COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. application for refund.

The CIR filed an Answer to Eastern's

E A S T E R N T E L E C O M M U N I C AT I O N S P H I L I P P I N E S, I N C ., appeal in which it raised the following special and affirmative
respondent. defenses:
DECISION 6.[Eastern's] claim for refund/tax credit is
BRION, ** J p: pending administrative
Through a petition for review on certiorari, 1 petitioner investigation;
Commissioner of Internal Revenue (CIR) seeks to set aside the
decision dated October 1, 2003 2 and the resolution dated May
26, 2004 3 of the Court of Appeals (CA) in CA G.R. SP No.
61157. The assailed CA rulings affirmed the decision dated July
17, 2000 4 of the Court of Tax Appeals (CTA) in CTA Case No. xxx xxx xxx
5551, partially granting respondent Eastern Telecommunications
Philippines, Inc.'s (Eastern's) claim for refund of unapplied input
tax from its purchase and importation of capital goods.
THE FACTUAL ANTECEDENTS

Eastern is a domestic corporation granted by Congress with a 8.[Eastern's] exempting clause under its
telecommunications franchise under Republic Act (RA) No. 7617 legislative franchise . . .
on June 25, 1992. Under its franchise, Eastern is allowed to should be understood or
install, operate, and maintain telecommunications system interpreted as written,
throughout the Philippines. meaning, the 3%
From July 1, 1995 to December 31, 1996, Eastern purchased franchise tax shall be
various imported equipment, machineries, and spare parts collected as substitute
necessary in carrying out its business activities. The importations for any internal revenue
were subjected to a 10% value-added tax (VAT) by the Bureau taxes . . . imposed on
of Customs, which was duly paid by Eastern. its franchise or gross
On September 19, 1997, Eastern filed with the CIR a written receipts/earnings
application for refund or credit of unapplied input taxes it paid on thereof . . . ;
the imported equipment during the taxable years 1995 and 1996
amounting to P22,013,134.00. In claiming for the tax refund,
Eastern principally relied on Sec. 10 of RA No. 7617, which
allows Eastern to pay 3% of its gross receipts in lieu of all taxes
on this franchise or earnings thereof. 5 In the alternative, 9.The [VAT] on importation under Section 101
Eastern cited Section 106 (B) of the National Internal Revenue of the [1977] Tax Code
Code of 1977 6 (Tax Code) which authorizes a VAT-registered is neither a tax on
taxpayer to claim for the issuance of a tax credit certificate or a franchise nor on gross
tax refund of input taxes paid on capital goods imported or receipts or earnings
purchased locally to the extent that such input taxes 7 have not thereof. It is a tax on
been applied against its output taxes. 8 ACIDSc the privilege of
To toll the running of the two-year prescriptive period under the importing goods
same provision, Eastern filed an appeal with the CTA on whether or not the
September 25, 1997 without waiting for the CIR's decision on its taxpayer is engaged in
 business, and organic or statute law
regardless of whether and cannot be
the imported goods are permitted to exist upon
intended for sale, barter vague implication . . . ;
or exchange;

12.Taxes paid and collected are presumed to

10.The VAT under Section 101 (A) of the Tax have been made in
Code . . . replaced the accordance with the
advance sales tax and laws and regulations;
compensating tax . . . . and
Accordingly, the 3%
franchise tax did not
substitute the 10%
[VAT] on [Eastern's]
importation of 13.It is incumbent upon the taxpayer to
equipment, machineries establish its right to the
and spare parts for the refund and failure to
use of its sustain the burden is
telecommunication fatal to the claim for
system; refund. 9 SCaEcD

11.Tax refunds are in the nature of tax
exemptions. As such,
they are regarded in
derogation of sovereign
authority and to be
construed in strictissimi
juris against the person
or entity claiming the
exemption. The burden
is upon him who claims
the exemption in his
favour and he must be
able to justify his claim
by the clearest grant of
Ruling in favor of Eastern, the CTA found that Eastern has a valid
claim for the refund/credit of the unapplied input taxes, not on
the basis of the "in lieu of all taxes" provision of its legislative
franchise, 10 but rather, on Section 106 (B) of the Tax
Code,which states:
SECTION 106.Refunds or tax credits of input tax. —
xxx xxx xxx
(b)Capital goods. — A VAT-registered person
may apply for the issuance of a
tax credit certificate or refund of
 input taxes paid on capital goods
imported or locally purchased, to
the extent that such input taxes
have not been applied against
output taxes. The application may
be made only within two (2) years
after the close of the taxable
quarter when the importation or
purchase was made. 11
[Emphases supplied.]
The CTA ruled that Eastern had satisfactorily shown
that it was entitled to the claimed refund/credit as
all the elements of the above provision were
present: (1) Eastern was a VAT-registered entity
which paid 10% input taxes on its importations of
capital equipment; (2) this input VAT remained
unapplied as of the first quarter of 1997; and (3)
Eastern seasonably filed its application for refund/
credit within the two-year period stated in the law.
However, the CTA noted that Eastern was able to
substantiate only P21,487,702.00 of its claimed
amount of P22,013,134.00. The difference
represented input taxes that were allegedly paid but
were not supported by the corresponding receipts,
as found by an independent auditor. Moreover, it
excluded P5,360,634.00 in input taxes on imported
equipment for the year 1995, even when these were
properly documented as they were already booked
by Eastern as part of the cost. Once input tax
becomes part of the cost of capital equipment, it
necessarily forms part of depreciation. Thus, to
grant the refund of the 1995 creditable input tax
amounts to twice giving Eastern the tax benefit.
Thus, in its July 17, 2000 decision, the CTA granted
in part Eastern's appeal by declaring it entitled to a
tax refund of P16,229,100.00, representing
unapplied input taxes on imported capital goods for
the taxable year 1996. 12
The CIR filed, on August 3, 2000, a motion for reconsideration
13 of the CTA's decision. About a month and a half later, it filed a
supplemental motion for reconsideration dated September 15,
2000. 14 The CTA denied the CIR's motion for reconsideration in
its resolution dated September 20, 2000. 15 The CIR then
elevated the case to the CA through a petition for review under
Rule 43 of the Rules of Court. The CA affirmed the CTA ruling
through its decision dated October 1, 2003 16 and its resolution
dated May 26, 2004, 17 denying the motion for reconsideration.
Hence, the present petition.
THE PETITIONER'S ARGUMENTS
The CIR takes exception to the CA's ruling that Eastern is
entitled to the full amount of unapplied input taxes paid for its
purchase of imported capital goods that were substantiated by
the corresponding receipts and invoices. The CIR posits that,
applying Section 104 (A) of the Tax Code on apportionment of
tax credits, Eastern is entitled to a tax refund of only
P8,814,790.15, instead of the P16,229,100.00 adjudged by the
CTA and the CA. Section 104 (A) of the Tax Code states:
SEC. 104.Tax Credits. —
(a)Creditable Input tax. —
xxx xxx xxx
A VAT-registered person who is also engaged in transactions not
subject to the value-added tax shall be allowed input tax credit
as follows:
(A)Total input tax which can be directly
attributed to
t ra n s a c t i o n s
subject to
va l u e -a d d e d
tax; and
(B)A ratable portion of any input tax which cannot be directly
attributed to either activity. 18 [Emphases supplied.]
To be entitled to a tax refund of the full amount of
P16,229,100.00, the CIR asserts that Eastern must prove that
(a) it was engaged in purely VAT taxable transactions and (b)
the unapplied input taxes it claims as refund were directly
attributable to transactions subject to VAT. The VAT returns of
Eastern for the 1st, 2nd, 3rd, and 4th quarters of 1996,
however, showed that it earned income from both transactions
subject to VAT and transactions exempt from VAT; 19 the returns
reported income earned from taxable sales, zero-rated sales,
and exempt sales in the following amounts:
1996 Taxable Zero- Exempt
Sales Rated Sales
Sales
1st ---
820,673.70 ---
Total 1,040,907,129.77
Amount
of Sales
The taxable sales and zero-rated sales are considered
transactions subject to VAT, 20 while exempt sales
refer to transactions not subject to VAT.
Since the VAT returns clearly reflected income from exempt
sales, the CIR asserts that this constitutes as an admission on
Eastern's part that it engaged in transactions not subject to VAT.
Hence, the proportionate allocation of the tax credit to VAT and
non-VAT transactions provided in Section 104 (A) of the Tax
Code should apply. Eastern is then entitled to only
P8,814,790.15 as the ratable portion of the tax credit, computed
in the following manner:

Quart Taxable Sales

er + Zero-rated
2nd 3,361,618.59
225,088,899.07
140,111,655.85 Sales
Quart —————— x Input = Refunda
er —————— Tax as ble
3rd 2,607,168.96
169,821,537.80
187,712,657.16 —— found
Quart Total by the input tax
er Sales CTA
4th 1,134,942.71
162,530,947.40
147,717,028.53 7,924,403.96
Quart +
er 557,445,384.9
TOTA 7,924,403.96
557,441,384.27
475,541,341.54 7
L —————— x = P8,814,7
—————— 16,229,1 90.15
—— 00.00
 2.Such person is engaged in a transaction
1,040,907,129.77 subject to VAT;

THE RESPONDENT'S ARGUMENTS

Eastern objects to the arguments raised in the petition, alleging

that these have not been raised in the Answer filed by the CIR 3.The person is also engaged in other
before the CTA. In fact, the CIR only raised the applicability of transactions not subject
Section 104 (A) of the Tax Code in his supplemental motion for to VAT; and
reconsideration of the CTA's ruling which, notably, was filed a
month and a half after the original motion was filed, and thus
beyond the 15-day reglementary period. 21 Accordingly, the
applicability of Section 104 (A) was never validly presented as an
issue before the CTA; this, Eastern presumes, is the reason why
it was not discussed in the CTA's resolution denying the motion 4.The ratable portion of any input tax cannot
for reconsideration. Eastern claims that for the CIR to raise such be directly attributed to
an issue now would constitute a violation of its right to due either activity.
process; following settled rules of procedure and fair play, the
CIR should not be allowed at the appeal level to change his
theory of the case. aETAHD
Moreover, in raising the question of whether Eastern was in fact
engaged in transactions not subject to VAT and whether the In the case at bar, the third and fourth
unapplied input taxes can be directly attributable to transactions requisites are not extant. It is
subject to VAT, Eastern posits that the CIR is effectively raising undisputed that [Eastern] is VAT-
factual questions that cannot be the subject of an appeal by registered and the importation of
certiorari before the Court. [Eastern's] telecommunications
Even if the CIR's arguments were considered, Eastern insists equipment, machinery, spare
that the petition should nevertheless be denied since the CA parts, fiber optic cables, and the
found that there was no evidence in the claim that it was like, as found by the CTA, is a
engaged in non-VAT transactions. The CA has ruled that: t r a n s a c t i o n s u b j e c t t o VAT.
The following requirements must be present However, there is no evidence on
before [Section 104 (A)] of the record that would evidently show
[1977 Tax Code] can be applied, that respondent is also engaged in
to wit: other transactions that are not
s u b j e c t t o V AT. [ E m p h a s i s
supplied.] 22

1.The person claiming the creditable input tax

must be VAT-registered;
Given the parties' arguments, the issue for resolution is whether
the rule in Section 104 (A) of the Tax Code on the apportionment
of tax credits can be applied in appreciating Eastern's claim for for reconsideration of the CTA decision (which was even
tax refund, considering that the matter was raised by the CIR belatedly filed), the issue was not properly and timely raised
only when he sought reconsideration of the CTA ruling? and, hence, could not be considered by the CTA. By raising the
THE COURT'S RULING issue in his appeal before the CA, the CIR has violated the
above-cited procedural rule.
We find the CIR's petition meritorious. Contrary to Eastern's claim, we find that the CIR has previously
The Rules of Court prohibits raising
 questioned the nature of Eastern's transactions insofar as they
new issues on appeal; the question of
 affected the claim for tax refund in his motion for reconsideration
the applicability of Section 104 (A) of
 of the CTA decision, although it did not specifically refer to
the Tax Code was already raised but
 Section 104 (A) of the Tax Code.We quote relevant portions of
the tax court did not rule on it the motion:
[W]e maintain that [Eastern's] claims are not
Section 15, Rule 44 of the Rules of Court embodies the rule creditable input taxes under
against raising new issues on appeal: TCcIaA [Section 104 (A) of the Tax Code].
SEC. 15.Questions that may be raised on What the law contemplates as
appeal. — Whether or not the creditable input taxes are only
appellant has filed a motion for those paid on purchases of goods
new trial in the court below, he and services specifically
may include in his assignment of enumerated under [Section 104
errors any question of law or fact (A)] and that such input tax must
that has been raised in the court have been paid by a
below and which is within the VAT[-]registered person/entity in
issues framed by the parties. the course of trade or business. It
must be noted that [Eastern]
failed to prove that such
purchases were used in their
VAT[-]taxable business. [Eastern's
pieces of ] evidence are not
The general rule is that appeals can only raise questions of law
purchases of capital goods and do
or fact that (a) were raised in the court below, and (b) are within
not fall under the
the issues framed by the parties therein. 23 An issue which was
enumeration . . . .
neither averred in the pleadings nor raised during trial in the
court below cannot be raised for the first time on appeal. 24 The
rule was made for the benefit of the adverse party and the trial
court as well. Raising new issues at the appeal level is offensive
to the basic rules of fair play and justice and is violative of a
party's constitutional right to due process of law. Moreover, the It is significant to point out here that refund of
trial court should be given a meaningful opportunity to consider input taxes on capital goods shall
and pass upon all the issues, and to avoid or correct any alleged be allowed only to the extent that
errors before those issues or errors become the basis for an such capital goods are used in
appeal. 25 VAT[-]taxable business. . . . a
Eastern posits that since the CIR raised the applicability of perusal of the evidence submitted
Section 104 (A) of the Tax Code only in his supplemental motion before [the CTA] does not show
 that the alleged capital goods
w e r e u s e d i n VAT [ - ] t a x a b l e
business of [Eastern] . . . .
[Emphases supplied.] 26
In raising these matters in his motion for reconsideration, the
CIR put forward the applicability of Section 104 (A) because,
essentially, the applicability of the provision boils down to the
question of whether the purchased capital goods which a
taxpayer paid input taxes were also used in a VAT-taxable
business, i.e., transactions that were subject to VAT, in order for
them to be refundable/creditable. Once proved that the taxpayer
used the purchased capital goods in a both VAT taxable and non-
VAT taxable business, the proportional allocation of tax credits
stated in the law necessarily applies. This rule is also embodied
in Section 4.106-1 of Revenue Regulation No. 7-95, entitled
Consolidated Value-Added Tax Regulations, which states: DEcITS
SEC. 4.106-1.Refunds or tax credits of input
tax. — . . .
(b)Capital Goods. — Only a VAT-registered
person may apply for issuance of
a tax credit certificate or refund of
input taxes paid on capital goods
imported or locally purchased. The
refund shall be allowed to the
extent that such input taxes have
not been applied against output
taxes. The application should be
made within two (2) years after
the close of the taxable quarter
when the importation or purchase
was made.
Refund of input taxes on capital goods shall be allowed only to
the extent that such capital goods are used in VAT taxable
business. If it is also used in exempt operations, the input tax
refundable shall only be the ratable portion corresponding to the
taxable operations. [Emphasis supplied.]
That the CTA failed to rule on this question when it
resolved the CIR's motion for reconsideration should
not be taken against the CIR. It was the CTA which
committed an error when it failed to avail of that
"meaningful opportunity to avoid or correct any
alleged errors before those errors become the basis
for an appeal." 27 cEaTHD
Exceptions to the general rule;

Eastern's VAT returns reporting

income from exempt sales are

matters of record that the tax court

should have considered
The rule against raising new issues on appeal is not without
exceptions; it is a procedural rule that the Court may relax when
compelling reasons so warrant or when justice requires it. What
constitutes good and sufficient cause that would merit
suspension of the rules is discretionary upon the courts. 28
Former Senator Vicente Francisco, a noted authority in
procedural law, cites an instance when the appellate court may
take up an issue for the first time:
The appellate court may, in the interest of justice, properly take
into consideration in deciding the case matters of record having
some bearing on the issue submitted which the parties failed to
raise or the lower court ignored, although they have not been
specifically raised as issues by the pleadings. This is in
consonance with the liberal spirit that pervades the Rules of
Court, and the modern trend of procedure which accord the
courts broad discretionary power, consistent with the orderly
administration of justice, in the decision of cases brought before
them. 29 [Emphasis supplied.]
As applied in the present case, even without the CIR raising the
applicability of Section 104 (A), the CTA should have considered
it since all four of Eastern's VAT returns corresponding to each
taxable quarter of 1996 clearly stated that it earned income from
exempt sales, i.e., non-VAT taxable sales. Eastern's quarterly
VAT returns are matters of record. In fact, Eastern included them to VAT, the sellers cannot pass on
in its formal offer of evidence before the CTA "to prove that [it any output VAT to the purchasers
is] engaged in VAT taxable, VAT exempt, and VAT zero-rated of goods, properties, or services,
sales." By declaring income from exempt sales, Eastern and they may not claim tax credit/
effectively admitted that it engaged in transactions not subject refund of the input VAT they had
to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill any paid thereon. 34
output tax on his sales to his customers and, corollarily, is not
allowed any credit or refund of the input taxes he paid on his
purchases. 30 This non-crediting of input taxes in exempt
transactions is the underlying reason why the Tax Code adopted
the rule on apportionment of tax credits under Section 104 (A) The mere declaration of exempt sales in the VAT
whenever a VAT-registered taxpayer engages in both VAT returns, whether based on Section 103 of the Tax
taxable and non-VAT taxable sales. In the face of these Code or some other special law, should have
disclosures by Eastern, we thus find the CA's the conclusion that prompted the CA to apply Section 104 (A) of the
"there is no evidence on record that would evidently show that Tax Code to Eastern's claim. It was thus erroneous
[Eastern] is also engaged in other transactions that are not for the appellate court to rule that the declaration of
subject to VAT" to be questionable. 31 exempt sales in Eastern's VAT return, which may
Also, we disagree with the CA's declaration that: correspond to exempt transactions under Section
The mere fact that [Eastern's] Quarterly VAT Returns confirm 103, does not indicate that Eastern was also
that [Eastern's] transactions involved zero-rated sales and involved in non-VAT transactions. IaECcH
exempt sales do not sufficiently establish that the same were
derived from [Eastern's] transactions that are not subject to VAT.
Exception to general rule; taxpayer

On the contrary, the transactions from which [Eastern's] sales
claiming refund has the duty to

were derived are subject to VAT but are either zero[-]rated (0%)
prove entitlement thereto
or otherwise exempted for falling within the transactions
enumerated in [Section 102 (B) or Section 103] of the Tax Code.
Another exemption from the rule against raising new issues on
32 [Emphasis supplied.]
appeal is when the question involves matters of public
Section 103 of the Tax Code 33 is an enumeration of
importance. 35
transactions exempt from VAT. Explaining the
The power of taxation is an inherent attribute of sovereignty; the
relation between exempt transactions in Section
government chiefly relies on taxation to obtain the means to
103 and claims for tax refunds, the Court declared
carry on its operations. Taxes are essential to its very existence;
in CIR v. Toshiba Equipment (Phils.), Inc. that:
36 hence, the dictum that "taxes are the lifeblood of the
government." For this reason, the right of taxation cannot easily
Section 103 . . . of the Tax Code of 1977, as
be surrendered; statutes granting tax exemptions are considered
amended, relied upon by
as a derogation of the sovereign authority and are strictly
petitioner CIR, relates to VAT-
construed against the person or entity claiming the exemption.
exempt transactions. These are
Claims for tax refunds, when based on statutes granting tax
transactions exempted from VAT
exemption or tax refund, partake of the nature of an exemption;
by special laws or international
thus, the rule of strict interpretation against the taxpayer-
agreements to which the
claimant similarly applies. 37
Philippines is a signatory. Since
The taxpayer is charged with the heavy burden of proving that
such transactions are not subject
he has complied with and satisfied all the statutory and
administrative requirements to be entitled to the tax refund. This
burden cannot be offset by the non-observance of procedural
technicalities by the government's tax agents when the non-
observance of the remedial measure addressing it does not in
any manner prejudice the taxpayer's due process rights, as in
the present case.
Eastern cannot validly claim to have been taken by surprise by
the CIR's arguments on the relevance of Section 104 (A) of the
Tax Code,considering that the arguments were based on the
reported exempt sales in the VAT returns that Eastern itself
prepared and formally offered as evidence. Even if we were to
consider the CIR's act as a lapse in the observance of procedural
rules, such lapse does not work to entitle Eastern to a tax refund
when the established and uncontested facts have shown
otherwise. Lapses in the literal observance of a rule of procedure
may be overlooked when they have not prejudiced the adverse
party and especially when they are more consistent with
upholding settled principles in taxation.
WHEREFORE, we GRANT the petitioner's petition for review on
certiorari, and REVERSE the decision of the Court of Appeals in
CA G.R. SP No. 61157, promulgated on October 1, 2003, as well
as its resolution of May 26, 2004. We order the REMAND of the
case to the Court of Tax Appeals to determine the proportionate
amount of tax credit that respondent is entitled to, consistent
with our ruling above. Costs against the respondent. DIEcHa
SO ORDERED.
Carpio, * Abad, *** Villarama, Jr. and Mendoza, **** JJ.,
concur.

