Internal Revenue upon removal of petroleum
products from its refinery can be shifted to its buyer, like the NPC, by adding them to
the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment to the NPC charter
by Presidential Decree No. 938, the exemption of NPC from indirect taxation was
revoked and repealed. While petitioner concedes that NPC enjoyed broad exemption
privileges from both direct and indirect taxes on the petroleum products it used,
under Section 13 of Republic Act No, 6395 and more so under Presidential Decree
No. 380, however, by the deletion of the phrases "directly or indirectly" and "on all
petroleum products used by the Corporation in the generation, transmission,
utilization and sale of electric power" he contends that the exemption from indirect
taxes was withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in Section 13 of
Presidential Decree No. 938 regarding the payments of "all forms of taxes, etc."
cannot be interpreted to include indirect tax exemption. He cites Philippine
Aceytelene Co. Inc. vs. Commissioner of Internal Revenue.14 Petitioner emphasizes
the principle in taxation that the exception contained in the tax statutes must be
strictly construed against the one claiming the exemption, and that the rule that a tax
statute granting exemption must be strictly construed against the one claiming the
exemption is similar to the rule that a statute granting taxing power is to be construed
strictly, with doubts resolved against its existence.15 Petitioner cites rulings of the
BIR that the phrase exemption from "all taxes, etc." from "all forms of taxes" and "in
lieu of all taxes" covers only taxes for which the taxpayer is directly liable.16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under
Presidential Decree No. 1931, the relevant provision of which are to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary
notwithstanding, all exemptions from the payment of duties, taxes . . .
heretofore granted in favor of government-owned or controlled corporations
are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of Finance,
upon the recommendation of the Fiscal Incentives Review Board . . . is
hereby empowered to restore, partially or totally, the exemptions withdrawn
by Section 1 above . . . (Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the
National Power Corporation under C.A. No. 120 as amended are restored up to June
30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB
Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing
agreements, the NPC is hereby required to furnish the FIRB on a periodic basis the
particulars of items received or to be received through such arrangements, for
purposes of tax and duty exemptions privileges.17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the
National Power Corporation (NPC) under Commonwealth Act No. 120, as amended,
are restored: Provided, That importations of fuel oil (crude oil equivalent), and coal
of the herein grantee shall be subject to the basic and additional import
duties; Provided, further, that the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and
yield or any other monetary benefits from deposit substitutes, trust
funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on
land and improvements owned by it provided that the beneficial use of the property
is not transferred to another pursuant to the provisions of Sec. 10(a) of the Real
Property Tax Code, as amended.18
Petitioner does not question the validity and enforceability of FIRB Resolution Nos.
10-85 and 1-86. Indeed, they were issued in compliance with the requirement of
Section 2, P.D. No. 1931, whereby the FIRB should make the recommendation
subject to the approval of "the President of the Philippines and/or the Minister of
Finance." While said Resolutions do not appear to have been approved by the
President, they were nevertheless approved by the Minister of Finance who is also
duly authorized to approve the same. In fact it was the Minister of Finance who
signed and promulgated said resolutions.19
The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB
Resolution Nos. 10-85 and 1-86 which were promulgated by then Acting Minister of
Finance Alfredo de Roda, Jr. and Minister of Finance Cesar E.A Virata, as Chairman
of FIRB respectively, should be separately approved by said Minister of Finance as
required by P.D. 1931 is, a superfluity. An examination of the said resolutions which
are reproduced in full in the dissenting opinion show that the said officials signed
said resolutions in the dual capacity of Chairman of FIRB and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National Power Corporation
vs. Province of Albay,20wherein the Court observed that under P.D. No. 776 the
power of the FIRB was only recommendatory and requires the approval of the
President to be valid. Thus, in said case the Court held that FIRB Resolutions Nos.
10-85 and 1-86 not having been approved by the President were not valid and
effective while the validity of FIRB 17-87 was upheld as it was duly approved by the
Office of the President on October 5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove
reproduced, which amended P.D. No. 776, it is clearly provided for that such FIRB
resolution, may be approved by the "President of the Philippines and/or the Minister
of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly
approved by the Minister of Finance, hence they are valid and effective. To this
extent, this decision modifies or supersedes the Court's earlier decision
in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only the tax and duty
exemption privileges enjoyed by the NPC under its charter, C.A. No. 120, as
amended, are restored, that is, only its direct tax exemption privilege; and that it
cannot be interpreted to cover indirect taxes under the principle that tax exemptions
are construed stricissimi juris against the taxpayer and liberally in favor of the taxing
authority.
Petitioner argues that the release by the BIR of the P58.0 million refund to
respondent NPC by way of a tax credit certificate21 which was assigned to
respondent Caltex through a deed of assignment approved by the BIR 22 is patently
illegal. He also contends that the pending claim of respondent NPC in the amount of
P410.58 million with respondent BIR for the sale and delivery to it of bunker fuel by
respondents Petrophil, Shell and Caltex from July 1, 1985 up to 1986, being illegal,
should not be released.
Now to the second corollary issue involving the validity of FIRB Resolution No. 17-
87 issued on June 24, 1987. It was issued under authority of Executive Order No. 93
dated December 17, 1986 which grants to the FIRB among others, the power to
recommend the restoration of the tax and duty exemptions/incentives withdrawn
thereunder.
Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion
No. 77 to the effect that the powers conferred upon the FIRB by Section 2(a), (b),
and (c) and (4) of Executive Order No. 93 "constitute undue delegation of legislative
power and is, therefore, unconstitutional." Petitioner observes that the FIRB did not
merely recommend but categorically restored the tax and duty exemption of the NPC
so that the memorandum of the respondent Executive Secretary dated October 5,
1987 approving the same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been legally issued,
following the doctrine in Philippine Aceytelene, petitioner avers that the restoration
cannot cover indirect taxes and it cannot create new indirect tax exemption not
otherwise granted in the NPC charter as amended by Presidential Decree No. 938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for the general good and
welfare23 wholly owned by the government of the Republic of the
Philippines.24 From the very beginning of its corporate existence, the NPC enjoyed
preferential tax treatment25 to enable the Corporation to pay the indebtedness and
obligation and in furtherance and effective implementation of the policy enunciated
in Section one of "Republic Act No. 6395" 26 which provides:
Sec. 1. Declaration of Policy—Congress hereby declares that (1) the
comprehensive development, utilization and conservation of Philippine
water resources for all beneficial uses, including power generation, and (2)
the total electrification of the Philippines through the development of power
from all sources to meet the need of rural electrification are primary
objectives of the nation which shall be pursued coordinately and supported
by all instrumentalities and agencies of the government including its
financial institutions.
From the changes made in the NPC charter, the intention to strengthen its
preferential tax treatment is obvious.
Under Republic Act No. 358, its exemption is provided as follows:
Sec. 2. To facilitate payment of its indebtedness, the National Power
Corporation shall be exempt from all taxes, duties, fees, imposts, charges,
and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities."
Under Republic Act No. 6395:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes,
Duties, Fees, Imposts and other Charges by Government and Governmental
Instrumentalities.— The Corporation shall be non-profit and shall devote all
its returns from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness
and obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, the Corporation is hereby
declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and
service fees in any court or administrative proceedings in which it may be a
 party, restrictions and duties to the Republic of the Philippines, its provinces,
cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operations and
projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by
the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum products
used by the Corporation in the generation, transmission, utilization, and
sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes,
Duties, Fees, Imposts and other Charges by the Government and
Government Instrumentalities.— The Corporation shall be non-profit and
shall devote all its returns from its capital investment as well as excess
revenues from its operation, for expansion. To enable the Corporation to
pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and
services fees in any court or administrative proceedings in which it may be a
party, restrictions and duties to the Republic of the Philippines, its provinces,
cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other
governmental agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operation and
projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed
directly or indirectly by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and instrumentalities, on all
petroleum produced used by the Corporation in the generation,
transmission, utilization, and sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from All
Taxes, Duties, Fees, Imposts and Other Charges by the Government and
Government Instrumentalities.—The Corporation shall be non-profit and
shall devote all its returns from its capital investment as well as excess
revenues from its operation, for expansion. To enable the Corporation to
pay the indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section One of this Act, the
Corporation, including its subsidiaries hereby declared exempt from the
payment of all forms of taxes, duties, fees, imposts as well as costs and
service fees including filing fees, appeal bonds, supersedeas bonds, in any
court or administrative proceedings. (Emphasis supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general
terms, as to cover "all taxes, duties, fees, imposts, charges, etc. . . ." However, the
amendment under Republic Act No. 6395 enumerated the details covered by the
exemption. Subsequently, P.D. No. 380, made even more specific the details of the
exemption of NPC to cover, among others, both direct and indirect taxes on all
petroleum products used in its operation. Presidential Decree No. 938 amended the
tax exemption by simplifying the same law in general terms. It succinctly exempts
NPC from "all forms of taxes, duties, fees, imposts, as well as costs and service fees
including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to
give NPC all the tax exemptions it has been enjoying before. The rationale for this
exemption is that being non-profit the NPC "shall devote all its returns from its
capital investment as well as excess revenues from its operation, for expansion. To
enable the Corporation to pay the indebtedness and obligations and in furtherance
and effective implementation of the policy enunciated in Section one of this
Act, . . ."27
The preamble of P.D. No. 938 states—
WHEREAS, in the application of the tax exemption provision of the
Revised Charter, the non-profit character of the NPC has not been fully
utilized because of restrictive interpretations of the taxing agencies of the
government on said provisions. . . . (Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that the said
provisions of P.D. No. 938 shall be construed strictly against NPC. On the contrary,
the law mandates that it should be interpreted liberally so as to enhance the tax
exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the
interpretation of statutes granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not
apply in the case of exemptions in favor of a government political subdivision or
instrumentality.28
The basis for applying the rule of strict construction to statutory provisions
granting tax exemptions or deductions, even more obvious than with
reference to the affirmative or levying provisions of tax statutes, is to
minimize differential treatment and foster impartiality, fairness, and
equality of treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to
the benefit of the government itself or its agencies. In such case the
practical effect of an exemption is merely to reduce the amount of money
that has to be handled by government in the course of its operations. For
these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax liability of such agencies. 29
In the case of property owned by the state or a city or other public corporations, the
express exemption should not be construed with the same degree of strictness that
applies to exemptions contrary to the policy of the state, since as to such property
"exemption is the rule and taxation the exception." 30
The contention of petitioner that the exemption of NPC from indirect taxes under
Section 13 of R.A. No. 6395 and P.D. No. 380, is deemed repealed by P.D. No. 938
when the reference to it was deleted is not well-taken.
Repeal by implication is not favored unless it is manifest that the legislature so
intended. As laws are presumed to be passed with deliberation and with knowledge
of all existing ones on the subject, it is logical to conclude that in passing a statute it
is not intended to interfere with or abrogate a former law relating to the same subject
matter, unless the repugnancy between the two is not only irreconcilable but also
clear and convincing as a result of the language used, or unless the latter Act fully
embraces the subject matter of the earlier.31 The first effort of a court must always be
to reconcile or adjust the provisions of one statute with those of another so as to give
sensible effect to both provisions.32
The legislative intent must be ascertained from a consideration of the statute as a
whole, and not of an isolated part or a particular provision alone. 33 When construing
a statute, the reason for its enactment should be kept in mind and the statute should
be construed with reference to its intended scope and purpose 34 and the evil sought to
be remedied.35
The NPC is a government instrumentality with the enormous task of undertaking
development of hydroelectric generation of power and production of electricity from
other sources, as well as the transmission of electric power on a nationwide basis, to
improve the quality of life of the people pursuant to the State policy embodied in
Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax
exemption of NPC from all forms of taxes including indirect taxes as provided for
under R.A. No. 6895 and P.D. No. 380 if it is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged with its
implementation should be given controlling weight.36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary
of Finance of June 26, 1985 confirming said ruling, the letters of the BIR of August
18, 1986, and December 22, 1986, the letter of the Secretary of Finance of February
19, 1987, the Memorandum of the Executive Secretary of October 9, 1987, by
authority of the President, confirming and approving FIRB Resolution No. 17-87, the
letter of the Secretary of Finance of May 20, 1988 to the Executive Secretary
rendering his opinion as requested by the latter, and the latter's reply of June 15,
1988, it was uniformly held that the grant of tax exemption to NPC under C.A. No.
120, as amended, included exemption from payment of all taxes relative to NPC's
petroleum purchases including indirect taxes.37 Thus, then Secretary of Finance
Vicente Jayme in his letter of May 20, 1988 to the Executive Secretary Macaraig
aptly stated the justification for this tax exemption of NPC —
The issue turns on the effect to the exemption of NPC from taxes of the
deletion of the phrase 'taxes imposed indirectly on oil products and its
exemption from 'all forms of taxes.' It is suggested that the change in
language evidenced an intention to exempt NPC only from taxes directly
imposed on or payable by it; since taxes on fuel-oil purchased by it; since
taxes on fuel-oil purchased by NPC locally are levied on and paid by its oil
suppliers, NPC thereby lost its exemption from those taxes. The principal
authority relied on is the 1967 case of Philippine Acetylene Co., Inc. vs.
Commissioner of Internal Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the Revised
Charter, the strengthening of NPC's preferential tax treatment was clearly
the intention. To the extent that the explanatory "whereas clauses" may
disclose the intent of the law-maker, the changes effected by P.D. 938 can
only be read as being expansive rather than restrictive, including its version
of Section 13.
Our Tax Code does not recognize that there are taxes directly imposed and
those imposed indirectly. The textbook distinction between a direct and an
indirect tax may be based on the possibility of shifting the incidence of the
tax. A direct tax is one which is demanded from the very person intended to
be the payor, although it may ultimately be shifted to another. An example
of a direct tax is the personal income tax. On the other hand, indirect taxes
are those which are demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another. An
example of this type of tax is the sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or an
indirect tax) is really of no moment. What is more relevant is that when an
"indirect tax" is paid by those upon whom the tax ultimately falls, it is
paid not as a tax but as an additional part of the cost or of the market price
of the commodity.
This distinction was made clear by Chief Justice Castro in the Philippine
Acetylene case, when he analyzed the nature of the percentage (sales) tax to
determine whether it is a tax on the producer or on the purchaser of the
commodity. Under out Tax Code, the sales tax falls upon the manufacturer
or producer. The phrase "pass on" the tax was criticized as being inaccurate.
Justice Castro says that the tax remains on the manufacturer alone. The
purchaser does not pay the tax; he pays an amount added to the price
because of the tax. Therefore, the tax is not "passed on" and does not for
that reason become an "indirect tax" on the purchaser. It is eminently
possible that the law maker in enacting P.D. 938 in 1976 may have used
lessons from the analysis of Chief Justice Castro in 1967 Philippine
Acetylene case.
When P.D. 938 which exempted NPC from "all forms of taxes" was issued
in May 1976, the so-called oil crunch had already drastically pushed up
crude oil Prices from about $1.00 per bbl in 1971 to about $10 and a peak
(as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC was
operating the Meralco thermal plants under a lease agreement. The power
generated by the leased plants was sold to Meralco for distribution to its
customers. This lease and sale arrangement was entered into for the benefit
of the consuming public, by reducing the burden on the swiftly rising world
crude oil prices. This objective was achieved by the use of NPC's "tax
umbrella under its Revised Charter—the exemption from specific taxes on
locally purchased fuel oil. In this context, I can not interpret P.D. 938 to
have withdrawn the exemption from tax on fuel oil to which NPC was
already entitled and which exemption Government in fact was utilizing to
soften the burden of high crude prices.
There is one other consideration which I consider pivotal. The taxes paid by
oil companies on oil products sold to NPC, whether paid to them by NPC or
no never entered into the rates charged by NPC to its customers not even
during those periods of uncertainty engendered by the issuance of P.D.
1931 and E. 0. 93 on NP/Cs tax status. No tax component on the fuel have
been charged or recovered by NPC through its rates.
There is an import duty on the crude oil imported by the local refineries.
After the refining process, specific and ad valorem taxes are levied on the
finished products including fuel oil or residue upon their withdrawal from
the refinery. These taxes are paid by the oil companies as the manufacturer
thereof.
In selling the fuel oil to NPC, the oil companies include in their billings the
duty and tax component. NPC pays the oil companies' invoices including
the duty component but net of the tax component. NPC then applies for
drawback of customs duties paid and for a credit in amount equivalent to
the tax paid (by the oil companies) on the products purchased. The tax
credit is assigned to the oil companies—as payment, in effect, of the tax
component shown in the sales invoices. (NOTE: These procedures varied
over time—There were instances when NPC paid the tax component that
was shifted to it and then applied for tax credit. There were also side issues
raised because of P.D. 1931 and E.O. 93 which withdrew all exemptions of
government corporations. In these latter instances, the resolutions of the
Fiscal Incentives Review Board (FIRB) come into play. These incidents
will not be touched upon for purposes of this discussion).
NPC rates of electricity are structured such that changes in its cost of fuel
are automatically (without need of fresh approvals) reflected in the
subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC
should ever accept liability to the tax and duty component on the oil
products, such amount will go into its fuel cost and be passed on to its
customers through corresponding increases in rates. Since 1974, when NPC
operated the oil-fired generating stations leased from Meralco (which
plants it bought in 1979), until the present time, no tax on fuel oil ever went
into NPC's electric rates.
That the exemption of NPC from the tax on fuel was not withdrawn by P.D.
938 is impressed upon me by yet another circumstance. It is conceded that
NPC at the very least, is exempt from taxes to which it is directly liable.
NPC therefore could very well have imported its fuel oil or crude residue
for burning at its thermal plants. There would have been no question in
such a case as to its exemption from all duties and taxes, even under the
strictest interpretation that can be put forward. However, at the time P.D.
938 was issued in 1976, there were already operating in the Philippines
three oil refineries. The establishment of these refineries in the Philippines
involved heavy investments, were economically desirable and enabled the
country to import crude oil and process / refine the same into the various
petroleum products at a savings to the industry and the public. The refining
process produced as its largest output, in volume, fuel oil or residue, whose
conventional economic use was for burning in electric or steam generating
plants. Had there been no use locally for the residue, the oil refineries
would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would have in
effect forced NPC to by-pass the local oil refineries and import its fossil
fuel requirements directly in order to avail itself of its exemption from
"direct taxes." The oil refineries had to keep operating both for economic
development and national security reasons. In fact, the restoration by the
FIRB of NPC's exemption after P.D. 1931 and E.O. 93 expressly excluded
direct fuel oil importations, so as not to prejudice the continued operations
of the local oil refineries.
To answer your query therefore, it is the opinion of this Department that
NPC under the provisions of its Revised Charter retains its exemption from
duties and taxes imposed on the petroleum products purchased locally and
used for the generation of electricity.
The Department in issuing this ruling does so pursuant to its power and
function to supervise and control the collection of government revenues by
the application and implementation of revenue laws. It is prepared to take
the measures supplemental to this ruling necessary to carry the same into
full effect.
As presented rather extensively above, the NPC electric power rates did not
carry the taxes and duties paid on the fuel oil it used. The point is that while
these levies were in fact paid to the government, no part thereof was
recovered from the sale of electricity produced. As a consequence, as of our
most recent information, some P1.55 B in claims represent amounts for
which the oil suppliers and NPC are "out-of-pocket. There would have to be
specific order to the Bureaus concerned for the resumption of the
processing of these claims."38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then
Secretary of Finance, the said opinion ruling of the latter was confirmed and its
implementation was directed.39
The Court finds and so holds that the foregoing reasons adduced in the aforestated
letter of the Secretary of Finance as confirmed by the then Executive Secretary are
well-taken. When the NPC was exempted from all forms of taxes, duties, fees,
imposts and other charges, under P.D. No. 938, it means exactly what it says, i.e., all
forms of taxes including those that were imposed directly or indirectly on petroleum
products used in its operation.
Reference is made in the dissenting opinion to contrary rulings of the BIR that the
exemption of the NPC extends only to taxes for which it is directly liable and not to
taxes merely shifted to it. However, these rulings are predicated on Philippine
Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to
the present case. It involved the sales tax of products the plaintiff sold to NPC from
June 2, 1953 to June 30,1958 when NPC was enjoying tax exemption from all taxes
under Commonwealth Act No. 120, as amended by Republic Act No. 358 issued on
June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the manufacturer and not
the buyer, so plaintiff cannot claim exemptions simply because the NPC, the buyer,
was exempt.
However, on September 10, 1971, Republic Act No. 6395 was passed as the revised
charter of NPC whereby Section 13 thereof was amended by emphasizing its non-
profit character and expanding the extent of its tax exemption.
As petitioner concedes, Section 13(d) aforestated of this amendment under Republic
Act No. 6345 spells out clearly the exemption of the NPC from indirect taxes. And
as hereinabove stated, in P.D. No. 380, the exemption of NPC from indirect taxes
was emphasized when it was specified to include those imposed "directly and
indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under
Section 13 defining the same in general terms to cover "all forms of taxes, duties,
fees, imposts, etc." which, as hereinabove discussed, logically includes exemption
from indirect taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931
was passed, on the authority of which FIRB Resolution Nos. 10-85 and 1-86 were
issued, and when Executive Order No. 93 was promulgated, by which FIRB
Resolution 17-87 was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different
environmental circumstances. As a matter of fact, the amendments of Section 13,
under R.A. No. 6395, P.D. No, 380 and P.D. No. 838 appear to have been brought
about by the earlier inconsistent rulings of the tax agencies due to the doctrine
in Philippine Acetylene, so as to leave no doubt as to the exemption of the NPC from
indirect taxes on petroleum products it uses in its operation. Effectively, said
amendments superseded if not abrogated the ruling in Philippine Acetylene that the
tax exemption of NPC should be limited to direct taxes only.
In the light of the foregoing discussion the first corollary issue must consequently be
resolved in the affirmative, that is, FIRB Resolution No. 10-85 dated February 7,
1985 and FIRB Resolution No. 1-86 dated January 7, 1986 which restored NPC's tax
exemption privileges included the restoration of the indirect tax exemption of the
NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated
June 24, 1987 which restored NPC's tax exemption privilege effective March 10,
1987, the Court finds that the same is valid and effective.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and
duty exemption privileges of the National Power Corporation, including
those pertaining to its domestic purchases of petroleum and petroleum
products, granted under the terms and conditions of Commonwealth Act No.
120 (Creating the National Power Corporation, defining its powers,
objectives and functions, and for other purposes), as amended, are restored
effective March 10, 1987, subject to the following conditions:
1. The restoration of the tax and duty exemption privileges does not apply to
the following:
1.1. Importation of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which
include but are not limited to those financed by the NPC's own
internal funds, domestic borrowings from any source whatsoever,
borrowing from foreign-based private financial institutions, etc.);
and
1.3. Interest income derived from any source.
2. The NPC shall submit to the FIRB a report of its expansion program,
including details of disposition of relieved tax and duty payments for such
expansion on an annual basis or as often as the FIRB may require it to do so.
This report shall be in addition to the usual FIRB reporting requirements on
incentive availment.40
Executive Order No. 93 provides as follows—
Sec. 1. The provisions of any general or special law to the contrary
notwithstanding, all tax and duty incentives granted " to government and
private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective international agreements to which
the Government of the Republic of the Philippines is a signatory;
c) those enjoyed-by enterprises registered with:
(i) the Board of Investments pursuant to Presidential
Decree No. 1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to
Presidential Decree No. 66, as amended;
(iii) the Philippine Veterans Investment Development
Corporation Industrial Authority pursuant to Presidential
Decree No. 538, as amended;
d) those enjoyed by the copper mining industry pursuant to the
provisions of Letter of Instruction No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the
Fiscal Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential
Decree No. 776, as amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in
whole or in part;
 b) revise the scope and coverage of tax and/of duty exemption that
may be restored.
c) impose conditions for the restoration of tax and/or duty
exemption;
d) prescribe the date or period of effectivity of the restoration of
tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete
system for the grant of subsidies to deserving beneficiaries, in lieu
of or in combination with the restoration of tax and duty
exemptions or preferential treatment in taxation, indicating the
source of funding therefor, eligible beneficiaries and the terms and
conditions for the grant thereof taking into consideration the
international commitments of the Philippines and the necessary
precautions such that the grant of subsidies does not become the
basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives
Review Board shall take into account any or all of the following
considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue
generation effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977
was of the view that the powers conferred upon the FIRB by Sections 2(a), (b), (c),
and (d) of Executive Order No. 93 constitute undue delegation of legislative power
and is therefore unconstitutional. However, he was overruled by the respondent
Executive Secretary in a letter to the Secretary of Finance dated March 30, 1989. The
Executive Secretary, by authority of the President, has the power to modify, alter or
reverse the construction of a statute given by a department secretary. 41
A reading of Section 3 of said law shows that it set the policy to be the greater
national interest. The standards of the delegated power are also clearly provided for.
The required "standard" need not be expressed. In Edu vs. Ericta42 and in De la
Llana vs. Alba43 this Court held: "The standard may be either express or implied. If
the former, the non-delegated objection is easily met. The standard though does not
have to be spelled out specifically. It could be implied from the policy and purpose
of the act considered as a whole."
In People vs. Rosenthal44 the broad standard of "public interest" was deemed
sufficient. In Calalang vs. Williams,45, it was "public welfare" and in Cervantes vs.
Auditor General,46 it was the purpose of promotion of "simplicity, economy and
efficiency." And, implied from the purpose of the law as a whole, "national security"
was considered sufficient standard47 and so was "protection of fish fry or fish eggs.48
The observation of petitioner that the approval of the President was not even required
in said Executive Order of the tax exemption privilege approved by the FIRB unlike
in previous similar issuances, is not well-taken. On the contrary, under Section l(f) of
Executive Order No. 93, aforestated, such tax and duty exemptions extended by the
FIRB must be approved by the President. In this case, FIRB Resolution No. 17-87
was approved by the respondent Executive Secretary, by authority of the President,
on October 15, 1987.49
Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated
—
The latest in our jurisprudence indicates that delegation of legislative power
has become the rule and its non-delegation the exception. The reason is the
increasing complexity of modern life and many technical fields of
governmental functions as in matters pertaining to tax exemptions. This is
coupled by the growing inability of the legislature to cope directly with the
many problems demanding its attention. The growth of society has ramified
its activities and created peculiar and sophisticated problems that the
legislature cannot be expected reasonably to comprehend. Specialization
even in legislation has become necessary. To many of the problems
attendant upon present day undertakings, the legislature may not have the
competence, let alone the interest and the time, to provide the required
direct and efficacious, not to say specific solutions.50
Thus, in the case of Tablarin vs. Gutierrez,51 this Court enunciated the rationale in
favor of delegation of legislative functions—
One thing however, is apparent in the development of the principle of
separation of powers and that is that the maxim of delegatus non potest
delegare or delegati potestas non potest delegare, adopted this practice
(Delegibus et Consuetudiniis Anglia edited by G.E. Woodline, Yale
University Press, 1922, Vol. 2, p. 167) but which is also recognized in
principle in the Roman Law d. 17.18.3) has been made to adapt itself to the
complexities of modern government, giving rise to the adoption, within
certain limits, of the principle of subordinate legislation, not only in the
United States and England but in practically all modern governments.
(People vs. Rosenthal and Osmeña, 68 Phil. 318, 1939). Accordingly, with
the growing complexities of modern life, the multiplication of the subjects of
governmental regulation, and the increased difficulty of administering the
laws, there is a constantly growing tendency toward the delegation of
greater power by the legislative, and toward the approval of the practice by
the Courts. (Emphasis supplied.)
The legislative authority could not or is not expected to state all the detailed
situations wherein the tax exemption privileges of persons or entities would be
restored. The task may be assigned to an administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity
of the statute. Such presumption can be overturned if its invalidity is proved beyond
reasonable doubt. Otherwise, a liberal interpretation in favor of constitutionality of
legislation should be adopted.52
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative
power to the FIRB And as above discussed, the tax exemption privilege that was
restored to NPC by FIRB Resolution No. 17-87 of June 1987 includes exemption
from indirect taxes and duties on petroleum products used in its operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-
87 has been upheld in Albay.53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and
1955 issued by President Marcos in 1984 are invalid as they were presumably
promulgated under the infamous Amendment No. 6 and that as they cover
tax exemption, under Section 17(4), Article VIII of the 1973 Constitution, the same
cannot be passed "without the concurrence of the majority of all the members of the
Batasan Pambansa." And, even conceding that the reservation of legislative power in
the President was valid, it is opined that it was not validly exercised as there is no
showing that such presidential encroachment was justified under the conditions then
existing. Consequently, it is concluded that Executive Order No. 93, which was
intended to implement said decrees, is also illegal. The authority of the President to
sub-delegate to the FIRB powers delegated to him is also questioned.
In Albay,54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931.
The latter decree withdrew tax exemptions of government-owned or controlled
corporations including their subsidiaries but authorized the FIRB to restore the same.
Nevertheless, in Albay, as above-discussed, this Court ruled that the tax exemptions
under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions
were only recommendatory and were not duly approved by the President of the
Philippines as required by P.D. No. 776.55 The Court also sustained in Albaythe
validity of Executive Order No. 93, and of the tax exemptions restored under FIRB
Resolution No. 17-87 which was issued pursuant thereto, as it was duly approved by
the President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987
Constitution, it is provided that:
All existing laws, decrees, executive orders, proclamation, letters of
instructions, and other executive issuances not inconsistent with this
constitution shall remain operative until amended, repealed or revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are
inconsistent with the Constitution.1âwphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are
not valid and are unconstitutional, the result would be the same, as then the latest
applicable law would be P.D. No. 938 which amended the NPC charter by granting
exemption to NPC from all forms of taxes. As above discussed, this exemption of
NPC covers direct and indirect taxes on petroleum products used in its operation.
This is as it should be, if We are to hold as invalid and inoperative the withdrawal of
such tax exemptions under P.D. No. 1931 as well as under Executive Order No. 93
and the delegation of the power to restore these exemptions to the FIRB.
The Court realizes the magnitude of the consequences of this decision. To reiterate,
in Albay this Court ruled that the NPC is liable for real estate taxes as of June 11,
1984 (the date of promulgation of P.D. No. 1931) when NPC had ceased to enjoy tax
exemption privileges since FIRB Resolution Nos. 1085 and 1-86 were not validly
issued. The real estate tax liability of NPC from June 11, 1984 to December 1, 1990
is estimated to amount to P7.49 billion plus another P4.76 billion in fuel import
duties the firm had earlier paid to the government which the NPC now proposed to
pass on to the consumers by another 33-centavo increase per kilowatt hour in power
rates on top of the 17-centavo increase per kilowatt hour that took effect just over a
week ago.,56 Hence, another case has been filed in this Court to stop this proposed
increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued,
P.D. No. 776 dated August 24, 1975 was already amended by P.D. No.
1931 ,57 wherein it is provided that such FIRB resolutions may be approved not only
by the President of the Philippines but also by the Minister of Finance. Such
resolutions were promulgated by the Minister of Finance in his own right and also in
his capacity as FIRB Chairman. Thus, a separate approval thereof by the Minister of
Finance or by the President is unnecessary.
As earlier stated a reexamination of the ruling in Albay on this aspect is therefore
called for and consequently, Albaymust be considered superseded to this extent by
this decision. This is because P.D. No. 938 which is the latest amendment to the NPC
charter granting the NPC exemption from all forms of taxes certainly covers real
estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall continue to
generate electricity for the country but more importantly, to assure cheaper rates to
be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil companies is not quite
correct.1a\^/phi1 There are various arrangements in the payment of crude oil
purchased by NPC from oil companies. Generally, the custom duties paid by the oil
companies are added to the selling price paid by NPC. As to the specific and ad
valorem taxes, they are added a part of the seller's price, but NPC pays the price net
of tax, on condition that NPC would seek a tax refund to the oil companies. No tax
component on fuel had been charged or recovered by NPC from the consumers
through its power rates.58 Thus, this is not a case of tax evasion of the oil companies
but of tax relief for the NPC. The billions of pesos involved in these exemptions will
certainly inure to the ultimate good and benefit of the consumers who are thereby
spared the additional burden of increased power rates to cover these taxes paid or to
be paid by the NPC if it is held liable for the same.
The fear of the serious implication of this decision in that NPC's suppliers, importers
and contractors may claim the same privilege should be dispelled by the fact that (a)
this decision particularly treats of only the exemption of the NPC from all taxes,
duties, fees, imposts and all other charges imposed by the government on the
petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A. No.
6395 and Section 13(d) of P.D. No. 380, both specifically exempt the NPC from all
taxes, duties, fees, imposts and all other charges imposed by the government on all
petroleum products used in its operation only, which is the very exemption which
this Court deems to be carried over by the passage of P.D. No. 938. As a matter of
fact in Section 13(d) of P.D. No. 380 it is specified that the aforesaid exemption from
taxes, etc. covers those "directly or indirectly" imposed by the "Republic of the
Philippines, its provincies, cities, municipalities and other government agencies and
instrumentalities" on said petroleum products. The exemption therefore from direct
and indirect tax on petroleum products used by NPC cannot benefit the suppliers,
importers and contractors of NPC of other products or services.
The Court realizes the laudable objective of petitioner to improve the revenue of the
government. The amount of revenue received or expected to be received by this tax
exemption is, however, not going to any of the oil companies. There would be no
loss to the government. The said amount shall accrue to the benefit of the NPC, a
government corporation, so as to enable it to sustain its tremendous task of providing
electricity for the country and at the least cost to the consumers. Denying this tax
exemption would mean hampering if not paralyzing the operations of the NPC. The
resulting increased revenue in the government will also mean increased power rates
to be shouldered by the consumers if the NPC is to survive and continue to provide
our power requirements.59 The greater interest of the people must be paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as
to costs.
SO ORDERED.
Narvasa, Melencio-Herrera, Feliciano, Bidin, Medialdea and Regalado, JJ., concur.
Fernan C.J., No part.
Paras, J., I dissent, but the NPC should be refunded not by the consuming public but
by the oil companies for ultimately these oil companies get the benefit of the alleged
tax exemption.
Padilla, J., took no part.
G.R. No. 196596, November 09, 2016
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE
UNIVERSITY, INC., Respondent.
G.R. No. 198841
DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE,Respondent.
G.R. No. 198941
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE
UNIVERSITY, INC., Respondent.
DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:1
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue
(Commissioner) to assail the December 10, 2010 decision and March 29,
2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No.
622;2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the
June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case
No. 671;3 and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011
decision and October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First
Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En
BancCase No. 622 filed by the Commissioner to challenge CTA Case No. 7303.
G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed
by DLSU to also challenge CTA Case No. 7303.chanroblesvirtuallawlibrary
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's
books of accounts and other accounting records for all internal revenue taxes for the
period Fiscal Year Ending 2003 and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
Subsequently on August 18, 2004, the BIR through a Formal Letter of
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST)
on loans and lease contracts. The BIR demanded the payment of P17,303,001.12,
inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and 2003.7
DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
DLSU filed on August 3, 2005 a petition for review with the CTA Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its
petition on Article XIV, Section 4 (3) of the Constitution, which reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt
from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
The dispositive portion of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
assessment on the loan transactions of [DLSU] in the amount of P1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency
income tax, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal
years 2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the
total amount due computed from September 30, 2004 until full payment thereof
pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the
compromise penalties imposed by [the Commissioner] were excluded, there. being
no compromise agreement between the parties.
 have been used actually, directly and exclusively for educational
SO ORDERED.9ChanRoblesVirtualawlibrary purposes.18chanroblesvirtuallawlibrary
Both the Commissioner and DLSU moved for the reconsideration of the January 5, The CTA En Banc Rulings
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's
motion for reconsideration while it held in abeyance the resolution on DLSU's CTA En Banc Case No. 622
motion for reconsideration.11
The CTA En Banc dismissed the Commissioner's petition for review and sustained
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En the findings of the CTA Division.19
Banc Case No. 622) arguing that DLSU's use of its revenues and assets for non-
educational or commercial purposes removed these items from the exemption Tax on rental income
coverage under the Constitution.12
Relying on the findings of the court-commissioned Independent Certified Public
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces Accountant (Independent CPA), the CTA En Banc found that DLSU was able to
of documentary evidence to prove that its rental income was used actually, directly prove that a portion of the assessed rental income was used actually, directly and
and exclusively for educational purposes.13The Commissioner did not promptly exclusively for educational purposes; hence, exempt from tax.20 The CTA En
object to the formal offer of supplemental evidence despite notice. 14 Banc was satisfied with DLSU's supporting evidence confirming that part of its
rental income had indeed been used to pay the loan it obtained to build the
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, university's Physical Education - Sports Complex.21
reduced the amount of DLSU's tax deficiencies. The dispositive portion of
the amended decision reads: Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its
chanRoblesvirtualLawlibrary income that was not shown by supporting documents to have been actually, directly
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is and exclusively used for educational purposes, must be subjected to income tax and
hereby PARTIALLY GRANTED. [DLSU] is hereby ORDERED TO PAY for VAT.22
deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total adjusted amount of P5,506,456.71...xxx. DST on loan and mortgage transactions