| | | ( C o m m i s s i o n e r o f I n t e r n a l R e v e n u e v. E a s t e r n
Telecommunications Philippines, Inc., G.R. No. 163835, [July 7,
2010], 638 PHIL 334-352)
THE COMMISSIONER OF CUSTOMS and THE COLLECTOR OF
CUSTOMS, petitioners, vs. EASTERN SEA TRADING, respondent.
Solicitor General for petitioners.
Valentin C . Gutierrez for respondent.
SYLLABUS
1. IMPORT AND EXPORT; CENTRAL BANK; AUTHORITY TO
REGULATE NO-DOLLAR IMPORTS. — The Central Bank has
authority to regulate no-dollar imports, because its broad powers
under the charter, to maintain monetary stability and to preserve
the international value of the currency, under section 2 of
Republic Act No. 265, in relation to section 14 of said Act —
authorizing the bank to issue such rules and regulations as it
may consider necessary for the effective discharge of the
responsibilities and the exercise of the power assigned to the
Monetary Board and to the Central Bank — connote the authority
to regulate no-dollar imports, owing to the influence and effect
that the same may and do have upon the stability of the peso
and its international value.
2. ID.; ID.; ID.; ISSUANCE OF IMPORT LICENSES NOT VESTED
EXCLUSIVELY UPON IMPORT CONTROL COMMISSION. — The
authority to issue import licenses was not vested exclusively
upon the Import Control Commission, because Executive Order
No. 328 provided for export or import licenses "from the Central
Bank of the Philippines or the Import Control Administration" or
Commission. The latter was created only to perform the task of
implementing certain objectives of the Monetary Board and the
Central Bank, which otherwise had to be undertaken by these
(2) agencies. Upon the abolition of said Commission, the duty to
provide means and ways for the accomplishment of said
objectives had merely to be discharged directly by the Monetary
Board and the Central Bank, even if the aforementioned
Executive Order had been silent thereon.
3 . C O N S T I T U T I O N A L L AW; E X E C U T I V E A G R E E M E N TS ;
CONCURRENCE OF SENATE NOT REQUIRED. — While the
concurrence of the Senate is required by the Constitution in the
making of "treaties" (Constitution of the Philippines, Article VII,
Section 10 [7], "executive agreements" may be validly entered
into without such concurrence.
DECISION
CONCEPCION, J p:
Petition for review of a judgment of the
Court of Tax Appeals reversing a decision of the
Commissioner of Customs.
Respondent Eastern Sea Trading was the consignee of several
shipments of onion and garlic which arrived at the Port of Manila
from August 25 to September 7, 1954. Some shipments came
from Japan and others from Hongkong. Inasmuch as none of the
shipments had the certificate required by Central Bank Circulars
Nos. 44 and 45 for the release thereof, the goods thus imported
were seized and subjected to forfeiture proceedings for alleged
violations of section 1363 ( f ) of the Revised Administrative
Code, in relation to the aforementioned circulars of the Central
Bank. In due course, the Collector of Customs of Manila
rendered a decision on September 4, 1956, declaring said goods
forfeited to the Government and — the goods having been, in
the meantime, released to the consignees on surely bonds, filed
by the same, as principal, and the Alto Surety & Insurance Co.,
Inc., as surety, in compliance with orders of the Court of First
Instance of Manila, in Civil Cases Nos. 23942 and 23852 thereof
— directing that the amounts of said bonds be paid, by said
principal and surety, jointly and severally, to the Bureau of
Customs, within thirty (30) days from notice.
On appeal taken by the consignee, said decision was affirmed by
the Commissioner of Customs on December 27, 1956.
Subsequently, the consignee sought a review of the decision of
said two (2) officers by the Court of Tax Appeals, which reversed
the decision of the Commissioner of Customs and ordered that
the aforementioned bonds be cancelled and withdrawn. Hence,
the present petition of the Commissioner of Customs for review
of the decision of the Court of Tax Appeals.
The latter is based upon the following premises, namely: that
the Central Bank has no authority to regulate transactions not
involving foreign exchange; that the shipments in question are in
the nature of "no-dollar" imports; that, as such, the
aforementioned shipments do not involve foreign exchange;
that, insofar as a Central Bank license and a certificate
authorizing the importation or release of the goods under
consideration are required by Central Bank Circulars Nos. 44 and
45, the latter are null and void; and that the seizure and
forfeiture of the goods imported from Japan cannot be justified
under Executive Order No. 328, 1 not only because the same
seeks to implement an executive agreement 2 — extending the xxx xxx xxx
effectivity of our Trade 3 and Financial Agreements 4 with Japan
— which (executive agreement), it believed, is of dubious
validity, but, also because there is no governmental agency
authorized to issue the import license required by the
aforementioned executive order. ". . . the right of the Executive to enter into
The authority of the Central Bank to regulate no-dollar imports binding agreements without the
and the validity of the aforementioned Circulars Nos. 44 and 45 necessity of subsequent
have already been passed upon and repeatedly upheld by this Congressional approval has been
Court (Pascual vs. Commissioner of Customs, L-10979 [June 30, confirmed by long usage. From
1959]; Acting Commissioner of Customs vs. Leuterio, L-9142 the earliest days of our history we
[October 17, 1959]; Commissioner of Customs vs. Pascual, have entered into executive
L-9836 [November 18, 1959]; Commissioner of Customs vs. agreements covering such
Serree Investment Co., L-12007 [May 16, 1960]; Commissioner subjects as commercial and
of Customs vs. Serree Investment Co., L-14274 [November 29, consular relations, most-favored-
1960]), for the reason that the broad powers of the Central nation rights, patent rights,
Bank, under its charter, to maintain our monetary stability and trademark and copyright
to preserve the international value of our currency, under section protection, postal and navigation
2 of Republic Act No. 265, in relation to section 14 of said Act — arrangements and the settlement
authorizing the bank to issue such rules and regulations as it of claims. The validity of these has
may consider necessary for the effective discharge of the never been seriously questioned
responsibilities and the exercise of the powers assigned to the by our courts.
Monetary Board and to the Central Bank — connote the authority
to regulate no-dollar imports, owing to the influence and effect
that the same may and do have upon the stability of our peso
and its international value.
The Court of Tax Appeals entertained doubts on the legality of
the executive agreement sought to be implemented by Executive xxx xxx xxx
Order No. 328, owing to the fact that our Senate had not
concurred in the making of said executive agreement. The
concurrence of said House of Congress is required by our
fundamental law in the making of "treaties" (Constitution of the
Philippines, Article VII, Section 10[7]), which are, however, "Agreements with respect to the registration of
distinct and different from "executive agreements", which may trade-marks have been concluded
be validly entered into without such concurrence. by the Executive with various
"Treaties are formal documents which require countries under the Act of
ratification with the approval of Congress of March 3, 1881 (21
two-thirds of the Senate. Stat. 502). Postal conventions
Executive agreements become regulating the reciprocal
binding through executive action treatment of mail matters, money
without the need of a vote by the orders, parcel post, etc., have
Senate or by Congress. been concluded by the Post-
 master General with various
countries under authorization by
Congress beginning with the Act
of February 20, 1792 (I Stat. 232,
239). Ten executive agreements
were concluded by the President
pursuant to the McKinley Tariff Act
of 1890 (26 Stat. 567, 612), and
nine such agreements were
entered into under the Dingley
Tariff Act of 1897 (30 Stat. 151,
203, 214). A very much larger
number of agreements, along the
lines of the one with Rumania
previously referred to, providing
for most-favored-nation treatment
in customs and related matters
have been entered into since the
passage of the Tariff Act of 1922,
not by direction of the Act but in
harmony with it.
xxx xxx xxx
"International agreements involving political
issues or changes of national
policy and those involving
international arrangements of a
permanent character usually take
the form of treaties. But
international agreements
embodying adjustments of detail
carrying out well-established
national policies and traditions
and those involving arrangements
of a more or less temporary
nature usually take the form of
executive agreements.
xxx xxx xxx
"Furthermore, the United States Supreme
Court has expressly recognized
the validity and constitutionality of
executive agreements entered
into without Senate approval." (39
Columbia Law Review, pp.
753-754) (See, also, U.S. vs.
Curtis-Wright Export Corporation,
299 U.S. 304, 81 L. ed. 255; U.S.
vs. Belmont, 301 U.S. 324, 81 L.
ed. 1134; U.S. vs. Pink, 315 U.S.
203, 86 L. ed. 796; Ozanic vs.
U.S. 188 F. 2d. 288; Yale Law
Journal, Vol. 15, pp. 1905-1906;
California Law Review, Vol. 25, pp.
670-675; Hyde on International
Law [Revised Edition], Vol. 2, pp.
1405, 1416-1418; Willoukhby on
the U.S. Constitutional Law, Vol. I
[2d. ed.], pp. 537-540; Moore,
International Law Digest, Vol. V,
pp. 210-218; Hackworth,
International Law Digest, Vol. V,
pp. 390-407). (Emphasis
supplied.)
In this connection, Francis B. Sayre, former U. S. High
Commissioner to the Philippines, said in his work on "The
Constitutionality of Trade Agreement Acts":
"Agreements concluded by the President which
fall short of treaties are commonly
referred to as executive
agreements and are no less
common in our scheme of
government than are the more
formal instruments — treaties and
conventions. They sometimes take
the form of exchanges of notes
and at other times that of more
formal documents denominated
'agreements' or 'protocols'. The
point where ordinary
correspondence between this and
other governments ends and
agreements — whether
denominated executive
agreements or exchanges of notes
or otherwise — begin, may
sometimes be difficult of ready
ascertainment. It would be
useless to undertake to discuss
here the large variety of executive
agreements as such, concluded
from time to time. Hundreds of
executive agreements, other than
those entered into under the
trade-agreements act, have been
negotiated with foreign
governments. . . . It would seem
to be sufficient, in order to show
that the trade agreements under
the act of 1934 are not anomalous
in character, that they are not
treaties, and that they have
abundant precedent in our history,
to refer to certain classes of
agreements heretofore entered
into by the Executive without the
approval of the Senate. They
cover such subjects as the
inspection of vessels, navigation
dues, income tax on shipping
profits, the admission of civil
aircraft, customs matters, and
commercial relations generally,
international claims, postal
matters, the registration of trade-
marks and copyrights, etc. Some
of them were concluded not by
specific congressional
authorization but in conformity
with policies declared in acts of
Congress with respect to the
general subject matter, such as
tariff acts; while still others,
particularly those with respect to
the settlement of claims against
foreign governments, were
concluded independently of any
legislation." (39 Columbia Law
Review, pp. 651, 755.)
The validity of the executive agreement in question is thus
patent. In fact, the so-called Parity Rights provided for in the
Ordinance Appended to our Constitution were, prior thereto, the
subject of an executive agreement, made without the
concurrence of two-thirds (2/3) of the Senate of the United
States.
Lastly, the lower court held that it would be unreasonable to
require from respondent-appellee an import license when the
Import Control Commission was no longer in existence and,
hence, there was, said court believed, no agency authorized to
issue the aforementioned license. This conclusion is untenable,
for the authority to issue the aforementioned licenses was not
vested exclusively upon the Import Control Commission or
Administration. Executive Order No. 328 provided for export or
import licenses "from the Central Bank of the Philippines or the
Import Control Administration" or Commission. Indeed, the latter
was created only to perform the task of implementing certain
objectives of the Monetary Board and the Central Bank, which
otherwise had to be undertaken by these two (2) agencies. Upon
the abolition of said Commission, the duty to provide means and
ways for the accomplishment of said objectives had merely to be
discharged directly by the Monetary Board and the Central Bank,
even if the aforementioned Executive Order had been silent
thereon.
WHEREFORE, the decision appealed from is hereby reversed and
another one shall be entered affirming that of the Commissioner
of Customs, with costs against respondent-appellee, Eastern Sea
Trading. It is so ordered.
Bengzon, C . J ., Padilla, Bautista Angelo, Labrador, Reyes, J.B.L.,
Paredes, Dizon and De Leon, JJ ., concur.
Barrera, J ., took no part.
||| (Commissioner of Customs v. Eastern Sea Trading, G.R. No.
L-14279, [October 31, 1961], 113 PHIL 333-340)
NATIONAL POWER CORPORATION, petitioner, vs. CITY OF
CABANATUAN, respondent.
The Solicitor General for petitioner.
Edgardo G. Villarin and Trese D. Wenceslao for respondent.
SYNOPSIS
Petitioner is a government owned and controlled corporation
created under Commonwealth Act No. 120, as amended. For
many years, petitioner sold electric power to the residents of
Cabanatuan City. Pursuant to a 1992 ordinance, the respondent
assessed the petitioner a franchise tax. In refusing to pay the
tax assessment, petitioner argued that the respondent had no
authority to impose tax on government entities like itself and
that it was a tax exempt entity by express provisions of law.
Hence, respondent filed a collection suit demanding payment of
the assessed tax due alleging that petitioner's exemption from
local taxes has been repealed. The trial court dismissed the case
and ruled that the tax exemption privileges granted to petitioner
still subsists. On appeal, the Court of Appeals reversed the trial
court's order. Petitioner's motion for reconsideration was denied
by the appellate court. Hence, this petition for review filed before
the Supreme Court.
The Supreme Court denied this petition and affirmed the
decision of the Court of Appeals. According to the Court, one of
the most significant provisions of the Local Government Code
(LGC)is the removal of the blanket exclusion of instrumentalities
and agencies of the national government from the coverage of
local taxation. Although as a general rule, Local Government
Units (LGU) cannot impose taxes, fees or charges of any kind on
the National Government, its agencies and instrumentalities, this
rule now admits an exception, i.e., when specific provisions of
the LGC authorize the LGU to impose taxes, fees or charges on
the aforementioned entities. In the case at bar, Section 151 in
relation to Section 137 of the LGC clearly authorized the
respondent city government to impose on the petitioner the
franchise tax in question.
SYLLABUS
1. TAXATION; TAXES AS THE LIFEBLOOD OF THE GOVERNMENT;
CONSTRUED. — Taxes are the lifeblood of the government, for
without taxes, the government can neither exist nor endure. A
principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state whose
social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of
the power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
2. ID.; POWER TO TAX; LOCAL GOVERNMENT UNITS; ENJOY
DIRECT AUTHORITY TO LEVY TAXES, FEES AND OTHER
CHARGES PURSUANT TO ARTICLE X, SECTION 5 OF THE
CONSTITUTION; RATIONALE. — In recent years, the increasing
social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice
and the equitable distribution of wealth, economic progress and
the protection of local industries as well as public welfare and
similar objectives. Taxation assumes even greater significance
with the ratification of the 1987 Constitution. Thenceforth, the
power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes,
fees and other charges pursuant to Article X, Section 5 of the
1987 Constitution, viz: "Section 5. — Each Local Government
unit shall have the power to create its own sources of revenue,
to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees and charges
shall accrue exclusively to the Local Governments." This
paradigm shift results from the realization that genuine
development can be achieved only by strengthening local
autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure
has bred a culture of dependence among local government
leaders upon the national leadership. It has also "dampened the
spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government
leaders." The only way to shatter this culture of dependence is to
give the LGUs a wider role in the delivery of basic services, and
confer them sufficient powers to generate their own sources for
the purpose. To achieve this goal, Section 3 of Article X of the
1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of
local autonomy, set the guidelines and limitations to this grant of
taxing powers.
3. ID.; ID.; ID.; CANNOT IMPOSE TAXES, FEES OR CHARGES OF
ANY KIND ON THE NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES AS A RULE; EXCEPTION. — Considered as
the most revolutionary piece of legislation on local autonomy,
the LGC effectively deals with the fiscal constraints faced by
LGUs. It widens the tax base of LGUs to include taxes which
were prohibited by previous laws such as the imposition of taxes
on forest products, forest concessionaires, mineral products,
mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their
needs and capabilities. It does not prescribe graduated fixed
rates but merely specifies the minimum and maximum tax rates
and leaves the determination of the actual rates to the
respective sanggunian. One of the most significant provisions of
the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from
the coverage of local taxation. Although as a general rule, LGUs
cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC
authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz: "Section 133. Common Limitations
on the Taxing Powers of the Local Government Units — Unless
otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend
to the levy of the following: . . . (o) Taxes, fees, or charges of
any kind on the National Government, its agencies and
instrumentalities, and local government units."
4. MERCANTILE LAW; FRANCHISE; DEFINED AND CONSTRUED.
— In its general signification, a franchise is a privilege conferred
by government authority, which does not belong to citizens of
the country generally as a matter of common right. In its specific
sense, a franchise may refer to a general or primary franchise,
or to a special or secondary franchise. The former relates to the
right to exist as a corporation, by virtue of duly approved articles
of incorporation, or a charter pursuant to a special law creating
the corporation. The right under a primary or general franchise is
vested in the individuals who compose the corporation and not in
the corporation itself. On the other hand, the latter refers to the
right or privileges conferred upon an existing corporation such as
the right to use the streets of a municipality to lay pipes of
tracks, erect poles or string wires. The rights under a secondary
or special franchise are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power
granted to a corporation to dispose of its property, except such
special or secondary franchises as are charged with a public use.
ISDHcT
5. TAXATION; FRANCHISE TAX IMPOSED UNDER THE LOCAL
GOVERNMENT CODE; REQUISITES. — In Section 131 (m) of the
LGC,Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion
when the word franchise is used in the context of taxation. As
commonly used, a franchise tax is "a tax on the privilege of
transacting business in the state and exercising corporate
franchises granted by the state." It is not levied on the
corporation simply for existing as a corporation, upon its
property or its income, but on its exercise of the rights or
privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do
business and exercise its franchise. It is within this context that
the phrase "tax on businesses enjoying a franchise" in Section
137 of the LGC should be interpreted and understood. Verily, to
determine whether the petitioner is covered by the franchise tax
in question, the following requisites should concur: (1) that
petitioner has a "franchise" in the sense of a secondary or
special franchise; and (2) that it is exercising its rights or
privileges under this franchise within the territory of the
respondent city government. To stress, a franchise tax is
imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is
the corporation which exercises the franchise, and not the
individual stockholders.
6. ID.; TAX EXEMPTION; CONSTRUED STRONGLY AGAINST THE
CLAIMANT; APPLICATION IN CASE AT BAR. — As a rule, tax
exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions. In the case at bar, the
petitioner's sole refuge is Section 13 of Rep. Act No. 6395
exempting from, among others, "all income taxes, franchise
taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies
and instrumentalities." However, Section 193 of the LGC
withdrew, subject to limited exceptions, the sweeping tax
privileges previously enjoyed by private and public corporations.
Contrary to the contention of petitioner, Section 193 of the LGC
is an express, albeit general, repeal of all statutes granting tax
exemptions from local taxes. It reads: "Sec. 193. Withdrawal of
Tax Exemption Privileges. — Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-
stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code." It is a basic
precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio
alterius. Not being a local water district, a cooperative registered
under R.A. No. 6938, or a non-stock and non-profit hospital or
educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point
to some provisions of the LGC that expressly grant it exemption
from local taxes.
7. POLITICAL LAW; GOVERNMENT OWNED AND CONTROLLED
CORPORATION; CONSTRUED. — Section 2 of Pres. Decree No.
2029 classifies government-owned or controlled corporations
(GOCCs) into those performing governmental functions and
those performing proprietary functions, viz: "A government-
owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary
functions, which is directly chartered by special law or if
organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at
least a majority of its outstanding voting capital stock . . . ."
G ove r n m e n t a l f u n c t i o n s a r e t h o s e p e r t a i n i n g t o t h e
administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way
of advancing the general interest of society, and are merely
optional on the government. Included in the class of GOCCs
performing proprietary functions are "business-like" entities such
as the National Steel Corporation (NSC), the National
Development Corporation (NDC), the Social Security System
(SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA), among
others.
DECISION
PUNO, J p:
This is a petition for review 1 of the Decision 2 and the
Resolution 3 of the Court of Appeals dated March 12, 2001 and
July 10, 2001, respectively, finding petitioner National Power
Corporation (NPC) liable to pay franchise tax to respondent City
of Cabanatuan. CEDScA
Petitioner is a government-owned and controlled corporation
created under Commonwealth Act No. 120, as amended. 4 It is
tasked to undertake the "development of hydroelectric
generations of power and the production of electricity from
nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis." 5
Concomitant to its mandated duty, petitioner has, among others,
the power to construct, operate and maintain power plants,
auxiliary plants, power stations and substations for the purpose
of developing hydraulic power and supplying such power to the
inhabitants. 6
For many years now, petitioner sells electric power to the
residents of Cabanatuan City, posting a gross income of
P107,814,187.96 in 1992. 7 Pursuant to Section 37 of Ordinance
No. 165-92, 8 the respondent assessed the petitioner a franchise
tax amounting to P808,606.41, representing 75% of 1% of the
latter's gross receipts for the preceding year. 9
Petitioner, whose capital stock was subscribed and paid wholly by
the Philippine Government, 10 refused to pay the tax
assessment. It argued that the respondent has no authority to
impose tax on government entities. Petitioner also contended
that as a non-profit organization, it is exempted from the
payment of all forms of taxes, charges, duties or fees 11 in
accordance with Sec. 13 of Rep. Act No. 6395, as amended, viz:
Sec. 13. Non-profit Character of the
Corporation; Exemption from all
Taxes, Duties, Fees, Imposts and
Other Charges by Government
and Governmental
Instrumentalities. — The
Corporation shall be non-profit
and shall devote all its return from
its capital investment, as well as
excess revenues from its
operation, for expansion. To
enable the Corporation to pay its
 indebtedness and obligations and
in furtherance and effective
implementation of the policy
enunciated in Section one of this
Act, the Corporation is hereby
exempt:
(a) From the payment of all taxes, duties, fees,
imposts, charges, costs and
service fees in any court or
administrative proceedings in
w h i c h i t m a y b e a p a r t y,
restrictions and duties to the
Republic of the Philippines, its
provinces, cities, municipalities
and other government agencies
and instrumentalities;
(b) From all income taxes, franchise taxes and
realty taxes to be paid to the
National Government, its
provinces, cities, municipalities
and other government agencies
and instrumentalities;
(c) From all import duties, compensating taxes
and advanced sales tax, and
wharfage fees on import of foreign
goods required for its operations
and projects; and
(d) From all taxes, duties, fees, imposts, and
all other charges imposed by the
Republic of the Philippines, its
provinces, cities, municipalities
and other government agencies
and instrumentalities, on all
petroleum products used by the
Corporation in the generation,
transmission, utilization, and sale
of electric power." 12
The respondent filed a collection suit in the Regional Trial Court
of Cabanatuan City, demanding that petitioner pay the assessed
tax due, plus a surcharge equivalent to 25% of the amount of
tax, and 2% monthly interest. 13 Respondent alleged that
petitioner's exemption from local taxes has been repealed by
Section 193 of Rep. Act No. 7160, 14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption
Privileges. — Unless otherwise
provided in this Code, tax
exemptions or incentives granted
to, or presently enjoyed by all
persons, whether natural or
juridical, including government
owned or controlled corporations,
except local water districts,
cooperatives duly registered under
R.A. No. 6938, non-stock and
non-profit hospitals and
educational institutions, are
h e r e b y w i t h d ra w n u p o n t h e
effectivity of this Code."
On January 25, 1996, the trial court issued an Order 15
dismissing the case. It ruled that the tax exemption privileges
granted to petitioner subsist despite the passage of Rep. Act No. to modify or repeal the earlier
7160 for the following reasons: (1) Rep. Act No. 6395 is a special law. Thus, despite the
particular law and it may not be repealed by Rep. Act No. 7160 passage of R.A. No. 7160 from
which is a general law; (2) Section 193 of Rep. Act No. 7160 is which the questioned Ordinance
in the nature of an implied repeal which is not favored; and (3) No. 165-92 was based, the tax
local governments have no power to tax instrumentalities of the exemption privileges of defendant
national government. Pertinent portion of the Order reads: NPC remain.
"The question of whether a particular law has
been repealed or not by a
subsequent law is a matter of
legislative intent. The lawmakers
may expressly repeal a law by Another point going against plaintiff in this
incorporating therein repealing case is the ruling of the Supreme
provisions which expressly and Court in the case of Basco vs.
specifically cite(s) the particular Philippine Amusement and
law or laws, and portions thereof, Gaming Corporation, 197 SCRA
that are intended to be repealed. 52, where it was held that:
A declaration in a statute, usually
in its repealing clause, that a
p a r t i c u l a r a n d s p e c i f i c l a w,
identified by its number or title is
repealed is an express repeal; all
others are implied repeal. Sec. 'Local governments have no power to tax
193 of R.A. No. 7160 is an implied instrumentalities of the
repealing clause because it fails to National Government.
identify the act or acts that are PAGCOR is a
intended to be repealed. It is a government owned or
well-settled rule of statutory controlled corporation
construction that repeals of with an original charter,
statutes by implication are not PD 1869. All of its
favored. The presumption is shares of stocks are
against inconsistency and owned by the National
repugnancy for the legislative is Government. . . . Being
presumed to know the existing an instrumentality of
laws on the subject and not to the government,
have enacted inconsistent or PAGCOR should be and
conflicting statutes. It is also a actually is exempt from
well-settled rule that, generally, local taxes. Otherwise,
general law does not repeal a its operation might be
special law unless it clearly burdened, impeded or
appears that the legislative has subjected to control by
intended by the latter general act mere local government.'
Like PAGCOR, NPC, being a government owned
and controlled corporation with an
original charter and its shares of
stocks owned by the National
Government, is beyond the taxing
power of the Local Government.
Corollary to this, it should be
noted here that in the NPC
Charter's declaration of Policy,
Congress declared that: '. . . (2)
the total electrification of the
Philippines through the
development of power from all
services to meet the needs of
industrial development and
dispersal and needs of rural
electrification are primary
objectives of the nations which
shall be pursued coordinately and
supported by all instrumentalities
and agencies of the government,
including its financial
institutions.' (emphasis supplied).
To allow plaintiff to subject
defendant to its tax-ordinance
would be to impede the avowed
goal of this government
instrumentality.
Unlike the State, a city or municipality has no
inherent power of taxation. Its
taxing power is limited to that
which is provided for in its charter
or other statute. Any grant of
taxing power is to be construed
strictly, with doubts resolved
against its existence.
From the existing law and the rulings of the
Supreme Court itself, it is very
clear that the plaintiff could not
impose the subject tax on the
defendant." 16
On appeal, the Court of Appeals reversed the trial court's Order
17 on the ground that Section 193, in relation to Sections 137
and 151 of the LGC,expressly withdrew the exemptions granted
to the petitioner. 18 It ordered the petitioner to pay the
respondent city government the following: (a) the sum of
P808,606.41 representing the franchise tax due based on gross
receipts for the year 1992, (b) the tax due every year thereafter
based in the gross receipts earned by NPC, (c) in all cases, to
pay a surcharge of 25% of the tax due and unpaid, and (d) the
sum of P10,000.00 as litigation expense. 19
On April 4, 2001, the petitioner filed a Motion for
Reconsideration on the Court of Appeal's Decision. This was
denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for
reconsideration. Its arguments
reiterated therein that the taxing
power of the province under Art.
137 (sic) of the Local Government
Code refers merely to private
persons or corporations in which
category it (NPC) does not belong,
and that the LGC (RA 7160) which
is a general law may not impliedly
repeal the NPC Charter which is a
special law — finds the answer in
Section 193 of the LGC to the
effect that 'tax exemptions or
incentives granted to, or presently
enjoyed by all persons, whether
natural or juridical, including
government-owned or controlled
corporations except local water
 districts . . . are hereby EXEMPTION FROM ALL
withdrawn.' The repeal is direct FORMS OF TAXES HAS
and unequivocal, not implied. BEEN REPEALED BY THE
PROVISION OF THE
LOCAL GOVERNMENT
CODE AS THE
ENACTMENT OF A
I N V I E W W H E R E O F, t h e m o t i o n f o r LATER LEGISLATION,
reconsideration is hereby DENIED. WHICH IS A GENERAL
L A W, C A N N O T B E
CONSTRUED TO HAVE
REPEALED A SPECIAL
LAW.

SO ORDERED." 20

C. THE COURT OF APPEALS GRAVELY ERRED IN

NOT CONSIDERING
In this petition for review, petitioner raises the following issues: THAT AN EXERCISE OF
"A. THE COURT OF APPEALS GRAVELY ERRED POLICE POWER
IN HOLDING THAT NPC, THROUGH TAX
A PUBLIC NON-PROFIT EXEMPTION SHOULD
C O R P O R AT I O N , I S PREVAIL OVER THE
LIABLE TO PAY A LOCAL GOVERNMENT
FRANCHISE TAX AS IT CODE." 21
FAILED TO CONSIDER
THAT SECTION 137 OF
THE LOCAL
GOVERNMENT CODE IN
RELATION TO SECTION
131 APPLIES ONLY TO It is beyond dispute that the respondent city government has the
PRIVATE PERSONS OR authority to issue Ordinance No. 165-92 and impose an annual
CORPORATIONS tax on "businesses enjoying a franchise," pursuant to Section
ENJOYING A 151 in relation to Section 137 of the LGC,viz:
FRANCHISE. "Sec. 137. Franchise Tax. — Notwithstanding
any exemption granted by any law
or other special law, the province
may impose a tax on businesses
enjoying a franchise, at a rate not
exceeding fifty percent (50%) of
B. THE COURT OF APPEALS GRAVELY ERRED IN one percent (1%) of the gross
HOLDING THAT NPC'S
 annual receipts for the preceding
calendar year based on the
incoming receipt, or realized,
within its territorial jurisdiction.
In the case of a newly started business, the
tax shall not exceed one-twentieth
(1/20) of one percent (1%) of the
capital investment. In the
s u c c e e d i n g c a l e n d a r y e a r,
regardless of when the business
started to operate, the tax shall
be based on the gross receipts for
the preceding calendar year, or
any fraction thereof, as provided
herein." (emphasis supplied)
xxx xxx xxx
Sec. 151. Scope of Taxing Powers. — Except as
otherwise provided in this Code,
the city, may levy the taxes, fees,
and charges which the province or
municipality may impose:
Provided, however, That the taxes,
fees and charges levied and
collected by highly urbanized and
independent component cities
shall accrue to them and
distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may
exceed the maximum rates
a l l o w e d f o r t h e p r ov i n c e o r
municipality by not more than fifty
percent (50%) except the rates of
professional and amusement
taxes."
Petitioner, however, submits that it is not liable to pay an annual
franchise tax to the respondent city government. It contends
that Sections 137 and 151 of the LGC in relation to Section 131,
limit the taxing power of the respondent city government to
private entities that are engaged in trade or occupation for
profit. 22
Section 131 (m) of the LGC defines a "franchise" as "a right or
privilege, affected with public interest which is conferred upon
private persons or corporations, under such terms and conditions
as the government and its political subdivisions may impose in
the interest of the public welfare, security and safety." From the
phraseology of this provision, the petitioner claims that the word
"private" modifies the terms "persons" and "corporations."
Hence, when the LGC uses the term "franchise," petitioner
submits that it should refer specifically to franchises granted to
private natural persons and to private corporations. 23 Ergo, its
charter should not be considered a "franchise" for the purpose of
imposing the franchise tax in question.
On the other hand, Section 131 (d) of the LGC defines
"business" as "trade or commercial activity regularly engaged in
as means of livelihood or with a view to profit." Petitioner claims
that it is not engaged in an activity for profit, in as much as its
charter specifically provides that it is a "non-profit organization."
In any case, petitioner argues that the accumulation of profit is
merely incidental to its operation; all these profits are required
by law to be channeled for expansion and improvement of its
facilities and services. 24
Petitioner also alleges that it is an instrumentality of the National
Government, 25 and as such, may not be taxed by the
respondent city government. It cites the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation 26 where this
Court held that local governments have no power to tax
instrumentalities of the National Government, viz:
"Local governments have no power to tax
instrumentalities of the National
Government.
PAGCOR has a dual role, to operate and
regulate gambling casinos. The
latter role is governmental, which
places it in the category of an
agency or instrumentality of the
Government. Being an
instrumentality of the
Government, PAGCOR should be
and actually is exempt from local
taxes. Otherwise, its operation
might be burdened, impeded or
subjected to control by a mere
local government.
'The states have no power by taxation or
otherwise, to retard,
impede, burden or in
any manner control the
operation
constitutional laws
enacted by Congress to
carry into execution the
powers vested in the
f e d e ra l g ove r n m e n t .
(MC Culloch
Maryland, 4 Wheat 316,
4 L Ed. 579)'
This doctrine emanates from the 'supremacy'
of the National Government over
local governments.
'Justice Holmes, speaking for the Supreme
Court, made reference
to the entire absence of
power on the part of the
States to touch, in that
way (taxation) at least,
the instrumentalities of
the United States
(Johnson v. Maryland,
254 US 51) and it can
be agreed that no state
or political subdivision
can regulate a federal
instrumentality in such
a way as to prevent it
from consummating its
federal responsibilities,
or even seriously
burden it from
accomplishment of
them.' (Antieau, Modern
Constitutional Law, Vol.
2, p. 140, italics
of supplied)
Otherwise, mere creatures of the State can
v. defeat National policies thru
extermination of what local
authorities may perceive to be
undesirable activities or enterprise
using the power to tax as 'a tool
 regulation' (U.S. v. Sanchez, 340
US 42).
The power to tax which was called by Justice
Marshall as the 'power to
destroy' (Mc Culloch v. Maryland,
supra) cannot be allowed to
defeat an instrumentality or
creation of the very entity which
has the inherent power to wield
it." 27
Petitioner contends that Section 193 of Rep. Act No. 7160,
withdrawing the tax privileges of government-owned or
controlled corporations, is in the nature of an implied repeal. A
special law, its charter cannot be amended or modified impliedly
by the local government code which is a general law.
Consequently, petitioner claims that its exemption from all taxes,
fees or charges under its charter subsists despite the passage of
the LGC,viz:
"It is a well-settled rule of statutory
construction that repeals of
statutes by implication are not
favored and as much as possible,
e f f e c t m u s t b e g i ve n t o a l l
enactments of the legislature.
Moreover, it has to be conceded
that the charter of the NPC
constitutes a special law. Republic
Act No. 7160, is a general law. It
i s a b as i c r u l e i n s t at u t o r y
construction that the enactment of
a later legislation which is a
general law cannot be construed
to have repealed a special law.
Where there is a conflict between
a general law and a special
statute, the special statute should
p r e va i l s i n c e i t e v i n c e s t h e
legislative intent more clearly than
the general statute. 28
Finally, petitioner submits that the charter of the NPC, being a
valid exercise of police power, should prevail over the LGC.It
alleges that the power of the local government to impose
franchise tax is subordinate to petitioner's exemption from
taxation; "police power being the most pervasive, the least
limitable and most demanding of all powers, including the power
of taxation." 29
The petition is without merit.
Taxes are the lifeblood of the government, 30 for without taxes,
the government can neither exist nor endure. A principal
attribute of sovereignty, 31 the exercise of taxing power derives
its source from the very existence of the state whose social
contract with its citizens obliges it to promote public interest and
common good. The theory behind the exercise of the power to
tax emanates from necessity; 32 without taxes, government
cannot fulfill its mandate of promoting the general welfare and
well-being of the people.
In recent years, the increasing social challenges of the times
expanded the scope of state activity, and taxation has become a
tool to realize social justice and the equitable distribution of
wealth, economic progress and the protection of local industries
as well as public welfare and similar objectives. 33 Taxation
assumes even greater significance with the ratification of the
1987 Constitution. Thenceforth, the power to tax is no longer
vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges 34
pursuant to Article X, Section 5 of the 1987 Constitution, viz:
"Section 5. Each Local Government unit shall
have the power to create its own
sources of revenue, to levy taxes,
fees and charges subject to such
guidelines and limitations as the
 Congress may provide, consistent
with the basic policy of local
autonomy. Such taxes, fees and
charges shall accrue exclusively to
the Local Governments."
This paradigm shift results from the realization that genuine
development can be achieved only by strengthening local
autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure
has bred a culture of dependence among local government
leaders upon the national leadership. It has also "dampened the
spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government
leaders." 35 The only way to shatter this culture of dependence
is to give the LGUs a wider role in the delivery of basic services,
and confer them sufficient powers to generate their own sources
for the purpose. To achieve this goal, Section 3 of Article X of the
1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of
local autonomy, set the guidelines and limitations to this grant of
taxing powers, viz:
"Section 3. The Congress shall enact a local
government code which shall
provide for a more responsive and
accountable local government
structure instituted through a
system of decentralization with
effective mechanisms of recall,
initiative, and referendum,
allocate among the different local
government units their powers,
responsibilities, and resources,
and provide for the qualifications,
election, appointment and
removal, term, salaries, powers
and functions and duties of local
officials, and all other matters
relating to the organization and
operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, 36
also known as the Local Government Code of 1991 (LGC),
various measures have been enacted to promote local autonomy.
These include the Barrio Charter of 1959, 37 the Local Autonomy
Act of 1959, 38 the Decentralization Act of 1967 39 and the
Local Government Code of 1983. 40 Despite these initiatives,
however, the shackles of dependence on the national
government remained. Local government units were faced with
the same problems that hamper their capabilities to participate
effectively in the national development efforts, among which
are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and
approve development projects, (d) heavy dependence on
external sources of income, and (e) limited supervisory control
over personnel of national line agencies. 41
Considered as the most revolutionary piece of legislation on local
autonomy, 42 the LGC effectively deals with the fiscal constraints
faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of
taxes on forest products, forest concessionaires, mineral
products, mining operations, and the like. The LGC likewise
provides enough flexibility to impose tax rates in accordance
with their needs and capabilities. It does not prescribe graduated
fixed rates but merely specifies the minimum and maximum tax
rates and leaves the determination of the actual rates to the
respective sanggunian. 43
One of the most significant provisions of the LGC is the removal
of the blanket exclusion of instrumentalities and agencies of the
national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or
charges of any kind on the National Government, its agencies
and instrumentalities, this rule now admits an exception, i.e.,
when specific provisions of the LGC authorize the LGUs to
impose taxes, fees or charges on the aforementioned entities,
viz:
"Section 133. Common Limitations on the
Ta x i n g Po w e r s o f t h e L o c a l
Government Units. — Unless
otherwise provided herein, the
exercise of the taxing powers of
provinces, cities, municipalities,
and barangays shall not extend to
the levy of the following:
xxx xxx xxx
(o) Taxes, fees, or charges of any kind on the
National Government, its agencies
and instrumentalities, and local
government units." (emphasis
supplied)
In view of the afore-quoted provision of the LGC,the doctrine in
Basco vs. Philippine Amusement and Gaming Corporation 44
relied upon by the petitioner to support its claim no longer
applies. To emphasize, the Basco case was decided prior to the
effectivity of the LGC,when no law empowering the local
government units to tax instrumentalities of the National
Government was in effect. However, as this Court ruled in the
case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos, 45 nothing prevents Congress from decreeing that even
instrumentalities or agencies of the government performing
governmental functions may be subject to tax. 46 In enacting
the LGC,Congress exercised its prerogative to tax
instrumentalities and agencies of government as it sees fit.
Thus, after reviewing the specific provisions of the LGC,this
Court held that MCIAA, although an instrumentality of the
national government, was subject to real property tax, viz:
"Thus, reading together Sections 133, 232,
and 234 of the LGC,we conclude
that as a general rule, as laid
down in Section 133, the taxing
p o w e r o f l o c a l g ove r n m e n t s
cannot extend to the levy of inter
alia, 'taxes, fees and charges of
any kind on the national
government, its agencies and
instrumentalities, and local
government units'; however,
pursuant to Section 232,
provinces, cities and municipalities
in the Metropolitan Manila Area
may impose the real property tax
except on, inter alia, 'real
property owned by the Republic of
the Philippines or any of its
political subdivisions except when
the beneficial use thereof has
been granted for consideration or
otherwise, to a taxable person as
provided in the item (a) of the
first paragraph of Section 12.'" 47
In the case at bar, Section 151 in relation to Section 137 of the
LGC clearly authorizes the respondent city government to
impose on the petitioner the franchise tax in question. STIEHc
In its general signification, a franchise is a privilege conferred by
government authority, which does not belong to citizens of the
country generally as a matter of common right. 48 In its specific
sense, a franchise may refer to a general or primary franchise,
or to a special or secondary franchise. The former relates to the
right to exist as a corporation, by virtue of duly approved articles
of incorporation, or a charter pursuant to a special law creating
the corporation. 49 The right under a primary or general
franchise is vested in the individuals who compose the
corporation and not in the corporation itself. 50 On the other water power in any part
hand, the latter refers to the right or privileges conferred upon of the Philippines;
an existing corporation such as the right to use the streets of a
municipality to lay pipes of tracks, erect poles or string wires. 51
The rights under a secondary or special franchise are vested in
the corporation and may ordinarily be conveyed or mortgaged
under a general power granted to a corporation to dispose of its (f) To take water from any public stream, river,
property, except such special or secondary franchises as are creek, lake, spring or
charged with a public use. 52 waterfall in the
In Section 131 (m) of the LGC,Congress unmistakably defined a Philippines, for the
franchise in the sense of a secondary or special franchise. This is purposes specified in
to avoid any confusion when the word franchise is used in the this Act; to intercept
context of taxation. As commonly used, a franchise tax is "a tax and divert the flow of
on the privilege of transacting business in the state and waters from lands of
exercising corporate franchises granted by the state." 53 It is not riparian owners and
levied on the corporation simply for existing as a corporation, from persons owning or
upon its property 54 or its income, 55 but on its exercise of the interested in waters
rights or privileges granted to it by the government. Hence, a which are or may be
corporation need not pay franchise tax from the time it ceased to necessary for said
do business and exercise its franchise. 56 It is within this context purposes, upon
that the phrase "tax on businesses enjoying a franchise" in payment of just
Section 137 of the LGC should be interpreted and understood. compensation therefor;
Verily, to determine whether the petitioner is covered by the t o a l t e r, s t ra i g h t e n ,
franchise tax in question, the following requisites should concur: obstruct or increase the
(1) that petitioner has a "franchise" in the sense of a secondary flow of water in streams
or special franchise; and (2) that it is exercising its rights or or water channels
privileges under this franchise within the territory of the intersecting or
respondent city government. connecting therewith or
Petitioner fulfills the first requisite. Commonwealth Act No. 120, contiguous to its works
as amended by Rep. Act No. 7395, constitutes petitioner's or any part thereof.
primary and secondary franchises. It serves as the petitioner's Provided, That just
charter, defining its composition, capitalization, the appointment compensation shall be
and the specific duties of its corporate officers, and its corporate paid to any person or
life span. 57 As its secondary franchise, Commonwealth Act No. persons whose property
120, as amended, vests the petitioner the following powers is, directly or indirectly,
which are not available to ordinary corporations, viz: adversely affected or
"xxx xxx xxx damaged thereby;

(e) To conduct investigations and surveys for

the development of
(g) To construct, operate and maintain power
plants, auxiliary plants,
dams, reservoirs, pipes,
m a i n s , t ra n s m i s s i o n
lines, power stations
and substations, and
other works for the
purpose of developing
hydraulic power from
any river, creek, lake,
spring and waterfall in
the Philippines and
supplying such power to
the inhabitants thereof,
to acquire, construct,
install, maintain,
operate, and improve
gas, oil, or steam
engines, and/or other
prime movers,
generators and
mac h i n ery i n p l an t s
and/or auxiliary plants
for the production of
electric power; to
establish, develop,
operate, maintain and
administer power and
lighting systems for the
transmission and
utilization of its power
generation; to sell
electric power in bulk to
(1) industrial
enterprises, (2) city,
municipal or provincial
systems and other
government institutions,
(3) electric
cooperatives, (4)
franchise holders, and
(5) real estate
subdivisions . . .;
(h) To acquire, promote, hold, transfer, sell,
lease, rent, mortgage,
encumber and
otherwise dispose of
property incident to, or
necessary, convenient
or proper to carry out
the purposes for which
the Corporation was
created: Provided, That
in case a right of way is
necessary for its
transmission lines,
easement of right of
way shall only be
sought: Provided,
however, That in case
the property itself shall
be acquired by
purchase, the cost
thereof shall be the fair
market value at the
time of the taking of
such property;
(i) To construct works across, or otherwise,
any stream,
 watercourse, canal, constructed by the
ditch, flume, street, Corporation. Upon
a ve n u e , h i g h wa y o r determination by the
railway of private and Corporation of the areas
public ownership, as the required for watersheds
location of said works for a specific project,
may require . . .; the Bureau of Forestry,
the Reforestation
Administration and the
Bureau of Lands shall,
upon written advice by
(j) To exercise the right of eminent domain for the Corporation,
the purpose of this Act forthwith surrender
in the manner provided jurisdiction to the
by law for instituting Corporation of all areas
c o n d e m n a t i o n embraced within the
proceedings by the watersheds, subject to
national, provincial and existing private rights,
municipal governments; the needs of waterworks
systems, and the
requirements of
domestic water supply;

xxx xxx xxx

(m) To cooperate with, and to coordinate its

(o) In the prosecution and maintenance of its
operations with those of
projects, the
the National
Corporation shall adopt
E l e c t r i f i c a t i o n
measures to prevent
Administration and
environmental pollution
public service entities;
and promote the
c o n s e r v a t i o n ,
development and
maximum utilization of
natural resources . . ."
(n) To exercise complete jurisdiction and 58
control over watersheds
surrounding the
reservoirs of plants and/
or projects constructed
or proposed to be
With these powers, petitioner eventually had the monopoly in
the generation and distribution of electricity. This monopoly was
strengthened with the issuance of Pres. Decree No. 40, 59
nationalizing the electric power industry. Although Exec. Order
No. 215 60 thereafter allowed private sector participation in the
generation of electricity, the transmission of electricity remains
the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within
the respondent city government's territorial jurisdiction pursuant
to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan,
petitioner realized a gross income of P107,814,187.96 in 1992.
Fulfilling both requisites, petitioner is, and ought to be, subject
of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage
of the franchise tax simply because its stocks are wholly owned
by the National Government, and its charter characterized it as a
"non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership
but on the exercise by the corporation of a privilege to do
business. The taxable entity is the corporation which exercises
the franchise, and not the individual stockholders. By virtue of its
charter, petitioner was created as a separate and distinct entity
from the National Government. It can sue and be sued under its
own name, 61 and can exercise all the powers of a corporation
under the Corporation Code. 62
To be sure, the ownership by the National Government of its
entire capital stock does not necessarily imply that petitioner is
not engaged in business. Section 2 of Pres. Decree No. 2029 63
classifies government-owned or controlled corporations (GOCCs)
into those performing governmental functions and those
performing proprietary functions, viz:
"A government-owned or controlled
corporation is a stock or a non-
stock corporation, whether
p e r f o r m i n g g ove r n m e n t a l o r
proprietary functions, which is
directly chartered by special law
or if organized under the general
corporation law is owned or
controlled by the government
directly, or indirectly through a
parent corporation or subsidiary
corporation, to the extent of at
least a majority of its outstanding
voting capital
stock . . .." (emphases supplied)
G ove r n m e n t a l f u n c t i o n s a r e t h o s e p e r t a i n i n g t o t h e
administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way
of advancing the general interest of society, and are merely
optional on the government. 64 Included in the class of GOCCs
performing proprietary functions are "business-like" entities such
as the National Steel Corporation (NSC), the National
Development Corporation (NDC), the Social Security System
(SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA), 65 among
others. caHCSD
Petitioner was created to "undertake the development of
hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as
the transmission of electric power on a nationwide basis." 66
Pursuant to this mandate, petitioner generates power and sells
electricity in bulk. Certainly, these activities do not partake of the
sovereign functions of the government. They are purely private
and commercial undertakings, albeit imbued with public interest.
The public interest involved in its activities, however, does not
distract from the true nature of the petitioner as a commercial
enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water
supply and irrigation companies, gas, coal or light companies,
power plants, ice plant among others; all of which are declared
by this Court as ministrant or proprietary functions of
government aimed at advancing the general interest of society.
67
A closer reading of its charter reveals that even the legislature
treats the character of the petitioner's enterprise as a
"business," although it limits petitioner's profits to twelve twelve percent (12%) on profits. 69 The main difference is that
percent (12%), viz: 68 the petitioner is mandated to devote "all its returns from its
"(n) When essential to the proper capital investment, as well as excess revenues from its
administration of its operation, for expansion" 70 while other franchise holders have
c o r p o ra t e a f f a i r s o r the option to distribute their profits to its stockholders by
necessary for the proper declaring dividends. We do not see why this fact can be a source
transaction of its of difference in tax treatment. In both instances, the taxable
business or to carry out entity is the corporation, which exercises the franchise, and not
the purposes for which the individual stockholders.
it was organized, to We also do not find merit in the petitioner's contention that its
contract indebtedness tax exemptions under its charter subsist despite the passage of
and issue bonds subject the LGC.
to approval of the As a rule, tax exemptions are construed strongly against the
President upon claimant. Exemptions must be shown to exist clearly and
recommendation of the categorically, and supported by clear legal provisions. 71 In the
Secretary of Finance; case at bar, the petitioner's sole refuge is Section 13 of Rep. Act
No. 6395 exempting from, among others, "all income taxes,
franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other
government agencies and instrumentalities." However, Section
(o) To exercise such powers and do such things 193 of the LGC withdrew, subject to limited exceptions, the
as may be reasonably sweeping tax privileges previously enjoyed by private and public
necessary to carry out corporations. Contrary to the contention of petitioner, Section
the business and 193 of the LGC is an express, albeit general, repeal of all
purposes for which it statutes granting tax exemptions from local taxes. 72 It reads:
was organized, or "Sec. 193. Withdrawal of Tax Exemption
which, from time to Privileges. — Unless otherwise
time, may be declared provided in this Code, tax
by the Board to be exemptions or incentives granted
n e c e s s a r y, u s e f u l , to, or presently enjoyed by all
incidental or auxiliary to persons, whether natural or
accomplish the said juridical, including government-
purpose . . . ."(emphasi owned or controlled corporations,
s supplied) except local water districts,
cooperatives duly registered under
R.A. No. 6938, non-stock and
non-profit hospitals and
educational institutions, are
h e r e b y w i t h d ra w n u p o n t h e
It is worthy to note that all other private franchise holders effectivity of this
receiving at least sixty percent (60%) of its electricity Code." (emphasis supplied)
requirement from the petitioner are likewise imposed the cap of
It is a basic precept of statutory construction that the express
mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est
exclusio alterius. 73 Not being a local water district, a
cooperative registered under R.A. No. 6938, or a non-stock and
non-profit hospital or educational institution, petitioner clearly
does not belong to the exception. It is therefore incumbent upon
the petitioner to point to some provisions of the LGC that
expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC
clearly states that the LGUs can impose franchise tax
"notwithstanding any exemption granted by any law or other
special law." This particular provision of the LGC does not admit
any exception. In City Government of San Pablo, Laguna v.
Reyes, 74 MERALCO's exemption from the payment of franchise
taxes was brought as an issue before this Court. The same issue
was involved in the subsequent case of Manila Electric Company
v. Province of Laguna. 75 Ruling in favor of the local government
in both instances, we ruled that the franchise tax in question is
imposable despite any exemption enjoyed by MERALCO under
special laws, viz:
"It is our view that petitioners correctly rely on
provisions of Sections 137 and
193 of the LGC to support their
position that MERALCO's tax
exemption has been withdrawn.
The explicit language of Section
137 which authorizes the province
to impose franchise tax
'notwithstanding any exemption
granted by any law or other
special law' is all-encompassing
and clear. The franchise tax is
imposable despite any exemption
enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption
privileges. By stating that unless otherwise provided in this
Code, tax exemptions or incentives granted to or presently
enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations except (1) local
water districts, (2) cooperatives duly registered under R.A. 6938,
(3) non-stock and non-profit hospitals and educational
institutions, are withdrawn upon the effectivity of this code, the
obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory
construction that the express mention of one person, thing, act,
or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius. In the absence of
any provision of the Code to the contrary, and we find no other
provision in point, any existing tax exemption or incentive
enjoyed by MERALCO under existing law was clearly intended to
be withdrawn.
Reading together Sections 137 and 193 of the LGC,we conclude
that under the LGC the local government unit may now impose a
local tax at a rate not exceeding 50% of 1% of the gross annual
receipts for the preceding calendar based on the incoming
receipts realized within its territorial jurisdiction. The legislative
purpose to withdraw tax privileges enjoyed under existing law or
charter is clearly manifested by the language used on (sic)
Sections 137 and 193 categorically withdrawing such exemption
subject only to the exceptions enumerated. Since it would be not
only tedious and impractical to attempt to enumerate all the
existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general,
withdrawal of such exemptions or privileges. No more
unequivocal language could have been used." 76 (emphasis
supplied).
It is worth mentioning that Section 192 of the LGC empowers
the LGUs, through ordinances duly approved, to grant tax
exemptions, initiatives or reliefs. 77 But in enacting Section 37
of Ordinance No. 165-92 which imposes an annual franchise tax
"notwithstanding any exemption granted by law or other special
law," the respondent city government clearly did not intend to
exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to
raise needed revenues to finance and support myriad activities
of the local government units for the delivery of basic services
essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people.
As this Court observed in the Mactan case, "the original reasons
for the withdrawal of tax exemption privileges granted to
government-owned or controlled corporations and all other units
of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly
situated enterprises." 78 With the added burden of devolution, it
is even more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying
taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the
assailed Decision and Resolution of the Court of Appeals dated
March 12, 2001 and July 10, 2001, respectively, are hereby
AFFIRMED.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Carpio-Morales, JJ.,
concur.