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency Contrary to the Commissioner's contention, DLSU proved its remittance of the DST
interest on the...basic deficiency taxes...until full payment thereof pursuant to Section due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's
249(B) of the [National Internal Revenue Code]...xxx. DST payments had been remitted to the BIR, evidenced by the stamp on the
documents made by a DST imprinting machine, which is allowed under Section 200
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue
the deficiency taxes, surcharge and deficiency interest which have accrued...from Regulations (RR) No. 15-2001.25cralawred
September 30, 2004 until fully paid.15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En Admissibility of DLSU's supplemental evidence
Banc and argued that the CTA Division erred in admitting DLSU's additional
evidence.16 The CTA En Banc held that the supplemental pieces of documentary evidence were
admissible even if DLSU formally offered them only when it moved for
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed reconsideration of the CTA Division's original decision. Notably, the law creating
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) the CTA provides that proceedings before it shall not be governed strictly by the
on the following grounds: (1) the entire assessment should have been cancelled technical rules of evidence.26
because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA
Division should still have cancelled the entire assessment because DLSU submitted The Commissioner moved but failed to obtain a reconsideration of the CTA En
evidence similar to those submitted by Ateneo De Manila University (Ateneo) in Banc's December 10, 2010 decision.27 Thus, she came to this court for relief through
a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA a petition for review on certiorari (G.R. No. 196596).
Division erred in finding that a portion of DLSU's rental income was not proved to
CTA En Banc Case No. 671
 income tax liability.36
The CTA En Banc partially granted DLSU's petition for review and further reduced
its tax liabilities to P2,554,825.47 inclusive of surcharge.28 The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must
be harmonized with Section 30 (H) of the Tax Code, which states among others, that
On the validity of the Letter of Authority the income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of (its] activities
The issue of the LOA's validity was raised during trial;29 hence, the issue was conducted for profit regardless of the disposition made of such income, shall be
deemed properly submitted for decision and reviewable on appeal. subject to tax imposed by this Code.37

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one
taxable period and that the practice of issuing a LOA covering audit of unverified
prior years is prohibited.30 The prohibition is consistent with Revenue Memorandum
Order (RMO) No. 43-90, which provides that if the audit includes more than one
taxable period, the other periods or years shall be specifically indicated in the LOA. 31
The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that
revenues however generated are covered by the constitutional exemption, provided
that, the revenues will be used for educational purposes or will be held in reserve for
such purposes.39

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and On the contrary, the Commissioner posits that a tax-exempt organization like DLSU
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and is exempt only from property tax but not from income tax on the rentals earned from
DST for taxable years 2001 and 2002 are void, but the assessment for taxable property.40 Thus, DLSU's income from the leases of its real properties is not exempt
year 2003 is valid.32 from taxation even if the income would be used for educational purposes. 41

On the applicability of the Ateneo case Second, the Commissioner insists that DLSU did not prove the fact of DST
payment42 and that it is not qualified to use the On-Line Electronic DST Imprinting
The CTA En Banc held that the Ateneo case is not a valid precedent because it Machine, which is available only to certain classes of taxpayers under RR No. 9-
involved different parties, factual settings, bases of assessments, sets of evidence, 2000.43
and defenses.33
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of
On the CTA Division's appreciation of the evidence evidence. The belated submission of supplemental evidence reopened the case for
trial, and worse, DLSU offered the supplemental evidence only after it received the
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
held that while DLSU successfully proved that a portion of its rental income was supplemental documentary evidence was unnecessary since its rental income was
transmitted and used to pay the loan obtained to fund the construction of the Sports taxable regardless of its disposition.45
Complex, the rental income from other sources were not shown to have been actually,
directly and exclusively used for educational purposes. 34 G.R. No. 198841

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the DLSU argues as that:
Commissioner (G.R. No. 198941) came to this Court for
relief.chanroblesvirtuallawlibrary First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
The Consolidated Petitions of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
assessment issued based on such defective LOA must also be void. 46
G.R. No. 196596
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
The Commissioner submits the following arguments: Unverified Prior Years. On the basis of this defective LOA, the Commissioner
assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001,
First, DLSU's rental income is taxable regardless of how such income is derived, 2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is
used or disposed of.35 DLSU's operations of canteens and bookstores within its valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides
campus even though exclusively serving the university community do not negate
that:
chanRoblesvirtualLawlibrary DLSU thus invokes the doctrine of constitutional supremacy, which renders any
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby subsequent law that is contrary to the Constitution void and without any force and
prohibited.ChanRoblesVirtualawlibrary effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income
it refers to the LOA which has the format "Base Year + Unverified Prior Years." of whatever kind and character of a nonstock and non-profit educational institution
Since the LOA issued to DLSU follows this format, then any assessment arising from any of its properties, real or personal, or from any of its activities conducted for
from it must be entirely voided.48 profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all
Second, DLSU invokes the principle of uniformity in taxation, which mandates that revenues and assets of non-stock, non-profit educational institutions used actually,
for similarly situated parties, the same set of evidence should be appreciated and directly, and exclusively for educational purposes." 57
weighed in the same manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU's evidence as it did to the pieces of evidence submitted by Ateneo, DLSU further submits that it complies with the requirements enunciated in
also a non-stock, non-profit educational institution.50 the YMCA case, that for an exemption to be granted under Article XIV, Section 4 (3)
of the Constitution, the taxpayer must prove that: (1) it falls under the classification
G.R. No. 198941 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
The issues and arguments raised by the Commissioner in G.R. No. 198941 petition purposes.58 Unlike YMCA, which is not an educational institution, DLSU is
are exactly the same as those she raised in her: (1) petition docketed as G.R. No. undisputedly a non-stock, non-profit educational institution. It had also submitted
196596 and (2) comment on DLSU's petition docketed as G.R. No. evidence to prove that it actually, directly and exclusively used its income for
198841.51chanroblesvirtuallawlibrary educational purposes.59
Counter-arguments
DLSU also cites the deliberations of the 1986 Constitutional Commission where they
DLSU's Comment on G.R. No. 196596 recognized that the tax exemption was granted "to incentivize private educational
institutions to share with the State the responsibility of educating the youth."60
First, DLSU questions the defective verification attached to the petition. 52
Third, DLSU highlights that both the CTA En Banc and Division found that the bank
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that handled DLSU's loan and mortgage transactions had remitted to the BIR the
that all assets and revenues of non-stock, non-profit educational institutions used DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In
actually, directly and exclusively for educational purposes are exempt from taxes and any case, DLSU argues that it cannot be held liable for DST owmg to the exemption
duties.53 granted under the Constitution.62

On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of formal offer of supplemental evidence. Because of the Commissioner's failure to
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the timely object, she became bound by the results of the submission of such
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code - with supplemental evidence.63
the addition of non-stock, non-profit educational institutions to the list of tax-exempt
entities; and (3) that the 1977 Tax Code was promulgated when the 1973 The CIR's Comment on G.R. No. 198841
Constitution was still in place.
The Commissioner submits that DLSU is estopped from questioning the LOA's
DLSU elaborates that the tax exemption granted to a private educational institution validity because it failed to raise this issue in both the administrative and judicial
under the 1973 Constitution was only for real property tax. Back then, the special tax proceedings.64 That it was asked on crossexamination during the trial does not make
treatment on income of private educational institutions only emanates from it an issue that the CTA could resolve.65 The Commissioner also maintains that
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption DLSU's rental income is not tax-exempt because an educational institution is only
from tax of all the assets and revenues of non-stock, non-profit educational exempt from property tax but not from tax on the income earned from the property. 66
institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined.55 DLSU's Comment on G.R. No. 198941
 reads:
DLSU puts forward the same counter-arguments discussed above.67 chanRoblesvirtualLawlibrary

In addition, DLSU prays that the Court award attorney's fees in its favor because it (3) All revenues and assets of non-stock, non-profit educational institutions used
was constrained to unnecessarily retain the services of counsel in this separate actually, directly, and exclusively for educational purposes shall be exempt
petition.68chanroblesvirtuallawlibrary from taxes and duties. Upon the dissolution or cessation of the corporate
Issues existence of such institutions, their assets shall be disposed of in the manner
provided by law. Proprietary educational institutions, including those
Although the parties raised a number of issues, the Court shall decide only the cooperatively owned, may likewise be entitled to such exemptions subject to
pivotal issues, which we summarize as follows: the limitations provided by law including restrictions on dividends and
I. Whether DLSU's income and revenues proved to have been used actually, provisions for reinvestment [underscoring and emphasis supplied]
directly and exclusively for educational purposes are exempt from duties Before fully discussing the merits of the case, we observe that:
and taxes;chanrobleslaw
II. Whether the entire assessment should be voided because of the defective First, the constitutional provision refers to two kinds of educational institutions: (1)
LOA;chanrobleslaw non-stock, non-profit educational institutions and (2) proprietary educational
III. Whether the CTA correctly admitted DLSU's supplemental pieces of institutions.69
evidence; and
IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may Second, DLSU falls under the first category. Even the Commissioner admits the
be disturbed by the Court. status of DLSU as a non-stock, non-profit educational institution.70
Our Ruling
Third, while DLSU's claim for tax exemption arises from and is based on the
As we explain in full below, we rule that: Constitution, the Constitution, in the same provision, also imposes certain conditions
I. The income, revenues and assets of non-stock, non-profit educational to avail of the exemption. We discuss below the import of the constitutional text vis-
institutions proved to have been used actually, directly and exclusively for a-vis the Commissioner's counter-arguments.
educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable Fourth, there is a marked distinction between the treatment of nonstock, non-profit
year 2003 is valid. educational institutions and proprietary educational institutions. The tax exemption
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; granted to non-stock, non-profit educational institutions is conditioned only on the
and actual, direct and exclusive use of their revenues and assets for educational purposes.
IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown While tax exemptions may also be granted to proprietary educational institutions,
to have manifestly overlooked certain relevant facts not disputed by the these exemptions may be subject to limitations imposed by Congress.
parties and which, if properly considered, would justify a different
conclusion. As we explain below, the marked distinction between a non-stock, non-profit and a
proprietary educational institution is crucial in determining the nature and extent of
The parties failed to convince the Court that the CTA overlooked or failed the tax exemption granted to non-stock, non-profit educational institutions.
to consider relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, The Commissioner opposes DLSU's claim for tax exemption on the basis of Section
directly and exclusively for educational purposes; and 30 (H) of the Tax Code. The relevant text reads:
b. DLSU proved the payment of the DST through its bank's on-line chanRoblesvirtualLawlibrary
imprinting machine. The following organizations shall not be taxed under this Title [Tax on Income] in
I. The revenues and assets of non-stock, non-profit educational institutions respect to income received by them as such:
proved to have been used actually, directly, and exclusively for educational xxxx
purposes are exempt from duties and taxes.
(H) A non-stock and non-profit educational institution
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real
or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income shall be subject to tax imposed under this Code.
[underscoring and emphasis supplied]ChanRoblesVirtualawlibrary
The Commissioner posits that the 1997 Tax Code qualified the tax exemption
granted to non-stock, non-profit educational institutions such that the revenues and
income they derived from their assets, or from any of their activities conducted for
profit, are taxable even if these revenues and income are used for educational
purposes.
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions?
We answer in the negative.
While the present petition appears to be a case of first impression, 71 the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article
XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property
owned by the YMCA, established as a "welfare, educational and charitable non-
profit corporation," was subject to income tax under the Tax Code and the
Constitution.72
The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA
is not tax-exempt per se; "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." 74
The Court held that the exemption claimed by the YMCA is expressly disallowed by
the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties, real
or personal, are subject to the same tax imposed by the Tax Code, regardless of how
that income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its property. 75
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA
invoked the tax privilege granted under Article XIV, Section 4 (3) of the Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws
granting tax exemptions, refers to the school system (synonymous with formal
education); it includes a college or an educational establishment; it refers to the
hierarchically structured and chronologically graded learnings organized and
provided by the formal school system.76
The Court then significantly laid down the requisites for availing the tax exemption
under Article XIV, Section 4 (3), namely: (1) the taxpayer 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.77
We now adopt YMCA as precedent and hold that:
1. The last paragraph of Section 30 of the Tax Code is without force and effect
with respect to non-stock, non-profit educational institutions, provided, that
the non-stock, non-profit educational institutions prove that its assets and
revenues are used actually, directly and exclusively for educational
purposes.
2. The tax-exemption constitutionally-granted to non-stock, non profit
educational institutions, is not subject to limitations imposed by law.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and exclusive
use of their assets, revenues and income 78for educational purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-profit
cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes...," Article XIV, Section 4 (3) categorically states that
"[a]ll revenues and assets... used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of
the Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission 79 to provide broader tax
privilege to non-stock, non-profit educational institutions as recognition of their role
in assisting the State provide a public good. The tax exemption was seen as
beneficial to students who may otherwise be charged unreasonable tuition fees if not
for the tax exemption extended to all revenues and assets of non-stock, non-profit
educational institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4
(3) does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution.
The phrase all revenues is unqualified by any reference to the source of revenues. not incidental to and reasonably necessary for the accomplishment of the main
Thus, so long as the revenues and income are used actually, directly and exclusively purpose of a university, which is to educate its students.
for educational purposes, then said revenues and income shall be exempt from taxes
and duties.81 However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues
We find it helpful to discuss at this point the taxation of revenues versus the taxation shall be exempt from taxes and duties. The tax exemption no longer hinges on the
of assets. use of the asset from which the revenues were earned, but on the actual, direct and
exclusive use of the revenues for educational purposes.
Revenues consist of the amounts earned by a person or entity from the conduct of
business operations.82 It may refer to the sale of goods, rendition of services, or the Parenthetically, income and revenues of non-stock, non-profit educational
return of an investment. Revenue is a component of the tax base in income institution not used actually, directly and exclusively for educational purposes are not
tax,83 VAT,84 and local business tax (LBT).85 exempt from duties and taxes. To avail of the exemption, the taxpayer must factually
prove that it used actually, directly and exclusively for educational purposes the
Assets, on the other hand, are the tangible and intangible properties owned by a revenues or income sought to be exempted.
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in the
stocks of a corporation, inventory of goods, or any property from which the person or The crucial point of inquiry then is on the use of the assets or on the use of the
entity may derive income or use to generate the same. In Philippine taxation, the fair revenues. These are two things that must be viewed and treated separately. But so
market value of real property is a component of the tax base in real property tax long as the assets or revenues are used actually, directly and exclusively for
(RPT).87 Also, the landed cost of imported goods is a component of the tax base in educational purposes, they are exempt from duties and taxes.
VAT on importation88 and tariff duties.89
The tax exemption granted by the Constitution to non-stock, non-profit
Thus, when a non-stock, non-profit educational institution proves that it uses educational institutions, unlike the exemption that may be availed of by
its revenues actually, directly, and exclusively for educational purposes, it shall be proprietary educational institutions, is not subject to limitations imposed by law.
exempted from income tax, VAT, and LBT. On the other hand, when it also shows
that it uses its assets in the form of real property for educational purposes, it shall be That the Constitution treats non-stock, non-profit educational institutions differently
exempted from RPT. from proprietary educational institutions cannot be doubted. As discussed, the
privilege granted to the former is conditioned only on the actual, direct and exclusive
To be clear, proving the actual use of the taxable item will result in an exemption, use of their revenues and assets for educational purposes. In clear contrast, the tax
but the specific tax from which the entity shall be exempted from shall depend on privilege granted to the latter may be subject to limitations imposed by law.
whether the item is an item of revenue or asset.
We spell out below the difference in treatment if only to highlight the privileged
To illustrate, if a university leases a portion of its school building to a bookstore or status of non-stock, non-profit educational institutions compared with their
cafeteria, the leased portion is not actually, directly and exclusively used for proprietary counterparts.
educational purposes, even if the bookstore or canteen caters only to university
students, faculty and staff. While a non-stock, non-profit educational institution is classified as a tax-exempt
entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
The leased portion of the building may be subject to real property tax, as held proprietary educational institution is covered by Section 27 (Rates of Income Tax on
in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of Domestic Corporations).
exemption from taxation is the use of the property for purposes mentioned in the
Constitution. We also held that the exemption extends to facilities which are To be specific, Section 30 provides that exempt organizations like non-stock, non-
incidental to and reasonably necessary for the accomplishment of the main purposes. profit educational institutions shall not be taxed on income received by them as such.