||| (National Power Corporation v. City of Cabanatuan, G.R. No.

149110, [April 9, 2003], 449 PHIL 233-262)
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH
OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for
respondent British Airways.
DECISION
MELENCIO-HERRERA, J p:
Petitioner Commissioner of Internal Revenue (CIR) seeks a
review on Certiorari of the joint Decision of the Court of Tax
Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26
January 1983, which set aside petitioner's assessment of
deficiency income taxes against respondent British Overseas
Airways Corporation (BOAC) for the fiscal years 1959 to 1967,
1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration. cdphil
BOAC is a 100% British Government-owned corporation
organized and existing under the laws of the United Kingdom. It
is engaged in the international airline business and is a member-
signatory of the Interline Air Transport Association (IATA). As
such, it operates air transportation service and sells
transportation tickets over the routes of the other airline
members. During the periods covered by the disputed
assessments, it is admitted that BOAC had no landing rights for
traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a
nine-month period, partly in 1961 and partly in 1962, when it
was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or
from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the
Philippines — Warner Barnes and Company, Ltd., and later
Qantas Airways — which was responsible for selling BOAC tickets
covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue
(CIR, for brevity) assessed BOAC the aggregate amount of
P2,498,358.56 for deficiency income taxes covering the years
1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment,
dated 16 January 1970 for the years 1959 to 1967 in the
amount of P858,307.79. BOAC paid this new assessment under
protest.
On 7 October 1970, BOAC filed a claim for refund of the amount
of P858,307.79, which claim was denied by the CIR on 16
February 1972. But before said denial, BOAC had already filed a
petition for review with the Tax Court on 27 January 1972,
assailing the assessment and praying for the refund of the
amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income
taxes, interests, and penalty for the fiscal years 1968/1969 to
1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February
1972, however, the CIR not only denied the BOAC request for
refund in the First Case but also re-issued in the Second Case
the deficiency income tax assessment for P534,132.08 for the
years 1969 to 1970-71 plus P1,000.00 as compromise penalty
under Section 74 of the Tax Code. BOAC's request for
reconsideration was denied by the CIR on 24 August 1973. This
prompted BOAC to file the Second Case before the Tax Court
praying that it be absolved of liability for deficiency income tax
for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint
Decision reversing the CIR. The Tax Court held that the proceeds
of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from
Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax.
The CTA position was that income from transportation is income
from services so that the place where services are rendered
determines the source. Thus, in the dispositive portion of its
Decision, the Tax Court ordered petitioner to credit BOAC with
the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the
fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on Certiorari of the Decision of
the Tax Court.
The Solicitor General, in representation of the CIR, has aptly
defined the issues, thus:
"1. Whether or not the revenue derived by
private respondent British
Overseas Airways Corporation
(BOAC) from sales of tickets in the
Philippines for air transportation,
while having no landing rights
here, constitute income of BOAC
from Philippine sources, and,
accordingly, taxable.
"2. Whether or not during the fiscal years in
question BOAC is a resident
foreign corporation doing business
in the Philippines or has an office
or place of business in the
Philippines.
"3. In the alternative that private respondent
may not be considered a resident
foreign corporation but a non-
resident foreign corporation, then
it is liable to Philippine income tax
at the rate of thirty-five per cent
(35%) of its gross income
received from all sources within
the Philippines."
Under Section 20 of the 1977 Tax Code:
"(h) the term 'resident foreign corporation'
applies to a foreign corporation
engaged in trade or business
within the Philippines or having an
office or place of business therein.
"(i) The term 'non-resident foreign corporation'
applies to a foreign corporation
not engaged in trade or business
within the Philippines and not
having any office or place of
business therein." LLpr
It is our considered opinion that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case
must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be
regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one
of a temporary character.' 3
BOAC, during the periods covered by the subject-assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of
trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the Next, we address ourselves to the issue of whether or not the
mode of interline settlement as prescribed by Article VI of the revenue from sales of tickets by BOAC in the Philippines
Resolution No. 850 of the IATA Agreement." 4 Those activities constitutes income from Philippine sources and, accordingly,
were in exercise of the functions which are normally incident to, taxable under our income tax laws.
and are in progressive pursuit of, the purpose and object of its The Tax Code defines "gross income" thus:
organization as an international air carrier. In fact, the regular "'Gross income' includes gains, profits, and
sale of tickets, its main activity, is the very lifeblood of the airline income derived from salaries,
business, the generation of sales being the paramount objective. wages or compensation for
There should be no doubt then that BOAC was "engaged in" personal service of whatever kind
business in the Philippines through a local agent during the and in whatever form paid, or
period covered by the assessments. Accordingly, it is a resident from profession, vocations, trades,
foreign corporation subject to tax upon its total net income business, commerce, sales, or
received in the preceding taxable year from all sources within dealings in property, whether real
the Philippines. 5 or personal, growing out of the
"Sec. 24. Rates of tax on corporations. — . . . ownership or use of or interest in
such property; also from interests,
rents, dividends, securities, or the
transactions of any business
carried on for gain or profit or
"(b) Tax on foreign corporations. — . . . gains, profits, and income derived
from any source whatever" (Sec.
29[3]; Emphasis supplied)

"(2) Resident corporations. — A corporation

organized, authorized, or existing
under the laws of any foreign
country, except a foreign life
insurance company, engaged in
trade or business within the
Philippines, shall be taxable as
provided in subsection (a) of this
section upon the total net income
received in the preceding taxable
year from all sources within the
Philippines. (Emphasis ours)
The definition is broad and comprehensive to include proceeds
from sales of transport documents. "The words 'income from any
source whatever' disclose a legislative policy to include all
income not expressly exempted within the class of taxable
income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within
a specific time . . .; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in
our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for
the fiscal years 1968-69 to 1970-71 amounted to
P10,428,368.00. 7
Did such "flow of wealth" come from "sources within the
Philippines"?
The source of an income is the property, activity or service that
produced the income. 8 For the source of income to be
considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency.
The situs of the source of payments is the Philippines. The flow
of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued
by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket
issued to members of the travelling public in general embraces
within its terms all the elements to constitute it a valid contract,
binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of
gross income from sources within the Philippines, namely: (1)
interest, (2) dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal property, does not
mention income from the sale of tickets for international
transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language,
does not intend the enumeration to be exclusive. It merely
directs that the types of income listed therein be treated as
income from sources within the Philippines. A cursory reading of
the section will show that it does not state that it is an all-
inclusive enumeration, and that no other kind of income may be
so considered. 10
BOAC, however, would impress upon this Court that income
derived from transportation is income for services, with the
result that the place where the services are rendered determines
the source; and since BOAC's service of transportation is
performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under
our income tax laws. The Tax Court upholds that stand in the
joint Decision under review.
The absence of flight operations to and from the Philippines is
not determinative of the source of income or the situs of income
taxation. Admittedly, BOAC was an off-line international airline at
the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity . . . which
produced the income. 11 Unquestionably, the passage
documentations in these cases were sold in the Philippines and
the revenue therefrom was derived from a business activity
regularly pursued within the Philippines. And even if the BOAC
tickets sold covered the "transport of passengers and cargo to
and from foreign cities", 12 it cannot alter the fact that income
from the sale of tickets was derived from the Philippines. The
word "source" conveys one essential idea, that of origin, and the
origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld
herein apply only to the fiscal years covered by the questioned
deficiency income tax assessments in these cases, or, from 1959
to 1967, 1968-69 to 1970-71. For, pursuant to Presidential
Decree No. 69, promulgated on 24 November, 1972,
international carriers are now taxed as follows:
". . . Provided, however, That international
carriers shall pay a tax of 2-1/2
per cent on their gross Philippine
billings." (Sec. 24[b] [2], Tax
Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978,
provided a statutory definition of the term "gross Philippine
billings," thus:
". . . 'Gross Philippine billings' includes 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 foregoing provision ensures that international airlines are ||| (Commissioner of Internal Revenue v. British Overseas
taxed on their income from Philippine sources. The 2-1/2% tax Airways Corp., G.R. Nos. L-65773-74, [April 30, 1987], 233 PHIL
on gross Philippine billings is an income tax. If it had been 406-438)
intended as an excise or percentage tax it would have been
place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the
dismissal for lack of merit by this Court of the appeal in JAL vs.
Commissioner of Internal Revenue (G.R. No. L-30041) on
February 3, 1969, is res judicata to the present case. The ruling
by the Tax Court in that case was to the effect that the mere sale
of tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to
the common carrier's tax. As elucidated by the Tax Court,
however, the common carrier's tax is an excise tax, being a tax
on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to
tax the business of transportation. 14 Being an excise tax, the
same can be levied by the State only when the acts, privileges
or businesses are done or performed within the jurisdiction of
the Philippines. The subject matter of the case under
consideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever
form derived from any source." Since the two cases treat of a
different subject matter, the decision in one cannot be res
judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax
Appeals is hereby SET ASIDE. Private respondent, the British
Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the
fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed
three (3) years in accordance with the Tax Code. The BOAC
claim for refund in the amount of P858,307.79 is hereby denied.
Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento, Yap and Cortes, JJ .,
concur.
Fernan, J ., took no part, his brother-in-law being a member of
the law firm representing private respondents.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AYALA
SECURITIES CORPORATION and THE HONORABLE COURT OF
TAX APPEALS, respondents.
DECISION
TEEHANKEE, J p:
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: prLL
"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 331 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 accumulated surplus on earnings,
reasoning as follows: LLjur
"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
I n t e r n a l Re ve n u e C o d e , t h e
assessment has already
prescribed under Section 331 of
the same Code.
"Section 331 of the Revenue Code provides:
" S E C . 3 3 1 . Pe r i o d o f l i m i t a t i o n u p o n
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 the 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 taxes which do not require the
or levy by a proceeding filing of a return.
in court, but only if
begun (1) within five
years after the
assessment of the tax,
or (2) prior to the "It is well settled limitations upon the right of
expiration of any period the government to assess and
for collection agreed collect taxes will not be presumed
upon in writing by the in the absence of clear legislation
Commissioner of to the contrary. The existence of a
Internal Revenue and time limit beyond which the
the taxpayer before the government may recover unpaid
expiration of such five- taxes is purely dependent upon
year period. The period some express statutory provision,
so agreed upon may be (51 Am. Jur. 867; 10 Mertens Law
extended by subsequent on Federal Income Taxation, par.
agreements in writing 57. 02.). It follows that in the
made before the absence of express statutory
expiration of the period provision, the right of the
previously agreed upon. government to assess unpaid
taxes is imprescriptible. Since
there is no express statutory
provision limiting the right of the
Commissioner of Internal Revenue
"It will be noted that Section 332 has reference to assess the tax on unreasonable
to national internal revenue taxes accumulation of surplus provided
which require the filing of returns. in Section 25 of the Revenue
This is Implied from the provision Code, said tax may be assessed at
that the ten-year period for any time." (Emphasis copied)
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 Such ruling was in effect upheld by this Court en banc upon its
where no return is required to be dismissal of the taxpayer's appeal for lack of merit as above
filed by law or by regulations. It stated. LLpr
is, therefore, our opinion that the The Court is persuaded by the fundamental principle invoked by
ten-year period for making an petitioner that limitations upon the right of the government to
assessment under Section 332 assess and collect taxes will not be presumed in the absence of
does not apply to internal revenue clear legislation to the contrary and that where the government
has not by express statutory provision provided a limitation upon owned 174,996 shares
its right to assess unpaid taxes, such right is imprescriptible. of stock.
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 "Q. Is that right, Mr. Cabral?
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 "Atty. Ong
where a corporation unduly retains its surplus earnings instead
of declaring and paying 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 Objection, Your Honor, on the materiality of the
shareholders through its mother company, a registered co- question.
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.
prcd
"Judge Alvarez
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation,
testified before the court as follows:
"Atty. Garces

What is the materiality of the question?

The investigation Your Honor, shows that for

the year 1955, the
Ayala Securities "Atty. Garces
Corporation had
175,000 outstanding
shares of stock and out
of these shares of Ayala
Securities Corporation, We want to prove to this Honorable Court that
the Ayala and Company Ayala Securities
Corporation is a holding
 or investment company, respondent prove on
the parent company this point?
being Ayala and
Company.

"Atty. Garces

"Judge Alvarez

Same purpose, Your Honor; to prove that Ayala

Securities Corporation is
Witness may answer. a mere investment or
holding company.

"A. I think so; yes.

"Atty. Ong

"Q. And Ayala and Company is owned almost

wholly by the Zobel What is the materiality of the case if it is a
Family and the Ayala mere investment
Family? company. In fact, we
are here in court to
prove the
reasonableness or
unreasonableness of the
"Atty. Ong accumulation of profit. I
think counsel for the
respondent is trying to
harp on presumption;
but actually we will not
be delving on
If Your Honor please, objection again on the presumption but on
materiality. What would actual facts proving the
counsel for the reasonableness of the
 accumulation based on "A. Yes, sir; they were.
actual evidence.

"Q. And also are the employees of the Ayala

"Judge Alvarez. Securities Corporation
and the Ayala and
Company the same —
meaning that the
employees of the Ayala
In order to determine the reasonableness or Securities Corporation
unreasonableness, there are also the employees
must be a basis. of the Ayala and
Witness will have to Company?
answer the question.

"A. At the time, if I remember right, Ayala and

"A. Yes. Company was the
operating company and
the employees were the
employees of the Ayala
and Company; (t.s.n.,
pp. 32-37)
xxx xxx xxx

Another witness, Mr. Salvador J. Lorayes, the Secretary and head

"Q. As of September 30, 1955 when the Ayala of the Legal Department of the corporation, also testified that:
Securities Corporation Judge Alvarez questions
filed its income tax
return, were the officers
of the Ayala Securities
Corporation and the
Aya l a a n d C o m p a ny
housed in the same "Q. May we know from you whether Ayala
building? Securities Corporation is
an affiliate of Ayala and
Company?
"A. Yes, Your Honor. b y Ay a l a S e c u r i t i e s
Corporation?

"Q. Do we understand from you that Ayala and

Company is the mother "A. If the project is assigned to Ayala
corporation of this Securities Corporation,
affiliate? it will be followed by
Ayala Securities
Corporation; if to
another affiliate, no
(t.s.n., pp. 149-150). . .
"A. That is correct. ." LLjur

"Q. And that the policy of Ayala Securities Respondent corporation was therefore fully shown to fall under
Corporation is Revenue Regulation No. 2 implementing the provisions of the
practically governed by income tax law which provides on holding and investment
the officers or partners companies that
of Ayala and Company? "SEC. 20. Holding and Investment Companies.
— A corporation having practically
n o a c t i v i t i e s e xc e p t h o l d i n g
property, and col l ecti ng the
income therefrom or investing
therein shall be considered a
"A. They have a strong influence over the h o l d i n g c o m p a ny w i t h i n t h e
policy of Ayala meaning of section 25."
Securities Corporation.

Petitioner commissioner's plausible alternative contention is that

"Q. So that whatever is decided by the even if the 25% surtax were to be deemed subject to
partners of Ayala and prescription, computed from the filing of the income tax return in
Company for a certain 1955, the intent to evade payment of the surtax is an inherent
investment or project quality of the violation and the return filed must necessarily
would also be followed 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 case 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. cdphil
Makasiar, Fernandez, Guerrero and De Castro, * JJ ., concur.
Melencio-Herrera, J ., took no part.