In concrete terms, the lease of a portion of a school building for commercial Section 27 (B), on the other hand, states that [p]roprietary educational
purposes, removes such asset from the property tax exemption granted under the institutions...which are nonprofit shall pay a tax of ten percent (10%) on their taxable
Constitution.91 There is no exemption because the asset is not used actually, directly income...Provided, that if the gross income from unrelated trade, business or other
and exclusively for educational purposes. The commercial use of the property is also activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions...[the regular corporate income tax of 30%] shall be imposed
on the entire taxable income...92 The relevant provision is Section C of RMO No. 43-90, the pertinent portion of
which reads:
By the Tax Code's clear terms, a proprietary educational institution is entitled only to chanRoblesvirtualLawlibrary
the reduced rate of 10% corporate income tax. The reduced rate is applicable only if: 3. A Letter of Authority [LOA] should cover a taxable period not exceeding
(1) the proprietary educational institution is non profit and (2) its gross income from one taxable year. The practice of issuing [LOAs] covering audit of
unrelated trade, business or activity does not exceed 50% of its total gross income. unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do specifically indicated in the [LOA].98
not apply to non-stock, non-profit educational institutions. What this provision clearly prohibits is the practice of issuing LOAs covering audit
of unverified prior years. RMO 43-90 does not say that a LOA which contains
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and unverified prior years is void. It merely prescribes that if the audit includes more
effect for being contrary to the Constitution insofar as it subjects to tax the income than one taxable period, the other periods or years must be specified. The provision
and revenues of non-stock, non-profit educational institutions used actually, directly read as a whole requires that if a taxpayer is audited for more than one taxable year,
and exclusively for educational purpose. We make this declaration in the exercise of the BIR must specify each taxable year or taxable period on separate LOAs.
and consistent with our duty93 to uphold the primacy of the Constitution.94
Read in this light, the requirement to specify the taxable period covered by the LOA
Finally, we stress that our holding here pertains only to non-stock, non-profit is simply to inform the taxpayer of the extent of the audit and the scope of the
educational institutions and does not cover the other exempt organizations under revenue officer's authority. Without this rule, a revenue officer can unduly burden the
Section 30 of the Tax Code. taxpayer by demanding random accounting records from random unverified years,
which may include documents from as far back as ten years in cases of fraud audit.99
For all these reasons, we hold that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
from duties and taxes. Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because
it includes unverified prior years. This does not mean, however, that the entire LOA
II. The LOA issued to DLSU is not entirely void. The assessment for taxable is void.
year 2003 is valid.
As the CTA correctly held, the assessment for taxable year 2003 is valid because this
DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable taxable period is specified in the LOA. DLSU was fully apprised that it was being
year 2003 and insists that the entire LOA should be voided for being contrary to audited for taxable year 2003. Corollarily, the assessments for taxable years 2001
RMO No. 43-90, which provides that if tax audit includes more than one taxable and 2002 are void for having been unspecified on separate LOAs as required under
period, the other periods or years shall be specifically indicated in the LOA. RMO No. 43-90.

A LOA is the authority given to the appropriate revenue officer to examine the books Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's
of account and other accounting records of the taxpayer in order to determine the validity at the CTA Division, and thus, should not have been entertained on appeal,
taxpayer's correct internal revenue liabilities95 and for the purpose of collecting the is not accurate.
correct amount oftax,96 in accordance with Section 5 of the Tax Code, which gives
the CIR the power to obtain information, to summon/examine, and take testimony of On the contrary, the CTA En Banc found that the issue of the LOA's validity came
persons. The LOA commences the audit process97 and informs the taxpayer that it is up during the trial.100 DLSU then raised the issue in its memorandum and motion for
under audit for possible deficiency tax assessment. partial reconsideration with the CTA Division. DLSU raised it again on appeal to
the CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to the LOA.101 Besides, the Commissioner had the opportunity to argue for the validity
DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency of the LOA at the CTA En Banc but she chose not to file her comment and
for taxable year 2003? memorandum despite notice.102

We answer in the negative. III. The CTA correctly admitted the supplemental evidence formally offered by
DLSU. Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for reconsideration and the admission of the Final Adjustment
The Commissioner objects to the CTA Division's admission of DLSU's supplemental Return.110 We thus admitted and gave weight to the Final Adjustment
pieces of documentary evidence. Return although it was only submitted upon motion for reconsideration.

To recall, DLSU formally offered its supplemental evidence upon filing its motion We held that while it is true that strict procedural rules generally frown upon the
for reconsideration with the CTA Division.103 The CTA Division admitted the submission of documents after the trial, the law creating the CTA specifically
supplemental evidence, which proved that a portion of DLSU's rental income was provides that proceedings before it shall not be governed strictly by the technical
used actually, directly and exclusively for educational purposes. Consequently, the rules of evidence111 and that the paramount consideration remains the ascertainment
CTA Division reduced DLSU's tax liabilities. of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.112
We uphold the CTA Division's admission of the supplemental evidence on distinct
but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object We applied the same reasoning in the subsequent cases of Filinvest Development
to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
by the technical rules of evidence. Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for reconsideration.
First, the failure to object to the offered evidence renders it admissible, and the court
cannot, on its own, disregard such evidence.104 Although the cited cases involved claims for tax refunds, we also dispense with the
strict application of the technical rules of evidence in the present tax assessmentcase.
The Court has held that if a party desires the court to reject the evidence offered, it If anything, the liberal application of the rules assumes greater force and significance
must so state in the form of a timely objection and it cannot raise the objection to the in the case of a taxpayer who claims a constitutionally granted tax exemption. While
evidence for the first time on appeal.105 the taxpayers in the cited cases claimed refund of excess tax payments based on the
Tax Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality
Because of a party's failure to timely object, the evidence offered becomes part of the is afforded to taxpayers who paid more than they should have under a statute, then
evidence in the case. As a consequence, all the parties are considered bound by any with more reason that we should allow a taxpayer to prove its exemption from tax
outcome arising from the offer of evidence properly presented. 106 based on the Constitution.

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence
offer of evidence despite notice.107 The Commissioner objected to the admission of not only because the Commissioner failed to promptly object, but more so because
the supplemental evidence only when the case was on appeal to the CTA En Banc. the strict application of the technical tules of evidence may defeat the intent of the
By the time the Commissioner raised her objection, it was too late; the formal offer, Constitution.
admission and evaluation of the supplemental evidence were all fait accompli.
IV. The CTA's appreciation of evidence is generally binding on the Court unless
We clarify that while the Commissioner's failure to promptly object had no bearing compelling reasons justify otherwise.
on the materiality or sufficiency of the supplemental evidence admitted, she was
bound by the outcome of the CTA Division's assessment of the evidence. 108 It is doctrinal that the Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its function of being dedicated exclusively to the
Second, the CTA is not governed strictly by the technical rules of evidence. The resolution of tax problems, has developed an expertise on the subject, unless there
CTA Division's admission of the formal offer of supplemental evidence, without has been an abuse or improvident exercise of authority.116 We thus accord
prompt objection from the Commissioner, was thus justified. the findings of fact by the CTA with the highest respect. These findings of facts can
only be disturbed on appeal if they are not supported by substantial evidence or there
Notably, this Court had in the past admitted and considered evidence attached to the is a showing of gross error or abuse on the part of the CTA. In the absence of any
taxpayers' motion for reconsideration. clear and convincing proof to the contrary, this Court must presume that the CTA
rendered a decision which is valid in every respect. 117
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund
claimant attached to its motion for reconsideration with the CTA its Final We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that Based on the Independent CPA's report and on its own appreciation of the evidence,
DLSU had used actually, directly and exclusively for educational purposes the CTA held that only the portion of the rental income pertaining to
a portion of its assessed income and that it had remitted the DST payments though an the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the
online imprinting machine. CF-CPA Account was considered as used actually, directly and exclusively for
a. DLSU used actually, directly, and exclusively for educational purposes educational purposes. Consequently, the unaccounted and unsubstantiated
a portion of its assessed income. disbursements must be subjected to income tax and VAT.123
To see how the CTA arrived at its factual findings, we review the process undertaken,
from which it deduced that DLSU successfully proved that it used actually, directly The CTA then further reduced DLSU's tax liabilities by cancelling the assessments
and exclusively for educational purposes a portion of its rental income. for taxable years 2001 and 2002 due to the defective LOA. 124

The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of receipts,
statement of disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed P93.86 Million,119 which was used to
build the university's Sports Complex. Based on these pieces of evidence, the CTA
found that DLSU's rental income from its concessionaires were indeed transmitted
and used for the payment of this loan. The CTA held that the degree of
preponderance of evidence was sufficiently met to prove actual, direct and exclusive
use for educational purposes.
The Court finds that the above fact-finding process undertaken by the CTA shows
that it based its ruling on the evidence on record, which we reiterate, were examined
and verified by the Independent CPA. Thus, we see no persuasive reason to deviate
from these factual findings.
However, while we generally respect the factual findings of the CTA, it does not
mean that we are bound by its conclusions. In the present case, we do not agree with
the method used by the CTA to arrive at DLSU's unsubstantiated rental income (i.e.,
income not proved to have been actually, directly and exclusively used for
educational purposes).

The CTA also found that DLSU's rental income from other concessionaires, which To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in
were allegedly deposited to a fund (CF-CPA Account),120 intended for the taxable year 2003.125 DLSU earned this income from leasing a portion of its premises
university's capital projects, was not proved to have been used actually, directly and to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp.,
exclusively for educational purposes. The CTA observed that "[DLSU]...failed to 5) Capri International, and 6) MTO Bookstore.126
fully account for and substantiate all the disbursements from the [fund]." Thus, the
CTA "cannot ascertain whether rental income from the [other] concessionaires was To prove that its rental income was used for educational purposes, DLSU identified
indeed used for educational purposes." 121 the transactions where the rental income was expended, viz.:
1) P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports
To stress, the CTA's factual findings were based on and supported by the report of Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account.128
the Independent CPA who reviewed, audited and examined the voluminous
documents submitted by DLSU. DLSU also submitted documents to the Independent CPA to prove that the
P6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
Under the CTA Revised Rules, an Independent CPA's functions include: (a) exclusively for educational purposes. According to the Independent CPA' findings,
examination and verification of receipts, invoices, vouchers and other long accounts; DLSU was able to substantiate disbursements from the CF-CPA Account amounting
(b) reproduction of, and comparison of such reproduction with, and certification that to P6,259,078.30.
the same are faithful copies of original documents, and pre-marking of documentary
exhibits consisting of voluminous documents; (c) preparation of schedules or Contradicting the findings of the Independent CPA, the CTA concluded that out of
summaries containing a chronological listing of the numbers, dates and amounts the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus,
covered by receipts or invoices or other relevant documents and the amount(s) of subject to income tax and VAT.129
taxes paid; (d) making findings as to compliance with substantiation
requirements under pertinent tax laws, regulations and jurisprudence; (e) The CTA then concluded that the ratio of substantiated disbursements to the total
submission of a formal report with certification of authenticity and veracity of disbursements from the CF-CPA Account for taxable year 2003 is only
findings and conclusions in the performance of the audit; (f) testifying on such 26.68%.130The CTA held as follows:
formal report; and (g) performing such other functions as the CTA may direct. 122 chanRoblesvirtualLawlibrary
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp.,
Capri International and MTO Bookstore, which were transmitted to the CF-CPA
Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental
income derived therein were actually, directly and exclusively used for educational
purposes. Likewise, the findings of the Court-Commissioned Independent CPA show
that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to P-
6,259,078.30 only. Hence, this portion of the rental income, being the substantiated
disbursements of the CF-CPA Account, was considered by the Special First Division
as used actually, directly and exclusively for educational purposes. Since for fiscal
year 2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-C"),
and the total disbursements per subsidiary ledger amounts to P23,463,543.02
(Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is
26.68% (P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68%
with the total rent income added to and used in the CF-CPA Account in the amount
of P6,602,655.00 ts P1,761,588.35. 131 (emphasis
supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports
Complex (P4,007,724.00) from the rental income (P10,610,379.00) earned
from the abovementioned concessionaries. The difference (P6,602,655.00)
was the portion claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA
disbursements (P1,761,308.37) from the P6,602,655.00 to arrive at
the supposed unsubstantiated portion of the rental income
(P4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was
derived by multiplying the rental income claimed to have been added to the
CF-CPA Account (P6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total disbursements (P23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated
disbursements from the CF-CPA Account as found by the Independent CPA
(P6,259,078.30) by the total disbursements (P23,463,543.02) from the same
account.
We find that this system of calculation is incorrect and does not truly give effect to
the constitutional grant of tax exemption to non-stock, nonprofit educational
institutions. The CTA's reasoning is flawed because it required DLSU to substantiate
an amount that is greater than the rental income deposited in the CF-CPA Account in
2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the
proceeds of its rental income (which amounted to a total of P10.61 million) 135 were
used for educational purposes. This amount was divided into two parts: (a) the P4.01
million, which was used to pay the loan obtained for the construction of the Sports
Complex; and (b) the P6.60 million,136 which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to P23.46
million.137 These figures, read in light of the constitutional exemption, raises the
question: does DLSU claim that the whole total CF-CPA disbursement of P23.46
million is tax-exempt so that it is required to prove that all these disbursements
had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA disbursements of
P23.46 million had been for educational purposes and should thus be tax-exempt;
DLSU only claimed P10.61 million for taxexemption and should thus be required to
prove that this amount had been used as claimed.
Of this amount, P4.01 had been proven to have been used for educational purposes,
as confirmed by the Independent CPA. The amount in issue is therefore the balance
of P6.60 million which was transferred to the CF-CPA which in turn made
disbursements of P23.46 million for various general purposes, among them the P6.60
million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements
for educational purposes in year 2003 in the amount P6.26 million. Based on these
given figures, the CTA concluded that the expenses for educational purposes that had
been coursed through the CF-CPA should be prorated so that only the portion that
P6.26 million bears to the total CF-CPA disbursements should be credited to DLSU
for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-exempt.
As already mentioned above, DLSU is not claiming that the whole P23.46 million
CF-CPA disbursement had been used for educational purposes; it only claims that
P6.60 million transferred to CF-CPA had been used for educational purposes. This
was what DLSU needed to prove to have actually and directly used for educational
purposes.
That this fund had been first deposited into a separate fund (the CF-CPA established
to fund capital projects) lends peculiarity to the facts of this case, but does not detract
from the fact that the deposited funds were DLSU revenue funds that had been
confirmed and proven to have been actually and directly used for educational
purposes via the CF-CPA. That the CF-CPA might have had other sources of funding
is irrelevant because the assessment in the present case pertains only to the rental
income which DLSU indisputably earned as revenue in 2003. That the proven CF-
CPA funds used for educational purposes should not be prorated as part of its total
CF-CPA disbursements for purposes of crediting to DLSU is also logical because no
claim whatsoever had been made that the totality of the CF-CPA disbursements had
been for educational purposes. No prorating is necessary; to state the obvious,
exemption is based on actual and direct use and this DLSU has indisputably proven. own or operate these commercial establishments to avail of the exemption. 140

Based on these considerations, DLSU should therefore be liable only for the Given the lack of complete identity of the issues involved, the CTA held that it had
difference between what it claimed and what it has proven. In more concrete terms, to evaluate the separate sets of evidence differently. The CTA likewise stressed that
DLSU only had to prove that its rental income for taxable year 2003 (P10,610,379.00) DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on
was used for educational purposes. Hence, while the total disbursements from the its decision on two different cases with two different issues."141
CF-CPA Account amounted to P23,463,543.02, DLSU only had to substantiate its
P10.6 million rental income, part of which was the P6,602,655.00 transferred to the DLSU disagrees with the CTA and argues that the entire assessment must be
CF-CPA account. Of this latter amount, P6.259 million was substantiated to have cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
been used for educational purposes. We reject DLSU's argument for being non sequitur. Its reliance on the concept of
uniformity of taxation is also incorrect.
To summarize, we thus revise the tax base for deficiency income tax and VAT for
taxable year 2003 as follows: First, even granting that Ateneo and DLSU submitted similar evidence,
chanRoblesvirtualLawlibrary the sufficiency and materiality of the evidence supporting their respective claims for
tax exemption would necessarily differ because their attendant issues and facts differ.
CTA Decision138 Revised
To state the obvious, the amount of income received by DLSU and by Ateneo during
Rental income 10,610,379.00 10,610,379.00 the taxable years they were assessed varied. The amount of tax assessment
also varied. The amount of income proven to have been used for educational
Less: Rent income used in construction purposes also varied because the amount substantiated varied.142 Thus, the amount of
4,007,724.00 4,007,724.00
of the Sports Complex tax assessment cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency
of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand, the
Rental income deposited to the CF-CPA
6,602,655.00 6,602.655.00 BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for the same period.
Account
Notably, DLSU was assessed deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income
actually, directly and exclusively for educational purposes by submitting similar
Less: Substantiated portion of CF-CPA
1,761,588.35 6,259,078.30 evidence, e.g., the testimony of their employees on the use of university revenues,
disbursements
the report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income
and revenues had indeed been used for educational purposes.
Tax base for deficiency income tax
4,841,066.65 343,576.70 The CTA significantly found that some documents that could have fully supported
and VAT
DLSU's claim were not produced in court. Indeed, the Independent CPA testified
On DLSU's argument that the CTA should have appreciated its evidence in the same that some disbursements had not been proven to have been used actually, directly
way as it did with the evidence submitted by Ateneo in another separate case, the and exclusively for educational purposes.144
CTA explained that the issue in the Ateneo case was not the same as the issue in the
present case. The final nail on the question of evidence is DLSU's own admission that the original
of these documents had not in fact been produced before the CTA although it
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay claimed that there was no bad faith on its part.145 To our mind, this admission is a
income taxes and VAT under certain BIR and Department of Finance good indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's
issuances139that required the educational institution to own and operate the canteens, failure to substantiate a portion of its claimed exemption.
or other commercial enterprises within its campus, as condition for tax exemption.
The CTA held that the Constitution does not require the educational institution to Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence,
that the contents of the missing supporting documents were proven by its recital in
some other authentic documents on record,146 can no longer be entertained at this late
stage of the proceeding. The CTA did not rule on this particular claim. The CTA also
made no finding on DLSU's assertion of lack of bad faith. Besides, it is not our duty
to go over these documents to test the truthfulness of their contents, this Court not
being a trier of facts.
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and
uniformity of taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate.147 A tax is uniform when it operates with the
same force and effect in every place where the subject of it is found.148 The concept
requires that all subjects of taxation similarly situated should be treated alike and
placed in equal footing.149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
them alike because their income proved to have been used actually, directly and
exclusively for educational purposes were exempted from taxes. The CTA equally
applied the requirements in the YMCA case to test if they indeed used their revenues
for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational
purposes its income and revenues, the CTA still affirmed the imposition of taxes.
That the DLSU secured a different result happened because it failed to fully prove
that it used actually, directly and exclusively for educational purposes its revenues
and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean
that subjects of taxation similarly situated are treated in literally the same way in all
and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-
profit educational institutions, does not mean that the CTA or this Court would
similarly decide every case for (or against) both universities. Success in tax litigation,
like in any other litigation, depends to a large extent on the sufficiency of evidence.
DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its
tax liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
transactions were paid and remitted through its bank's On-Line Electronic DST
Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this
method of payment because an educational institution is excluded from the class of
taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in
both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and paid
for by the person making, signing, issuing, accepting, or transferring the same. 150The
Tax Code provides that whenever one party to the document enjoys exemption from
DST, the other party not exempt from DST shall be directly liable for the tax. Thus,
it is clear that DST shall be payable by any party to the document, such that the
payment and compliance by one shall mean the full settlement of the DST due on the
document.
In the present case, DLSU entered into mortgage and loan agreements with banks.
These agreements are subject to DST.151 For the purpose of showing that the DST on
the loan agreement has been paid, DLSU presented its agreements bearing the
imprint showing that DST on the document has been paid by the bank, its
counterparty. The imprint should be sufficient proof that DST has been paid. Thus,
DLSU cannot be further assessed for deficiency DST on the said documents.
Finally, it is true that educational institutions are not included in the class of
taxpayers who can pay and remit DST through the On-Line Electronic DST
Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is
irrelevant because it was not DLSU who used the On-Line Electronic DST
Imprinting Machine but the bank that handled its mortgage and loan transactions. RR
No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-
Line Electronic DST Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of
the assessed DST deficiency, except for the unpaid balance of P13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner
of Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010
decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in
CTA En Banc Case No. 622, except for the total amount of deficiency tax liabilities
of De La Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841
and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court
of Tax Appeals En Banc in CTA En Banc Case No. 671, with
the MODIFICATIONthat the base for the deficiency income tax and VAT for
taxable year 2003 is P343,576.70.
SO ORDERED.cralawlawlibrary
[G.R. No. 80276 : December 21, 1990.]
192 SCRA 604
HYDRO RESOURCES CONTRACTORS CORPORATION,
Petitioner, vs. THE COURT OF TAX APPEALS and THE HON. DEPUTY
MINISTER OF FINANCE, ALFREDO PIO DE RODA, Respondents.
DECISION
PARAS, J.:
This is a special civil action of Certiorari instituted by petitioner Hydro Resources
Contractors Corporation against respondents Court of Tax Appeals and Deputy
Minister of Finance which seeks to set aside the decisions of both public respondents
holding petitioner liable for a 3% ad valorem duty in the amount of P281,591.00.
It appears that the National Irrigation Administration (referred to hereinafter as NIA
for brevity) a government owned and controlled corporation, entered into an
agreement, sometime in August 1978, with petitioner Hydro Resources Contractors
Corporation (Hydro for short), for the construction of the Magat River Multipurpose
Project in Isabela.
Under the aforesaid contract, designated as Contract No. MPI-C-1, petitioner was
allowed to procure new construction equipment, spare parts and tools from abroad,
the payment for which was advanced by NIA under a financing plan embodied in the
contract, as follows:
a) Procurement — Petitioner is required to submit to NIA for approval a list of new
construction equipment, spare parts and tools which it intends to acquire from abroad.
Petitioner shall procure these items as an agent of NIA as all invoices shall be in the
name of said government agency. NIA undertakes to pay all import taxes, duties and
all fees, imposts and other charges that may be due on said importations.: nad
b) Ownership and delivery — The equipment and spare parts imported from abroad
shall be owned by NIA and delivered to its construction site in Isabela.
c) Repayment — Petitioner shall repay NIA the costs of the above procurement and
the manner of repayment shall be through deductions from each monthly or periodic
progress payment due to petitioner.
d) Transfer of Ownership — Ownership shall be transferred to petitioner only upon
complete payment of the costs above mentioned.
The equipment imported by NIA in 1978 and 1979 for Hydro's use are —
DESCRIPTION OF EQUIPMENT NET BOOK VALUE
1 Tamrock Hyd. Jumbo Drill
Ser. #18153 P1,566,116.55
3 units Cat Drill Toyo TYPR 120 278,264.25
1 unit Tamrock Hyd. Drill
16 units Air Leg Drills Toyo 1,493,834.29
1 unit Toyo Reinforcing Bar 12,000.92
3 units Toyo TYCD 10 CY Cralwer 265,421.35
2 units Scheele K-60 Pump 624,772.80
2 units New Reed Gun Mdl. IAS 67,349.90
1 unit Prota Tunnel Profile 43,340.26
2 units Wild Theodolite Surveying
Equipment 28,545.93
1 unit Toyo Mud Sub Pump 201,108.01
2 units Aichi Skymaster Truck
mounted Boom 93,622.78
2 units Grindex Sub Type Pump 140,518.35
6 units K/Worth C500 Truck Mixer 1,690,054.60
1 unit Putamesitor 201,863.77
6 units Sullair Air Comp. 588,940.53
2 units Well Air Driven Grout 20,582.40
10 units Stancom VHF Radio Tran. 32,537.70
4 units Cummins 1,055,209.20
By the terms of the contract (quoted earlier) NIA undertakes payment of all the
import duties and taxes incident to the importations deductible from the proceeds of
the contract price. HYDRO shall repay NIA in full the value of the construction
equipment out of the same proceeds before eventual transfer or taking ownership of
subject construction equipment upon termination of the contract.
NIA reneged and failed in the compliance of its tax obligations. In the meantime,
HYDRO had fully repaid the value of the construction equipment in the amount of
P14,537,783.63 (US$1,991,477.21) so much so that on December 6, 1982 and March
24, 1983, NIA executed deeds of sale covering the same and transferring the
ownership thereof in favor of petitioner.
Upon the transfer of the ownership of the said equipment HYDRO was assessed by
the Bureau of Customs the corresponding customs duty and compensating tax,
respectively, as follows:
Customs Duty — P1,214,010.00
Compensating Tax — 1,089,368.63
——————
P2,303,378.63
=========
This amount was paid by HYDRO to the Bureau of Customs.
In addition, HYDRO was assessed additional 3% ad valorem duty in the amount of
P281,591.00 prescribed in Executive Order 860. HYDRO also paid this amount but
this time under protest.:-cralaw
The Collector of Customs acted favorably on petitioner's protest and ordered the
refund of the amount paid for the ad valorem duty in the form of tax credit, ruling
that —
"The foregoing scheme entered into between NIA and HYDRO had generated a
contract and it will be unfair to involve new proposal as in the imposition of 3%
additional duty ad valorem which was not obtaining at the time of the agreement nor
at the time of arrival and release of the shipment from the piers. For one thing, the
scheme may be viewed in the same light as sales of commodities to be delivered at
some future date, whose price or prices at the time of delivery may be way above or
below the sale price or prices. For another thing, HYDRO may not be deprived of
rights vested before the promulgation of Executive Order 860 prescribing 3%
additional duty ad valorem." (p. 22, Rollo)
The Acting Commissioner of Customs affirmed the ruling of the Collector of
Customs. In his 2nd Indorsement dated June 25, 1984, (p. 25, Rollo) Acting
Commissioner Ramon Farolan stated —
"This Office shares the view of the Collector of Customs to the effect that the various
equipment and parts in question which the National Irrigation Administration
imported in 1978 and 1979 and subsequently sold to Hydro Resources Construction
Corporation by virtue of a previous agreement, are subject to duties and taxes but not
the additional 3% ad valorem duty under Executive Order No. 860 which took effect
only on December 21, 1982. Moreover, the Deputy Minister of Finance, in his 1st
Indorsement to the Central Bank dated March 26, 1983, which was then reproduced
by the Central Bank Governor in a circular letter to all authorized agent banks,
clarified to all authorized agent banks, clarified that —
Letters of Credit opened prior to the effectivity of P.D. 1853 and E.O. 860 are not
subject to the provisions thereof even if they are amended after the effectivity thereof.
(p. 15, Rollo).
These findings of the Collector of Customs as well as the Acting Customs
Commissioner were reversed by the Deputy Minister of Finance.
Petitioner appealed to the Court of Tax Appeals but in its Decision dated May 22,
1987, the said court (with a dissenting opinion) affirmed the ruling of the Deputy
Minister of Finance denying petitioner's claim for refund.
Hence, the present recourse, after petitioner's motion for reconsideration was denied.
In this petition, Hydro presents the following issues —
I As a rule and principle, it was incumbent upon petitioner-taxpayer HYDRO to have
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
REFUSING TO CONSIDER THE FACT THAT THE SALE OF THE NIA-
FINANCED EQUIPMENT TOOK PLACE IN 1978.
II
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
APPLYING EXECUTIVE ORDER NO. 860 RETROACTIVELY.
III
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN FAILING
TO CONSIDER THAT THE IMPOSITION OF THE 3% AD VALOREM TAX ON
IMPORTATIONS MADE PRIOR TO ITS ISSUANCE IS VIOLATIVE OF THE
CONSTITUTION.
IV
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
IMPOSING THE AD VALOREM TAX SANS STATUTORY AND LEGAL
BASIS.
The petition is meritorious.
Executive Order No. 860 which was the basis for the imposition of the 3% ad
valorem duty upon the said importations, took effect on December 21, 1982. The
importations were effected in 1978 and 1979 by NIA. Nonetheless, respondent Court
of Tax Appeals denied petitioner's claim for refund because —
"When NIA transferred the equipment in question supposedly 'after its (HYDRO's)
use for a number of years', it cannot be doubted that these equipment were sold and
transferred presumably 'several years' after the equipment's importation in 1978 and
1979. It is obvious therefore that the sale or transfer of the ownership of the
equipment to petitioner HYDRO were unquestionably made after the effectivity of
PD 882 on January 20, 1976, undisputably said sale or transfer thereof was (sic)
governed by Section 4 of PD 882 and was correctly applied by respondent. We take
particular note of the fact that we cannot pinpoint with definiteness or exactitude
from the evidence, when or what years after the years 1978 and 1979 importations
were the equipment sold or transferred by NIA to petitioner HYDRO so that we can
determine outright whether the sale or transfers are covered by the mandatory
provision of Executive Order 860 effective on December 21, 1982 imposing 3%
additional ad valorem duty on such importations. Such that if the sale or transfer of
the ownership of the equipment were effected to petitioner HYDRO after December
21, 1982, the effective date of Executive Order No. 860, the 3% ad valorem duty is
imposable as said Executive Order 860 was applied prospectively and rightly. If the
sale or transfer of the ownership of the equipment to HYDRO were (sic) prior to the
effectivity of Executive Order No. 860, then said Executive Order 860 is inapplicable,
and petitioner is not liable to pay the 3% ad valorem duty of P281,591.00 and is
entitled to the refund thereof.
shown that the sale or transfer of said equipment to it were made before December
21, 1982, when the Executive Order No. 860 was effective in order that it shall not
be subject to the imposition of 3% additional ad valorem duty. Failing thus, its claim
for refund in the amount of P281,591.00 unquestionably fails." (pp. 37-38; Rollo).:-
nad
The foregoing conclusion is erroneous. The subsequent executions of the Deeds of
Sale of the equipment in question on December 6, 1982 and March 24, 1983 are not
relevant and material in the consideration of the application of Executive Order No.
860 because said Deeds of Sale were mere formalities in the implementation of
Contract No. MPI-C-1 executed on August 1978, which should be reckoned and
construed as the actual date of sale. This must be so because the contract of purchase
and sale of the NIA-financed/owned equipment to Hydro took place in 1978 when
Contract No. MPI-C-1 was signed by NIA and HYDRO wherein the contracting
parties provided for their financing, procurement, delivery, repayment, transfer of
possession and ownership. The said scheme contemplated a Contract of Sale within
the purview of Art. 1458 of the Civil Code which provides —
"Art. 1458. By the contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
thereafter a price certain in money or its equivalent.
"A contract of sale may be absolute or conditional." (p. 11, Rollo)
This view is shared by the Collector of Customs in his decision when he declared
that there being a meeting of the minds between NIA and HYDRO upon the object
of the contract of sale and upon the price, the contract of sale of the equipment
between them was perfected in 1978. It is a perfected contract of sale subject to a
suspensive condition, the full payment by HYDRO of the consideration for the
subject of the contract is the operative act to compel NIA to effect the transfer of
absolute ownership thereof to HYDRO. And under Art. 1187 of the Civil Code, the
effectivity of said contract reverts back to the constitution of the contract, in this case
August 1978.
"ART. 1187. The effects of a conditional obligation to give, once the condition has
been fulfilled, shall retroact to the day of the constitution of the obligation." (p. 12,
Rollo)
It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is
provided. (Art. 4, Civil Code) Except for a statement providing for its immediate
execution, Executive Order No. 860 does not provide for its retroactivity. Moreover,
the Deputy Minister of Finance in his 1st Indorsement to the Central Bank dated
March 26, 1983 which was reproduced by the Central Bank Governor in a circular
letter to all authorized agent banks, clarified that letters of credit opened prior to the
effectivity of E.O. 860 are not subject to the provisions thereof. Consequently, the
importations in question which arrived in 1977 and 1978 are not subject to the 3%
additional ad valorem duty, the same being imposed only on those whose letter of
credit were opened after the promulgation of Executive Order 860. In this regard
Judge Alex Reyes in his dissenting opinion correctly observed —
"Let it suffice that the procurement of the equipment, as earlier stated, was not on a
tax exempt basis as the import liabilities thereon have been secured to be paid under
the terms of the financial scheme in the contract. The formality of vesting of title
over the equipment was not an unwarranted expectation but a matter of an
implementation of a pre-existing agreement, hence, the imported articles can only be
subject to the rates of import duties/taxes prevailing at the time of entry or
withdrawal from customs' custody (Sec. 205, TCC) in 1978 and 1979, thus
foreclosing any retroactive application of the 1982 Executive Order.:-cralaw
"Taken in the above light, it would be unfair and incongruous to hold petitioner to an
additional levy sans any statutory basis. The majority could have fumbled into a
precipitate action in taking an adverse position on petitioner's right to a refund." (pp.
44-45, Rollo)
IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is GRANTED;
the assailed Decisions of respondents Court of Tax Appeals and Deputy Minister of
Finance are SET ASIDE and another one rendered ordering the refund of the amount
of P281,591.00 representing 3% additional ad valorem duty to petitioner Hydro
Resources Contractors Corporation in the form of tax credit.
SO ORDERED.
G.R. Nos. L-23236 and L-23254 May 31, 1967
CENTRAL AZUCARERA DON PEDRO, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioner.
Office of the Solicitor General Anturo A. Alafriz, Solicitor A.B. Afurong and Attorney
M.R. Balasbas for respondents.
REYES, J.B.L., J.:
Separate appeals, by the same petitioner, Central Azucarera Don Pedro, from two (2)
decisions of the Court of Tax Appeals, the first (CTA Case No. 1273) holding it
liable for the payment of the sum of P1,507.30, as ½% monthly (6% per annum)
interest on the deficiency income tax assessed against it for the fiscal year ending
August 31, 1954; and, the other (CTA Case No. 1278) denying its claim for refund in
the total amount of P2,307.10, already paid and collected, as ½% monthly (6% per
annum) interest on the deficiency income taxes assessed against it for the fiscal years
ending August 31 — 1955, 1956, 1957 and 1958.
Inasmuch as these two (2) appeals involved the same parties and identical issues; and
the Solicitor General, upon motion, was allowed by this Court to file a consolidated
brief in these two cases we will consider them jointly.
In G.R. No. L-23236 (CTA Case No. 1273), the undisputed facts are:
Petitioner Central Azucarera Don Pedro, a domestic corporation with office at
Nasugbu, Batangas, had been filing its income tax returns on the "fiscal year" basis
ending August 31, of every year. Within the period allowed it under Section 46 of
the National Internal Revenue Code, petitioner filed, on October 24, 1954, with the
Bureau of Internal Revenue, its income tax return for the fiscal year ending August
31, 1954, for which it paid the total sum of P491,038.00, as income tax, computed on
the basis of said return.
On October 15, 1959, Respondent Commissioner of Internal Revenue assessed
against petitioner the amount of P167,935.00, as deficiency income tax for the
abovementioned fiscal year, but he did not assess and impose any interest thereon.
Petitioner protested, in a letter dated October 26, 1959, said deficiency income tax
assessment and requested that the same be cancelled.
Acting on the letter-protest, respondent finally ascertained and assessed, in a letter
dated December 20, 1961, against petitioner the amount of P10,062.00, as deficiency
income tax, to which was added the sum of P1,509.30 as ½% monthly interest
thereon, which interest was imposed pursuant to Section 51 (d) of the National
Internal Revenue Code, as amended by Republic Act No. 2343 (effective June 20,
1959), and computed from June 20, 1959 to December 20, 1961 which was the date
of the revised assessment. In the same letter, respondent required petitioner to pay
said revised assessment and interest thereon on or before January 16, 1962.
Petitioner was satisfied with the revised assessment of said deficiency income tax
proper and, accordingly, it paid, on January 16, 1962, the said amount of P10,062.00
to respondent; however, it objected, in a letter-protest dated January 18, 1962, to the
demand and imposition of interest which was assessed and included for the first time
in respondent's letter of December 20,1961.
Respondent decided said protest in a letter dated September 22, 1962, maintaining
the correctness and validity of the imposition of the interest.
In due time petitioner went to the Tax Court in a petition for review, claiming that
the imposition of ½% monthly interest on its deficiency tax for the fiscal year 1954,
Pursuant to Section 51 (d) of the Revenue Code, as amended by Republic Act No.
2343, is illegal, because the imposition of interest on efficiency income tax earned
prior to the effectivity of the amendatory law (Rep. Act 2343) will be tantamount to
giving it (Rep. Act No. 2343) retroactive application.
Respondent filed his answer to the petition, and there being no genuine issue raised
therein as to any material fact, petitioner presented a motion for summary judgment.
Respondent did not oppose the motion.
The Tax Court found that the only issue involved in the case is purely legal. It
ordered the parties to submit their respective memoranda and, upon so doing, the
case was deemed submitted for decision.
On June 15, 1964, the Tax Court rendered its decision, upholding the ruling of
respondent Commissioner.
In G. R. No. L-23254 (CTA Case No. 1278), the undisputed facts are as follows:
The same petitioner (Central Azucarera Don Pedro) filed its income tax returns
within the prescribed period for the succeeding fiscal years ending August 31 —
1955, 1956, 1957, and 1958, for which it paid the corresponding income taxes, based
on said returns.
After verification and examination of petitioner's income tax returns for the
abovestated fiscal years, respondent Commissioner ascertained and assessed, for
each of said fiscal years against petitioner, deficiency income taxes in the total
amount of P21,330.00, and interest thereon in the total sum of P2,307.10, which
interest were likewise imposed pursuant to Section 51 (d) of the Internal Revenue
Code, as amended by Republic Act No. 2343.
Petitioner paid said deficiency income taxes and interests within the period
prescribed by respondent to pay the same; however, on January 19, 1962, it filed
with the latter a claim for refund or tax credit of the aforesaid sum of P2,307.00,
which was paid as interests, claiming that said payment was erroneous and the
collection thereof by respondent was illegal, which contention is similar to that
alleged in its previous protest (now CTA Case No. 1273).
Respondent Commissioner was unable to decide immediately this claim for refund,
and view of the fact that the two-year prescriptive period provided for in Section 306
of the Revenue Code was about to expire, petitioner filed, on October 23, 1962, its
petition for review in the Court of Tax Appeals, disputing the legality and validity of
the imposition of interest on taxable incomes earned prior to, although assessed after,
the effectivity of Republic Act No. 2343, and praying that the said sum of P2,307.10,
which it paid is interest, be ordered refunded.
Respondent answered the petition, maintaining, among other things, that the
imposition of said interest is in accordance with law.
The issues having been joined, the case was set for hearing wherein the parties
presented their respective evidences which were entirely documentary. Thereafter,
the case was submitted for decision.
On June 29, 1964, the Court of Tax Appeals rendered its decision, sustaining the
ruling of respondent Commissioner.
In both cases, the Court of Tax Appeals ruled that Congress had power to impose
interest on deficiency income tax due on income earned prior to the amendatory law,
but assessed after its enactment, that the deficiency income tax in the case it bar was
assessed after the effectivity of the new law (Rep. Act No. 2343), and inasmuch as
the interest imposed thereon has been computed only from June 20, 1959 (which was
the date of effectivity of said law), Republic Act No. 2343 is not being applied
retroactively. It also ruled that the provision of Section 13 of Republic Act No. 2343
providing that its new tax rates should apply to income earned in 1959, did not
indicate that Congress intended to limit the applicability of the interest prescribed in
Section 51 (d) of the Revenue Code, as amended by Republic Act No. 2343, to the
deficiency income tax on income earned after the effectivity of the new law, since
said Section 51 (d) does not distinguish between taxable income earned prior to, or
after, the effectivity of said Republic Act No. 2343.
The petitioner appealed in both cases to this Court, insisting on its original stand
previously outlined.
The common issue posed in both cases is: whether or not the interest of six per
centum (6%)per annum (or ½% monthly interest), provided for in Section 51 (d) of
the National Internal Revenue Code, as amended by Republic Act No. 2343
(effective June 20, 1959) is imposable on deficiency income tax due on income
earned prior to the effectivity of said Republic Act No. 2343, but assessed after it.
It is not disputed that petitioner is a domestic corporation which filed its income tax
returns on a fiscal year basis; that it filed its income tax returns and paid the
corresponding income taxes, based on said returns, within the period prescribed
therefor; that the taxable incomes, in these two cases, were earned before, but were
assessed after, the effectivity on June 20, 1959 of Republic Act No. 2343; that the
deficiency income tax assessments proper, including the interests in the later case
(CTA Case No. 1278) were paid by petitioner within the period prescribed by
respondent Commissioner to pay the same; and that these deficiency income tax
assessments were made on account of petitioner's erroneous (but not fraudulent or
false) returns.
When petitioner filed its income tax returns and paid the corresponding income taxes,
based on said returns, the pertinent provisions of the Tax Code then in force (before
the effectivity of Rep. Act 2343) read —
Sec. 51. Assessment and payment of income tax. — (a) Assessment of Tax.
— All assessments shall be made by the Collector of Internal Revenue and
all persons and corporation subject to tax shall be notified of the amount for
which the are respectively liable on or before the first day of May each
successive year.
(b) Time of payment. — The total amount of tax imposed by this Title shall
be paid on or before the fifteenth day of May following the close of the
calendar year, by the person subject to tax, and in case of a corporation, by
the president, vice-president, or other responsible officer thereof. If the
return is made on the basis of a fiscal year, the total amount of the tax shall
be paid on or before the fifteenth day of the fifth month following the close
of the fiscal year.
xxx xxx xxx
(d) Refusal or neglect to make returns; fraudulent returns, etc. — In case(s)
of . . . erroneous . . . returns, the Collector of Internal Revenue shall, upon
discovery thereof, . . . make a return upon information obtained as provided
for in this code or by existing law, or require the necessary corrections to be
 made, and the assessment made by the Collector of Internal Revenue
thereon shall be paid by such person or corporation immediately upon
notification of the amount of such assessment.
(e) Surcharge and interest in case of delinquency.—To any sum or sums
due and unpaid after the dates prescribed in subsections (b), (c) and (d) for
the payment of the same, there shall be added the sum of fiveper centum on
the amount of tax unpaid and interest at the rate of one per centum a month
upon said tax from the time the same became due, except from the estates of
insane, deceased, or insolvent persons.1äwphï1.ñët
Sec. 46. Corporation returns. — . . .
(b) When to file. — The return shall be rendered on or before the first day of
March of each year for the preceding calendar year, or if the corporation has
designated a fiscal year, then within sixty days after the close of such fiscal
year.
while the pertinent provisions of the same Sections 51 and 46, after their amendment
by Republic Act No. 2343, read as follows:
Sec. 51. Payment and Assessment of income tax. — (a) Payment of tax. —
(1) In general. — The total amount of tax imposed by this Title shall be
paid at the time the return is filed but not later than the fifteenth day of April
following the close of the calendar year, or, if the return is made on the
basis of a fiscal year, then not later than the fifteenth day of the fourth
month following the close of the fiscal year. Such tax shall be paid by the
person subject thereto, and in the case of a corporation by the President,
Vice-President, or other responsible officer thereof: Provided, That if in any
preceding year, the payer was entitled to a refund of any amount thereof, if
not yet refunded, it may be deducted from the amount of tax to be paid.
xxx xxx xxx
(b) Assessment and payment of deficiency tax. — After the return is filed,
the Commissioner of Internal Revenue shall examine it and assess the
correct amount of the tax. The tax or deficiency in tax so discovered shall be
paid upon notice and demand from the Commissioner of Internal Revenue.
xxx xxx xxx
(d) Interest on deficiency. — Interest upon the amount determined as a
deficiency shall be assessed at the same time as the deficiency and shall be
paid upon notice and demand from the Commissioner of Internal Revenue;
and shall be collected as a part of the tax, at the rate of six per centum per
annum from the date prescribed for the payment of the tax (or, if the tax is
paid in installments, from the date prescribed for the payment of the first
installment) to the date the deficiency is assessed: Provided, That the
maximum amount that may be collected as interest on deficiency shall in no
case exceed the amount corresponding to a period of three years, the present
provisions regarding prescription to the contrary notwithstanding.
Sec. 46. Corporation returns. — . . . .
(b) When to file. — The return shall be filed on or before the fifteenth day of
April of each year for the preceding calendar year, or if the corporation has
designated a fiscal year, on or before the fifteenth day of the fourth month
following the close of such fiscal year.
and insofar as the effectivity of said Republic Act No. 2343 is concerned, Section 13
thereof provides —
(c) Sec. 13. This Act shall take effect upon its approval: Provided, That the
rate hereinabove stipulated shall apply to income received from January
first, nineteen hundred and fifty-nine, and for the fiscal periods ending after
June thirty, nineteen hundred and fifty nine.
From a perusal and comparison of the abovequoted sections of the Tax Code, before
and after its amendment, it will be observed that, although the Commissioner
(formerly Collector) of Internal Revenue, under the old Section 51 (a) was required
to assess the tax due, based on the taxpayer's return, and notify the taxpayer of said
assessment, still, under subsection (b) of the same old Section 51, the time prescribed
for the payment of tax was fixed, whether or not a notice of the assessment was
given to the taxpayer. Under the new provision, the time of payment is also fixed and
pre-determined (usually coinciding with the filing of the return) without the necessity
of giving notification of the assessment to the taxpayer by the Commissioner.
It should further be observed that, under the old Section 51 (e), the interest on
deficiency was imposed from the time the tax became due; while under the new
Section 51 (d), said interest is imposed on the deficiency from the date prescribed for
the payment of the tax.
It is thus evident that petitioner's contention that "interest on such deficiency accrued
only when the taxpayer failed to pay the tax within the period prescribed therefor by
respondent (Commissioner of Internal Revenue)" is not correct; said interest was
imposable in case of non-payment on time, not only on the basic income tax, but also
on the deficiency tax, since the deficiency was part and parcel of petitioner's income
tax liability.
It appearing that the new Section 51 (d) under Republic Act 2343 expressly provides
that the interest on deficiency shall be assessed at the same time as the deficiency
income tax; and that respondent Commissioner of Internal Revenue imposed and
sought to collect the interest only from June 20, 1959, which was the date of
effectivity of said Republic Act No. 2343; that the deficiency income taxes in
question were assessed and unpaid when said Act was already in force, the Tax
Court correctly held that said Section 51 (d), as amended, is not being applied
retroactively as contended by petitioner herein.
Moreover, the application of said Section 51 (d), as amended, in the cases at bar,
operated and worked in favor of petitioner-appellant, since instead of imposing the
rate of one per centum (1%) monthly interest prescribed in the old section 51 (e)
from the time the tax became due, i.e., from January 15, — 1955, 1956, 1957, 1958
and 1959, respectively, respondent Commissioner merely imposed the new ½%
monthly interest from January 20, 1959, which interests, as computed, are less than
what would be due under the old law.
With respect to the petitioner's contention that the application of the amended
provision (now Sec. 51-d of the Tax Code) to the cases at bar would run counter to
the constitutional restriction against the enactment of ex post facto laws, it is to be
noted that the collection of interest in these cases is not penal in nature, thus —
 the imposition of . . . interest is but a just compensation to the state for the
delay in paying the tax, and for the concomitant use by the taxpayer of TINGA, J.:
funds that rightfully should be in the government's hands (U.S. vs.
Goldstein, 189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp. 330; U.S. vs. This is a petition for the review of a consolidated Decision of the Former
Joffray, 97 Fed. [2d] 488). The fact that the interest charged is made Fourteenth Division of the Court of Appeals[1] ordering the Commissioner of Internal
proportionate to the period of delay constitutes the best evidence that such Revenue to award tax credits to Benguet Corporation in the amount corresponding to
interest is not penal but compensatory. (Castro vs. Collector of Internal the input value added taxes that the latter had incurred in relation to its sale of gold to
Revenue, G.R. No. L-12174, Resolution on Motion for Reconsideration, the Central Bank during the period of 01 August 1989 to 31 July 1991.
December 28, 1962)
and we had already held that — Petitioner is the Commissioner of Internal Revenue (petitioner) acting in his
The doctrine of unconstitutionality raised by appellant is based on the official capacity as head of the Bureau of Internal Revenue (BIR), an attached
prohibition against ex post facto laws. But this prohibition applies only to agency of the Department of Finance,[2] with the authority, inter alia, to determine
criminal or penal matters, and not to laws which concern civil matters or claims for refunds or tax credits as provided by law. [3]
proceedings generally, or which affect or regulate civil or private rights (Ex
parte Garland, 18 Law Ed., 366; 16 C.J.S., 889-891). (Republic vs. Oasan Respondent Benguet Corporation (respondent) is a domestic corporation
Vda. de Fernandez, 99 Phil. 934, 937). organized and existing by virtue of Philippine laws, engaged in the exploration,
Finally, section 13 of the amendatory Republic Act No. 2343 refers only to the basic development and operation of mineral resources, and the sale or marketing thereof to
tax rates, which are made applicable to income received in 1959 onward, but does various entities.[4] Respondent is a value added tax (VAT) registered enterprise. [5]
not affect the interest due on deficiencies, which are left to be governed by section 51
(d).
Wherefore, the decisions under review in G.R. No. L-23236 (CTA Case No. 1273)
and G.R. No. L-23254 (CTA Case No. 1278) should be, as they are hereby, affirmed.
With costs against petitioner-appellant Central Azucarera Don Pedro in both
instances. So ordered.
Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Castro,
JJ., concur. The transactions in question occurred during the period between 1988 and
Sanchez, J., took no part. 1991. Under Sec. 99 of the National Internal Revenue Code (NIRC), [6] as amended
by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person who, in the
course of trade or business, sells, barters or exchanges goods, renders services, or
COMMISSIONER OF G.R. Nos. 134587 & 134588 engages in similar transactions and any person who imports goods is liable for output
INTERNAL REVENUE, VAT at rates of either 10% or 0% (zero-rated) depending on the classification of the
Petitioner, Present: transaction under Sec. 100 of the NIRC. Persons registered under the VAT
system[7] are allowed to recognize input VAT, or the VAT due from or paid by it in
PUNO, J., the course of its trade or business on importation of goods or local purchases of
Chairman, goods or service, including lease or use of properties, from a VAT-registered
- versus - AUSTRIA-MARTINEZ, person.[8]
CALLEJO, SR.,
TINGA, and In January of 1988, respondent applied for and was granted by the BIR
CHICO-NAZARIO, JJ. zero-rated status on its sale of gold to Central Bank.[9] On 28 August 1988, Deputy
BENGUET CORPORATION, Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-
Respondent. 88, which declared that [t]he sale of gold to Central Bank is considered as export
Promulgated: sale subject to zero-rate pursuant to Section 100[[10]] of the Tax Code, as amended by
July 8, 2005 Executive Order No. 273. The BIR came out with at least six (6) other
x-------------------------------------------------------------------x issuances[11] reiterating the zero-rating of sale of gold to the Central Bank, the latest
of which is VAT Ruling No. 036-90 dated 14 February 1990.[12]
DECISION
 Relying on its zero-rated status and the above issuances, respondent sold
gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and
entered into transactions that resulted in input VAT incurred in relation to the subject