||| (Commissioner of Internal Revenue v. Ayala Securities Corp.,

G.R. No. L-29485, [November 21, 1980], 189 PHIL 159-168)
THE COMMISSIONER OF CUSTOMS and THE COLLECTOR OF
CUSTOMS, petitioners, vs. EASTERN SEA TRADING, respondent.
Solicitor General for petitioners.
Valentin C . Gutierrez for respondent.
SYLLABUS
1. IMPORT AND EXPORT; CENTRAL BANK; AUTHORITY TO
REGULATE NO-DOLLAR IMPORTS. — The Central Bank has
authority to regulate no-dollar imports, because its broad powers
under the charter, to maintain monetary stability and to preserve
the international value of the currency, under section 2 of
Republic Act No. 265, in relation to section 14 of said Act —
authorizing the bank to issue such rules and regulations as it
may consider necessary for the effective discharge of the
responsibilities and the exercise of the power assigned to the
Monetary Board and to the Central Bank — connote the authority
to regulate no-dollar imports, owing to the influence and effect
that the same may and do have upon the stability of the peso
and its international value.
2. ID.; ID.; ID.; ISSUANCE OF IMPORT LICENSES NOT VESTED
EXCLUSIVELY UPON IMPORT CONTROL COMMISSION. — The
authority to issue import licenses was not vested exclusively
upon the Import Control Commission, because Executive Order
No. 328 provided for export or import licenses "from the Central
Bank of the Philippines or the Import Control Administration" or
Commission. The latter was created only to perform the task of
implementing certain objectives of the Monetary Board and the
Central Bank, which otherwise had to be undertaken by these
(2) agencies. Upon the abolition of said Commission, the duty to
provide means and ways for the accomplishment of said
objectives had merely to be discharged directly by the Monetary
Board and the Central Bank, even if the aforementioned
Executive Order had been silent thereon.
3 . C O N S T I T U T I O N A L L AW; E X E C U T I V E A G R E E M E N TS ;
CONCURRENCE OF SENATE NOT REQUIRED. — While the
concurrence of the Senate is required by the Constitution in the
making of "treaties" (Constitution of the Philippines, Article VII,
Section 10 [7], "executive agreements" may be validly entered
into without such concurrence.
||| (Commissioner of Customs v. Eastern Sea Trading, G.R. No.
L-14279, [October 31, 1961], 113 PHIL 333-340)
Eastern Sea Trading (EST) was a shipping company which
imports from Japan onion and garlic into the Philippines. In
1956, the Commissioner of Customs ordered the seizure and
forfeiture of the import goods because EST was not able to
comply with Central Bank Circulars 44 and 45. The said circulars
were pursuant to Executive Order 328. On the other hand, EO
328 was the implementing law of the Trades and Financial
Agreements, an executive agreement, entered into between the
Philippines and Japan. The said executive agreement states,
among others, that all import transactions between Japan and
the Philippines should be invoiced in dollar. In this case, the said
items imported by EST from Japan were not invoiced in dollar.
EST questioned the validity of the said EO averring that the
executive agreement that the EO was implementing was never
concurred upon by the Senate. The issue was elevated to the
Court of Tax Appeals and the latter ruled in favor of EST. The
Commissioner appealed.
ISSUE: Whether or not the Executive Agreement is subject to
the concurrence by the Senate.
HELD: No, Executive Agreements are not like treaties which are
subject to the concurrence of at least 2/3 of the members of the
Senate. Agreements concluded by the President which fall short
of treaties are commonly referred to as executive agreements
and are no less common in our scheme of government than are
the more formal instruments — treaties and conventions. They
sometimes take the form of exchanges of notes and at other
times that of more formal documents denominated ‘agreements’
or ‘protocols’.
The point where ordinary correspondence between this and other
governments ends and agreements — whether denominated
executive agreements or exchanges of notes or otherwise —
begin, may sometimes be difficult of ready ascertainment. It
would be useless to undertake to discuss here the large variety
of executive agreements as such, concluded from time to time.
Hundreds of executive agreements, other than those entered
into under the trade- agreements act, have been negotiated with
foreign governments. . . . It would seem to be sufficient, in order
to show that the trade agreements under the act of 1934 are not
anomalous in character, that they are not treaties, and that they
have abundant precedent in our history, to refer to certain
classes of agreements heretofore entered into by the Executive
without the approval of the Senate.
They cover such subjects as the inspection of vessels, navigation
dues, income tax on shipping profits, the admission of civil
aircraft, customs matters, and commercial relations generally,
international claims, postal matters, the registration of trade-
marks and copyrights, etc. Some of them were concluded not by
specific congressional authorization but in conformity with
policies declared in acts of Congress with respect to the general
subject matter, such as tariff acts; while still others, particularly
those with respect to the settlement of claims against foreign
governments, were concluded independently of any legislation.
NATIONAL POWER CORPORATION, petitioner, vs. CITY OF
CABANATUAN, respondent.
The Solicitor General for petitioner.
Edgardo G. Villarin and Trese D. Wenceslao for respondent.
SYNOPSIS
Petitioner is a government owned and controlled corporation
created under Commonwealth Act No. 120, as amended. For
many years, petitioner sold electric power to the residents of
Cabanatuan City. Pursuant to a 1992 ordinance, the respondent
assessed the petitioner a franchise tax. In refusing to pay the
tax assessment, petitioner argued that the respondent had no
authority to impose tax on government entities like itself and
that it was a tax exempt entity by express provisions of law.
Hence, respondent filed a collection suit demanding payment of
the assessed tax due alleging that petitioner's exemption from
local taxes has been repealed. The trial court dismissed the case
and ruled that the tax exemption privileges granted to petitioner
still subsists. On appeal, the Court of Appeals reversed the trial
court's order. Petitioner's motion for reconsideration was denied
by the appellate court. Hence, this petition for review filed before
the Supreme Court.
The Supreme Court denied this petition and affirmed the
decision of the Court of Appeals. According to the Court, one of
the most significant provisions of the Local Government Code
(LGC)is the removal of the blanket exclusion of instrumentalities
and agencies of the national government from the coverage of
local taxation. Although as a general rule, Local Government
Units (LGU) cannot impose taxes, fees or charges of any kind on
the National Government, its agencies and instrumentalities, this
rule now admits an exception, i.e., when specific provisions of
the LGC authorize the LGU to impose taxes, fees or charges on
the aforementioned entities. In the case at bar, Section 151 in
relation to Section 137 of the LGC clearly authorized the
respondent city government to impose on the petitioner the
franchise tax in question.
SYLLABUS
1. TAXATION; TAXES AS THE LIFEBLOOD OF THE GOVERNMENT;
CONSTRUED. — Taxes are the lifeblood of the government, for
without taxes, the government can neither exist nor endure. A
principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state whose
social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of
the power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
2. ID.; POWER TO TAX; LOCAL GOVERNMENT UNITS; ENJOY
DIRECT AUTHORITY TO LEVY TAXES, FEES AND OTHER
CHARGES PURSUANT TO ARTICLE X, SECTION 5 OF THE
CONSTITUTION; RATIONALE. — In recent years, the increasing
social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice
and the equitable distribution of wealth, economic progress and
the protection of local industries as well as public welfare and
similar objectives. Taxation assumes even greater significance
with the ratification of the 1987 Constitution. Thenceforth, the
power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes,
fees and other charges pursuant to Article X, Section 5 of the
1987 Constitution, viz: "Section 5. — Each Local Government
unit shall have the power to create its own sources of revenue,
to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees and charges
shall accrue exclusively to the Local Governments." This
paradigm shift results from the realization that genuine
development can be achieved only by strengthening local
autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure
has bred a culture of dependence among local government
leaders upon the national leadership. It has also "dampened the
spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government
leaders." The only way to shatter this culture of dependence is to
give the LGUs a wider role in the delivery of basic services, and
confer them sufficient powers to generate their own sources for
the purpose. To achieve this goal, Section 3 of Article X of the
1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of
local autonomy, set the guidelines and limitations to this grant of
taxing powers.
3. ID.; ID.; ID.; CANNOT IMPOSE TAXES, FEES OR CHARGES OF
ANY KIND ON THE NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES AS A RULE; EXCEPTION. — Considered as
the most revolutionary piece of legislation on local autonomy,
the LGC effectively deals with the fiscal constraints faced by
LGUs. It widens the tax base of LGUs to include taxes which
were prohibited by previous laws such as the imposition of taxes
on forest products, forest concessionaires, mineral products,
mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their
needs and capabilities. It does not prescribe graduated fixed
rates but merely specifies the minimum and maximum tax rates
and leaves the determination of the actual rates to the
respective sanggunian. One of the most significant provisions of
the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from
the coverage of local taxation. Although as a general rule, LGUs
cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC
authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz: "Section 133. Common Limitations
on the Taxing Powers of the Local Government Units — Unless
otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend
to the levy of the following: . . . (o) Taxes, fees, or charges of
any kind on the National Government, its agencies and
instrumentalities, and local government units."
4. MERCANTILE LAW; FRANCHISE; DEFINED AND CONSTRUED.
— In its general signification, a franchise is a privilege conferred
by government authority, which does not belong to citizens of
the country generally as a matter of common right. In its specific
sense, a franchise may refer to a general or primary franchise,
or to a special or secondary franchise. The former relates to the
right to exist as a corporation, by virtue of duly approved articles
of incorporation, or a charter pursuant to a special law creating
the corporation. The right under a primary or general franchise is
vested in the individuals who compose the corporation and not in
the corporation itself. On the other hand, the latter refers to the
right or privileges conferred upon an existing corporation such as
the right to use the streets of a municipality to lay pipes of
tracks, erect poles or string wires. The rights under a secondary
or special franchise are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power
granted to a corporation to dispose of its property, except such
special or secondary franchises as are charged with a public use.
ISDHcT
5. TAXATION; FRANCHISE TAX IMPOSED UNDER THE LOCAL
GOVERNMENT CODE; REQUISITES. — In Section 131 (m) of the
LGC,Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion
when the word franchise is used in the context of taxation. As
commonly used, a franchise tax is "a tax on the privilege of
transacting business in the state and exercising corporate
franchises granted by the state." It is not levied on the
corporation simply for existing as a corporation, upon its
property or its income, but on its exercise of the rights or
privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do
business and exercise its franchise. It is within this context that
the phrase "tax on businesses enjoying a franchise" in Section
137 of the LGC should be interpreted and understood. Verily, to
determine whether the petitioner is covered by the franchise tax
in question, the following requisites should concur: (1) that
petitioner has a "franchise" in the sense of a secondary or
special franchise; and (2) that it is exercising its rights or
privileges under this franchise within the territory of the
respondent city government. To stress, a franchise tax is
imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is
the corporation which exercises the franchise, and not the
individual stockholders.
6. ID.; TAX EXEMPTION; CONSTRUED STRONGLY AGAINST THE
CLAIMANT; APPLICATION IN CASE AT BAR. — As a rule, tax
exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions. In the case at bar, the
petitioner's sole refuge is Section 13 of Rep. Act No. 6395
exempting from, among others, "all income taxes, franchise
taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies
and instrumentalities." However, Section 193 of the LGC
withdrew, subject to limited exceptions, the sweeping tax
privileges previously enjoyed by private and public corporations.
Contrary to the contention of petitioner, Section 193 of the LGC
is an express, albeit general, repeal of all statutes granting tax
exemptions from local taxes. It reads: "Sec. 193. Withdrawal of
Tax Exemption Privileges. — Unless otherwise provided in this ||| (National Power Corporation v. City of Cabanatuan, G.R. No.
Code, tax exemptions or incentives granted to, or presently 149110, [April 9, 2003], 449 PHIL 233-262)
enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-
stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code." It is a basic
precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio
alterius. Not being a local water district, a cooperative registered
under R.A. No. 6938, or a non-stock and non-profit hospital or
educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point
to some provisions of the LGC that expressly grant it exemption
from local taxes.

7. POLITICAL LAW; GOVERNMENT OWNED AND CONTROLLED

CORPORATION; CONSTRUED. — Section 2 of Pres. Decree No.
2029 classifies government-owned or controlled corporations
(GOCCs) into those performing governmental functions and
those performing proprietary functions, viz: "A government-
owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary
functions, which is directly chartered by special law or if
organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at
least a majority of its outstanding voting capital stock . . . ."
G ove r n m e n t a l f u n c t i o n s a r e t h o s e p e r t a i n i n g t o t h e
administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way
of advancing the general interest of society, and are merely
optional on the government. Included in the class of GOCCs
performing proprietary functions are "business-like" entities such
as the National Steel Corporation (NSC), the National
Development Corporation (NDC), the Social Security System
(SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA), among
others.
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR
APPLIANCE CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.;
and HARDWARE WORKSHOP, INC., petitioners, vs. ANTHONY
ACEVEDO, in his capacity as THE TREASURER OF MANILA; and
THE CITY OF MANILA, respondents.
DECISION
BERSAMIN, J p:
The issue here concerns double taxation. There is double
taxation when the same taxpayer is taxed twice when he should
be taxed only once for the same purpose by the same taxing
authority within the same jurisdiction during the same taxing
period, and the taxes are of the same kind or character. Double
taxation is obnoxious.
The Case
Under review are the resolution promulgated in CA-G.R. SP No.
72191 on June 18, 2007, 1 whereby the Court of Appeals (CA)
denied petitioners' appeal for lack of jurisdiction; and the
resolution promulgated on November 14, 2007, 2 whereby the
CA denied their motion for reconsideration for its lack of merit.
Antecedents
The City of Manila assessed and collected taxes from the
individual petitioners pursuant to Section 15 (Tax on
Wholesalers, Distributors, or Dealers) and Section 17 (Tax on
Retailers) of the Revenue Code of Manila. 3 At the same time,
the City of Manila imposed additional taxes upon the petitioners
pursuant to Section 21 of the Revenue Code of Manila, 4 as
amended, as a condition for the renewal of their respective
business licenses for the year 1999. Section 21 of the Revenue
Code of Manila stated: HSCATc
Section 21. Tax on Business Subject to the
Excise, Value-Added or Percentage
Taxes under the NIRC. — On any
of the following businesses and
articles of commerce subject to
the excise, value-added or
p e r c e n t a g e t a xe s u n d e r t h e
National Internal Revenue Code,
hereinafter referred to as NIRC, as
amended, a tax of FIFTY PERCENT
(50%) OF ONE PERCENT (1%) per
annum on the gross sales or
receipts of the preceding calendar
year is hereby imposed:
A) On person who sells goods and services in
the course of trade or
businesses; . . .
PROVIDED, that all registered businesses in
the City of Manila already paying
the aforementioned tax shall be
exempted from payment thereof.
To comply with the City of Manila's assessment of taxes under
Section 21, supra, the petitioners paid under protest the
following amounts corresponding to the first quarter of 1999, 5
to wit:
(a) Nursery Care Corporation — P595,190.25
(b) Shoemart Incorporated — P3,283,520.14
(c) Star Appliance Center — P236,084.03
(d) H & B, Inc. — P1,271,118.74
(e) Supplies Station, Inc. — P239,501.25
(f) Hardware Work Shop, Inc. — P609,953.24
By letter dated March 1, 1999, the petitioners formally requested
the Office of the City Treasurer for the tax credit or refund of the
local business taxes paid under protest. 6 However, then City
Treasurer Anthony Acevedo (Acevedo) denied the request
through his letter of March 10, 1999. 7
On April 8, 1999, the petitioners, through their representative,
Cecilia R. Patricio, sought the reconsideration of the denial of
their request. 8 Still, the City Treasurer did not reconsider. 9
In the meanwhile, Liberty Toledo succeeded Acevedo as the City
Treasurer of Manila. 10
On April 29, 1999, the petitioners filed their respective petitions The Court perceives of no instance of the
for certiorari in the Regional Trial Court (RTC) in Manila. The constitutionally proscribed double
petitions, docketed as Civil Cases Nos. 99-93668 to 99-93673, taxation, in the strict, narrow or
11 were initially raffled to different branches, but were soon obnoxious sense, imposed upon
consolidated in Branch 34. 12 After the presiding judge of the petitioners under Sections 15
Branch 34 voluntarily inhibited himself, the consolidated cases and 17, on the one hand, and
were transferred to Branch 23, 13 but were again re-raffled to under Section 21, on the other, of
Branch 19 upon the designation of Branch 23 as a special drugs the questioned Ordinance. The tax
court. 14 imposed under Sections 15 and
The parties agreed on and jointly submitted the following issues 17, as against that imposed under
for the consideration and resolution of the RTC, namely: Section 21, are levied against
(a) Whether or not the collection of taxes different tax objects or subject
under Section 21 of matter. The tax under Section 15
Ordinance No. 7794, as is imposed upon wholesalers,
amended, constitutes distributors or dealers, while that
double taxation. under Section 17 is imposed upon
retailers. In short, taxes imposed
under Sections 15 and 17 is a tax
on the business of wholesalers,
distributors, dealers and retailers.
(b) Whether or not the failure of the petitioners On the other hand, the tax
to avail of the imposed upon herein petitioners
statutorily provided under Section 21 is not a tax
remedy for their tax against the business of the
protest on the ground of petitioners (as wholesalers,
u n c o n s t i t u t i o n a l i t y, distributors, dealers or retailers)
illegality and b u t i s ra t h e r a t a x a g a i n s t
oppressiveness under consumers or end-users of the
Section 187 of the Local articles sold by petitioners. This is
Government Code plain from a reading of the
renders the present modifying paragraph of Section 21
action dismissible for which says:
non-exhaustion of
administrative remedy.
15

"The tax shall be payable by the person paying

for the services
rendered and shall be
Decision of the RTC paid to the person
On April 26, 2002, the RTC rendered its decision, holding thusly: rendering the services
who is required to
 collect and pay the tax
within twenty (20) days
after the end of each
quarter." (Underscoring
supplied)
In effect, the petitioners only act as the
collection or withholding agent of
the City while the ones actually
paying the tax are the consumers
or end-users of the articles being
sold by petitioners. The taxes
imposed under Sec. 21 represent
additional amounts added by the
business establishment to the
basic prices of its goods and
services which are paid by the
end-users to the businesses. It is
actually not taxes on the business
of petitioners but on the
consumers. Hence, there is no
double taxation in the narrow,
strict or obnoxious sense, involved
in the imposition of taxes by the
City of Manila under Sections 15,
17 and 21 of the questioned
Ordinance. This in effect resolves
in favor of the constitutionality of
the assailed sections of Ordinance
No. 7807 of the City of Manila.
the Court cannot do, without
doing away with the mandatory
provisions of Section 187 of the
Local Government Code which
distinctly commands that an
appeal questioning the
constitutionality or legality of a
tax ordinance shall not have the
effect of suspending the effectivity
of the ordinance and the accrual
and payment of the tax, fee or
charge levied therein. This is so
because an ordinance carries with
it the presumption of validity.
xxx xxx xxx
With the foregoing findings, petitioners' prayer
for the refund of the amounts paid
by them under protest must,
likewise, fail.
Wherefore, the petitions are dismissed.
Without pronouncement as to
costs.

SO ORDERED. 16
Petitioners, likewise, pray the Court to direct
respondents to cease and desist
from implementing Section 21 of
the questioned Ordinance. That
The petitioners appealed to the CA. 17
Ruling of the CA "Sec. 2. Dismissal of improper appeal to the
On June 18, 2007, the CA denied the petitioners' appeal, ruling Court of Appeals. — An
as follows: IDSaEA appeal under Rule 41
The six (6) cases were consolidated on a taken from the Regional
common question of fact and law, Trial Court to the Court
that is, whether the act of the City of Appeals raising only
Treasurer of Manila of assessing questions of law shall be
and collecting business taxes dismissed, issues purely
under Section 21 of Ordinance of law not being
7807, on top of other business reviewable by said
taxes also assessed and collected c o u r t . S i m i l a r l y, a n
under the previous sections of the appeal by notice of
same ordinance is a violation of appeal instead of by
the provisions of Section 143 of petition for review from
the Local Government Code. the appellate judgment
of a Regional Trial Court
shall be dismissed.

Clearly, the disposition of the present appeal in

these consolidated cases does not
necessitate the calibration of the An appeal erroneously taken to the Court of
whole evidence as there is no Appeals shall not be
question or doubt as to the truth transferred to the
or the falsehood of the facts appropriate court but
obtaining herein, as both parties shall be dismissed
agree thereon. The present case outright.
involves a question of law that
would not lend itself to an
examination or evaluation by this
Court of the probative value of the
evidence presented. WHEREFORE, the foregoing considered, the
appeal is DISMISSED.

Thus the Court is constrained to dismiss the

instant petition for lack of SO ORDERED. 18
jurisdiction under Section 2, Rule
50 of the 1997 Rules on Civil
Procedure which states:
The petitioners moved for reconsideration, but the CA denied C.
their motion through the resolution promulgated on November
14, 2007. 19
Issues
The petitioners now appeal, raising the following grounds, to wit:
A.
THE COURT OF APPEALS ERRED IN NOT
RULING THAT THE ACT OF THE
CITY TREASURER OF MANILA IN
I M P O S I N G , A SS E SS I N G A N D
COLLECTING THE ADDITIONAL
THE COURT OF APPEALS, IN DISMISSING THE BUSINESS TAX UNDER SECTION
APPEAL OF THE PETITIONERS 21 OF ORDINANCE NO. 7794, AS
AND DENYING THEIR MOTION AMENDED BY ORDINANCE NO.
FOR RECONSIDERATION, ERRED 7807, ALSO KNOWN AS THE
IN RULING THAT THE ISSUE REVENUE CODE OF THE CITY OF
INVOLVED IS A PURELY LEGAL MANILA, IS CONSTITUTIVE OF
QUESTION. DOUBLE TAXATION AND
V I O L AT I V E O F T H E L O C A L
GOVERNMENT CODE OF 1991. 20

B.