sales of gold. It then filed applications for tax refunds/credits corresponding to input
VAT for the amounts[13] of P46,177,861.12,[14]
[15] [16]
P19,218,738.44, and P84,909,247.96. Respondents applications were either
unacted upon or expressly disallowed by petitioner.[17] In addition, petitioner issued a
deficiency assessment against respondent when, after applying respondents
creditable input VAT costs against the retroactive 10% VAT levy, there resulted a
balance of excess output VAT.[18]
The express disallowance of respondents application for refunds/credits and
the issuance of deficiency assessments against it were based on a BIR ruling BIR
VAT Ruling No. 008-92 dated 23 January 1992 that was issued subsequent to the
consummation of the subject sales of gold to the Central Bank which provides that
sales of gold to the Central Bank shall not be considered as export sales and thus,
shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew,
modified, and superseded all inconsistent BIR issuances. The relevant portions of the
ruling provides, thus:
1. In general, for purposes of the term export sales only direct
export sales and foreign currency denominated sales, shall be
qualified for zero-rating.
....
4. Local sales of goods, which by fiction of law are considered
export sales (e.g., the Export Duty Law considers sales of gold to
the Central Bank of the Philippines, as export sale). This
transaction shall not be considered as export sale for VAT
purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent
herewith are considered withdrawn, modified or
superseded. (Emphasis supplied)
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue
Memorandum Order No. 22-92 which decreed that the revocation of VAT Ruling No.
3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining companies
and, thus, could be applied retroactively.[19]
Respondent filed three separate petitions for review with the Court of Tax
Appeals (CTA), docketed as CTA Case No. 4945, CTA Case No. 4627, and the
consolidated cases of CTA Case Nos. 4686 and 4829.
In the three cases, respondent argued that a retroactive application of BIR
VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC, which mandates the
non-retroactivity of rulings or circulars issued by the Commissioner of Internal
Revenue that would operate to prejudice the taxpayer. Respondent then discussed in
detail the manner and extent by which it was prejudiced by this retroactive
application.[20] Petitioner on the other hand, maintained that BIR VAT Ruling No.
008-92 is, firstly, not void and entitled to great respect, having been issued by the
body charged with the duty of administering the VAT law, and secondly, it may
validly be given retroactive effect since it was not prejudicial to respondent.
In three separate decisions,[21] the CTA dismissed respondents respective
petitions. It held, with Presiding Judge Ernesto D. Acosta dissenting, that no
prejudice had befallen respondent by virtue of the retroactive application of BIR
VAT Ruling No. 008-92, and that, consequently, the application did not violate Sec.
246 of the NIRC.[22]
The CTA decisions were appealed by respondent to the Court of Appeals.
The cases were docketed therein as CA-G.R. SP Nos. 37205, 38958, and 39435, and
thereafter consolidated. The Court of Appeals, after evaluating the arguments of the
parties, rendered the questioned Decision reversing the Court of Tax Appeals insofar
as the latter had ruled that BIR VAT Ruling No. 008-92 did not prejudice the
respondent and that the same could be given retroactive effect.
In its Decision, the appellate court held that respondent suffered financial
damage equivalent to the sum of the disapproved claims. It stated that had
respondent known that such sales were subject to 10% VAT, which rate was not the
prevailing rate at the time of the transactions, respondent would have passed on the
cost of the input taxes to the Central Bank. It also ruled that the remedies which the
CTA supposed would eliminate any resultant prejudice to respondent were not
sufficient palliatives as the monetary values provided in the supposed remedies do
not approximate the monetary values of the tax credits that respondent lost after the
implementation of the VAT ruling in question. It cited
Manila Mining Corporation v. Commissioner of Internal Revenue,[23] in which the
Court of Appeals held[24] that BIR VAT Ruling No. 008-92 cannot be given
retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the The
New Expanded VAT Law, reveals the intent of the lawmakers with regard to the
treatment of sale of gold to the Central Bank since the amended version therein of
Sec. 100 of the NIRC expressly provides that the sale of gold to the Bangko Sentral
ng Pilipinas is an export sale subject to 0% VAT rate. The appellate court thus
allowed respondents claims, decreeing in its dispositive portion, viz:
 WHEREFORE, the appealed decision is hereby REVERSED. The
respondent Commissioner of Internal Revenue is ordered to award the
following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 P49,611,914.00
2) in CA-G.R. SP No. 38958 - P19,218,738.44
3) in CA-G.R. SP No. 39435 - P84,909,247.96[25]
Dissatisfied with the above ruling, petitioner filed the instant Petition for
Review questioning the determination of the Court of Appeals that the retroactive
application of the subject issuance was prejudicial to respondent and could not be
applied retroactively.
Apart from the central issue on the validity of the retroactive application of
VAT Ruling No. 008-92, the question of the validity of the issuance itself has been
touched upon in the pleadings, including a reference made by respondent to a Court
of Appeals Decision holding that the VAT Ruling had no legal basis.[26] For its part,
as the party that raised this issue, petitioner spiritedly defends the validity of the
issuance.[27]Effectively, however, the question is a non-issue and delving into it
would be a needless exercise for, as respondent emphatically pointed out in
its Comment, unlike petitioners formulation of the issues, the only real issue in this
case is whether VAT Ruling No. 008-92 which revoked previous rulings of the
petitioner which respondent heavily relied upon . . . may be legally applied
retroactively to respondent.[28] This Court need not invalidate the BIR issuances,
which have the force and effect of law, unless the issue of validity is so crucially at
the heart of the controversy that the Court cannot resolve the case without having to
strike down the issuances. Clearly, whether the subject VAT ruling may validly be
given retrospective effect is the lis mota in the case. Put in another but specific
fashion, the sole issue to be addressed is whether respondents sale of gold to the
Central Bank during the period when such was classified by BIR issuances as zero-
rated could be taxed validly at a 10% rate after the consummation of the transactions
involved.
In a long line of cases,[29] this Court has affirmed that the rulings, circular,
rules and regulations promulgated by the Commissioner of Internal Revenue would
have no retroactive application if to so apply them would be prejudicial to the
taxpayers. In fact, both petitioner[30] and respondent[31] agree that the retroactive
application of VAT Ruling No. 008-92 is valid only if such application would not be
prejudicial to the respondent pursuant to the explicit mandate under Sec. 246 of the
NIRC, thus:
Sec. 246. Non-retroactivity of rulings.- Any revocation,
modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Section
or any of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers except
in the following cases: (a) where the taxpayer deliberately
misstates or omits material facts from his return on any document
required of him by the Bureau of Internal Revenue; (b) where the
facts subsequently gathered by the Bureau of Internal Revenue are
materially different form the facts on which the ruling is based; or
(c) where the taxpayer acted in bad faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be prejudiced
by a retroactive application; respondent maintains the contrary. Consequently, the
determination of the issue of retroactivity hinges on whether respondent would suffer
prejudice from the retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered
prejudice is a factual issue. It is an established rule that in the exercise of its power of
review, the Supreme Court is not a trier of facts. Moreover, in the exercise of the
Supreme Courts power of review, the findings of facts of the Court of Appeals are
conclusive and binding on the Supreme Court.[32] An exception to this rule is when
the findings of fact a quo are conflicting,[33] as is in this case.
VAT is a percentage tax imposed at every stage of the distribution process
on the sale, barter, exchange or lease of goods or properties and rendition of services
in the course of trade or business, or the importation of goods. [34] It is an indirect tax,
which may be shifted to the buyer, transferee, or lessee of the goods, properties, or
services.[35] However, the party directly liable for the payment of the tax is the
seller.[36]
In transactions taxed at a 10% rate, when at the end of any given taxable
quarter the output VAT exceeds the input VAT, the excess shall be paid to the
government; when the input VAT exceeds the output VAT, the excess would be
carried over to VAT liabilities for the succeeding quarter or quarters. [37] On the other
hand, transactions which are taxed at zero-rate do not result in any output tax. Input
VAT attributable to zero-rated sales could be refunded or credited against other
internal revenue taxes at the option of the taxpayer.[38]
To illustrate, in a zero-rated transaction, when a VAT-registered person
(taxpayer) purchases materials from his supplier at P80.00,P7.30[39] of which was
passed on to him by his supplier as the latters 10% output VAT, the taxpayer is
allowed to recover P7.30 from the BIR, in addition to other input VAT he had
incurred in relation to the zero-rated transaction, through tax credits or refunds.
When the taxpayer sells his finished product in a zero-rated transaction, say,
for P110.00, he is not required to pay any output VAT thereon. In the case of a
transaction subject to 10% VAT, the taxpayer is allowed to recover both the input
VAT of P7.30 which he paid to his supplier and his output VAT of P2.70 (10%
the P30.00 value he has added to the P80.00 material) by passing on both costs to the
buyer. Thus, the buyer pays the total 10% VAT cost, in this case P10.00 on the
product.
In both situations, the taxpayer has the option not to carry any VAT cost
because in the zero-rated transaction, the taxpayer is allowed to recover input tax
from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer
is allowed to pass on both input and output VAT to the buyer. Thus, there is an
elemental similarity between the two types of VAT ratings in that the taxpayer has
the option not to take on any VAT payment for his transactions by simply exercising
his right to pass on the VAT costs in the manner discussed above.
Proceeding from the foregoing, there appears to be no upfront economic
difference in changing the sale of gold to the Central Bank from a 0% to 10% VAT
rate provided that respondent would be allowed the choice to pass on its VAT costs
to the Central Bank. In the instant case, the retroactive application of VAT Ruling
No. 008-92 unilaterally forfeited or withdrew this option of respondent. The adverse
effect is that respondent became the unexpected and unwilling debtor to the BIR of
the amount equivalent to the total VAT cost of its product, a liability it previously
could have recovered from the BIR in a zero-rated scenario or at least passed on to
the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is
clear that respondent suffered economic prejudice when its consummated sales of
gold to the Central Bank were taken out of the zero-rated category. The change in the
VAT rating of respondents transactions with the Central Bank resulted in the twin
loss of its exemption from payment of output VAT and its opportunity to recover
input VAT, and at the same time subjected it to the 10% VAT sans the option to pass
on this cost to the Central Bank, with the total prejudice in money terms being
equivalent to the 10% VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that the
deficiency 10% that may be assessable will only be equal to 1/11thof the amount
billed to the [Central Bank] rather than 10% thereof. In short, [respondent] may
only be charged based on the tax amount actually and technically passed on to the
[Central Bank] as part of the invoiced price.[40] To the Court, the aforequoted
statement is a clear recognition that respondent would suffer prejudice in the amount
actually and technically passed on to the [Central Bank] as part of the invoiced price.
In determining the prejudice suffered by respondent, it matters little how the amount
charged against respondent is computed,[41] the point is that the amount (equal to
1/11th of the amount billed to the Central Bank) was charged against respondent,
resulting in damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No.
008-92 is stripped of any prejudicial effect when viewed in relation to several
available options to recoup whatever liabilities respondent may have incurred, i.e.,
respondents input VAT may still be used (1) to offset its output VAT on the sales of
gold to the Central Bank or on its output VAT on other sales subject to 10% VAT,
and (2) as deductions on its income tax under Sec. 29 of the Tax Code. [42]
On petitioners first suggested recoupment modality, respondent counters
that its other sales subject to 10% VAT are so minimal that this mode is of little
value. Indeed, what use would a credit be where there is nothing to set it off against?
Moreover, respondent points out that after having been imposed with 10%
VAT sans the opportunity to pass on the same to the Central Bank, it was issued a
deficiency tax assessment because its input VAT tax credits were not enough to
offset the retroactive 10% output VAT. The prejudice then experienced by
respondent lies in the fact that the tax refunds/credits that it expected to receive had
effectively disappeared by virtue of its newfound output VAT liability against which
petitioner had offset the expected refund/credit. Additionally, the prejudice to
respondent would not simply disappear, as petitioner claims, when a liability (which
liability was not there to begin with) is imposed concurrently with an opportunity to
reduce, not totally eradicate, the newfound liability. In sum, contrary to petitioners
suggestion, respondents net income still decreased corresponding to the amount it
expected as its refunds/credits and the deficiency assessments against it, which when
summed up would be the total cost of the 10% retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its
income taxes for the relevant years, the input VAT cost that respondent had paid to
its suppliers was not treated by respondent as part of its cost of goods sold, which is
deductible from gross income for income tax purposes, but as an asset which could
be refunded or applied as payment for other internal revenue taxes. In fact, Revenue
Regulation No. 5-87 (VAT Implementing Guidelines), requires input VAT to be
recorded not as part of the cost of materials or inventory purchased but as a separate
entry called input taxes, which may then be applied against output VAT, other
internal revenue taxes, or refunded as the case may be. [43] In being denied the
opportunity to deduct the input VAT from its gross income, respondents net income
was overstated by the amount of its input VAT. This overstatement was assessed tax
at the 32% corporate income tax rate, resulting in respondents overpayment of
income taxes in the corresponding amount. Thus, respondent not only lost its right to
refund/ credit its input VAT and became liable for deficiency VAT, it also overpaid
its income tax in the amount of 32% of its input VAT.
This leads us to the second recourse that petitioner has suggested to offset
any resulting prejudice to respondent as a consequence of giving retroactive effect to
BIR VAT Ruling No. 008-92. Petitioner submits that granting that respondent has no
other sale subject to 10% VAT against which its input taxes may be used in payment,
then respondent is constituted as the final entity against which the costs of the
tax passes-onshall legally stop; hence, the input taxes may be converted as costs
available as deduction for income tax purposes.[44]
Even assuming that the right to recover respondents excess payment of
income tax has not yet prescribed, this relief would only address respondents
overpayment of income tax but not the other burdens discussed above. Verily, this
remedy is not a feasible option for respondent because the very reason why it was
issued a deficiency tax assessment is that its input VAT was not enough to offset its
retroactive output VAT. Indeed, the burden of having to go through an unnecessary
and cumbersome refund process is prejudice enough. Moreover, there is in fact
nothing left to claim as a deduction from income taxes.
From the foregoing it is clear that petitioners suggested options by which
prejudice would be eliminated from a retroactive application of VAT Ruling No.
008-92 are either simply inadequate or grossly unrealistic.
At the time when the subject transactions were consummated, the prevailing
BIR regulations relied upon by respondent ordained that gold sales to the Central
Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2
of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be
considered export and therefore shall be subject to the export and premium duties. In
coming out with this interpretation, the BIR also considered Sec. 169 of Central
Bank Circular No. 960 which states that all sales of gold to the Central Bank are
considered
constructive exports.[45] Respondent should not be faulted for relying on the BIRs
interpretation of the said laws and regulations.[46] While it is true, as petitioner
alleges, that government is not estopped from collecting taxes which remain unpaid
on account of the errors or mistakes of its agents and/or officials and there could be
no vested right arising from an erroneous interpretation of law, these principles must
give way to exceptions based on and in keeping with the interest of justice and
fairplay, as has been done in the instant matter. For, it is primordial that every person
must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.[47]
The case of ABS-CBN Broadcasting Corporation v. Court of Tax
Appeals[48] involved a similar factual milieu. There the Commissioner of Internal
Revenue issued Memorandum Circular No. 4-71 revoking an earlier circular for
being erroneous for lack of legal basis. When the prior circular was still in effect,
petitioner therein relied on it and consummated its transactions on the basis thereof.
We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due
from foreign corporations because it had already remitted all film
rentals and no longer had any control over them when the new
Circular was issued. . . .
....
This Court is not unaware of the well-entrenched
principle that the [g]overnment is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. But,
like other principles of law, this also admits of exceptions in the
interest of justice and fairplay. . . .In fact, in the United States, . . .
it has been held that the Commissioner [of Internal Revenue] is
precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or where
there has been a misrepresentation to the taxpayer.[49]
Respondent, in this case, has similarly been put on the receiving end of a
grossly unfair deal. Before respondent was entitled to tax refunds or credits based on
petitioners own issuances. Then suddenly, it found itself instead being made to pay
deficiency taxes with petitioners retroactive change in the VAT categorization of
respondents transactions with the Central Bank. This is the sort of unjust treatment of
a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court
of Appeals is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
COMMISSIONER OF G.R. No. 153205
INTERNAL REVENUE,
Petitioner, Present:
QUISUMBING, J.
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
BURMEISTER AND WAIN VELASCO, JR., JJ.
SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated:
Respondent.
January 22, 2007
x----------------------------------------------------------------------------------------x
DECISION
CARPIO, J.:
The Case
This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the
Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August
2001 Decision[3] of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal address located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium
composed of Burmeister and Wain Scandinavian Contractor A/S
(BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and
Mitsui and Co., Ltd. entered into a contract with the National
Power Corporation (NAPOCOR) for the operation and
maintenance of [NAPOCORs] two power barges. The Consortium
appointed BWSC-Denmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the
actual operation and maintenance of NAPOCORs two power
barges as well as the performance of other duties and acts which
necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a
mixture of currencies (Mark, Yen, and Peso). The freely
convertible non-Peso component is deposited directly to the
Consortiums bank accounts in Denmark and Japan, while the Peso-
denominated component is deposited in a separate and special
designated bank account in the Philippines. On the other hand, the
Consortium pays [respondent] in foreign currency inwardly
remitted to the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions,
[respondent] sought a ruling from the BIR which responded with
BIR Ruling No. 023-95 dated February 14, 1995, declaring therein
that if [respondent] chooses to register as a VAT person and the
consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas, the aforesaid
services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26,
1995, the Certificate of Registration bearing RDO Control No. 95-
113-007556 was issued in favor of [respondent] by the Revenue
District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly
Value-Added Tax Returns reflecting, among others, a total zero-
rated sales of P147,317,189.62 with VAT input taxes
of P3,361,174.14, detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
---------------------------------------------------------------------------------
-
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14
On December 29, 1997, [respondent] availed of the Voluntary
Assessment Program (VAP) of the BIR. It allegedly misinterpreted
Revenue Regulations No. 5-96 dated February 20, 1996 to be
applicable to its case. Revenue Regulations No. 5-96 provides in
part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of
Revenue Regulations No. 7-95 are hereby
amended to read as follows:
 Section 4.102-2(b)(2) Services other than
processing, manufacturing or repacking for other
persons doing business outside the Philippines
for goods which are subsequently exported, as
well as services by a resident to a non-resident
foreign client such as project studies,
information services, engineering and
architectural designs and other similar services,
the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
BSP.
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations,
[respondent] subjected its sale of services to the Consortium to the
10% VAT in the total amount of P103,558,338.11 representing
April to December 1996 sales since said Revenue Regulations No.
5-96 became effective only on April 1996. The sum
of P43,893,951.07, representing January to March 1996 sales was
subjected to zero rate. Consequently, [respondent] filed its 1996
amended VAT return consolidating therein the VAT output and
input taxes for the four calendar quarters of 1996. It paid the
amount of P6,994,659.67 through BIRs collecting agent, PCIBank,
as its output tax liability for the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling
No. 003-99 from the VAT Review Committee which reconfirmed
BIR Ruling No. 023-95 insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%).
On the strength of the aforementioned rulings, [respondent]
on April 22,1999, filed a claim for the issuance of a tax credit
certificate with Revenue District No. 113 of the BIR. [Respondent]
believed that it erroneously paid the output VAT for 1996 due to
its availment of the Voluntary Assessment Program (VAP) of the
BIR.[4]
On 27 December 1999, respondent filed a petition for review with the CTA in order
to toll the running of the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit
certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated:
[Respondents] sale of services to the Consortium [was] paid for in
acceptable foreign currency inwardly remitted to the Philippines
and accounted for in accordance with the rules and regulations
of Bangko Sentral ng Pilipinas. These were established by various
BPI Credit Memos showing remittances in Danish Kroner (DKK)
and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were further
certified by the Branch Manager x x x of BPI-
Davao Lanang Branch to represent payments for sub-contract fees
that came from Den Danske Aktieselskab Bank-Denmark for the
account of [respondent]. Clearly, [respondents] sale of services to
the Consortium is subject to VAT at 0% pursuant to Section
108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium
was even confirmed by the [petitioner] in BIR Ruling No. 023-95
dated February 15, 1995, and later by VAT Ruling No. 003-99
dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows
that it mistakenly availed of the Voluntary Assessment Program by
paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires
the return of what has been delivered by mistake, the [petitioner] is
obligated to issue the tax credit certificate prayed for by
[respondent]. x x x[5]
Petitioner filed a petition for review with the Court of Appeals, which dismissed the
petition for lack of merit and affirmed the CTA decision. [6]
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that
since respondents services are not destined for consumption abroad, they are not of
the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-2(b)(2)
of Revenue Regulations No. 5-96[7] as subject to 0% VAT. Thus, according to
petitioner, respondents services cannot legally qualify for 0% VAT but are subject to
the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT Ruling
No. 040-98, respondents services should be destined for consumption abroad to
enjoy zero-rating. Contrary to petitioners interpretation, there are two kinds of
transactions or services subject to zero percent VAT under VAT Ruling No. 040-
98. These are (a) services other than repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported; and (b)
services by a resident to a non-resident foreign client, such as project studies,
information services, engineering and architectural designs and other similar services,
the consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).[9]
The Court of Appeals stated that only the first classification is required by the
provision to be consumed abroad in order to be taxed at zero rate. In x x x the
absence of such express or implied stipulation in the statute, the second classification
need not be consumed abroad.[10]
The Court of Appeals further held that assuming petitioners interpretation of Section
4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative
provision is void being an amendment to the Tax Code. Petitioner went beyond
merely providing the implementing details by adding another requirement to zero-
rating. This is indicated by the additional phrase as well as services by a resident to a
non-resident foreign client, such as project studies, information services and
engineering and architectural designs and other similar services. In effect, this phrase
adds not just one but two requisites: (a) services must be rendered by a resident to a
non-resident; and (b) these must be in the nature of project studies, information
services, etc.[11]
The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,[12] for
services which were performed in the Philippines to enjoy zero-rating, these must
comply only with two requisites, to wit: (1) payment in acceptable foreign currency
and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of
the Tax Code does not provide that services must be destined for consumption
abroad in order to be VAT zero-rated.[13]
The Court of Appeals disagreed with petitioners argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports
taxable).[14] The Court of Appeals stated that if indeed the destination
principle underlies and is the basis of the VAT laws, then petitioners proper remedy
would be to recommend an amendment of Section 108(b)(2) to Congress. Without
such amendment, however, petitioner should apply the terms of the basic law.
Petitioner could not resort to administrative legislation, as what [he] had done in this
case.[15]
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996. [16]
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not on the
ground that respondents services are subject to 0% VAT. Rather, it is based on the
non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95[17] and VAT
Ruling No. 003-99,[18] which held that respondents services are subject to 0% VAT
and which respondent invoked in applying for refund of the output VAT.
Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when respondent
rendered the services and paid the VAT in question, enumerates which services are
zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services
performed in the Philippines by VAT-registered persons shall be
subject to 0%:
(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
 (2) Services other than those mentioned in the preceding
sub-paragraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which
the Philippines is a signatory effectively subjects the supply of
such services to zero rate;
(4) Services rendered to vessels engaged exclusively in
international shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceed seventy percent (70%) of
total annual production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it complied
with the requirements of the Tax Code for zero rating under the second paragraph of
Section 102(b). Respondent asserts that (1) the payment of its service fees was in
acceptable foreign currency, (2) there was inward remittance of the foreign currency
into the Philippines, and (3) accounting of such remittance was in accordance with
BSP rules. Moreover, respondent contends that its services which constitute the
actual operation and management of two (2) power barges in Mindanao are not even
remotely similar to project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96.
As such, respondents services need not be destined to be consumed abroad in order
to be VAT zero-rated.
Respondent is mistaken.
The Tax Code not only requires that the services be other than processing,
manufacturing or repacking of goods and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essential condition for qualification to zero-rating under Section 102(b)(2) is that
the recipient of such services is doing business outside the Philippines. While this
requirement is not expressly stated in the second paragraph of Section 102(b), this is
clearly provided in the first paragraph of Section 102(b) where the listed services
must be for other persons doing business outside the Philippines. The phrase for
other persons doing business outside the Philippines not only refers to the services
enumerated in the first paragraph of Section 102(b), but also pertains to the general
term services appearing in the second paragraph of Section 102(b). In short, services
other than processing, manufacturing, or repacking of goods must likewise be
performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the
provider and recipient of the other services are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the regular
VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment
in foreign currency inwardly remitted by the recipient of services. To interpret
Section 102(b)(2) to apply to a payer-recipient of services doing business in the
Philippines is to make the payment of the regular VAT under Section 102(a)
dependent on the generosity of the taxpayer. The provider of services can choose to
pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly
remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax
measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in acceptable foreign currency
under BSP rules, the law clearly envisions the payer-recipient of services to be doing
business outside the Philippines. Only those not doing business in the Philippines can
be required under BSP rules[20] to pay in acceptable foreign currency for their
purchase of goods or services from the Philippines. In a domestic transaction, where
the provider and recipient of services are both doing business in the Philippines, the
BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export
sales since the payer-recipient of services is doing business outside the
Philippines. Under BSP rules,[21] the proceeds of export sales must be reported to
the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency
proceeds to the BSP. The same rationale does not apply if the provider and recipient
of the services are both doing business in the Philippines since their transaction is not
in the nature of an export sale even if payment is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business
in the Philippines, their transaction falls squarely under Section 102(a)
governing domesticsale or exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of course the transaction
falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of [s]ervices other than those
mentioned in the preceding subparagraph, the legislative intent is that only the
services are different between subparagraphs 1 and 2. The requirements for zero-
rating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are [s]ervices other than those mentioned in the [first]
paragraph [of Section 108(b)] rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not engaged in business who
is outside the Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP.
In this case, the payer-recipient of respondents services is the Consortium which is a
joint-venture doing business in the Philippines. While the Consortiums principal
members are non-resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which
states that the contract between the Consortium and NAPOCOR is for a 15-year
term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a
consortium composed of Burmeister & Wain Scandinavian
Contractor A/S (BWSC), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. (MITSUI), all referred to
hereinafter as the Consortium, and the National Power Corporation
(NAPOCOR) for the operation and maintenance of two 100-
Megawatt power barges (Power Barges) acquired by
NAPOCOR for a 15-year term.[23] (Emphasis supplied)
Considering this length of time, the Consortiums operation and
maintenance of NAPOCORs power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which requires
that the recipient of the services must be a person doing business outside the
Philippines. Therefore, respondents services to the Consortium, not being supplied to
a person doing business outside the Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and
maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the
Consortium, through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This payment scheme does
not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal
Revenue v. American Express International, Inc. (Philippine Branch),[24] the place of
payment is immaterial, much less is the place where the output of the service is
ultimately used. An essential condition for entitlement to 0% VAT under Section
102(b)(1) and (2) is that the recipient of the services is a person doing business
outside the Philippines. In this case, the recipient of the services is the
Consortium, which is doing business not outside, but within the Philippines
because it has a 15-year contract to operate and maintain NAPOCORs two 100-
megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the
destination principle (exports are zero-rated whereas imports are taxed). However, as
the Court stated in American Express, there is an exception to this rule.[25] This
exception refers to the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by Section 102(b)(1) and (2), the
recipient of the services must be a person doing business outside the
Philippines. Thus, to be exempt from the destination principle under Section
102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a
person doing business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.
Respondents reliance on the ruling in American Express[26] is misplaced. That case
involved a recipient of services, specifically American Express International, Inc.
(HongkongBranch), doing business outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine
Branch)] is a VAT-registered person that facilitates the collection
and payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)],
for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with BSP rules and
regulations. x x x x[27] (Emphasis supplied)
In contrast, this case involves a recipient of services the Consortium which is doing
business in the Philippines. Hence, American Express services were subject to 0%
VAT, while respondents services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT
Ruling No. 003-99,[28] which reconfirmed BIR Ruling No. 023-95[29] insofar as it
held that the services being rendered by BWSCMI is subject to VAT at zero percent
(0%). Respondents reliance on these BIR rulings binds petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim for
refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling
No. 023-95. However, such revocation cannot be given retroactive effect since it will
prejudice respondent. Changing respondents status will deprive respondent of a
refund of a substantial amount representing excess output tax. [30] Section 246 of the
Tax Code provides that any revocation of a ruling by the Commissioner of Internal
Revenue shall not be given retroactive application if the revocation will prejudice the
taxpayer. Further, there is no showing of the existence of any of the exceptions
enumerated in Section 246 of the Tax Code for the retroactive application of such
revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA
contesting respondents claim for refund, respondents services shall be subject to the
regular 10% VAT.[31] Such filing is deemed a revocation of VAT Ruling No. 003-99
and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
G.R. No. L-29485 November 21, 1980
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF
TAX APPEALS, respondents.
TEEHANKEE, J.:
Before the Court is petitioner Commissioner of Internal Revenue's motion for
reconsideration of the Court's decision of April 8, 1976 wherein the Court affirmed
in toto the appealed decision of respondent Court of Tax Appeals, the dispositive
portion of which provides as follows:
WHEREFORE, the decision of the respondent Commissioner of
Internal Revenue assessing petitioner the amount of P758,687.04
as 25% surtax and interest is reversed. Accordingly, said
assessment of respondent for 1955 is hereby cancelled and
declared of no force and effect, Without pronouncement as to costs.
This Court's decision under reconsideration held that the assessment made on
February 21, 1961 by petitioner against respondent corporation (and received by the
latter on March 22, 1961) in the sum of P758,687.04 on its surplus of P2,758,442.37
for its fiscal year ending September 30, 1955 fell under the five-year prescriptive
period provided in section 331 of the National Internal Revenue Code and that the
assessment had, therefore, been made after the expiration of the said five-year
prescriptive period and was of no binding force and effect .
Petitioner has urged that
A perusal of Sections 331 and 332(a) will reveal that they refer to a
tax, the basis of which is required by law to be reported in a return
such as for example, income tax or sales tax. However, the surtax
imposed by Section 25 of the Tax Code is not one such tax.
Accumulated surplus are never returned for tax purposes, as there
is no law requiring that such surplus be reported in a return for
purposes of the 25% surtax. In fact, taxpayers resort to all means
and devices to cover up the fact that they have unreasonably
accumulated surplus.
Petitioner, therefore, submits that
As there is no law requiring taxpayers to file returns of their
accumulated surplus, it is obvious that neither Section 33 nor
Section 332(a) of the Tax Code applies in a case involving the 25%
surtax imposed by Section 25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case of United
Equipment & Supply Company vs. Commissioner of Internal Revenue (CTA Case No.
1795, October 30, 1971) which was appealed by petitioner taxpayer to this Court in
G. R. No. L-35653 bearing the same title, which appeal was denied by this Court en
banc for lack of merit as per its Resolution of October 25, 1972, In said case, the tax
court squarely ruled that the provisions of sections 331 and 332 of the National
Internal Revenue Code for prescriptive periods of five 5 and ten (10) years after the
filing of the return do not apply to the tax on the taxpayer's unreasonably
accumulated surplus under section 25 of the Tax Code since no return is required to
be filed by law or by regulation on such unduly ac cumulated surplus on earnings,
reasoning as follows:
In resisting the assessment amounting to P10,864.26 as accumulated earnings tax for
1957, petitioner also invoked the defense of prescription against the right of
respondent to assess the said tax. It is contended that since its income tax return for
1957 was filed in 1958, and with the clarification by respondent in his letter dated
May 14, 1963, that the amount sought to be collected was petitioner's surtax liability
under Section 25 rather than deficiency corporate income tax under Section 24 of the
National Internal Revenue Code, the assessment has already prescribed under
Section 331 of the same Code.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and collection. —
Except as provided in the succeeding section, internal revenue
taxes shall be assessed within five years after the return was filed,
and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period. For
the purpose of this section a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed
on such last day; Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.
Obviously, Section 331 applies to, assessment of National Internal
Revenue Taxes which requires the filing of returns. A return, the
filing of which is necessary to start the running of tile five-year
period for making an assessment, must be one which is required
for the particular tax. Consequently, it has been held that the filing
of an income tax return does not start the running of the statute of
limitation for assessment of the sales tax. (Butuan Sawmill, Inc. v.
Court of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA
277).
Although petitioner filed an income tax return, no return was filed
covering its surplus profits which were improperly accumulated. In
fact, no return could have been filed, and the law could not
possibly require, for obvious reasons, the filing of a return
covering unreasonable accumulation of corporate surplus profits. A
tax imposed upon unreasonable accumulation of surplus is in the
nature of a penalty. (Helvering v. National Grocery Co., 304 U.S.
282). It would not be proper for the law to compel a corporation to
report improper accumulation of surplus. Accordingly, Section 331
limiting the right to assess internal revenue taxes within five years
from the date the return was filed or was due does not apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment and
collection of taxes.— (a) In the case of a false or fraudulent return
with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud, or omission.
(b) Where before the expiration of the time
prescribed in the preceding section for the
assessment of the tax, both the Commissioner of
Internal Revenue and the taxpayer have
consented in writing to its assessment after such
time, the tax may be assessed at any time prior to
the expiration of the period agreed upon. The
period so agreed upon may be extended by
subsequent agreements in writing made before
the expiration of the period previously agreed
upon.
(c) Where the assessment of any internal revenue
tax has been made within the period of limitation
above-prescribed such tax may be collected by
distraint or levy by a proceeding in court, but
only if begun (1) within five years after the
assessment of the tax, or (2) prior to the
expiration of any period for collection agreed
upon in writing by the Commissioner of Internal
Revenue and the taxpayer before the expiration
of such five-year period. The period so agreed
upon may be extended by subsequent agreements
in writing made before the expiration of the
period previously agreed upon.
It will be noted that Section 332 has reference to national internal
revenue taxes which require the filing of returns. This is implied,
from the provision that the ten-year period for assessment specified
therein treats of the filing of a false or fraudulent return or of a
failure to file a return. There can be no failure or omission to file a
return where no return is required to be filed by law or by
regulation. It is, therefore, our opinion that the ten-year period for
making in assessment under Section 332 does not apply to internal
revenue taxes which do not require the filing of a return.
It is well settled limitations upon the right of the government to
assess and collect taxes will not be presumed in the absence of
clear legislation to the contrary. The existence of a time limit
beyond which the government may recover unpaid taxes is purely
dependent upon some express statutory provision, (51 Am. Jur.
867; 10 Mertens Law of Federal Income Taxation, par. 57. 02.). It
follows that in the absence of express statutory provision, the right
of the government to assess unpaid taxes is imprescriptible. Since
there is no express statutory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25 of the
Revenue Code, said tax may be assessed at any time. (Emphasis
supplied)
Such ruling was in effect upheld by this Court en banc upon its dismissal of the
taxpayer's appeal for lack of merit as above stated.
The Court is persuaded by the fundamental principle invoked by petitioner that
limitations upon the right of the government to assess and collect taxes will not be
presumed in the absence of clear legislation to the contrary and that where the
government has not by express statutory provision provided a limitation upon its
right to assess unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under reconsideration that
the right to assess and collect the assessment in question had prescribed after five
years, and instead rules that there is no such time limit on the right of the
Commissioner of Internal Revenue to assess the 25% tax on unreasonably
accumulated surplus provided in section 25 of the Tax Code, since there is no
express statutory provision limiting such right or providing for its prescription. The
underlying purpose of the additional tax in question on a corporation's improperly
accumulated profits or surplus is as set forth in the text of section 25 of the Tax Code
itself 1 to avoid the situation where a corporation unduly retains its surplus instead of
declaring and paving dividends to its shareholders or members who would then have
to pay the income tax due on such dividends received by them. The record amply
shows that respondent corporation is a mere holding company of its shareholders
through its mother company, a registered co-partnership then set up by the individual
shareholders belonging to the same family and that the prima facie evidence and
presumption set up by the Tax Code, therefore applied without having been
adequately rebutted by the respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, testified before the
court as follows:
Atty. Garces
The investigation, Your Honor, shows that for
the year 1955, the Ayala Securities Corporation
had 175,000 outstanding shares of stock and out
of these shares of Ayala Securities Corporation,
the Ayala and Company owned 174,996 shares
of stock.
Q. Is that right, Mr. Cabral?
Atty. Ong
Objection, Your Honor, on the
materiality of the question.
Judge Alvarez
What is the materiality of the
question?
Atty. Garces
We want to prove to this honorable Court that
Ayala Securities Corporation is a holding or
investment company, the parent company being
Ayala and Company.
Judge Alvarez
Witness may answer.
A. I think so; yes.
Q. And Ayala and Company's owned almost
wholly by the Zobel Family and the Ayala
Family?
Atty. Ong
If Your Honor please, objection again on the
materiality. What would counsel for the
respondent prove on this point?
Atty. Garces
Same purpose, Your If Honor to prove that
Ayala Securities corporation is a mere
investment or holding company
Atty. Ong
What is the materiality of the case if it is a mere
investment company. In fact, we are here in court
to prove the reasonableness or unreasonableness
of the accumulation of profit. I think counsel for
the respondent is trying to harp on presumption;
but actually we will not be delving on
presumption but on actual facts proving the
reasonableness of the accumulation based on
actual evidence.
Judge Alvarez
In order to determine the reasonableness or
unreasonableness, there must be a basis. witness
will have to answer the question.
A. Yes.
xxx xxx xxx
Q. As of September 30, 1955 when the Ayala
Securities Corporation tiled its income tax return,
were the officers of the Ayala Securities
Corporation and the Ayala and Company housed
in the same building?
A. Yes, sir; they were.
Q. And also are the employees of the Ayala
Securities corporation and the Ayala and
Company the same - meaning that the employees
of the Ayala Securities Corporation are also the
employees of the Ayala and Company?
A. At the time, if I remember right, Ayala and
Company was the operating company and the
employees were the employees of the Ayala and
Company; (t.s.n., pp. 32-37).
Another witness, Mr. Salvador J. Lorayes the Secretary and head of the Legal
Department of the corporation, also testified that:
Judge Alvarez questions
Q. May we know from you whether Ayala
Securities corporation is an affiliate of Ayala and
Company?
A. Yes, Your honor.
Q. Do we understand from you that Ayala and
Company is the mother corporation of this
affiliate?
A. That is correct.
Q. And that the policy of Ayala Securities
Corporation is practically governed by the
officers or partners of Ayala and company
A. They have a strong influence over the policy
of Ayala Securities Corporation.
Q. So that whatever is decided by the partners of
Ayala and Company for a certain investment or
project would also be followed by Ayala
Securities Corporation?
A. If the project is assigned to Ayala Securities
Corporation it will be followed by Ayala
Securities Corporation; if to another affiliate, no
(t.s.n., pp. 149-150). ...
Respondent corporation was therefore fully shown to fall under Revenue Regulation
No. 2 implementing the provisions of the income tax law which provides on holding
and investment companies that
SEC. 20. Holding and Investment Companies. — A corporation
having practically no activities except holding property, and
collecting the income therefrom or investing therein, shall be
considered a holding company within the meaning of section 25.
Petitioner commissioner's plausible alternative contention is that even if the 25%
surtax were to be deemed subject to prescription, computed from the filing of the
income tax return in 1955, the intent to evade payment of the surtax is an inherent
quality of the violation and the return filed must necessarily partake of a false and/or
fraudulent character which would make applicable the 10-year prescriptive period
provided in section 332(a) of the Tax Code and since the assessment was made in
1961 (the sixth year), the assessment was clearly within the 10-year prescriptive
period. The Court sees no necessity, however, for ruling on this point in view of its
adherence to the ruling in the earlier raise of United Equipment & Supply
Co., supra, holding that the 25% surtax is not subject to any statutory prescriptive
period.
ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu
thereof, judgment is hereby rendered ordering respondent corporation to pay the
assessment in the sum of P758,687.04 as 25% surtax on its unreasonably
accumulated surplus, plus the 5% surcharge and 1% monthly interest thereon,
pursuant to section 51 (e) of the National Internal Revenue Code, as amended by R.
A. 2343. With Costs.
Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.
Melencio-Herrera, J., took no part.
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES,
INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol
and Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes
for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil
Case No. 3294, which was certified to Us by the Court of Appeals on October 6,
1969, as involving only pure questions of law, challenging the power of taxation
delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264,
as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the
Court of First Instance of Leyte for that court to declare Section 2 of Republic Act
No. 2264.1 otherwise known as the Local Autonomy Act, unconstitutional as an
undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27,
series of 1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions
of which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein are practically the same,
and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan,
Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in
said municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September
25, 1962, levies and collects "from soft drinks producers and manufacturers a tai of
one-sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the
purpose of computing the taxes due, the person, firm, company or corporation
producing soft drinks shall submit to the Municipal Treasurer a monthly report, of
the total number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28,
1962, levies and collects "on soft drinks produced or manufactured within the
territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing
the taxes due, the person, fun company, partnership, corporation or plant producing
soft drinks shall submit to the Municipal Treasurer a monthly report of the total
number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment
"dismissing the complaint and upholding the constitutionality of [Section 2, Republic
Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering
the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the
costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court
of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the
Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of
power, confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and
impose percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent government, without being
expressly conferred by the people. 6 It is a power that is purely legislative and which
the central legislative body cannot delegate either to the executive or judicial
department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to which,
said theory does not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. 7 This is sanctioned by
immemorial practice. 8 By necessary implication, the legislative power to create
political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax. 9 Under the New
Constitution, local governments are granted the autonomous authority to create their
own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of revenue and to levy
taxes, subject to such limitations as may be provided by law." Withal, it cannot be
said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of
the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-
appellant's pretense, would not suffice to invalidate the said law as confiscatory and
oppressive. In delegating the authority, the State is not limited 6 the exact measure of
that which is exercised by itself. When it is said that the taxing power may be
delegated to municipalities and the like, it is meant that there may be delegated such
measure of power to impose and collect taxes as the legislature may deem expedient.
Thus, municipalities may be permitted to tax subjects which for reasons of public
policy the State has not deemed wise to tax for more general purposes. 10 This is not
to say though that the constitutional injunction against deprivation of property
without due process of law may be passed over under the guise of the taxing power,
except when the taking of the property is in the lawful exercise of the taxing power,
as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection of certain kinds
of taxes notice and opportunity for hearing are provided. 11 Due process is usually
violated where the tax imposed is for a private as distinguished from a public
purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation;
and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a
tax does not violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the
amount of tax to be raised should be determined by judicial inquiry, and a notice and
hearing as to the amount of the tax and the manner in which it shall be apportioned
are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the
delegating authority specifies the limitations and enumerates the taxes over which
local taxation may not be exercised. 13 The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double taxation, in general, is
not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and
some states of the Union.14 Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the
same jurisdiction for the same purpose, 16 but not in a case where one tax is imposed
by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As earlier quoted,
Ordinance No. 23, which was approved on September 25, 1962, levies or collects
from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo
for .every bottle corked, irrespective of the volume contents of the bottle used. When
it was discovered that the producer or manufacturer could increase the volume
contents of the bottle and still pay the same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
difference between the two ordinances clearly lies in the tax rate of the soft drinks
produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in
Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.)
of volume capacity. The intention of the Municipal Council of Tanauan in enacting
Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior
Ordinance No. 23, and operates as a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only
seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts
confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6
compel compliance by the plaintiff-appellant of the provisions of said Ordinance No.
27, series of 1962. The aforementioned admission shows that only Ordinance No. 27,
series of 1962 is being enforced by defendants-appellees. Even the Provincial Fiscal,
counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No.
27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are
inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend
to almost "everything, accepting those which are mentioned therein." As long as the
text levied under the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within the ambit of the general
rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the prohibition against
municipalities and municipal districts to impose "any percentage tax or other taxes in
any form based thereon nor impose taxes on articles subject to specific tax except
gasoline, under the provisions of the National Internal Revenue Code." For purposes
of this particular limitation, a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of the taxpayer imposes a sales
tax and is null and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured
under Ordinance No. 27 does not partake of the nature of a percentage tax on sales,
or other taxes in any form based thereon. The tax is levied on the produce (whether
sold or not) and not on the sales. The volume capacity of the taxpayer's production of
soft drinks is considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and the amount of the
tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed
on specified articles, such as distilled spirits, wines, fermented liquors, products of
tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and
other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards,
saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those
specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity
on all softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per
case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would
not support the claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates of imposable
taxes. 25 This is in line with the constutional policy of according the widest possible
autonomy to local governments in matters of local taxation, an aspect that is given
expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount
is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as
unreasonable. 27 Reluctance should not deter compliance with an ordinance such as
Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were
to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not
more than ten crowners or P2,000.00 with ten but not more than twenty crowners
imposed on manufacturers, producers, importers and dealers of soft drinks and/or
mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance
No. 41, series of 1968, of defendant Municipality, 29 appears not to affect the
resolution of the validity of Ordinance No. 27. Municipalities are empowered to
impose, not only municipal license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and uniform taxes. The
ordinance in question (Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264,
otherwise known as the Local Autonomy Act, as amended, is hereby upheld and
Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962,
re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and
legal effect. Costs against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma,
Aquino and Concepcion, Jr., JJ., concur.
[G.R. No. 127105. June 25, 1999]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON
AND SON, INC., and COURT OF APPEALS, respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to set aside the decision of the Court of Appeals dated November 7, 1996 in
CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA
Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to
wit:
[Respondent], a domestic corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks and Technology Transfer under
Certificate of Registration No. 8064 (Exh. A).
For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and subjected the
same to 25% withholding tax on royalty payments which [respondent] paid for the
period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs.
B to L and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties
arguing that, the antecedent facts attending [respondents] case fall squarely within
the same circumstances under which said MacGeorge and Gillete rulings were
issued. Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the [respondent]. We therefore submit
that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject
to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax
Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax
Treaty [Article 12 (2) (b)] (Petition for Review [filed with the Court of Appeals], par.
12). [Respondents] claim for the refund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
______ _______ __________ __________ ______
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
P6,421,770 P1,605,443 P642,177 P963,266[1]
======== ======== ======= =======
The Commissioner did not act on said claim for refund. Private respondent S.C.
Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court
of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim
a refund of the overpaid withholding tax on royalty payments from July 1992 to May
1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C.
Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid withholding tax on
royalty payments beginning July, 1992 to May, 1993.[2]
The Commissioner of Internal Revenue thus filed a petition for review with the
Court of Appeals which rendered the decision subject of this appeal on November 7,
1996 finding no merit in the petition and affirming in toto the CTA ruling.[3]
This petition for review was filed by the Commissioner of Internal Revenue
raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND
SON, USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF
10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN
RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty,
which is known as the most favored nation clause, the lowest rate of the Philippine
tax at 10% may be imposed on royalties derived by a resident of the United States
from sources within the Philippines only if the circumstances of the resident of the
United States are similar to those of the resident of West Germany. Since the RP-US
Tax Treaty contains no matching credit provision as that provided under Article 24
of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Even assuming that the phrase paid under similar
circumstances refers to the payment of royalties, and not taxes, as held by the Court
of Appeals, still, the most favored nation clause cannot be invoked for the reason that
when a tax treaty contemplates circumstances attendant to the payment of a tax, or
royalty remittances for that matter, these must necessarily refer to circumstances that
are tax-related. Finally, petitioner argues that since S.C. Johnsons invocation of the
most favored nation clause is in the nature of a claim for exemption from the
application of the regular tax rate of 25% for royalties, the provisions of the treaty
must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition
should be denied (1) because it contains a defective certification against forum
shopping as required under SC Circular No. 28-91, that is, the certification was not
executed by the petitioner herself but by her counsel; and (2) that the most favored
nation clause under the RP-US Tax Treaty refers to royalties paid under similar
circumstances as those royalties subject to tax in other treaties; that the phrase paid
under similar circumstances does not refer to payment of the tax but to the subject
matter of the tax, that is, royalties, because the most favored nation clause is intended
to allow the taxpayer in one state to avail of more liberal provisions contained in
another tax treaty wherein the country of residence of such taxpayer is also a party
thereto, subject to the basic condition that the subject matter of taxation in that other
tax treaty is the same as that in the original tax treaty under which the taxpayer is
liable; thus, the RP-US Tax Treaty speaks of royalties of the same kind paid under
similar circumstances. S.C. Johnson also contends that the Commissioner is estopped
from insisting on her interpretation that the phrase paid under similar circumstances
refers to the manner in which the tax is paid, for the reason that said interpretation is
embodied in Revenue Memorandum Circular (RMC) 39-92 which was already
abandoned by the Commissioners predecessor in 1993; and was expressly revoked in
BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are
subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given
retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246
of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum
shopping was signed by petitioners counsel is not a fatal defect as to warrant the
dismissal of this petition since Circular No. 28-91 applies only to original actions and
not to appeals, as in the instant case. Moreover, the requirement that the certification
should be signed by petitioner and not by counsel does not apply to petitioner who
has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase paid under similar circumstances embodied in the most
favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and
not taxes, still the presence or absence of a matching credit provision in the said RP-
US Tax Treaty would constitute a material circumstance to such payment and would
be determinative of the said clauses application.
We address first the objection raised by private respondent that the certification
against forum shopping was not executed by the petitioner herself but by her counsel,
the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty.
Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE
SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM
SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO : xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts, tribunals or agencies have
to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the
Court of Appeals, the petitioner aside from complying with pertinent provisions of
the Rules of Court and existing circulars, must certify under oath to all of the
following facts or undertakings: (a) he has not theretofore commenced any other
action or proceeding involving the same issues in the Supreme Court, the Court of
Appeals, or any tribunal or agency; xxx
(2) Any violation of this revised Circular will entail the following sanctions: (a) it
shall be a cause for the summary dismissal of the multiple petitions or complaints;
xxx
The circular expressly requires that a certificate of non-forum shopping should
be attached to petitions filed before this Court and the Court of Appeals. Petitioners
allegation that Circular No. 28-91 applies only to original actions and not to appeals
as in the instant case is not supported by the text nor by the obvious intent of the
Circular which is to prevent multiple petitions that will result in the same issue being
resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that
he has not commenced any other action involving the same issues in this Court or the
Court of Appeals or any other tribunal or agency, we are inclined to accept
petitioners submission that since the OSG is the only lawyer for the petitioner, which
is a government agency mandated under Section 35, Chapter 12, title III, Book IV of
the 1987 Administrative Code[4] to be represented only by the Solicitor General, the
certification executed by the OSG in this case constitutes substantial compliance
with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this
appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty
regarding the rate of tax to be imposed by the Philippines upon royalties received by
a non-resident foreign corporation. The provision states insofar as pertinent that-
1) Royalties derived by a resident of one of the Contracting States from
sources within the other Contracting State may be taxed by both
Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross amount of the royalties,
and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third State.
xxx xxx xxx
(italics supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted
provision, it is entitled to the concessional tax rate of 10 percent on royalties based
on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State in
which they arise, and according to the law of that State, but the tax so
charged shall not exceed:
xxx
b) 10 percent of the gross amount of royalties arising from the use of, or
the right to use, any patent, trademark, design or model, plan, secret
formula or process, or from the use of or the right to use, industrial,
commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under b) shall, in the case of royalties arising
in the Republic of the Philippines, only apply if the contract giving rise to such
royalties has been approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit
of 20 percent of the gross amount of such royalties against German income and
corporation tax for the taxes payable in the Philippines on such royalties where the
tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-
Germany Tax Treaty states-
1) Tax shall be determined in the case of a resident of the Federal
Republic of Germany as follows:
xxxxxxxxx
b) Subject to the provisions of German tax law regarding credit for foreign tax, there
shall be allowed as a credit against German income and corporation tax payable in
respect of the following items of income arising in the Republic of the Philippines,
the tax paid under the laws of the Philippines in accordance with this Agreement on:
xxxxxxxxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxxxxxxxx
c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be
deemed to be
xxxxxxxxx
cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according
to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.
xxxxxxxxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty
are not paid under circumstances similar to those in the RP-West Germany Tax
Treaty since there is no provision for a 20 percent matching credit in the former
convention and private respondent cannot invoke the concessional tax rate on the
strength of the most favored nation clause in the RP-US Tax Treaty. Petitioners
position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine
tax paid on income from sources within the Philippines is allowed as a credit against
German income and corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of
the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of
such royalty. To illustrate, the royalty income of a German resident from sources
within the Philippines arising from the use of, or the right to use, any patent, trade
mark, design or model, plan, secret formula or process, is taxed at 10% of the gross
amount of said royalty under certain conditions. The rate of 10% is imposed if credit
against the German income and corporation tax on said royalty is allowed in favor of
the German resident. That means the rate of 10% is granted to the German taxpayer
if he is similarly granted a credit against the income and corporation tax of West
Germany. The clear intent of the matching credit is to soften the impact of double
taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar matching credit as that provided under
the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Therefore, the most favored nation clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US
Tax Treaty.[5]
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was
upheld by the Court of Appeals, that the phrase paid under similar circumstances in
Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the reason that the phrase
paid under similar circumstances is followed by the phrase to a resident of a third
state. The respondent court held that Words are to be understood in the context in
which they are used, and since what is paid to a resident of a third state is not a tax
but a royalty logic instructs that the treaty provision in question should refer to
royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but
fails to take into account the purpose animating the treaty provisions in point. To
begin with, we are not aware of any law or rule pertinent to the payment of royalties,
and none has been brought to our attention, which provides for the payment of
royalties under dissimilar circumstances. The tax rates on royalties and the
circumstances of payment thereof are the same for all the recipients of such royalties
and there is no disparity based on nationality in the circumstances of such
payment.[6] On the other hand, a cursory reading of the various tax treaties will show
that there is no similarity in the provisions on relief from or avoidance of double
taxation[7] as this is a matter of negotiation between the contracting parties. [8] As will
be shown later, this dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation.[9] The purpose of
these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions.[10] More precisely, the tax conventions are drafted with a view
towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods. [11], citing the
Committee on Fiscal Affairs of the Organization for Economic Co-operation and
Development (OECD).11 The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economies.[12] Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate. [13]
Double taxation usually takes place when a person is resident of a contracting
state and derives income from, or owns capital in, the other contracting state and
both states impose tax on that income or capital. In order to eliminate double taxation,
a tax treaty resorts to several methods. First, it sets out the respective rights to tax of
the state of source or situs and of the state of residence with regard to certain classes
of income or capital. In some cases, an exclusive right to tax is conferred on one of
the contracting states; however, for other items of income or capital, both states are
given the right to tax, although the amount of tax that may be imposed by the state of
source is limited.[14]
The second method for the elimination of double taxation applies whenever the
state of source is given a full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation. There are two methods of relief- the
exemption method and the credit method. In the exemption method, the income or
capital which is taxable in the state of source or situs is exempted in the state of
residence, although in some instances it may be taken into account in determining the
rate of tax applicable to the taxpayers remaining income or capital. On the other hand,
in the credit method, although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the former is credited
against the tax levied in the latter. The basic difference between the two methods is
that in the exemption method, the focus is on the income or capital itself, whereas the
credit method focuses upon the tax.[15]
In negotiating tax treaties, the underlying rationale for reducing the tax rate is
that the Philippines will give up a part of the tax in the expectation that the tax given
up for this particular investment is not taxed by the other country. [16] Thus the
petitioner correctly opined that the phrase royalties paid under similar circumstances
in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated
circumstances that are tax-related.
In the case at bar, the state of source is the Philippines because the royalties are
paid for the right to use property or rights, i.e. trademarks, patents and technology,
located within the Philippines.[17] The United States is the state of residence since the
taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax
Treaty, the state of residence and the state of source are both permitted to tax the
royalties, with a restraint on the tax that may be collected by the state of
source.[18] Furthermore, the method employed to give relief from double taxation is
the allowance of a tax credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or accrued to the Philippines) against
the United States tax, but such amount shall not exceed the limitations provided by
United States law for the taxable year.[19] Under Article 13 thereof, the Philippines
may impose one of three rates- 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of activities; or the lowest rate
of Philippine tax that may be imposed on royalties of the same kind paid under
similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored
nation clause, the concessional tax rate of 10 percent provided for in the RP-
Germany Tax Treaty should apply only if the taxes imposed upon royalties in the
RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-US
Tax Treaty grants similar tax reliefs to residents of the United States in respect of the
taxes imposable upon royalties earned from sources within the Philippines as those
allowed to their German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
expressly allows crediting against German income and corporation tax of 20% of the
gross amount of royalties paid under the law of the Philippines. On the other hand,
Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect
to relief for double taxation, does not provide for similar crediting of 20% of the
gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the
law of the United States (as it may be amended from time to time
without changing the general principle thereof), the United States shall
allow to a citizen or resident of the United States as a credit against the
United States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation owning
at least 10 percent of the voting stock of a Philippine corporation from
which it receives dividends in any taxable year, shall allow credit for
the appropriate amount of taxes paid or accrued to the Philippines by
the Philippine corporation paying such dividends with respect to the
profits out of which such dividends are paid. Such appropriate amount
shall be based upon the amount of tax paid or accrued to the
Philippines, but the credit shall not exceed the limitations (for the
purpose of limiting the credit to the United States tax on income from
sources within the Philippines or on income from sources outside the
United States) provided by United States law for the taxable year. xxx.
The reason for construing the phrase paid under similar circumstances as used
in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored
upon a logical reading of the text in the light of the fundamental purpose of such
treaty which is to grant an incentive to the foreign investor by lowering the tax and at
the same time crediting against the domestic tax abroad a figure higher than what
was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere
compositions, but have ends to be achieved and that the general purpose is a more
important aid to the meaning of a law than any rule which grammar may lay
down.[20] It is the duty of the courts to look to the object to be accomplished, the evils
to be remedied, or the purpose to be subserved, and should give the law a reasonable
or liberal construction which will best effectuate its purpose. [21] The Vienna
Convention on the Law of Treaties states that a treaty shall be interpreted in good
faith in accordance with the ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose.[22]
As stated earlier, the ultimate reason for avoiding double taxation is to
encourage foreign investors to invest in the Philippines - a crucial economic goal for
developing countries.[23] The goal of double taxation conventions would be thwarted
if such treaties did not provide for effective measures to minimize, if not completely
eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the
rates of tax are lowered by the state of source, in this case, by the Philippines, there
should be a concomitant commitment on the part of the state of residence to grant
some form of tax relief, whether this be in the form of a tax credit or
exemption.[24] Otherwise, the tax which could have been collected by the Philippine
government will simply be collected by another state, defeating the object of the tax
treaty since the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the investor, no
benefit would redound to the Philippines, i.e., increased investment resulting from a
favorable tax regime, should it impose a lower tax rate on the royalty earnings of the
investor, and it would be better to impose the regular rate rather than lose much-
needed revenues to another country.
At the same time, the intention behind the adoption of the provision on relief
from double taxation in the two tax treaties in question should be considered in light
of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the most
favored among other countries.[25] The most favored nation clause is intended to
establish the principle of equality of international treatment by providing that the
citizens or subjects of the contracting nations may enjoy the privileges accorded by
either party to those of the most favored nation. [26] The essence of the principle is to
allow the taxpayer in one state to avail of more liberal provisions granted in another
tax treaty to which the country of residence of such taxpayer is also a party provided
that the subject matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax
Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted,
speaks of tax on royalties for the use of trademark, patent, and technology. The
entitlement of the 10% rate by U.S. firms despite the absence of a matching credit
(20% for royalties) would derogate from the design behind the most favored nation
clause to grant equality of international treatment since the tax burden laid upon the
income of the investor is not the same in the two countries. The similarity in the
circumstances of payment of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not
give a matching tax credit of 20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax Treaty, private respondent
cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the
reason that there is no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they
are regarded as in derogation of sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption.[27] The burden of proof is
upon him who claims the exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statute law. [28] Private respondent is
claiming for a refund of the alleged overpayment of tax on royalties; however, there
is nothing on record to support a claim that the tax on royalties under the RP-US Tax
Treaty is paid under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The
decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated
November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.