The main issues for resolution are, therefore, (1) whether or not
the CA properly denied due course to the appeal for raising pure
questions of law; and (2) whether or not the petitioners were
entitled to the tax credit or tax refund for the taxes paid under
Section 21, supra.
THE COURT OF APPEALS ERRED IN NOT
Ruling
REVERSING THE DECISION OF
The appeal is meritorious. DSATCI
BRANCH 19 OF THE REGIONAL
1.
TRIAL COURT OF MANILA DATED
The CA did not err in dismissing the appeal;
26 APRIL 2002 DENYING
but the rules should be liberally applied
P E T I T I O N E R S ' P R AY E R F O R
for the sake of justice and equity
REFUND OF THE AMOUNTS PAID
The Rules of Court provides three modes of appeal from the
BY THEM UNDER PROTEST AND
decisions and final orders of the RTC, namely: (1) ordinary
DISMISSING THE PETITION FOR
appeal or appeal by writ of error under Rule 41, where the
CERTIORARI FILED BY THE
decisions and final orders were rendered in civil or criminal
PETITIONERS.
actions by the RTC in the exercise of original jurisdiction; (2)
petition for review under Rule 42, where the decisions and final
orders were rendered by the RTC in the exercise of appellate
jurisdiction; and (3) petition for review on certiorari to the
Supreme Court under Rule 45. 21 The first mode of appeal is
taken to the CA on questions of fact, or mixed questions of fact
and law. The second mode of appeal is brought to the CA on
questions of fact, of law, or mixed questions of fact and law. 22
The third mode of appeal is elevated to the Supreme Court only
on questions of law. 23
The distinction between a question of law and a question of fact
is well established. On the one hand, a question of law arises
when there is doubt as to what the law is on a certain state of
facts; on the other, there is a question of fact when the doubt
arises as to the truth or falsity of the alleged facts. 24 According
to Leoncio v. De Vera: 25
. . . For a question to be one of law, the same
must not involve an examination
of the probative value of the
evidence presented by the
litigants or any of them. The
resolution of the issue must rest
solely on what the law provides on
the given set of circumstances.
Once it is clear that the issue
invites a review of the evidence
presented, the question posed is
one of fact. Thus, the test of
whether a question is one of law
or of fact is not the appellation
given to such question by the
party raising the same; rather, it
is whether the appellate court can
determine the issue raised without
r e v i e w i n g o r e va l u a t i n g t h e
evidence, in which case, it is a
question of law; otherwise it is a
question of fact. 26
The nature of the issues to be raised on appeal can be gleaned
from the appellant's notice of appeal filed in the trial court, and
from the appellant's brief submitted to the appellate court. 27 In
this case, the petitioners filed a notice of appeal in which they
contended that the April 26, 2002 decision and the order of July
17, 2002 issued by the RTC denying their consolidated motion
for reconsideration were contrary to the facts and law obtaining
in the consolidated cases. 28 In their consolidated memorandum
filed in the CA, they essentially assailed the RTC's ruling that the
taxes imposed on and collected from the petitioners under
Section 21 of the Revenue Code of Manila constituted double
taxation in the strict, narrow or obnoxious sense. Considered
together, therefore, the notice of appeal and consolidated
memorandum evidently did not raise issues that required the re-
evaluation of evidence or the relevance of surrounding
circumstances.
The CA rightly concluded that the petitioners thereby raised only
a question of law. The dismissal of their appeal was proper,
strictly speaking, because Section 2, Rule 50 of the Rules of
Court provides that an appeal from the RTC to the CA raising
only questions of law shall be dismissed; and that an appeal
erroneously taken to the CA shall be outrightly dismissed. 29
2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double taxation
The foregoing notwithstanding, the Court, given the
circumstances obtaining herein and in light of jurisprudence
promulgated subsequent to the filing of the petition, deems it
fitting and proper to adopt a liberal approach in order to render a
just and speedy disposition of the substantive issue at hand.
Hence, we resolve, bearing in mind the following pronouncement
in Go v. Chaves: 30 ESaITA
Our rules of procedure are designed to
facilitate the orderly disposition of
cases and permit the prompt
disposition of unmeritorious cases
which clog the court dockets and
do little more than waste the
courts' time. These technical and
procedural rules, however, are
intended to ensure, rather than
suppress, substantial justice. A
deviation from their rigid
 enforcement may thus be allowed, Government Code, 33 the law that vested in the municipal and
as petitioners should be given the city governments the power to impose business taxes.
fullest opportunity to establish the The respondents counter, however, that double taxation did not
merits of their case, rather than occur from the imposition and collection of the tax pursuant to
lose their property on mere Section 21 of the Revenue Code of Manila; 34 that the taxes
technicalities. We held in Ong Lim imposed pursuant to Section 21 were in the concept of indirect
Sing, Jr. v. FEB Leasing and taxes upon the consumers of the goods and services sold by a
Finance Corporation that: business establishment; 35 and that the petitioners did not
exhaust their administrative remedies by first appealing to the
Secretary of Justice to challenge the constitutionality or legality
of the tax ordinance. 36
In resolving the issue of double taxation involving Section 21 of
Courts have the prerogative to relax procedural the Revenue Code of Manila, the Court is mindful of the ruling in
rules of even the most City of Manila v. Coca-Cola Bottlers Philippines, Inc., 37 which
mandatory character, has been reiterated in Swedish Match Philippines, Inc. v. The
mindful of the duty to Treasurer of the City of Manila. 38 In the latter, the Court has
reconcile both the need held:
to speedily put an end . . . [T]he issue of double taxation is not novel,
to litigation and the as it has already been settled by
parties' right to due this Court in The City of Manila v.
process. In numerous Coca-Cola Bottlers Philippines,
cases, this Court has Inc., in this wise:
allowed liberal
construction of the rules
when to do so would
serve the demands of
substantial justice and Petitioners obstinately ignore the exempting
equity. proviso in Section 21 of
Ta x O r d i n a n c e N o .
7794, to their own
detriment. Said
exempting proviso was
The petitioners point out that although Section 21 of the precisely included in
Revenue Code of Manila was not itself unconstitutional or invalid, said section so as to
its enforcement against the petitioners constituted double avoid double taxation.
taxation because the local business taxes under Section 15 and
Section 17 of the Revenue Code of Manila were already being
paid by them. 31 They contend that the proviso in Section 21
exempted all registered businesses in the City of Manila from
paying the tax imposed under Section 21; 32 and that the Double taxation means taxing the same
exemption was more in accord with Section 143 of the Local property twice when it
 should be taxed only city revenues; (3) by
once; that is, "taxing the same taxing
the same person twice authority — petitioner
by the same jurisdiction City of Manila; (4)
for the same thing." It within the same taxing
is obnoxious when the jurisdiction — within the
taxpayer is taxed twice, territorial jurisdiction of
when it should be but the City of Manila; (5)
once. Otherwise for the same taxing
described as "direct periods — per calendar
duplicate taxation," the year; and (6) of the
two taxes must be same kind or character
imposed on the same — a local business tax
subject matter, for the imposed on gross sales
same purpose, by the or receipts of the
same taxing authority, business.
within the same
jurisdiction, during the
same taxing period; and
the taxes must be of the
same kind or character. The distinction petitioners attempt to make
between the taxes
under Sections 14 and
21 of Tax Ordinance No.
7794 is specious. The
Using the aforementioned test, the Court finds Court revisits Section
that there is indeed 143 of the LGC,the very
double taxation if source of the power of
respondent is subjected municipalities and cities
to the taxes under both to impose a local
Sections 14 and 21 of business tax, and to
Ta x O r d i n a n c e N o . which any local business
7794, since these are tax imposed by
being imposed: (1) on petitioner City of Manila
the same subject matter must conform. It is
— the privilege of doing apparent from a perusal
business in the City of thereof that when a
Manila; (2) for the same municipality or city has
purpose — to make already imposed a
persons conducting business tax on
business within the City manufacturers, etc. of
of Manila contribute to liquors, distilled spirits,
 wines, and any other
article of commerce,
pursuant to Section
143(a) of the LGC,said
municipality or city may
no longer subject the
same manufacturers,
etc. to a business tax
under Section 143(h) of
the same Code. Section
143(h) may be imposed
only on businesses that
are subject to excise
tax, VAT, or percentage
tax under the NIRC, and
that are "not otherwise
specified in preceding
p a ra g ra p h s . " I n t h e
same way, businesses
such as respondent's,
already subject to a
local business tax under
S e c t i o n 1 4 o f Ta x
Ordinance No. 7794
[which is based on
Section 143(a) of the
LGC], can no longer be
made liable for local
business tax under
Section 21 of the same
Tax Ordinance [which is
based on Section
143(h) of the LGC].
Based on the foregoing reasons, petitioner
should not have been subjected to
taxes under Section 21 of the
Manila Revenue Code for the
fourth quarter of 2001,
considering that it had already
been paying local business tax
under Section 14 of the same
ordinance.
xxx xxx xxx
Accordingly, respondent's assessment under
both Sections 14 and 21 had no
basis. Petitioner is indeed liable to
pay business taxes to the City of
Manila; nevertheless, considering
that the former has already paid
these taxes under Section 14 of
the Manila Revenue Code, it is
exempt from the same payments
under Section 21 of the same
code. Hence, payments made
under Section 21 must be
refunded in favor of petitioner.
It is undisputed that petitioner paid business
taxes based on Sections 14 and
21 for the fourth quarter of 2001
in the total amount of
P470,932.21. Therefore, it is
entitled to a refund of
P164,552.04 corresponding to the
payment under Section 21 of the
Manila Revenue Code. ETHCDS
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. No pronouncement on costs of suit.
and Swedish Match Philippines, Inc., the Court now holds that all SO ORDERED.
the elements of double taxation concurred upon the City of Sereno, C.J., Leonardo-de Castro, Villarama, Jr. and Reyes, JJ.,
Manila's assessment on and collection from the petitioners of concur.
taxes for the first quarter of 1999 pursuant to Section 21 of the ||| (Nursery Care Corp. v. Acevedo, G.R. No. 180651, [July 30,
Revenue Code of Manila. 2014])
Firstly, because Section 21 of the Revenue Code of Manila
imposed the tax on a person who sold goods and services in the
course of trade or business based on a certain percentage of his
gross sales or receipts in the preceding calendar year, while
Section 15 and Section 17 likewise imposed the tax on a person
who sold goods and services in the course of trade or business
but only identified such person with particularity, namely, the
wholesaler, distributor or dealer (Section 15), and the retailer
(Section 17), all the taxes — being imposed on the privilege of
doing business in the City of Manila in order to make the
taxpayers contribute to the city's revenues — were imposed on
the same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority
(the City of Manila) and within the same jurisdiction in the same
taxing period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines, Inc. and
Swedish Match Philippines, Inc. involved Section 21 vis-à-vis
Section 14 (Tax on Manufacturers, Assemblers and Other
Processors) 39 of the Revenue Code of Manila, the legal
principles enunciated therein should similarly apply because
Section 15 (Tax on Wholesalers, Distributors, or Dealers) and
Section 17 (Tax on Retailers) of the Revenue Code of Manila
imposed the same nature of tax as that imposed under Section
14, i.e., local business tax, albeit on a different subject matter or
group of taxpayers.
In fine, the imposition of the tax under Section 21 of the
Revenue Code of Manila constituted double taxation, and the
taxes collected pursuant thereto must be refunded.
WHEREFORE, the Court GRANTS the petition for review on
certiorari; REVERSES and SETS ASIDE the resolutions
promulgated on June 18, 2007 and November 14, 2007 in CA-
G.R. SP No. 72191; and DIRECTS the City of Manila to refund
the payments made by the petitioners of the taxes assessed and
collected for the first quarter of 1999 pursuant to Section 21 of
the Revenue Code of Manila.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
SOLIDBANK CORPORATION, respondent.
Pablo M. Bastes, Jr. and Rhodora J. Corcuera-Menzon for
petitioner.
Esquivas Cruz Conlu & Yabut for respondent.
SYNOPSIS
Pursuant to the decision of the Court of
Tax Appeals (CTA) in CTA Case No. 4720, entitled
Asian Bank Corporation vs. Commissioner of
Internal Revenue, wherein it held that the 20% final
withholding tax (FWT) on bank's interest income
should not form part of its taxable gross receipts for
purposes of computing the gross receipts tax (GRT),
respondent Solidbank Corporation filed with the
Bureau of Internal Revenue (BIR) a letter-request
for refund or tax credit certificate and a petition for
review with the Court of Appeals by alleging that for
the calendar year 1995, it included in the
computation of the total gross receipt the sum of
P350,807, 875.15 representing gross receipt from
passive income which was already subjected to 20%
final withholding tax. After trial, the CTA rendered
its decision in favor of respondent. On appeal, the
Court of Appeals held that the 20% FWT on bank's
interest income did not form part of the taxable
gross receipts in computing the 5% GRT, because
the FWT was not actually received by the bank but
was directly remitted to the government. Hence, the
Commissioner of the Internal Revenue filed this
petition.
The petition was granted. Under the Tax
Code, the earnings of banks from "passive" income
are subject to a twenty percent final withholding tax
(20% FWT). This tax is withheld at source and is
thus not actually and physically received by the
banks, because it is paid directly to the government
by the entities from which the banks derived the
income. Apart from the 20% FWT, banks are also
subject to a five percent gross receipts tax (5%
GRT) which is imposed by the Tax Code on their
gross receipts, including the "passive" income. Since
the 20% FWT is constructively received by the
banks and forms part of their gross receipts or
earnings, it follows that it is subject to the 5% GRT.
After all, the amount withheld is paid to the
government on their behalf, in satisfaction of their
withholding taxes. That they do not actually receive
the amount does not alter the fact that it is remitted
for their benefit in satisfaction of their tax
obligations. Stated otherwise, the fact is that there
were no withholding tax system in place in this
country, this 20% portion of the "passive" income of
banks would actually be paid to the banks and then
remitted by them to the government in payment of
their income tax. The institution of the withholding
tax system does not alter the fact that the 20%
portion of their "passive" income constitutes part of
their actual earnings, except that it is paid directly
to the government on their behalf in satisfaction of
the 20% final income tax due on their "passive"
incomes.
SYLLABUS
1. TAXATION; TAX CODE; TAX ON
INCOME; EARNINGS OF BANKS FROM "PASSIVE"
INCOME ARE SUBJECT TO 20% FINAL
WITHHOLDING TAX. — Under the Tax Code, the
earnings of banks from "passive" income are subject
to a twenty percent final withholding tax (20%
FWT). This tax is withheld at source and is thus not
actually and physically received by the banks,
because it is paid directly to the government by the
entities from which the banks derived the income.
Apart from the 20% FWT, banks are also subject to
a five percent gross receipts tax (5% GRT) which is
imposed by the Tax Code on their gross receipts,
including the "passive" income.
2. ID.; ID.; OTHER. PERCENTAGE TAXES;
20% FINAL WITHHOLDING TAX FORMS PART OF
THEIR GROSS RECEIPTS, IT FOLLOWS THAT IT IS
SUBJECT TO THE 5% GROSS RECEIPTS TAX. —
Since the 20% FWT is constructively received by the
banks and forms part of their gross receipts or
earnings, it follows that it is subject to the 5% GRT.
After all, the amount withheld is paid to the
government on their behalf, in satisfaction of their
withholding taxes. That they do not actually receive
the amount does not alter the fact that it is remitted
for their benefit in satisfaction of their tax
obligations. Stated otherwise, the fact is that if
there were no withholding tax system in place in
this country, this 20 percent portion of the "passive"
income of banks would actually be paid to the banks
and then remitted by them to the government in
payment of their income tax. The institution of the
withholding tax system does not alter the fact that
the 20 percent portion of their "passive" income
constitutes part of their actual earnings, except that
is paid directly to the government on their behalf in
satisfaction of the 20 percent final income tax due
on their "passive" incomes.
3. ID.; ID.; ID.; BANK AND BANK
INTERMEDIARIES LIABLE FOR 5% GROSS RECEIPTS
TAX SHALL FILE QUARTERLY RETURNS ON THE
AMOUNT OF GROSS RECEIPTS. — The 5% GRT is
included under "Title V. Other Percentage Taxes" of
the Tax Code and is not subject to withholding. The
banks and non-bank financial intermediaries liable
therefor shall, under Section 125(a)(1), file
quarterly returns on the amount of gross receipts
and pay the taxes due thereon within twenty (20)
days after the end of each taxable quarter.
4 ID.; ID.; TAX ON INCOME; 20% FINAL
WITHHOLDING TAX IS A TAX ON PASSIVE INCOME
DEDUCTED AND WITHHELD AT SOURCE BY THE
PAYO R C O R P O R AT I O N A N D / O R P E R S O N AS
WITHHOLDING AGENT. — The 20% FWT, on the
other hand, falls under Section 24(e)(1) of "Title II.
Tax on Income." It is a tax on passive income,
deducted and withheld at source by the payor-
corporation and/or person as withholding agent
pursuant to Section 50, and paid in the same
manner and subject to the same conditions as
provided for in Section 51.
5. ID.; ID.; PERCENTAGE TAX:, DEFINED.
— A percentage tax is a national tax measured by a
certain percentage of the gross selling price or gross
value in money of goods sold, bartered or imported;
or of the gross receipts or earnings derived by any
person engaged in the sale of services. It is not
subject to withholding.
6. ID.; ID.; INCOME TAX; DEFINED. — An
income tax, on the other hand, is a national tax
imposed on the net or the gross income realized in
a taxable year. It is subject to withholding.
7. ID.; ID.; WITHHOLDING TAX SYSTEM;
EXPLAINED. — In a withholding tax system, the
payee is the taxpayer, the person on whom the tax
is imposed; the payor, a separate entity, acts as no
more than an agent of the government for the
collection of the tax in order to ensure its payment.
Obviously, this amount that is used to settle the tax
liability is deemed sourced from the proceeds
constitutive of the tax base. These proceeds are
either actual or constructive. Both parties herein
agree that there is no actual receipt by the bank of
the amount withheld. What needs to be determined
is if there is constructive receipt thereof. Since the
payee — not the payor — is the real taxpayer, the
rule on constructive receipt can be easily
rationalized, if not made clearly manifest.
8 . I D. ; I D. ; I D. ; P O SS E SS I O N I S
ACQUIRED BY THE PAYOR AS THE WITHHOLDING
AGENT OF THE GOVERNMENT. — In our withholding
tax system, possession is acquired by the payor as
the withholding agent of the government, because
the taxpayer ratifies the very act of possession for
the government. There is thus constructive receipt.
The processes of bookkeeping and accounting for
interest on deposits and. yield on deposit
substitutes that are subjected to FWT are indeed —
for legal purposes — tantamount to delivery, receipt
or remittance. Besides, respondent itself admits
that its income is subjected to a tax burden
immediately upon "receipt," although it claims that
it derives no pecuniary benefit or advantage
through the withholding process. There being
constructive receipt of such income — part of which
is withheld — RR 17-84 applies, and that income is
included as part of the tax base upon which the GRT
is imposed.
9. CIVIL LAW; POSSESSION;
ACQUISITION OF THE RIGHT OF POSSESSION IS
THROUGH THE PROPER ACTS AND LEGAL
FORMALITIES ESTABLISHED THEREFORE — Article
531 of the Civil Code clearly provides that the
acquisition of the right of possession is through the
proper acts and legal formalities established
therefor. The withholding process is one such act.
There may not be actual receipt of the income
withheld; however, as provided for in Article 532,
possession by any person without any power
whatsoever shall be considered as acquired when
ratified by the person in whose name the act of
possession is executed.
10. STATUTORY CONSTRUCTION; RULES
AND REGULATIONS ISSUED BY ADMINISTRATIVE
OR EXECUTIVE OFFICERS PURSUANT TO THE
PROCEDURE OR AUTHORITY CONFERRED BY LAW
UPON THE ADMINISTRATIVE AGENCY HAVE THE
FORCE AND EFFECT OF A STATUTE; APPLIED IN
CASE AT BAR — In general, rules and regulations
issued by administrative or executive officers
pursuant to the procedure or authority conferred by
law upon the administrative agency have the force
and effect, or partake of the nature, of a statute.
The reason is that statutes express the policies,
purposes, objectives, remedies and sanctions
intended by the legislature in general terms. The
details and manner of carrying them out are
oftentimes left to the administrative agency
entrusted with their enforcement. In the present
case, it is the finance secretary who promulgates
the revenue regulations, upon recommendation of
the BIR commissioner. These regulations are the
consequences of a delegated power to issue legal
provisions that have the effect of law.
11. TAXATION; REVENUE REGULATION IS
BINDING ON THE COURTS AS LONG AS THE
PROCEDURE FIXED FOR ITS PROMULGATION IS
FOLLOWED. — A revenue regulation is binding on
the courts as long as the procedure fixed for its
promulgation is followed. Even if the courts may not
be in agreement with its stated policy or innate
wisdom, it is nonetheless valid, provided that its
scope is within the statutory authority or standard
granted by the legislature. Specifically, the
regulation must (1) be germane to the object and
purpose of the law; (2) not contradict, but conform
to, the standards the law prescribes; and (3) be
issued for the sole purpose of carrying into effect
the general provisions of our tax laws.
12. STATUTORY CONSTRUCTION; REPEAL
MAY BE EXPRESS OR IMPLIED. — A repeal may be
express or implied. It is express when there is a
declaration in a regulation — usually in its repealing
clause — that another regulation, identified by its
number or title, is repealed. All others are implied
repeals. An example of the latter is a general
provision that predicates the intended repeal on a
substantial conflict between the existing and the
prior regulations.
1 3 . I D. ; E V E RY E F F O RT M U S T B E
EXERTED TO MAKE ALL REGULATIONS STAND AND
A LATER RULE WILL NOT OPERATE AS A REPEAL OF
AN EARLIER ONE, IF BY ANY REASONABLE
CONSTRUCTION, THE TWO CAN BE RECONCILED. —
Repeals by implication are not favored and will not
be indulged, unless it is manifest that the
administrative agency intended them. As a
regulation is presumed to have been made with
deliberation and full knowledge of all existing rules
on the subject, it may reasonably be concluded that
its promulgation was not intended to interfere with
or abrogate any earlier rule relating to the same
subject, unless it is either repugnant to or fully
inclusive of the subject matter of an earlier one, or
unless the reason for the earlier one is "beyond
peradventure removed." Every effort must be
exerted to make all regulations stand — and a later
rule will not operate as a repeal of an earlier one, if
by any reasonable construction, the two can be
reconciled.
14. TAXATION; REVENUE REGULATION
NO. 12-80; PROVIDES THAT ALL INTERESTS
EARNED SHALL BE INCLUDED IN THE TAX BASE
FOR COMPUTING THE GROSS RECEIPT TAX. —
Section 4(e) of the earlier RR 1280 provides that
only items of income actually received shall be
included in the tax base for computing the GRT, but
Section 7(c) of the later RR 17-84 makes no such
distinction and provides that all interests earned
shall be included. The exception having been
eliminated, the clear intent is that the later RR
17-84 includes the exception within the scope of the
general rule. x x x RR 1280 imposes the GRT only
on all items of income actually received, as opposed
to their mere accrual, while RR 17-84 includes all
interest income in computing the GRT. RR 12-80 is
superseded by the later rule, because Section 4(e)
thereof is not restated in RR 17-84. Clearly
therefore, as petitioner correctly states, this
particular provision was impliedly repealed when the
later regulations took effect.
15. ID.; ID.; "ACCRUAL" REFERS TO AN
ACCOUNTING METHOD. — The "accrual" referred to
therein should not be equated with the
determination of the amount to be used as tax base
in computing the GRT. Such accrual merely refers to
an accounting method that recognizes income as
earned although not received, and expenses as
incurred although not yet paid.
16. ID.; ID.; ID.; SHOULD NOT BE
CONFUSED WITH THE CONCEPT OF CONSTRUCTIVE
POSSESSION OR RECEIPT. — Accrual should not be
confused with the concept of constructive
possession or receipt as earlier discussed. Petitioner
correctly points out that income that is merely
accrued — earned, but not yet received — does not
form part of the taxable gross receipts; income that
has been received, albeit constructively, does.
17. ID.; ID.; ID:; STRESSES THE FACT
THAT SECTION 4(e) DOES NOT DISTINGUISH
BETWEEN ACTUAL AND CONSTRUCTIVE RECEIPT. —
The word "actually,." used confusingly in Section
4(e), will be clearer if removed entirely. Besides, if
actually is that important, accrual should have been
eliminated for being a mere surplusage. The
inclusion of accrual stresses the fact that Section
4(e) does not distinguish between actual and
constructive receipt. It merely focuses on the
method of accounting known as the accrual system.
18. ID.; ID.; RECONCILED WITH
REVENUE REGULATION NO. 17-84. — In reconciling
these two regulations, the earlier one includes in
the tax base for GRT all income, whether actually or
constructively received, while the later one includes
specifically interest income. In computing the
income tax liability, the only exception cited in the
later regulations is the exclusion from gross income
of interest income, which is already subjected to
withholding. This exception, however, refers to a
different tax altogether. To extend mischievously
such exception to the GRT will certainly lead to
results not contemplated by the legislators and the
administrative body promulgating the regulations.
 19. ID.; TAX CODE; GROSS RECEIPTS;
ELUCIDATED. — To begin, we have to nuance the
definition of gross receipts to determine what it is
exactly. In this regard, we note that US cases have
persuasive effect in our jurisdiction, because
Philippine income tax law is patterned after its US
counterpart. "'[G]ross receipts' with respect to any
period means the sum of: (a) The total amount
received or accrued during such period from the
sale, exchange, or other disposition of . . . other
property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the
ordinary course of its trade or business, and (b) The
gross income, attributable to a trade or business,
regularly carried on by the taxpayer, received or
accrued during such period . . . ." ". . . [B]y gross
earnings from operations . . . was intended all
operations .. . including incidental, subordinate, and
subsidiary operations, as well as principal
operations." "When we speak of the `gross
earnings' of a person or corporation, we mean the
entire earnings or receipts of such person or
corporation from the business or operations to
which we refer. From these cases, "gross receipts"
refer to the total; as opposed to the net, income.
These are therefore the total receipts before any
deduction for the expenses of management.
Webster's New International Dictionary, in fact,
defines gross as "whole or entire."
20. ID.; ID.; ID.; EARMARKING IS NOT
THE SAME AS WITHHOLDING. — Earmarking is not
the same as withholding. Amounts earmarked do
not form part of gross receipts, because, although
delivered or received, these are by law or regulation
reserved for some person other than the taxpayer.
On the contrary, amounts withheld form part of
gross receipts, because these are in constructive
possession and not subject to any reservation, the
withholding agent being merely a conduit in the
collection process.
21. ID.; ID.; ID.; INTEREST INCOME
THAT HAD BEEN WITHHELD FOR THE GOVERNMENT
BECAME PROPERTY OF THE FINANCIAL
INSTITUTIONS UPON CONSTRUCTIVE POSSESSION
THEREOF. — The Manila Jockey Club had to deliver
to the Board on Races, horse owners and jockeys
amounts that never became the property of the race
track. Unlike these amounts, the interest income
that had been withheld for the government became
property of the financial institutions upon
constructive possession thereof. Possession was
indeed acquired, since it was ratified by the financial
institutions in whose name the act of possession
had been executed. The money indeed belonged to
the taxpayers; merely holding it in trust was not
enough.
22. ID.; ID.; ID.; IT IS OWNERSHIP THAT
DETERMINES WHETHER INTEREST INCOME FORMS
PART OF TAXABLE GROSS RECEIPTS. — The
government subsequently becomes the owner of the
money when the financial institutions pay the FWT
to extinguish their obligation to the government. As
this Court has held before, this is the consideration
for the transfer of ownership of the FWT from these
institutions to the government. It is ownership that
determines whether interest income forms part of
taxable gross receipts. Being originally owned by
these financial institutions as part of their interest
income, the FWT should form part of their taxable
gross receipts.
23. ID.; ID.; FINAL WITHHOLDING TAX IS
A TAX ON PASSIVE INCOME WHILE THE GROSS
RECEIPT TAX IS ON BUSINESS. — Looking again
into Sections 24(e)(1) and 119 of the Tax Code, we
find that the first imposes an income tax; the
second, a percentage tax. The legislature clearly
intended two different taxes. The FWT is a tax on
passive income, while the GRT is on business. The
withholding of one is not equivalent to the payment
of the other.
24. ID.; STATUTORY CONSTRUCTION;
TAXING ACT WILL BE CONSTRUED FROM ITS
LANGUAGE. — A taxing act will be construed, and
the intent and meaning of the legislature
ascertained, from its language. Its clarity and
implied intent must exist to uphold the taxes as
against a taxpayer in whose favor doubts will be
resolved. No such doubts exist with respect to the
Tax Code, because the income and percentage taxes
we have cited earlier have been imposed in clear
and express language for that purpose. This Court
has steadfastly adhered to the doctrine that its first
and fundamental duty is the application of the law
according to its express terms — construction and
interpretation being called for only when such literal
application is impossible or inadequate without
them. In Quijano vs. Development Bank of the
Philippines, we stressed as follows: "No process of
interpretation or construction need be resorted to
where a provision of law peremptorily calls for
application."
25. ID.; ID.; COURTS ARE NOT TO GIVE
WORDS MEANINGS THAT WOULD LEAD TO ABSURD
OR UNREASONABLE CONSEQUENCES. — A literal
application of any part of a statute is to be rejected
if it will operate unjustly, lead to absurd results, or
contradict the evident meaning of the statute taken
as a whole. Unlike the CA, we find that the literal
application of the aforesaid sections of the Tax Code
and its implementing regulations does not operate
unjustly or contradict the evident meaning of the
statute taken as a whole. Neither does it lead to
absurd results. Indeed, our courts are not to give
words meanings that would lead to absurd or
unreasonable consequences.
26. R E ME DIAL LAW; E VIDE NC E ;
CREDIBILITY; FINDINGS OF FACT OF THE COURT
OF TAX APPEALS WILL ORDINARILY NOT BE
REVIEWED, ABSENT ANY SHOWING OF GROSS
ERROR OR ABUSE ON ITS PART. — Under our tax
system, the CTA acts as a highly specialized body
specifically created for the purpose of reviewing tax
cases. Because of its recognized expertise, its
findings of fact will ordinarily not be reviewed,
absent any showing of gross error or abuse on its
part. Such findings are binding on the Court and,
absent strong reasons for us to delve into facts,
only questions of law are open for determination.
27. TAXATION; TAX REFUNDS; IN THE
NATURE OF TAX EXEMPTIONS AND MUST BE
STRICTLY CONSTRUED AGAINST TAXPAYER. — Tax
refunds are in the nature of tax exemptions. Such
exemptions are strictly construed against the
taxpayer, being highly disfavored and almost said
"to be odious to the law." Hence, those who claim to
be exempt from the payment of a particular tax
must do so under clear and unmistakable terms
found in the statute. They must be able to point to
some positive provision, not merely a vague
implication, of the law creating that right. The right
of taxation will not be surrendered, except in words
too plain to be mistaken. The reason is that the
State cannot strip itself of this highest attribute of
sovereignty — its most essential power of taxation
— by vague or ambiguous language. Since tax
refunds are in the nature of tax exemptions, these
are deemed to be "in derogation of sovereign
authority and to be construed strictissimi juris
against the person or entity claiming the
exemption."
28. ID.; TAX EXEMPTIONS; CANNOT BE
G R ANTE D BY IMPLIC ATION OR ME R E
ADMINISTRATIVE REGULATION; APPLIED IN CASE
AT BAR. — No less than our 1987 Constitution
provides for the mechanism for granting tax
exemptions. They certainly cannot be granted by
implication or mere administrative regulation. Thus,
when an exemption is claimed, it must indubitably
be shown to exist, for every presumption is against
it, and a well-founded doubt is fatal to the claim. In
the instant case, respondent has not been able to
satisfactorily show that its FWT on interest income
is exempt from the GRT. Like China Banking
Corporation, its argument creates a tax exemption
where none exists,
29. ID.; ID.; NO EXEMPTIONS ARE
NORMALLY ALLOWED WHEN A GROSS RECEIPT TAX
IS IMPOSED. — No exemptions are normally
allowed when a GRT is imposed. It is precisely
designed to maintain simplicity in the tax collection
effort of the government and to assure its steady
source of revenue even during an economic slump.
30. ID.; DOUBLE TAXATION;
ELUCIDATED. — Double taxation means taxing the
same property twice when it should be taxed only
once; that is, ". . . . taxing the same person twice
by the same jurisdiction for the same thing." It is
obnoxious when the taxpayer is taxed twice, when it
should be but once. Otherwise described as "direct
duplicate taxation," the two taxes must be imposed
on the same subject matter, for the same purpose,
by the same taxing authority, within the same
jurisdiction, during the same taxing period; and
they must be of the same kind or character.
31. ID.; ID.; NOT PRESENT IN CASE AT
BAR. — First, the taxes herein are imposed on two
different subject matters. The subject matter of the
FWT is the passive income generated in the form of
interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT is
the privilege of engaging in the business of banking.
. . . Second, although both taxes are national in
scope because they are imposed by the same taxing
authority — the national government under the Tax
Code — and operate within the same Philippine
jurisdiction for the same purpose of raising
revenues, the taxing periods they affect are
different. The FWT is deducted and withheld as soon
as the income is earned, and is paid after every
calendar quarter in which it is earned. On the other
hand, the GRT is neither deducted nor withheld, but
is paid only after every taxable quarter in which it is
earned. Third, these two taxes are of different kinds
or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not
subject to withholding.
DECISION
PANGANIBAN, J p:
Under the Tax Code, the earnings of
banks from "passive" income are subject to a
twenty percent final withholding tax (20% FWT).
This tax is withheld at source and is thus not
actually and physically received by the banks,
because it is paid directly to the government by the
entities from which the banks derived the income.
Apart from the 20% FWT, banks are also subject to
a five percent gross receipts tax (5% GRT) which is
imposed by the Tax Code on their gross receipts,
including the "passive" income.
Since the 20% FWT is constructively
received by the banks and forms part of their gross
receipts or earnings, it follows that it is subject to
the 5% GRT. After all, the amount withheld is paid
to the government on their behalf, in satisfaction of
their withholding taxes. That they do not actually
receive the amount does not alter the fact that it is
remitted for their benefit in satisfaction of their tax
obligations.
Stated otherwise, the fact is that if there
were no withholding tax system in place in this
country, this 20 percent portion of the "passive"
income of banks would actually be paid to the banks
and then remitted by them to the government in
 payment of their income tax. The institution of the receipts tax payments in the
withholding tax system does not alter the fact that sum of P73,734,584.60, broken
the 20 percent portion of their "passive" income down as follows:
constitutes part of their actual earnings, except that
it is paid directly to the government on their behalf
in satisfaction of the 20 percent final income tax
due on their "passive" incomes.

The Case
Before us is a Petition for Review 1 under Gros
Rule 45 of the Rules of Court, seeking to annul the Gros
July 18, 2000 Decision 2 and the May 8, 2001 Period s
Resolution 3 of the Court of Appeals 4 (CA) in CA- s
GR SP No. 54599. The decretal portion of the
Covere Rece
assailed Decision reads as follows:
Rece
d ipts
ipts
"WHEREFORE, we Tax
AFFIRM in toto the assailed
decision and resolution of the
Court of Tax Appeals." 5
January P P
to 188,4 9,420
March 06,06 ,303.
1994 1.95 10
T h e c h a l l e n g e d Re s o l u t i o n d e n i e d
petitioner's Motion for Reconsideration. April to
The Facts
June 370,913,832.70
18,545,691.63
Quoting petitioner, the CA 6 summarized 1994
the facts of this case as follows:
July to
" Fo r t h e c a l e n d a r
year 1995, [respondent] Septem
seasonably filed its Quarterly
481,501,838.98
24,075,091.95
P e r c e n t a g e Ta x R e t u r n s
ber
reflecting gross receipts 1994
(pertaining to 5% [Gross
Receipts Tax] rate) in the total
amount of P1,474,691,693.44
with corresponding gross
 "On January 30,
October 1 9 9 6 , [ t h e C o u r t o f Ta x
to Appeals] rendered a decision in
CTA Case No. 4720 entitled
Decem 433,869,959.81
21,693,497.98 Asian Bank Corporation vs.
Commissioner of Internal
ber Revenue[,] wherein it was held
that the 20% final withholding
1994 tax on [a] bank's interest
------- ------- income should not form part of
its taxable gross receipts for
----- ---- purposes of computing the
gross receipts tax.
P
P
1,474
73,73
Total ,691,
4,584
693.4 "On June 19, 1997,
.60
4 on the strength of the
aforementioned decision,
==== [respondent] filed with the
==== Bureau of Internal Revenue
==== [BIR] a letter-request for the
==== refund or issuance of [a] tax
==== credit certificate in the
====
= aggregate amount of
P3,508,078.75, representing,
allegedly overpaid gross
receipts tax for the year 1995,
computed as follows:

"[Respondent] alleges
that the total gross receipts in
the amount of
P1,474,691,693.44 included the
sum of P350,807,875.15 Gross Receipts
representing gross receipts
from passive income which was Subjected to the
already subjected to 20% final
withholding tax. Final Tax
 =====
Derived from P350, =====
Passive 807,87 ==
[Income] 5.15
Multiply by
Final Tax 20%
rate "Without waiting for
an action from the [petitioner],
--------- [respondent] on the same day
filed [a] petition for review
- [with the Court of Tax Appeals]
in order to toll the running of
P the two-year prescriptive period
20% Final
70,161 to judicially claim for the refund
Tax Withheld of [any] overpaid internal
,575.0 revenue tax[,] pursuant to
at Source Section 230 [now 229] of the
3 Ta x C o d e , [ a l s o ' N a t i o n a l
Internal Revenue Code'] . . ..
Multiply by
[Gross
5%
Receipts
Tax] rate
xxx xxx xxx
---------
-
Overpaid
P "After trial on the
[Gross m e r i t s , t h e [ C o u r t o f Ta x
3,508, Appeals], on August 6, 1999,
Receipts rendered its decision
078.75
Tax] ordering . . . petitioner to
refund in favor of . . .
respondent the reduced amount
 of P1,555,749.65 as overpaid
[gross receipts tax] for the year
1995. The legal issue . . . was
resolved by the [Court of Tax
Appeals], with Hon. Amancio Q.
Saga dissenting, on the
strength of its earlier
pronouncement in . . . Asian
Bank Corporation vs.
Commissioner of Internal
Revenue . . ., wherein it was
held that the 20% [final
withholding tax] on [a] bank's
interest income should not form
part of its taxable gross
receipts for purposes of
computing the [gross receipts
tax]." 7
Ruling of the CA
The CA held that the 20% FWT on a
bank's interest income did not form part of the
taxable gross receipts in computing the 5% GRT,
because the FWT was not actually received by the
bank but was directly remitted to the government.
The appellate court curtly said that while the Tax
Code "does not specifically state any
exemption, . . . the statute must receive a sensible
construction such as will give effect to the
legislative intention, and so as to avoid an unjust or
absurd conclusion." 8
Hence, this appeal. 9
Issue
Petitioner raises this lone issue for our
consideration:
"Whether or not the
20% final withholding tax on
[a] bank's interest income
forms part of the taxable gross
receipts in computing the 5%
gross receipts tax." 10
The Court's Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts
Petitioner claims that although the 20%
FWT on respondent's interest income was not
actually received by respondent because it was
remitted directly to the government, the fact that
the amount redounded to the bank's benefit makes
it part of the taxable gross receipts in computing
the 5% GRT. Respondent, on the other hand,
maintains that the CA correctly ruled otherwise.
We agree with petitioner. In fact, the
same issue has been raised recently in China
Banking Corporation v. CA, 11 where this Court held
that the amount of interest income withheld in
payment of the 20% FWT forms part of gross
receipts in computing for the GRT on banks.
The FWT and the GRT :
Two Different Taxes
The 5% GRT is imposed by Section 119
12 of the Tax Code, 13 which provides:
 "SEC. 119. Tax on but not exceeding four (4) years
banks and non-bank financial 3%
intermediaries. — There shall Long-term maturity:
be collected a tax on gross
receipts derived from sources
within the Philippines by all
banks and non-bank financial
intermediaries in accordance
with the following schedule:
(i) Over four (4) years but not exceeding
seven (7)
years 1%
(ii) Over seven (7) years
0%
"(b) On
"(a) On interest, d i v i d e n d s
commissions and discounts
from lending activities as well 0%
as income from financial
leasing, on the basis of
remaining maturities of
instruments from which such
receipts are derived.
" ( c ) O n r oya l t i e s ,
rentals of property, real or
personal, profits from exchange
and all other items treated as
gross income under Section 28
Short-term maturity 14 of this Code 5%
not in excess of two (2)
years 5%

Provided, however, That in case the maturity period referred to

M e d i u m - t e r m
maturity — over two (2) years
in paragraph (a) is shortened thru pretermination, then the
maturity period shall be reckoned to end as of the date of
pretermination for purposes of classifying the transaction as
short, medium or long term and the correct rate of tax shall be
applied accordingly.
"Nothing in this Code
shall preclude the
 Commissioner from imposing
the same tax herein provided
on persons performing similar
banking activities."
The 5% GRT 15 is included under "Title V.
Other Percentage Taxes" of the Tax Code and is not
subject to withholding. The banks and non-bank
financial intermediaries liable therefor shall, under
Section 125(a)(1), 16 file quarterly returns on the
amount of gross receipts and pay the taxes due
thereon within twenty (20) 17 days after the end of
each taxable quarter. HESCcA
The 20% FWT, 18 on the other hand, falls
under Section 24(e)(1) 19 of "Title II. Tax on
Income." It is a tax on passive income, deducted
and withheld at source by the payor-corporation
and/or person as withholding agent pursuant to
Section 50, 20 and paid in the same manner and
subject to the same conditions as provided for in
Section 51. 21
A perusal of these provisions clearly
shows that two types of taxes are involved in the
present controversy: (1) the GRT, which is a
percentage tax; and (2) the FWT, which is an
income tax. As a bank, petitioner is covered by both
taxes.
A percentage tax is a national tax
measured by a certain percentage of the gross
selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale
of services. 22 It is not subject to withholding.
An income tax, on the other hand, is a
national tax imposed on the net or the gross income
realized in a taxable year. 23 It is subject to
withholding.
In a withholding tax system, the payee is
the taxpayer, the person on whom the tax is
imposed; the payor, a separate entity, acts as no
more than an agent of the government for the
collection of the tax in order to ensure its payment.
Obviously, this amount that is used to settle the tax
liability is deemed sourced from the proceeds
constitutive of the tax base. 24 These proceeds are
either actual or constructive. Both parties herein
agree that there is no actual receipt by the bank of
the amount withheld. What needs to be determined
is if there is constructive receipt thereof. Since the
payee — not the payor — is the real taxpayer, the
rule on constructive receipt can be easily
rationalized, if not made clearly manifest. 25
Constructive Receipt
Versus Actual Receipt
Applying Section 7 of Revenue
Regulations (RR) No. 17-84, 26 petitioner contends
that there is constructive receipt of the interest on
deposits and yield on deposit substitutes. 27
Respondent, however, claims that even if there is, it
is Section 4(e) of RR 12-80 28 that nevertheless
governs the situation.
Section 7 of RR 17-84 states:
"SEC. 7. Nature and
Tr e a t m e n t o f I n t e r e s t o n
Deposits and Yield on Deposit
Substitutes. —
 '(a) The interest
earned on Philippine Currency
bank deposits and yield from
deposit substitutes subjected to
the withholding taxes in
accordance with these
regulations need not be
included in the gross income in
computing the depositor's/
investor's income tax liability in
accordance with the provision
of Section 29(b), 29 (c) 30 and
(d) of the National Internal
Revenue Code, as amended.
'(b) Only interest paid
or accrued on bank deposits, or
yield from deposit substitutes
declared for purposes of
imposing the withholding taxes
in accordance with these
regulations shall be allowed as
interest expense deductible for
purposes of computing taxable
net income of the payor.
'(c) If the recipient of
the above-mentioned items of
income are financial
institutions, the same shall be
included as part of the tax base
upon which the gross receipt[s]
tax is imposed.'"
Section 4(e) of RR 12-80, on the other
hand, states that the tax rates to be imposed on the
gross receipts of banks, non-bank financial
intermediaries; financing companies, and other non-
bank financial intermediaries not performing quasi-
banking activities shall be based on all items of
income actually received. This provision reads:
"SEC. 4. . . .
"(e) Gross receipts
tax on banks, non-bank
financial intermediaries,
financing companies, and other
non-bank financial
intermediaries not performing
quasi-banking activities. — The
rates of tax to be imposed on
the gross receipts of such
financial institutions shall be
based on all items of income
actually received. Mere accrual
shall not be considered, but
once payment is received on
such accrual or in cases of
prepayment, then the amount
a c t u a l l y r e c e i ve d s h a l l b e
included in the tax base of such
financial institutions, as
provided hereunder . . .."
Respondent argues that the above-quoted
provision is plain and clear: since there is no actual
receipt, the FWT is not to be included in the tax
base for computing the GRT. There is supposedly no
pecuniary benefit or advantage accruing to the bank
from the FWT, because the income is subjected to a
tax burden immediately upon receipt through the
withholding process. Moreover, the earlier RR 12-80
covered matters not falling under the later RR
17-84. 31
We are not persuaded.
By analogy, we apply to the receipt of
income the rules on actual and constructive
possession provided in Articles 531 and 532 of our
Civil Code.
Under Article 531: 32
"Possession is
acquired by the material
occupation of a thing or the
exercise of a right, or by the
fact that it is subject to the
action of our will, or by the
proper acts and legal formalities
established for acquiring such
right."
Article 532 states:
"Possession may be
acquired by the same person
who is to enjoy it, by his legal
representative, by his agent, or
by any person without any
power whatever; but in the last
case, the possession shall not
be considered as acquired until
the person in whose name the
act of possession was executed
has ratified the same, without
prejudice to the juridical
consequences of negotiorum
gestio in a proper case." 33
The last means of acquiring possession
under Article 531 refers to juridical acts — the
acquisition of possession by sufficient title — to
which the law gives the force of acts of possession.
34 Respondent argues that only items of income
actually received should be included in its gross
receipts. It claims that since the amount had
already been withheld at source, it did not have
actual receipt thereof.
We clarify. Article 531 of the Civil Code
clearly provides that the acquisition of the right of
possession is through the proper acts and legal
formalities established therefor. The withholding
process is one such act. There may not be actual
receipt of the income withheld; however, as
provided for in Article 532, possession by any
person without any power whatsoever shall be
considered as acquired when ratified by the person
in whose name the act of possession is executed.
In our withholding tax system, possession
is acquired by the payor as the withholding agent of
the government, because the taxpayer ratifies the
very act of possession for the government. There is
thus constructive receipt. The processes of
bookkeeping and accounting for interest on deposits
and yield on deposit substitutes that are subjected
to FWT are indeed — for legal purposes —
 tantamount to delivery, receipt or remittance. 35
Besides, respondent itself admits that its income is
subjected to a tax burden immediately upon
"receipt," although it claims that it derives no
pecuniary benefit or advantage through the
withholding process. There being constructive
receipt of such income — part of which is withheld
— RR 17-84 applies, and that income is included as
part of the tax base upon which the GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue
regulations on interest income constructively
received.
In general, rules and regulations issued
by administrative or executive officers pursuant to
the procedure or authority conferred by law upon
the administrative agency have the force and effect,
or partake of the nature, of a statute. 36 The
reason is that statutes express the policies,
purposes, objectives, remedies and sanctions
intended by the legislature in general terms. The
details and manner of carrying them out are
oftentimes left to the administrative agency
entrusted with their enforcement.
In the present case, it is the finance
secretary who promulgates the revenue regulations,
upon recommendation of the BIR commissioner.
These regulations are the consequences of a
delegated power to issue legal provisions that have
the effect of law. 37
A revenue regulation is binding on the
courts as long as the procedure fixed for its
promulgation is followed. Even if the courts may not
be in agreement with its stated policy or innate
wisdom, it is nonetheless valid, provided that its
scope is within the statutory authority or standard
granted by the legislature. 38 Specifically, the
regulation must (1) be germane to the object and
purpose of the law; 39 (2) not contradict, but
conform to, the standards the law prescribes; 40
and (3) be issued for the sole purpose of carrying
into effect the general provisions of our tax laws. 41
In the present case, there is no question
about the regularity in the performance of official
duty. What needs to be determined is whether RR
12-80 has been repealed by RR 17-84. IEaCDH
A repeal may be express or implied. It is
express when there is a declaration in a regulation
— usually in its repealing clause — that another
regulation, identified by its number or title, is
repealed. All others are implied repeals. 42 An
example of the latter is a general provision that
predicates the intended repeal on a substantial
conflict between the existing and the prior
regulations. 43
As stated in Section 11 of RR 17-84, all
regulations, rules, orders or portions thereof that
are inconsistent with the provisions of the said RR
are thereby repealed. This declaration proceeds on
the premise that RR 17-84 clearly reveals such an
intention on the part of the Department of Finance.
Otherwise, later RRs are to be construed as a
continuation of, and not a substitute for, earlier RRs;
and will continue to speak, so far as the subject
matter is the same, from the time of the first
promulgation. 44
There are two well-settled categories of
implied repeals: (1) in case the provisions are in
irreconcilable conflict, the later regulation, to the
extent of the conflict, constitutes an implied repeal
of an earlier one; and (2) if the later regulation
covers the whole subject of an earlier one and is
clearly intended as a substitute, it will similarly
operate as a repeal of the earlier one. 45 There is
no implied repeal of an earlier RR by the mere fact
that its subject matter is related to a later RR,
which may simply be a cumulation or continuation
of the earlier one. 46
Where a part of an earlier regulation
embracing the same subject as a later one may not
be enforced without nullifying the pertinent
provision of the latter, the earlier regulation is
deemed impliedly amended or modified to the
extent of the repugnancy. 47 The unaffected
provisions or portions of the earlier regulation
remain in force, while its omitted portions are
deemed repealed. 48 An exception therein that is
amended by its subsequent elimination shall now
cease to be so and instead be included within the
scope of the general rule. 49
Section 4(e) of the earlier RR 12-80
provides that only items of income actually received
shall be included in the tax base for computing the
GRT, but Section 7(c) of the later RR 17-84 makes
no such distinction and provides that all interests
earned shall be included. The exception having been
eliminated, the clear intent is that the later RR
17-84 includes the exception within the scope of the
general rule.
Repeals by implication are not favored
and will not be indulged, unless it is manifest that
the administrative agency intended them. As a
regulation is presumed to have been made with
deliberation and full knowledge of all existing rules
on the subject, it may reasonably be concluded that
its promulgation was not intended to interfere with
or abrogate any earlier rule relating to the same
subject, unless it is either repugnant to or fully
inclusive of the subject matter of an earlier one, or
unless the reason for the earlier one is "beyond
peradventure removed." 50 Every effort must be
exerted to make all regulations stand — and a later
rule will not operate as a repeal of an earlier one, if
by any reasonable construction, the two can be
reconciled. 51
RR 12-80 imposes the GRT only on all
items of income actually received, as opposed to
their mere accrual, while RR 17-84 includes all
interest income in computing the GRT. RR 12-80 is
superseded by the later rule, because Section 4(e)
thereof is not restated in RR 17-84. Clearly
therefore, as petitioner correctly states, this
particular provision was impliedly repealed when the
later regulations took effect. 52
Reconciling the Two Regulations
Granting that the two regulations can be
reconciled, respondent's reliance on Section 4(e) of
RR 12-80 is misplaced and deceptive. The "accrual"
referred to therein should not be equated with the
determination of the amount to be used as tax base
in computing the GRT. Such accrual merely refers to
an accounting method that recognizes income as
earned although not received, and expenses as
incurred although not yet paid.
Accrual should not be confused with the
concept of constructive possession or receipt as
earlier discussed. Petitioner correctly points out that
income that is merely accrued — earned, but not
yet received — does not form part of the taxable
gross receipts; income that has been received,
albeit constructively, does. 53
The word "actually," used confusingly in
Section 4(e), will be clearer if removed entirely.
Besides, if actually is that important, accrual should
have been eliminated for being a mere surplusage.
The inclusion of accrual stresses the fact that
Section 4(e) does not distinguish between actual
and constructive receipt. It merely focuses on the
method of accounting known as the accrual system.
Under this system, income is accrued or
earned in the year in which the taxpayer's right
thereto becomes fixed and definite, even though it
may not be actually received until a later year;
 while a deduction for a liability is to be accrued or "'[G]ross receipts'
incurred and taken when the liability becomes fixed with respect to any period
and certain, even though it may not be actually paid means the sum of: (a) The total
until later. 54 amount received or accrued
during such period from the
Under any system of accounting, no duty sale, exchange, or other
or liability to pay an income tax upon a transaction disposition of . . . other
arises until the taxable year in which the event property of a kind which would
constituting the condition precedent occurs. 55 The properly be included in the
liability to pay a tax may thus arise at a certain time inventory of the taxpayer if on
and the tax paid within another given time. 56 hand at the close of the taxable
year, or property held by the
In reconciling these two regulations, the taxpayer primarily for sale to
earlier one includes in the tax base for GRT all customers in the ordinary
income, whether actually or constructively received, course of its trade or business,
while the later one includes specifically interest and (b) The gross income,
income. In computing the income tax liability, the attributable to a trade or
only exception cited in the later regulations is the business, regularly carried on
exclusion from gross income of interest income, by the taxpayer, received or
which is already subjected to withholding. This accrued during such
exception, however, refers to a different tax period . . . ." 61
altogether. To extend mischievously such exception
to the GRT will certainly lead to results not
contemplated by the legislators and the
administrative body promulgating the regulations.