G.R. Nos. L-33665-68 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO
and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO,
MANUEL S. GALVEZ and ESTER R. GALVEZ, and COURT OF TAX
APPEALS, respondents.
Leonardo Abola for respondents.
CRUZ, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals
absolving the private respondents from liability for capital gains tax on the stocks
received by them from the Eastern Theatrical Inc. These were originally four cages
involving appeals from the decision of the Commissioner of Internal Revenue dated
July 11, 1966, holding the said respondents, Vicente A. Rufino and Remedies S.
Rufino, Ernesto D. Rufino and Elvira B. Rufino, Rafael R. Rufino and Julieta A.
Rufino, and Manuel S. Galvez and Ester R. Galvez, liable for deficiency income tax,
surcharge and interest in the sums of P44,294.88, P27,229.44, P58,082.60 and
P58,074.24, respectively, for the year 1959.
The facts, as narrated by the Court of Tax Appeals, are as follows:
The private respondents were the majority stockholders of the defunct Eastern
Theatrical Co., Inc., a corporation organized in 1934, for a period of twenty-five
years terminating on January 25, 1959. It had an original capital stock of
P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,000
shares at P10.00 per share, and was organized to engage in the business of operating
theaters, opera houses, places of amusement and other related business enterprises,
more particularly the Lyric and Capitol Theaters in Manila. The President of this
corporation (hereinafter referred to as the Old Corporation) during the year in
question was Ernesto D. Rufino.
The private respondents are also the majority and controlling stockholders of another
corporation, the Eastern Theatrical Co Inc., which was organized on December 8,
1958, for a term of 50 years, with an authorized capital stock of P200,000.00, each
share having a par value of P10.00. This corporation is engaged in the same kind of
business as the Old Corporation. The General-Manager of this corporation
(hereinafter referred to as the New Corporation) at the time was Vicente A. Rufino.
In a special meeting of stockholders of the Old Corporation on December 17, 1958,
to provide for the continuation of its business after the end of its corporate life, and
upon the recommendation of its board of directors, a resolution was passed
authorizing the Old Corporation to merge with the New Corporation by transferring
its business, assets, goodwill, and liabilities to the latter, which in exchange would
issue and distribute to the shareholders of the Old Corporation one share for each
share held by them in the said Corporation.
It was expressly declared that the merger of the Old Corporation with the New
Corporation was necessary to continue the exhibition of moving pictures at the Lyric
and Capitol Theaters even after the expiration of the corporate existence of the
former, in view of its pending booking contracts, not to mention its collective
bargaining agreements with its employees.
Pursuant to the said resolution, the Old Corporation, represented by Ernesto D.
Rufino as President, and the New Corporation, represented by Vicente A. Rufino as
General Manager, signed on January 9, 1959, a Deed of Assignment providing for
the conveyance and transfer of all the business, property, assets and goodwill of the
Old Corporation to the New Corporation in exchange for the latter's shares of stock
to be distributed among the shareholders on the basis of one stock for each stock held
in the Old Corporation except that no new and unissued shares would be issued to
the shareholders of the Old Corporation; the delivery by the New Corporation to the
Old Corporation of 125,005-3/4 shares to be distributed to the shareholders of the
Old Corporation as their corresponding shares of stock in the New Corporation; the
assumption by the New Corporation of all obligations and liabilities of the Old
Corporation under its bargaining agreement with the Cinema Stage & Radio
Entertainment Free Workers (FFW) which included the retention of all personnel in
the latter's employ; and the increase of the capitalization of the New Corporation in
compliance with their agreement. This agreement was made retroactive to January 1,
1959.
The aforesaid transfer was eventually made by the Old Corporation to the New
Corporation, which continued the operation of the Lyric and Capitol Theaters and
assumed all the obligations and liabilities of the Old Corporation beginning January
1, 1959.
The resolution of the Old Corporation of December 17, 1958, and the Deed of
Assignment of January 9, 1959, were approved in a resolution by the stockholders of
the New Corporation in their special meeting on January 12, 1959. In the same
meeting, the increased capitalization of the New Corporation to P2,000,000.00 was
also divided into 200,000 shares at P10.00 par value each share, and the said increase
was registered on March 5, 1959, with the Securities and Exchange Commission,
which approved the same on August 20,1959.
As agreed, and in exchange for the properties, and other assets of the Old
Corporation, the New Corporation issued to the stockholders of the former stocks in
the New Corporation equal to the stocks each one held in the Old Corporation, as
follows:
Mr. & Mrs. Vicente A. Rufino............... 17,083 shares
Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares
Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares
Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares
It was this above-narrated series of transactions that the Bureau of Internal Revenue
examined later, resulting in the petitioner declaring that the merger of the aforesaid
corporations was not undertaken for a bona fide business purpose but merely to
avoid liability for the capital gains tax on the exchange of the old for the new shares
of stock. Accordingly, he imposed the deficiency assessments against the private
respondents for the amounts already mentioned. The private respondents' request for
reconsideration having been denied, they elevated the matter to the Court of Tax
Appeals, which reversed the petitioner.
We have given due course to the instant petition questioning the decision of the said
court holding that there was a valid merger between the Old Corporation and the
New Corporation and declaring that:
It is well established that where stocks for stocks were exchanged,
and distributed to the stockholders of the corporations, parties to
the merger or consolidation, pursuant to a plan of reorganization,
such exchange is exempt from capital gains tax . . .
In view of the foregoing, we are of the opinion and so hold that no
taxable gain was derived by petitioners from the exchange of their
old stocks solely for stocks of the New Corporation pursuant to
Section 35(c) (2), in relation to (c) (5), of the National Internal
Revenue Code, as amended by Republic Act 1921. 1
The above-cited Section 35 of the Tax Code, on the proper interpretation and
application of which the resolution of this case depends, provides in material part as
follows:
Sec. 35. Determination of gain or loss from the sale or other
disposition of property. — The gain derived or loss sustained from
the sale or other disposition of property, real, personal or mixed,
shall be determined in accordance with the following schedule:
xxx xxx xxx
(c) Exchange of property-
(1) General Rule. — Except as herein provided
upon the sale or exchange of property, the entire
amount of the gain or loss, as the case may be,
shall be recognized.
(2) Exceptions. — No gain or loss shall be
recognized if in pursuance of a plan of merger or
consolidation (a) a corporation which is a party
to a merger or consolidation, exchanges property
solely for stock in a corporation which is a party
to the merger or consolidation, (b) a shareholder
exchanges stock in a corporation which is a party
to the merger or consolidation solely for the
stock of another corporation, also a party to the
merger or consolidation, or (c) a security holder
of a corporation which is a party to the merger or
consolidation exchanges his securities in such
corporation solely for stock or securities in
another corporation, a party to the merger or
consolidation.
xxx xxx xxx
(5) Definitions.-(a) x x x (b) The term "merger"
or "consolidation," when used in this section,
shall be understood to mean: (1) The ordinary
merger or consolidation, or (2) the acquisition by
one corporation of all or substantially all the
properties of another corporation solely for stock;
Provided, That for a transaction to be regarded as
a merger or consolidation within the purview of
this section, it must be undertaken for a bona
fide business purpose and not solely for the
purpose of escaping the burden of taxation;
Provided further, That in determining whether a
bona fide business purpose exists, each and every
step of the transaction shall be considered and
the whole transaction or series of transactions
shall be treated as a single unit: ...
In support of its position that the Deed of Assignment was concluded by the private
respondents merely to evade the burden of taxation, the petitioner points to the fact
that the New Corporation did not actually issue stocks in exchange for the properties
of the Old Corporation at the time of the supposed merger on January 9, 1959. The
exchange, he says, was only on paper. The increase in capitalization of the New
Corporation was registered with the Securities and Exchange Commission only on
March 5, 1959, or 37 days after the Old Corporation expired on January 25, 1959.
Prior to such registration, it was not possible for the New Corporation to effect the
exchange provided for in the said agreement because it was capitalized only at
P200,000.00 as against the capitalization of the Old Corporation at P2,000,000.00.
Consequently, as there was no merger, the automatic dissolution of the Old
Corporation on its expiry date resulted in its liquidation, for which the respondents
are now liable in taxes on their capital gains.
For their part, the private respondents insist that there was a genuine merger between
the Old Corporation and the New Corporation pursuant to a plan aimed at enabling
the latter to continue the business of the former in the operation of places of
amusement, specifically the Capitol and Lyric Theaters. The plan was evolved
through the series of transactions above narrated, all of which could be treated as a
single unit in accordance with the requirements of Section 35. Obviously, all these
steps did not have to be completed at the time of the merger, as there were some of
them, such as the increase and distribution of the stock of the New Corporation,
which necessarily had to come afterwards. Moreover, the Old Corporation was
dissolved on January 1, 1959, pursuant to the Deed of Assignment, and not on
January 25, 1959, its original expiry date. As the properties of the Old Corporation
were transferred to the New Corporation before that expiry date, there could not have
been any distribution of liquidating dividends by the Old Corporation for which the
private respondents should be held liable in taxes.
We sustain the Court of Tax Appeals. We hold that it did not err in finding that no
taxable gain was derived by the private respondents from the questioned transaction.
Contrary to the claim of the petitioner, there was a valid merger although the actual
transfer of the properties subject of the Deed of Assignment was not made on the
date of the merger. In the nature of things, this was not possible. Obviously, it was
necessary for the Old Corporation to surrender its net assets first to the New
Corporation before the latter could issue its own stock to the shareholders of the Old
Corporation because the New Corporation had to increase its capitalization for this
purpose. This required the adoption of the resolution to this effect at the special
stockholders meeting of the New Corporation on January 12, 1959, the registration
of such issuance with the SEC on March 5, 1959, and its approval by that body on
August 20, 1959. All these took place after the date of the merger but they were
deemed part and parcel of, and indispensable to the validity and enforceability of, the
Deed of Assignment.
The Court finds no impediment to the exchange of property for stock between the
two corporations being considered to have been effected on the date of the merger.
That, in fact, was the intention, and the reason why the Deed of Assignment was
made retroactive to January 1, 1959. Such retroaction provided in effect that all
transactions set forth in the merger agreement shall be deemed to be taking place
simultaneously on January 1, 1959, when the Deed of Assignment became operative.
The certificates of stock subsequently delivered by the New Corporation to the
private respondents were only evidence of the ownership of such stocks. Although
these certificates could be issued to them only after the approval by the SEC of the
increase in capitalization of the New Corporation, the title thereto, legally speaking,
was transferred to them on the date the merger took effect, in accordance with the
Deed of Assignment.
The basic consideration, of course, is the purpose of the merger, as this would
determine whether the exchange of properties involved therein shall be subject or not
to the capital gains tax. The criterion laid down by the law is that the merger" must
be undertaken for a bona fide business purpose and not solely for the purpose of
escaping the burden of taxation." We must therefore seek and ascertain the intention
of the parties in the light of their conduct contemporaneously with, and especially
after, the questioned merger pursuant to the Deed of Assignment of January 9, 1959.
It has been suggested that one certain indication of a scheme to evade the capital
gains tax is the subsequent dissolution of the new corporation after the transfer to it
of the properties of the old corporation and the liquidation of the former soon
thereafter. This highly suspect development is likely to be a mere subterfuge aimed
at circumventing the requirements of Section 35 of the Tax Code while seeming to
be a valid corporate combination. Speaking of such a device, Justice Sutherland
declared for the United States Supreme Court in Helvering v. Gregory:
When subdivision (b) speaks of a transfer of assets by one
corporation to another, it means a transfer made 'in pursuance of a
plan of reorganization' (Section 112[g]) of corporate business; and
not a transfer of assets by one corporation to another in pursuance
of a plan having no relation to the business of either, as plainly is
the case here. Putting aside, then, the question of motive in respect
of taxation altogether, and fixing the character of proceeding by
what actually occurred, what do we find? Simply an operation
having no business or corporate purpose — a mere devise which
put on the form of a corporate reorganization as a disguise for
concealing its real character, and the sole object and
accomplishment of which was the consummation of a
preconceived plan, not to reorganize a business or any part of a
business, but to transfer a parcel of corporate shares to the
petitioner. No doubt, a new and valid corporation was created. But
that corporation was nothing more than a contrivance to the end
last described. It was brought into existence for no other purpose; it
performed, as it was intended from the beginning it should perform,
no other function. When that limited function had been exercised,
it immediately was put to death.
In these circumstances, the facts speak for themselves and are
susceptible of but one interpretation. The whole undertaking,
though conducted according to the terms of subdivision (b), was in
fact an elaborate and devious form of conveyance masquerading as
a corporate reorganization and nothing else. The rule which
excludes from consideration the motive of tax avoidance is not
pertinent to the situation, because the transaction upon its face lies
outside the plain intent of the statute. To hold otherwise would be
to exalt artifice above reality and to deprive the statutory provision
in question of all serious purpose. 2
We see no such furtive intention in the instant case. It is clear, in fact, that the
purpose of the merger was to continue the business of the Old Corporation, whose
corporate life was about to expire, through the New Corporation to which all the
assets and obligations of the former had been transferred. What argues strongly,
indeed, for the New Corporation is that it was not dissolved after the merger
agreement in 1959. On the contrary, it continued to operate the places of amusement
originally owned by the Old Corporation and transfered to the New Corporation,
particularly the Capitol and Lyric Theaters, in accordance with the Deed of
Assignment. The New Corporation, in fact, continues to do so today after taking over
the business of the Old Corporation twenty-seven years ago.
It may be recalled at this point that under the original provisions of the old
Corporation Law, which was in effect when the merger agreement was concluded in
1959, it was not possible for a corporation, by mere amendment of its charter, to
extend its life beyond the time fixed in the original articles; in fact, this was
specifically prohibited by Section 18, which provided that "any corporation may
amend its articles of incorporation by a majority vote of its board of directors or
trustees and the vote or written assent of two-thirds of its members, if it be a non-
stock corporation, or if it be a stock corporation, by the vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital stock of the
corporation ... : Provided, however, That the life of said corporation shall not be
extended by said amendment beyond the fixed in the original articles ... "
This prohibition, which incidentally has since been deleted, made it necessary for the
Old and New Corporations to enter into the questioned merger, to enable the former
to continue its unfinished business through the latter.
The procedure for such merger was prescribed in Section 28 1/2 of the old
Corporation Law which, although not expressly authorizing a merger by name (as
the new Corporation Code now does in its Section 77), provided that "a corporation
may, by action taken at any meeting of its board of directors, sell, lease, exchange, or
otherwise dispose of all or substantially all of its property and assets, including its
goodwill, upon such terms and conditions and for such considerations, which may be
money, stocks, bond, or other instruments for the payment of money or other
property or other considerations, as its board of directors deem expedient." The
transaction contemplated in the old law covered the second type of merger defined
by Section 35 of the Tax Code as "the acquisition by one corporation of all or
substantially all of the properties of another corporation solely for stock," which is
precisely what happened in the present case.
What is also worth noting is that, as in the case of the Old Corporation when it was
dissolved on December 31, 1958, there has been no distribution of the assets of the
New Corporation since then and up to now, as far as the record discloses. To date,
the private respondents have not derived any benefit from the merger of the Old
Corporation and the New Corporation almost three decades earlier that will make
them subject to the capital gains tax under Section 35. They are no more liable now
than they were when the merger took effect in 1959, as the merger, being genuine,
exempted them under the law from such tax.
By this decision, the government is, of course, not left entirely without recourse, at
least in the future. The fact is that the merger had merely deferred the claim for taxes,
which may be asserted by the government later, when gains are realized and benefits
are distributed among the stockholders as a result of the merger. In other words, the
corresponding taxes are not forever foreclosed or forfeited but may at the proper time
and without prejudice to the government still be imposed upon the private
respondents, in accordance with Section 35(c) (4) of the Tax Code. Then, in
assessing the tax, "the basis of the property transferred in the hands of the transferee
shall be the same as it would be in the hands of the transferor, increased by the
amount of gain recognized to the transferor on the transfer." The only inhibition now
is that time has not yet come.
The reason for this conclusion is traceable to the purpose of the legislature in
adopting the provision of law in question. The basic Idea was to correct the Tax
Code which, by imposing taxes on corporate combinations and expansions,
discouraged the same to the detriment of economic progress, particularly the
promotion of local industry. Speaking of this problem, HB No. 7233, which was
subsequently enacted into R.A. No. 1921 embodying Section 35 as now worded,
declared in the Explanatory Note:
The exemption from the tax of the gain derived from exchanges of
stock solely for stock of another corporation resulting from
corporate mergers or consolidations under the above provisions, as
amended, was intended to encourage corporations in pooling,
combining or expanding their resources conducive to the economic
development of the country. 3
Our ruling then is that the merger in question involved a pooling of resources aimed
at the continuation and expansion of business and so came under the letter and
intendment of the National Internal Revenue Code, as amended by the abovecited
law, exempting from the capital gains tax exchanges of property effected under
lawful corporate combinations.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed in full, without
any pronouncement as to costs.
SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court which
sustained the private respondent's contention that the deed of exchange whereby
Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades
Corporation in exchange for 2,500 shares of stock was actually a deed of sale which
violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot. No.
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by
Transfer Certificate of Title No. T-4240 of the Bulacan land
registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and providing
that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the
same to the lessee and the letter has the priority to buy under
similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International,
Inc. assigned its rights and obligations under the contract of lease
in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were
annotated at he back of the title, as per stipulation of the parties
(Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land
also located in Malinta Estate, Valenzuela, Metro Manila (TCT No.
4273) for 2,500 shares of stock of defendant corporation with a
total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45,
Rollo)
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines,
Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor
under conditions similar to those whereby Delpher Trades Corporation acquired the
property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The
dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the
valid existence of the plaintiffs preferential right to acquire the
subject property (right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to convey the said
property to plaintiff who may offer to acquire the same at the rate
of P14.00 per square meter, more or less, for Lot 1095 whose area
is 27,169 square meters only. Without pronouncement as to
attorney's fees and costs. (Appendix I; Rec., pp. 246- 247).
(Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate
Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to
review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the
resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the
petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent")
will acquire from petitioners a parcel of industrial land consisting
of 27,169 square meters or 2.7 hectares (located right after the
Valenzuela, Bulacan exit of the toll expressway) for only P14/sq.
meter, or a total of P380,366, although the prevailing value thereof
is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal
even if there is no "sale" or transfer of actual ownership interests
by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual
ownership interests, private respondent will acquire the
land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same
contractual provision invoked by private respondent. (pp. 251-252,
Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the
properties executed by the Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of sale which, in effect,
prejudiced the private respondent's right of first refusal over the leased property
included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia
Pacheco testified that Delpher Trades Corporation is a family corporation; that the
corporation was organized by the children of the two spouses (spouses Pelagia
Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles)
who owned in common the parcel of land leased to Hydro Pipes Philippines in order
to perpetuate their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate, including Lot No.
1095 which had been leased to Hydro Pipes Philippines, were transferred to the
corporation; that the leased property was transferred to the corporation by virtue of a
deed of exchange of property; that in exchange for these properties, Pelagia and
Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a
55% majority in the corporation because the other owners only owned 2,000 shares;
and that at the time of incorporation, he knew all about the contract of lease of Lot.
No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no
transfer of ownership of the subject parcel of land since the Pachecos remained in
control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of petitioner corporation remained in the hands of the original
co-owners, there was no transfer of actual ownership interests over the land when the
same was transferred to petitioner corporation in exchange for the latter's shares of
stock. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the
Pacheco co-owners; hence the corporation and the co-owners should be deemed to be
the same, there being in substance and in effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that
there was no sale and that they exchanged the land for shares of stocks in their own
corporation. "Hence, such transfer is not within the letter, or even spirit of the
contract. There is a sale when ownership is transferred for a price certain in money or
its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one
thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-
255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is
a corporate entity separate and distinct from the Pachecos. Thus, it contends that it
cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or
conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation
as such a separate and distinct corporate entity, is not a party who may allege that
this separate corporate existence should be disregarded. It maintains that there was
actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or
by purchasing stock directly from the corporation or from individual owners thereof
(Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa.,
609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher Trades Corporation.
Consequently, the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no
par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but
only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the
certificate itself that he is only an aliquot sharer in the assets of the
corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in
the case of par value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a stated
number of shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the assets of
the corporation, no matter what value they may have, to the extent
of 100/1,000 or 1/10. Thus, by removing the par value of shares,
the attention of persons interested in the financial condition of a
corporation is focused upon the value of assets and the amount of
its debts. (Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
107).
Moreover, there was no attempt to state the true or current market value of the real
estate. Land valued at P300.00 a square meter was turned over to the family's
corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45%
of the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos.
What they really did was to invest their properties and change the nature of their
ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on
inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation,
is there any benefit to the spouses Hernandez and
Pacheco in connection with their execution of a
deed of exchange on the properties for no par
value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and
corporation in entering in the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What
are these benefits to the spouses of this deed of
exchange?
A Continuous control of the property, tax
exemption benefits, and other inherent benefits
in a corporation.
Q What are these advantages to the said spouses
from the point of view of taxation in entering in
the deed of exchange?
A Having fulfilled the conditions in the income
tax law, providing for tax free exchange of
property, they were able to execute the deed of
exchange free from income tax and acquire a
corporation.
Q What provision in the income tax law are you
referring to?
A I refer to Section 35 of the National Internal
Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a
person exchanges his property for stock in a
corporation of which as a result of such exchange
said person alone or together with others not
exceeding four persons gains control of said
corporation."
Q Did you explain to the spouses this benefit at
the time you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that
the decision to have no par value share in the
defendant corporation was for the purpose of
flexibility. Can you explain flexibility in
connection with the ownership of the property in
question?
A There is flexibility in using no par value shares
as the value is determined by the board of
directors in increasing capitalization. The board
can fix the value of the shares equivalent to the
capital requirements of the corporation.
Q Now also from the point of taxation, is there
any flexibility in the holding by the corporation
of the property in question?
A Yes, since a corporation does not die it can
continue to hold on to the property indefinitely
for a period of at least 50 years. On the other
 hand, if the property is held by the spouse the
property will be tied up in succession
proceedings and the consequential payments of
estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in
relation to ownership by a particular person of
certain properties in respect to taxation?
A The property is not subjected to taxes on
succession as the corporation does not die.
Q So the benefit you are talking about are
inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid them,
by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The
collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S.
465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the
same hands. Hence, the private respondent has no basis for its claim of a light of first
refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision
and resolution of the then Intermediate Appellate Court are REVERSED and SET
ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of
First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
[G.R. No. 147188. September 14, 2004]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE
OF BENIGNO P. TODA, JR., Represented by Special Co-
administrators Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning
scheme adopted by a corporation constitutes tax evasion that would justify an
assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision[1] of the Court of Appeals of
31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000
Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, [3] which
held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency
income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22
for the year 1989, and ordered the cancellation and setting aside of the assessment
issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January
1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the
Commissioner of Internal Revenue for deficiency income tax arising from an alleged
simulated sale of a 16-storey commercial building known as Cibeles Building,
situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and
the two parcels of land on which the building stands for an amount of not less
than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to
Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal
Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds
of Absolute Sale notarized on the same day by the same notary public. [5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the
amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the
year 1989, declaring, among other things, its gain from the sale of real property in
the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it
paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T.
Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.[9] Three
and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment
notice[10] and demand letter to the CIC for deficiency income tax for the year 1989 in
the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should
be directed against the old CIC, and not against the new CIC, which is owned by an
entirely different set of stockholders; moreover, Toda had undertaken to hold the
buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years
1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special
co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of
Assessment[12] dated 9 January 1995 from the Commissioner of Internal Revenue for
deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed
as follows:
Income Tax 1989
Net Income per return P75,987,725.00
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
 per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest,
stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly
owned and controlled by Toda by covering up the additional gain of P100 million,
which resulted in the change in the income structure of the proceeds of the sale of the
two parcels of land and the building thereon to an individual capital gains, thus
evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA
alleging that the Commissioner erred in holding the Estate liable for income tax
deficiency; that the inference of fraud of the sale of the properties is unreasonable
and unsupported; and that the right of the Commissioner to assess CIC had already
prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the
two transactions actually constituted a single sale of the property by CIC to RMI, and
that Altonaga was neither the buyer of the property from CIC nor the seller of the
same property to RMI. The additional gain of P100 million (the difference between
the second simulated sale for P200 million and the first simulated sale for P100
million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains
tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent to evade payment of the tax was
thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only
on 8 March 1991, the assessment issued on 9 January 1995 was well within the
prescriptive period prescribed by Section 223 (a) of the National Internal Revenue
Code of 1986, which provides that tax may be assessed within ten years from the
discovery of the falsity or fraud. With the sale being tainted with fraud, the separate
corporate personality of CIC should be disregarded. Toda, being the registered owner
of the 99.991% shares of stock of CIC and the beneficial owner of the remaining
0.009% shares registered in the name of the individual directors of CIC, should be
held liable for the deficiency income tax, especially because the gains realized from
the sale were withdrawn by him as cash advances or paid to him as cash dividends.
Since he is already dead, his estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed
to prove that CIC committed fraud to deprive the government of the taxes due it. It
ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same
constituted mere tax avoidance, and not tax evasion. There being no proof of
fraudulent transaction, the applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the governments right to assess
CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of
99.991% of the capital stock of CIC was not in itself sufficient ground for piercing
the separate corporate personality of CIC. Hence, the CTA declared that the Estate is
not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the Commissioner on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of
the property owned by CIC was the result of the connivance between Toda and
Altonaga. She further alleged that the latter was a representative, dummy, and a close
business associate of the former, having held his office in a property owned by CIC
and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by
Toda for representation services rendered. The CTA denied [20] the motion for
reconsideration, prompting the Commissioner to file a petition for review[21] with the
Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed
the decision of the CTA, reasoning that the CTA, being more advantageously
situated and having the necessary expertise in matters of taxation, is better situated to
determine the correctness, propriety, and legality of the income tax assessments
assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed
the present petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT COMMITTED NO FRAUD WITH INTENT TO
EVADE THE TAX ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING
THE SEPARATE CORPORATE PERSONALITY OF CIBELES
INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR
DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and
insists that the sale by CIC of the Cibeles property was in connivance with its
dummy Rafael Altonaga, who was financially incapable of purchasing it. She further
points out that the documents themselves prove the fact of fraud in that (1) the two
sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of
Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale
between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the
latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public;
(3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June
1989 as investment in Cibeles Building. The substantial portion of P40 million was
withdrawn by Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present
the income tax return of Altonaga to prove that the latter is financially incapable of
purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are
pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year
1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of
CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation. Tax avoidance is the tax saving device within
the means sanctioned by law. This method should be used by the taxpayer in good
faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of
those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be
achieved, i.e., the payment of less than that known by the taxpayer to be legally due,
or the non-payment of tax when it is shown that a tax is due; (2) an accompanying
state of mind which is described as being evil, in bad faith, willfull,or deliberate and
not accidental; and (3) a course of action or failure of action which is unlawful. [24]
All these factors are present in the instant case. It is significant to note that as
early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to
Altonaga on 30 August 1989, CIC received P40 million from RMI,[25] and not from
Altonaga. That P40 million was debited by RMI and reflected in its trial
balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million
was debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This
would show that the real buyer of the properties was RMI, and not the intermediary
Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close
business associate and one of the many trusted corporate executives of Toda. This
information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an
old timer in the company. [27] But Mr. Prieto did not testify on this matter, hence, that
information remains to be hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of Altonaga was
unserved,[28] Altonaga having left for the United States of America in January 1990.
Nevertheless, that Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning scheme of CIC.
That admission is borne by the records. In its Memorandum, respondent Estate
declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale.
Admitted one hundred percent. But isnt this precisely the definition of tax planning?
Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the
Tax Code exists, allowing tax free transfers of property for stock, changing the
structure of the property and the tax to be paid. As long as it is done legally,
changing the structure of a transaction to achieve a lower tax is not against the law. It
is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely
petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to
5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of
the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI
cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting in the damage to another,
or by which an undue and unconscionable advantage is taken of another. [30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the
amount of tax to be paid especially that the transfer from him to RMI would then
subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring and transferring title of
the subject properties on the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless, the execution of the two sales was
calculated to mislead the BIR with the end in view of reducing the consequent
income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was
prompted more on the mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.[31]
Generally, a sale or exchange of assets will have an income tax incidence only
when it is consummated.[32] The incidence of taxation depends upon the substance of
a transaction. The tax consequences arising from gains from a sale of property are
not finally to be determined solely by the means employed to transfer legal title.
Rather, the transaction must be viewed as a whole, and each step from the
commencement of negotiations to the consummation of the sale is relevant. A sale by
one person cannot be transformed for tax purposes into a sale by another by using the
latter as a conduit through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to alter tax
liabilities, would seriously impair the effective administration of the tax policies of
Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made
through another and distinct entity when it is proved that the latter was merely a
conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga
should be disregarded for income tax purposes.[34] The two sale transactions should
be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the
NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which
stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is
hereby imposed upon the taxable net income received during each taxable year from
all sources by every corporation organized in, or existing under the laws of the
Philippines, and partnerships, no matter how created or organized but not including
general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one
hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989.
The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of
1986[35] (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is
inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR
must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act
of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of
taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a proceeding in court after the
collection of such tax may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failure to file a return, the period within which to assess tax is ten
years from discovery of the fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel,
asked the Opinion of the BIR on the tax consequence of the two sale
transactions.[36] Thus, the BIR was amply informed of the transactions even prior to
the execution of the necessary documents to effect the transfer. Subsequently, the
two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the
existence of fraud. As earlier discussed those two transactions were tainted with
fraud. And even assuming arguendo that there was no fraud, we find that the income
tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual
amount gained from the sale of the Cibeles property. Obviously, such was done with
intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of
false returns is ten years from the discovery of the falsity. The false return was filed
on 15 April 1990, and the falsity thereof was claimed to have been discovered only
on 8 March 1991.[37] The assessment for the 1989 deficiency income tax of CIC was
issued on 9 January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons
owning or composing it. Thus, the owners or stockholders of a corporation may not
generally be made to answer for the liabilities of a corporation and vice versa. There
are, however, certain instances in which personal liability may arise. It has been held
in a number of cases that personal liability of a corporate director, trustee, or officer
along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad
faith or gross negligence in directing its affairs, or (c) conflict of
interest, resulting in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down stocks or, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by specific provision of law, to personally answer for his
corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T.
Choa, he knowingly and voluntarily held himself personally liable for all the tax
liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of
the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has
no liabilities or obligations, contingent or otherwise, for taxes, sums of money or
insurance claims other than those reported in its audited financial statement as of
December 31, 1989, attached hereto as Annex B and made a part hereof. The
business of Cibeles has at all times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER undertakes and agrees to hold the
BUYER and Cibeles free from any and all income tax liabilities of Cibeles for
the fiscal years 1987, 1988 and 1989.[39][Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free
from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and
1989, he thereby voluntarily held himself personally liable therefor. Respondent
estate cannot, therefore, deny liability for CICs deficiency income tax for the year
1989 by invoking the separate corporate personality of CIC, since its obligation arose
from Todas contractual undertaking, as contained in the Deed of Sale of Shares of
Stock.
 WHEREFORE, in view of all the foregoing, the petition is hereby In a letter dated August 20, 1992,[4] Philex protested the demand for payment of
GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. the tax liabilities stating that it has pending claims for VAT input credit/refund for
SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as interest. Therefore, these claims for tax credit/refund should be applied against the
deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc
interest from 1 May 1994 until the amount is fully paid. Mines, Inc.[5]
Costs against respondent. In reply, the BIR, in a letter dated September 7, 1992, [6] found no merit in
SO ORDERED. Philexs position. Since these pending claims have not yet been established or
determined with certainty, it follows that no legal compensation can take
place. Hence, he BIR reiterated its demand that Philex settle the amount plus interest
[G.R. No. 125704. August 28, 1998] within 30 days from the receipt of the letter.
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF In view of the BIRs denial of the offsetting of Philexs claim for VAT input
INTERNAL REVENUE, COURT OF APPEALS, and THE COURT credit/refund against its exercise tax obligation, Philex raised the issue to the Court
OF TAX APPEALS, respondents. of Tax Appeals on November 6, 1992.[7] In the course of the proceedings, the BIR
DECISION issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which,
ROMERO, J.: applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals the latters tax obligation of P110,677,688.52.
promulgated on April 8, 1996 in CA-G.R. SP No. 36975[1] affirming the Court of Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay
Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 [2] ordering it to the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
pay the amount of P110,677,668.52 as excise tax liability for the period from the Thus, for legal compensation to take place, both obligations must be liquidated and
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August demandable. Liquidated debts are those where the exact amount has already been
6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is
to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st still pending litigation, and still has to be determined by this Court (C.T.A. Case No.
and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot,
follows: therefore, be set-off against the unliquidated claim which Petitioner conceived to
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL exist in its favor (see Compaia General de Tabacos vs. French and Unson, No.
EXCISE 14027, November 8, 1918, 39 Phil. 34).[8]
T Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off
A on compensation since claim for taxes is not a debt or contract. [9] The dispositive
X portion of the CTA decision[10] provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
D Petitioner is hereby ORDERED to PAY the Respondent the amount
U of P110,677,668.52 representing excise tax liability for the period from the
E 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 amended.
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88 Aggrieved with the decision, Philex appealed the case before the Court of
------------------- ----------------- ----------------- --------------------- Appeals docketed as CA-G.R. CV No. 36975.[11] Nonetheless, on April 8, 1996, the
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39 Court of Appeals affirmed the Court of Tax Appeals observation. The pertinent
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 portion of which reads:[12]
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88 WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13 the decision dated March 16, 1995 is AFFIRMED.
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 Philex filed a motion for reconsideration which was, nevertheless, denied in a
========== ========== =========== ===========[3] Resolution dated July 11, 1996.[13]
 However, a few days after the denial of its motion for reconsideration, Philex
was able to obtain its VAT input credit/refund not only for the taxable year 1989 to
1991 but also for 1992 and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that
the same should, ipso jure, off-set its excise tax liabilities[15] since both had already
become due and demandable, as well as fully liquidated;[16] hence, legal
compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each
other.[17] There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity.[18] We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate
Court,[19] we categorically held that taxes cannot be subject to set-off or
compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than
the tax being collected. The collection of tax cannot await the results of a lawsuit
against the government.
The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. v. Commission on Audit,[20] which reiterated that:
x x x a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off.
Further, Philexs reliance on our holding in Commissioner of Internal Revenue
v. Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off
against an existing tax liability even though the refund has not yet been approved by
the Commissioner,[21] is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case
was anchored on Section 51(d) of the National Revenue Code of 1939. However,
when the National Internal Revenue Code of 1977 was enacted, the same provision
upon which the Itogon-Suyoc pronouncement was based was
omitted.[22] Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked
by Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that
the imposition of surcharge and interest for the non-payment of the excise taxes
within the time prescribed was unjustified. Philex posits the theory that it had no
obligation to pay the excise liabilities within the prescribed period since, after all, it
still has pending claims for VAT input credit/refund with BIR. [23]
We fail to see the logic of Philexs claim for this is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.[24] Evidently, to countenance
Philexs whimsical reason would render ineffective our tax collection system. Too
simplistic, it finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on
the ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of bargain.[25] Hence, a tax does not
depend upon the consent of the taxpayer.[26] If any payer can defer the payment of
taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse to
pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the lawsuit
it filed against the government.[27] Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund
with the government is immaterial for the imposition of charges and penalties
prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the
surcharge is mandatory and the BIR is not vested with any authority to waive the
collection thereof.[28] The same cannot be condoned for flimsy reasons, [29] similar to
the one advanced by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e) [30] of the National
Internal Revenue Code of 1977, which requires the refund of input taxes within 60
days,[31] when it took five years for the latter to grant its tax claim for VAT input
credit/refund.[32]
In this regard, we agree with Philex. While there is no dispute that a claimant
has the burden of proof to establish the factual basis of his or her claim for tax credit
or refund,[33] however, once the claimant has submitted all the required documents, it
is the function of the BIR to assess these documents with purposeful dispatch. After
all, since taxpayers owe honesty to government it is but just that government render
fair service to the taxpayers.[34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but
the refund of these erroneously paid taxes was only granted in 1996. Obviously, had
the BIR been more diligent and judicious with their duty, it could have granted the
refund earlier. We need not remind the BIR that simple justice requires the speedy
refund of wrongly-held taxes.[35] Fair dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas
v. Court of Tax Appeals:[36]
"The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot kill
the 'hen that lays the golden egg.' And, in the order to maintain the general public's
trust and confidence in the Government this power must be used justly and not
treacherously."
Despite our concern with the lethargic manner by which the BIR handled
Philex's tax claim, it is a settled rule that in the performance of governmental
function, the State is not bound by the neglect of its agents and officers. Nowhere is
this more true than in the field of taxation.[37] Again, while we understand Philex's
predicament, it must be stressed that the same is not valid reason for the non-
payment of its tax liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public
servants or employees especially BIR examiners who, in investigating tax claims are
seen to drag their feet needlessly. First, if the BIR takes time in acting upon the
taxpayer's claims for refund, the latter can seek judicial remedy before the Court of
Tax Appeals in the manner prescribed by law.[38] Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil Code and the
Tax Code can also be availed of.
Article 27 of the Civil Code provides:
"Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may file
an action for damages and other relief against the latter, without prejudice to any
disciplinary action that may be taken."
More importantly, Section 269 (c) of the National Internal Revenue Act of
1997 states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law required for any sum collected in
the performance of duty or wilfully neglecting to perform, any other duties enjoined
by law."
Simply put, both provisions abhor official inaction, willful neglect and unreasonable
delay in the performance of official duties.[39] In no uncertain terms must we stress
that every public employee or servant must strive to render service to the people with
utmost diligence and efficiency. Insolence and delay have no place in government
service. The BIR, being the government collecting arm, must and should do no less.
It simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take
judicial notice of the taxpayer's generally negative perception towards the BIR;
hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in
performing its duties, still, the same cannot justify Philex's non-payment of its tax
liabilities. The adage "no one should take the law into his own hands" should have
guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is
hereby AFFIRMED.
SO ORDERED.
G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil
Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.
CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's
claims for refund of overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as
part of its ordinary and necessary business expenses, the amount it had spent for
drilling and exploration of its petroleum concessions. This claim was disallowed by
the respondent Commissioner of Internal Revenue on the ground that the expenses
should be capitalized and might be written off as a loss only when a "dry hole"
should result. ESSO then filed an amended return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of several of its oil wells.
Also claimed as ordinary and necessary expenses in the same return was the amount
of P340,822.04, representing margin fees it had paid to the Central Bank on its profit
remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing
the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the
period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The
deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by
ESSO to the Central Bank on its profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax
credit of P221,033.00 representing its overpayment on its income tax for 1959 and
paying under protest the additional amount of P213,201.92. On August 13, 1964, it
claimed the refund of P39,787.94 as overpayment on the interest on its deficiency
income tax. It argued that the 18% interest should have been imposed not on the total
deficiency of P367,944.00 but only on the amount of P146,961.00, the difference
between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the
entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims
of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding
that the margin fees paid to the Central Bank could not be considered taxes or
allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
contending that the margin fees were deductible from gross income either as a tax or
as an ordinary and necessary business expense. It also claimed an overpayment of its
tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that
even if the amount paid as margin fees were not legally deductible, there was still an
overpayment by P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and
P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This
portion of the decision was appealed by the CIR but was affirmed by this Court
in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated
on April 18, 1989. ESSO for its part appealed the CTA decision denying its claims
for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960.
That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize
the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates
of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue
measure, the margin fees paid by the petitioner to the Central Bank on its profit
remittances to its New York head office should be deductible from ESSO's gross
income under Sec. 30(c) of the National Internal Revenue Code. This provides that
all taxes paid or accrued during or within the taxable year and which are related to
the taxpayer's trade, business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and
legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less
than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This
was a revenue measure formally proposed by President Carlos P. Garcia to Congress
as part of, and in order to balance, the budget for 1959-1960. It was enacted by
Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the measure was one of
the major sources of revenue used to finance the ordinary operating expenditures of
the government. It was, moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established
principles, pointed out that —
We are not unmindful of the rule that opinions expressed in debates, actual
proceedings of the legislature, steps taken in the enactment of a law, or the history of
the passage of the law through the legislature, may be resorted to as an aid in the
interpretation of a statute which is ambiguous or of doubtful meaning. The courts
may take into consideration the facts leading up to, coincident with, and in any way
connected with, the passage of the act, in order that they may properly interpret the
legislative intent. But it is also well-settled jurisprudence that only in extremely
doubtful matters of interpretation does the legislative history of an act of Congress
become important. As a matter of fact, there may be no resort to the legislative
history of the enactment of a statute, the language of which is plain and unambiguous,
since such legislative history may only be resorted to for the purpose of solving
doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held
that a margin fee is not a tax but an exaction designed to curb the excessive demands
upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through
Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control
or restriction designed to discourage imports and encourage
exports, and ultimately, 'curtail any excessive demand upon the
international reserve' in order to stabilize the currency. Originally
adopted to cope with balance of payment pressures, exchange
restrictions have come to serve various purposes, such as limiting
non-essential imports, protecting domestic industry and when
combined with the use of multiple currency rates providing a
source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their
economic development programs. The different measures of
exchange control or restriction cover different phases of foreign
exchange transactions, i.e., in quantitative restriction, the control is
on the amount of foreign exchange allowable. In the case of the
margin levy, the immediate impact is on the rate of foreign
exchange; in fact, its main function is to control the exchange rate
without changing the par value of the peso as fixed in the Bretton
Woods Agreement Act. For a member nation is not supposed to
alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin
levy is part of the rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange
and hence should not form part of the exchange rate, suffice it to state that We have
already held the contrary for the reason that a tax is levied to provide revenue for
government operations, while the proceeds of the margin fee are applied to
strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v.
Central Bank, 3 the same idea was expressed, though in connection with a different
levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of
exporter's foreign exchange constitutes an export tax. A tax is a
levy for the purpose of providing revenue for government
operations, while the proceeds of the 20% retention, as we have
seen, are applied to strengthen the Central Bank's international
reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its
police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless
be considered necessary and ordinary business expenses and therefore still deductible
from its gross income. The fees were paid for the remittance by ESSO as part of the
profits to the head office in the Unites States. Such remittance was an expenditure
necessary and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code
reading as follows:
SEC. 30. Deductions from gross income in computing net income
there shall be allowed as deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; traveling
expenses while away from home in the pursuit of a trade or
business; and rentals or other payments required to be made as a
condition to the continued use or possession, for the purpose of the
trade or business, of property to which the taxpayer has not taken
or is not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and
foreign corporations. — In the case of a non-resident alien
individual or a foreign corporation, the expenses deductible are the
necessary expenses paid or incurred in carrying on any business or
trade conducted within the Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the statute
in which that deduction is authorized and must be able to prove
that he is entitled to the deduction which the law allows. As
previously adverted to, the law allowing expenses as deduction
from gross income for purposes of the income tax is Section 30(a)
(1) of the National Internal Revenue which allows a deduction of
'all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this section of the
statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be ordinary
and necessary, (2) it must be paid or incurred within the taxable
year, and (3) it must be paid or incurred in carrying on a trade or
business. In addition, not only must the taxpayer meet the business
test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction.
While it is true that there is a number of decisions in the United
States delving on the interpretation of the terms 'ordinary and
necessary' as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible. Similarly, this
Court has never attempted to define with precision the terms
'ordinary and necessary.' There are however, certain guiding
principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be
considered 'necessary' where the expenditure is appropriate and
helpful in the development of the taxpayer's business. It is
'ordinary' when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding circumstances.
The term 'ordinary' does not require that the payments be habitual
or normal in the sense that the same taxpayer will have to make
them often; the payment may be unique or non-recurring to the
particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may be the
controlling fact in making the determination. Assuming that the
expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must
be determined from the nature of the expenditure itself, which in
turn depends on the extent and permanency of the work
accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not
err when it held on this issue as follows:
Considering the foregoing test of what constitutes an ordinary and
necessary deductible expense, it may be asked: Were the margin
fees paid by petitioner on its profit remittance to its Head Office in
New York appropriate and helpful in the taxpayer's business in the
Philippines? Were the margin fees incurred for purposes proper to
the conduct of the affairs of petitioner's branch in the Philippines?
Or were the margin fees incurred for the purpose of realizing a
profit or of minimizing a loss in the Philippines? Obviously not. As
stated in the Lopez case, the margin fees are not expenses in
connection with the production or earning of petitioner's incomes
in the Philippines. They were expenses incurred in the disposition
of said incomes; expenses for the remittance of funds after they
have already been earned by petitioner's branch in the Philippines
for the disposal of its Head Office in New York which is already
another distinct and separate income taxpayer.
xxx
 Since the margin fees in question were incurred for the remittance
of funds to petitioner's Head Office in New York, which is a
separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said therefore
that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively
or were incurred for purposes proper to the conduct of the affairs
of petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively. If at all, the margin fees were incurred for
purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in New York, but certainly not in the
Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was
made in furtherance of its own trade or business. The petitioner merely presumed
that all corporate expenses are necessary and appropriate in the absence of a showing
that they are illegal or ultra vires. This is error. The public respondent is correct
when it asserts that "the paramount rule is that claims for deductions are a matter of
legislative grace and do not turn on mere equitable considerations ... . The taxpayer
in every instance has the burden of justifying the allowance of any deduction
claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its head
office, cannot now claim this as an ordinary and necessary expense paid or incurred
in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's
claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED,
with costs against the petitioner.
SO ORDERED.