Manila Jockey Club ". . . [B]y gross

Inapplicable earnings from operations . . .
In Commissioner of Internal Revenue v. was intended all operations . . .
Manila Jockey Club, 57 we held that the term "gross including incidental,
receipts" shall not include money which, although subordinate, and subsidiary
delivered, has been especially earmarked by law or operations, as well as principal
regulation for some person other than the taxpayer. operations." 62
58

To begin, we have to nuance the definition

of gross receipts 59 to determine what it is exactly.
In this regard, we note that US cases have
persuasive effect in our jurisdiction, because
"When we speak of the 'gross earnings' of a
Philippine income tax law is patterned after its US
person or corporation, we mean
counterpart. 60
the entire earnings or receipts of
 such person or corporation from
the business or operations to
which we refer." 63
From these cases, "gross receipts" 64
refer to the total, as opposed to the net, income. 65
These are therefore the total receipts before any
deduction 66 for the expenses of management. 67
Webster's New International Dictionary, in fact,
defines gross as "whole or entire." EDcICT
Statutes taxing the gross "receipts,"
"earnings," or "income" of particular corporations
are found in many jurisdictions. 68 Tax thereon is
generally held to be within the power of a state to
impose; or constitutional, unless it interferes with
interstate commerce or violates the requirement as
to uniformity of taxation. 69
Moreover, we have emphasized that the
BIR has consistently ruled that "gross receipts" does
not admit of any deduction. 70 Following the
principle of legislative approval by reenactment, 71
this interpretation has been adopted by the
legislature throughout the various reenactments of
then Section 119 of the Tax Code. 72
Given that a tax is imposed upon total
receipts and not upon net earnings, 73 shall the
income withheld be included in the tax base upon
which such tax is imposed? In other words, shall
interest income constructively received still be
included in the tax base for computing the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is
not the same as withholding. Amounts earmarked do not form
part of gross receipts, because, although delivered or received,
these are by law or regulation reserved for some person other
than the taxpayer. On the contrary, amounts withheld form part
of gross receipts, because these are in constructive possession
and not subject to any reservation, the withholding agent being
merely a conduit in the collection process.
The Manila Jockey Club had to deliver to
the Board on Races, horse owners and jockeys
amounts that never became the property of the race
track. 74 Unlike these amounts, the interest income
that had been withheld for the government became
property of the financial institutions upon
constructive possession thereof. Possession was
indeed acquired, since it was ratified by the financial
institutions in whose name the act of possession
had been executed. The money indeed belonged to
the taxpayers; merely holding it in trust was not
enough. 75
The government subsequently becomes
the owner of the money when the financial
institutions pay the FWT to extinguish their
obligation to the government. As this Court has held
before, this is the consideration for the transfer of
ownership of the FWT from these institutions to the
government. 76 It is ownership that determines
whether interest income forms part of taxable gross
receipts. 77 Being originally owned by these
financial institutions as part of their interest income,
the FWT should form part of their taxable gross
receipts.
Besides, these amounts withheld are in
payment of an income tax liability, which is different
from a percentage tax liability. Commissioner of
Internal Revenue v. Tours Specialists, Inc. aptly held
thus: 78
". . . [G]ross receipts
subject to tax under the Tax
Code do not include monies or
receipts entrusted to the
 taxpayer which do not belong
to them and do not redound to
the taxpayer's benefit; and it is
not necessary that there must
be a law or regulation which
would exempt such monies and
receipts within the meaning of
gross receipts under the Tax
Code." 79
In the construction and interpretation of
tax statutes and of statutes in general, the primary
consideration is to ascertain and give effect to the
intention of the legislature. 80 We ought to impute
to the lawmaking body the intent to obey the
constitutional mandate, as long as its enactments
fairly admit of such construction. 81 In fact, ". . . no
tax can be levied without express authority of law,
but the statutes are to receive a reasonable
construction with a view to carrying out their
purpose and intent." 82
Looking again into Sections 24(e)(1) and
119 of the Tax Code, we find that the first imposes
an income tax; the second, a percentage tax. The
legislature clearly intended two different taxes. The
FWT is a tax on passive income, while the GRT is on
business. 83 The withholding of one is not
equivalent to the payment of the other.
Non-Exemption of FWT from GRT :
Neither Unjust nor Absurd
Taxing the people and their property is
essential to the very existence of government.
Certainly, one of the highest attributes of
sovereignty is the power of taxation, 84 which may
legitimately be exercised on the objects to which it
is applicable to the utmost extent as the
government may choose. 85 Being an incident of
sovereignty, such power is coextensive with that to
which it is an incident. 86 The interest on deposits
and yield on deposit substitutes of financial
institutions, on the one hand, and their business as
such, on the other, are the two objects over which
the State has chosen to extend its sovereign power.
Those not so chosen are, upon the soundest
principles, exempt from taxation. 87
While courts will not enlarge by
construction the government's power of taxation, 88
neither will they place upon tax laws so loose a
construction as to permit evasions, merely on the
basis of fanciful and insubstantial distinctions. 89
When the legislature imposes a tax on income and
another on business, the imposition must be
respected. The Tax Code should be so construed, if
need be, as to avoid empty declarations or
possibilities of crafty tax evasion schemes. We have
consistently ruled thus:
". . . [I]t is upon
taxation that the [g]overnment
chiefly relies to obtain the
means to carry on its
operations, and it is of the
utmost importance that the
modes adopted to enforce the
collection of the taxes levied
should be summary and
interfered with as little as
possible. . . .." 90
"Any delay in the
proceedings of the officers,
 upon whom the duty is
devolved of collecting the taxes,
may derange the operations of
government, and thereby cause
serious detriment to the
public." 91
"No government
could exist if all litigants were
permitted to delay the
collection of its taxes." 92
A taxing act will be construed, and the
intent and meaning of the legislature ascertained,
from its language. 93 Its clarity and implied intent
must exist to uphold the taxes as against a taxpayer
in whose favor doubts will be resolved. 94 No such
doubts exist with respect to the Tax Code, because
the income and percentage taxes we have cited
earlier have been imposed in clear and express
language for that purpose. 95
This Court has steadfastly adhered to the
doctrine that its first and fundamental duty is the
application of the law according to its express terms
— construction and interpretation being called for
only when such literal application is impossible or
inadequate without them. 96 In Quijano v.
Development Bank of the Philippines, 97 we
stressed as follows:
"No process of
interpretation or construction
need be resorted to where a
provision of law peremptorily
calls for application." 98
A literal application of any part of a
statute is to be rejected if it will operate unjustly,
lead to absurd results, or contradict the evident
meaning of the statute taken as a whole. 99 Unlike
the CA, we find that the literal application of the
aforesaid sections of the Tax Code and its
implementing regulations does not operate unjustly
or contradict the evident meaning of the statute
taken as a whole. Neither does it lead to absurd
results. Indeed, our courts are not to give words
meanings that would lead to absurd or
u n r e a s o n a b l e c o n s e q u e n c e s . 1 0 0 We h ave
repeatedly held thus:
". . . [S]tatutes
should receive a sensible
construction, such as will give
effect to the legislative
intention and so as to avoid an
unjust or an absurd
conclusion." 101
"While it is true that
the contemporaneous
construction placed upon a
statute by executive officers
whose duty is to enforce it
should be given great weight by
the courts, still if such
 construction is so erroneous, . .
. the same must be declared as
null and void." 102
It does not even matter that the CTA, like
i n C h i n a B a n k i n g C o r p o ra t i o n , 1 0 3 r e l i e d
erroneously on Manila Jockey Club. Under our tax
system, the CTA acts as a highly specialized body
specifically created for the purpose of reviewing tax
cases. 104 Because of its recognized expertise, its
findings of fact will ordinarily not be reviewed,
absent any showing of gross error or abuse on its
part. 105 Such findings are binding on the Court
and, absent strong reasons for us to delve into
facts, only questions of law are open for
determination. 106
Respondent claims that it is entitled to a
refund on the basis of excess GRT payments. We
disagree.
Tax refunds are in the nature of tax
exemptions. 107 Such exemptions are strictly
construed against the taxpayer, being highly
disfavored 108 and almost said "to be odious to the
law." Hence, those who claim to be exempt from the
payment of a particular tax must do so under clear
and unmistakable terms found in the statute. They
must be able to point to some positive provision,
not merely a vague implication, 109 of the law
creating that right. 110
The right of taxation will not be
surrendered, except in words too plain to be
mistaken. The reason is that the State cannot strip
itself of this highest attribute of sovereignty — its
most essential power of taxation — by vague or
ambiguous language. Since tax refunds are in the
nature of tax exemptions, these are deemed to be
"in derogation of sovereign authority and to be
construed strictissimi juris against the person or
entity claiming the exemption." 111
No less than our 1987 Constitution
provides for the mechanism for granting tax
exemptions. 112 They certainly cannot be granted
by implication or mere administrative regulation.
Thus, when an exemption is claimed, it must
indubitably be shown to exist, for every
presumption is against it, 113 and a well-founded
doubt is fatal to the claim. 114 In the instant case,
respondent has not been able to satisfactorily show
that its FWT on interest income is exempt from the
GRT. Like China Banking Corporation, its argument
creates a tax exemption where none exists. 115
No exemptions are normally allowed when
a GRT is imposed. It is precisely designed to
maintain simplicity in the tax collection effort of the
government and to assure its steady source of
revenue even during an economic slump. 116
No Double Taxation
We have repeatedly said that the two
taxes, subject of this litigation, are different from
each other. The basis of their imposition may be the
same, but their natures are different, thus leading
us to a final point. Is there double taxation? TaDIHc
The Court finds none.
Double taxation means taxing the same property twice when it
should be taxed only once; that is, ". . . taxing the same person
twice by the same jurisdiction for the same thing." 117 It is
obnoxious when the taxpayer is taxed twice, when it should be
but once. 118 Otherwise described as "direct duplicate taxation,"
119 the two taxes must be imposed on the same subject matter,
for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and they must Appeals are hereby REVERSED and SET ASIDE. No
be of the same kind or character. 120 costs.
First, the taxes herein are imposed on two different subject
matters. The subject matter of the FWT is the passive income SO ORDERED.
generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the Davide, Jr., C .J ., Ynares-Santiago, Carpio and Azcuna, JJ .,
privilege of engaging in the business of banking. concur.

||| (Commissioner of Internal Revenue. v. Solidbank Corp., G.R.

A tax based on receipts is a tax on No. 148191, [November 25, 2003], 462 PHIL 96-135)
business rather than on the property; hence, it is an
excise 121 rather than a property tax. 122 It is not
an income tax, unlike the FWT. In fact, we have
already held that one can be taxed for engaging in
business and further taxed differently for the
income derived therefrom. 123 Akin to our ruling in
Velilla v. Posadas, 124 these two taxes are entirely
distinct and are assessed under different provisions.

Second, although both taxes are national in scope because they

are imposed by the same taxing authority — the national
government under the Tax Code — and operate within the same
Philippine jurisdiction for the same purpose of raising revenues,
the taxing periods they affect are different. The FWT is deducted
and withheld as soon as the income is earned, and is paid after
every calendar quarter in which it is earned. On the other hand,
the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The
FWT is an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding.
In short, there is no double taxation,
because there is no taxing twice, by the same
taxing authority, within the same jurisdiction, for
the same purpose, in different taxing periods, some
of the property in the territory. 125 Subjecting
interest income to a 20% FWT and including it in
the computation of the 5% GRT is clearly not double
taxation.

WHEREFORE, the Petition is GRANTED.

The assailed Decision and Resolution of the Court of
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 p:
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. AHDcCT
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 TcHCDI
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 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.
Tax Due thereof at 35% P61,595,703.75 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
Less: Payment already made 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
1. Per return P26,595,704.00
taxed at the rate of only 5% purportedly as capital gains tax of
2. Thru Capital Gains
Altonaga, instead of at the rate of 35% as corporate income tax
Tax made by R.A.
of CIC. The income tax return filed by CIC for 1989 with intent to
Altonaga 10,000,000.00 36,595,704.00
evade payment of the tax was thus false or fraudulent. Since
—————— ———————
such falsity or fraud was discovered by the BIR only on 8 March
Balance of tax due P24,999,999.75
1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the
Add: 50% Surcharge 12,499,999.88
National Internal Revenue Code of 1986, which provides that tax
may be assessed within ten years from the discovery of the
25% Surcharge 6,249,999.94 falsity or fraud. With the sale being tainted with fraud, the
—————— separate corporate personality of CIC should be disregarded.
Total P43,749,999.57 Toda, being the registered owner of the 99.991% shares of stock
of CIC and the beneficial owner of the remaining 0.009% shares
Add: Interest 20% from registered in the name of the individual directors of CIC, should
be held liable for the deficiency income tax, especially because
4/16/90-4/30/94 (.808) 35,349,999.65 the gains realized from the sale were withdrawn by him as cash
——————— advances or paid to him as cash dividends. Since he is already
TOTAL AMT. DUE & COLLECTIBLE P79,099,999.22 dead, his estate shall answer for his liability. EISCaD
In its decision 18 of 3 January 2000, the CTA held that the
============ Commissioner failed to prove that CIC committed fraud to
The Estate thereafter filed a letter of protest. 13 deprive the government of the taxes due it. It ruled that even
In the letter dated 19 October 1995, 14 the Commissioner assuming that a pre-conceived scheme was adopted by CIC, the
dismissed the protest, stating that a fraudulent scheme was same constituted mere tax avoidance, and not tax evasion.
deliberately perpetuated by the CIC wholly owned and controlled There being no proof of fraudulent transaction, the applicable
by Toda by covering up the additional gain of P100 million, which period for the BIR to assess CIC is that prescribed in Section 203
resulted in the change in the income structure of the proceeds of of the NIRC of 1986, which is three years after the last day
the sale of the two parcels of land and the building thereon to an prescribed by law for the filing of the return. Thus, the
individual capital gains, thus evading the higher corporate government's right to assess CIC prescribed on 15 April 1993.
income tax rate of 35%. The assessment issued on 9 January 1995 was, therefore, no
On 15 February 1996, the Estate filed a petition for review 15 longer valid. The CTA also ruled that the mere ownership by
with the CTA alleging that the Commissioner erred in holding the Toda of 99.991% of the capital stock of CIC was not in itself
sufficient ground for piercing the separate corporate personality II. THE COURT OF APPEALS ERRED IN NOT
of CIC. Hence, the CTA declared that the Estate is not liable for DISREGARDI
deficiency income tax of P79,099,999.22 and, accordingly, NG THE
cancelled and set aside the assessment issued by the SEPARATE
Commissioner on 9 January 1995. C O R P O R AT E
In its motion for reconsideration, 19 the Commissioner insisted PERSONALITY
that the sale of the property owned by CIC was the result of the OF CIBELES
connivance between Toda and Altonaga. She further alleged that INSURANCE
the latter was a representative, dummy, and a close business CORPORATIO
associate of the former, having held his office in a property N.
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. III. THE COURT OF APPEALS ERRED IN
In its challenged Decision of 31 January 2001, the Court of H O L D I N G
Appeals affirmed the decision of the CTA, reasoning that the THAT THE
CTA, being more advantageously situated and having the RIGHT OF
necessary expertise in matters of taxation, is "better situated to PETITIONER
determine the correctness, propriety, and legality of the income TO ASSESS
tax assessments assailed by the Toda Estate." 22 RESPONDENT
Unsatisfied with the decision of the Court of Appeals, the F O R
Commissioner filed the present petition invoking the following DEFICIENCY
grounds: INCOME TAX
I. THE COURT OF APPEALS ERRED IN HOLDING FOR THE
T H A T YEAR 1989
RESPONDENT H A D
C O M M I TT E D PRESCRIBED.
NO FRAUD
WITH INTENT
TO EVADE
THE TAX ON
THE SALE OF
T H E The Commissioner reiterates her arguments in her previous
P R O P E RT I E S pleadings and insists that the sale by CIC of the Cibeles property
OF CIBELES was in connivance with its dummy Rafael Altonaga, who was
INSURANCE financially incapable of purchasing it. She further points out that
CORPORATIO the documents themselves prove the fact of fraud in that (1) the
N. 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," "willful," or
"deliberate and not accidental"; and (3) a course of action or
failure of action which is unlawful. 24 SITCcE
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 RMI's
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 isn't 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 [Emphasis
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. Altonaga's 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. aTEScI
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 evade tax or of failure to file a
partnerships, no matter how return, the tax may be assessed,
created or organized but not or a proceeding in court after the
including general professional collection of such tax may be
partnerships, in accordance with begun without assessment, at any
the following: 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
Twenty-five percent upon the amount by which fact of fraud shall be judicially
the taxable net income does not taken cognizance of in the civil or
exceed one hundred thousand criminal action for collection
pesos; and thereof . . ..

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
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. TSIDEa
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 3. He agrees to hold himself personally and
within the prescriptive period. solidarily liable with the
Is respondent Estate liable corporation; or
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?

A corporation has a juridical personality distinct and separate 4. He is made, by specific provision of law, to
from the persons owning or composing it. Thus, the owners or personally answer for
stockholders of a corporation may not generally be made to his corporate action. 38
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 It is worth noting that when the late Toda sold his shares of
of the corporation, (b) stock to Le Hun T. Choa, he knowingly and voluntarily held
bad faith or gross himself personally liable for all the tax liabilities of CIC and the
negligence in directing buyer for the years 1987, 1988, and 1989. Paragraph g of the
its affairs, or (c) conflict Deed of Sale of Shares of Stocks specifically provides:
of interest, resulting in g. Except for transactions occurring in the
damages to the ordinary course of business,
corporation, its Cibeles has no liabilities or
stockholders, or other obligations, contingent or
persons; 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
2. He consents to the issuance of watered part hereof. The business of
down stocks or, having Cibeles has at all times been
knowledge thereof, does conducted in full compliance with
not forthwith file with all applicable laws, rules and
the corporate secretary regulations. SELLER undertakes
his written objection and agrees to hold the BUYER and
thereto; Cibeles free from any and all
income tax liabilities of Cibeles for
the fiscal years 1987, 1988 and
1989. 39 [Emphasis 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 CIC's deficiency income tax
for the year 1989 by invoking the separate corporate personality
of CIC, since its obligation arose from Toda's contractual
undertaking, as contained in the Deed of Sale of Shares of
Stock. ICESTA
WHEREFORE, in view of all the foregoing, the petition is hereby
GRANTED. The decision of the Court of Appeals of 31 January
2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of
Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income
tax of Cibeles Insurance Corporation for the year 1989, plus
legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio and Azcuna, JJ ., concur.

||| (Commissioner of Internal Revenue v. Estate of Toda, Jr., G.R.

No. 147188, [September 14, 2004], 481 PHIL 626-645)
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. A. D.
GUERRERO, Special Administrator, in substitution of NATHANIEL
I. GUNN, as Administrator of the Estate of the late PAUL I.
GUNN, respondent.
Solicitor General for petitioner.
A. E. Dacanay for respondent.
SYLLABUS
1. CONSTITUTIONAL LAW; ORDINANCE, BACKGROUND OF. —
Upon liberation in 1945 when the ravages of war left the
Philippines economically prostrate and helpless, the American
Congress enacted, by way of aid, the Philippine Trade Act
of1946, providing, in its Sec. 341, parity rights with respect to
"the disposition, exploitation, development and utilization" of all
the natural resources of the Philippines as well as the operation
of public utilities. This was embodied in an Executive Agreement
of July 4, 1946, signed by the President of the Philippines and
the plenipotentiary of the President of the United States, and
later appended to the Philippine Constitution as Ordinance.
2. ID.; ORDINANCE CONSTRUED. — What it promises must be
fulfilled. There must be recognition of the right of the "citizens of
the United States in the same manner as to, and under the same
conditions imposed upon, citizens of the Philippines, or
corporations or associations owned or controlled by citizens of
the Philippines," in the disposition, exploitation,development and
utilization of all the natural resources of the Philippines, and the
operation of public utilities. To that grant,the Philippines is
committed. Its terms are to be respected. Anything further than
its categorical wording would not bewarranted. Nothing less
would suffice, but anything more would not be justified. What
was not included, whether by purpose orinadvertence, cannot be
judicially supplied.
3. ID.; SCOPE OF ORDINANCE. — The Ordinance, which is
transitory in character providing merely for the exigencies of a
few years, is designed for a limited period to allow what the
Constitution prohibits. During its effectivity there should be no
thought of whittling down the grant thus freely made.
Nonetheless, it should not be given an interpretation at war with
the plain and explicit command of what is to continue far into
the future that would trench further on the plain constitutional
mandate to limit the operation of public utilities to Filipino hands,
for the Constitution is intended to endure through a long lapse of
ages and state principles for an expanding future.
4. ID.; TAX EXEMPTION RULE. — Exemption, being obnoxious to
taxation, is not favored and never presumed; if at all, it must be
categorically and unmistakably expressed in terms that admit of
no doubt, yet such exempting provision must be interpreted in
strictissimi juris against the taxpayer and liberally in favor of the
taxing authority. The silence on tax exemption in the Ordinance
being patently evident, without any franchise to supply that
omission, affords no warrant for the claim here made.
5 . I D. ; TA X AT I O N ; I N T E R N A L R E V E N U E C O D E ; TA X
REFUND;COMITY OF NATIONS; CASE AT BAR. — Sec. 142 of the
National Internal Revenue Code allowing Filipinos a refund of
50% of the specific tax paid on aviation oil, cannot be availed of
by aliens in the absence of showing that their country grants
similar exemption to Filipino citizens; and where no such
evidence was presented, the case should be remanded to the
court a quo for further proceedings.
DECISION
FERNANDO, J p:
A novel question, one of importance and significance, is before
this Court in this petition for the review of a decision of the Court
of Tax Appeals. For the first time, the Ordinance appended to the
Constitution calls for interpretation, having been invoked to
justify a claim for refund of taxes by the estate of an American
national, who in his life-time was engaged in the air
transportation business. More specifically, the issue is whether or
not Section 142 of the National Internal Revenue Code allowing
Filipinos a refund of 50 percentum of the specific tax paid on
aviation oil, could be availed of by citizens of the United States
and all forms of business enterprises owned or controlled directly
or indirectly by them in view of their privilege under the
Ordinance to operate public utilities "in the same manner as to,
and under the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or controlled
by citizens of the Philippines." 1
The Commissioner of Internal Revenue, now petitioner before
this Court, denied the claim for refund in the sum of P2,441.93
filed by the administrator of the estate of Paul I. Gunn,
thereafter substituted by the present respondent A. D. Guerrero
as special administrator under the above section of the National
Internal Revenue Code. 2 The deceased operated an air
transportation business under the business name and style of
Philippine Aviation Development; his estate, it was claimed, "was
entitled to the same rights and privileges as Filipino citizens
operating public utilities including privileges in the matter of
taxation." The Commissioner of Internal Revenue disagreed,
ruling that such partial exemption from the gasoline tax was not
included under the terms of the Ordinance and that in
accordance with the statute, to be entitled to its benefits, there
must be a showing that the United States of which the deceased
was a citizen granted a similar exemption to Filipinos. The refund
as already noted was denied. The matter was brought to the
Court of Tax Appeals on a stipulation of facts, no additional
evidence being introduced. Viewing the Ordinance differently, it
"ordered the petitioner to refund to the respondent the sum of
P2,441.93 representing 50% of the specific taxes paid on
61,048.19 liters of gasoline actually used in aviation during the
period from October 3, 1956 up to May 31, 1957." Not satisfied
with the above decision, petitioner appealed.
We sustain the Commissioner of Internal Revenue; accordingly,
the Court of Tax Appeals is reversed. To the extent that a refund
is allowable, there is in reality a tax exemption. The rule applied
with undeviating rigidity in the Philippines is that for a tax
exemption to exist, it must be so categorically declared in words
that admit of no doubt. No such language may be found in the
Ordinance. It furnishes no support, whether express or implied,
to the claim of respondent Administrator for a refund.
From 1906, in Catholic Church vs. Hastings 3 to 1966, in Esso
Standard Eastern, Inc. vs. Acting Commissioner of Customs, 4 it
has been the constant and uniform holding that exemption from
taxation is not favored and is never presumed, so that if granted
it must be strictly construed against the taxpayer. Affirmatively
put, the law frowns on exemption from taxation, hence, an
exempting provision should be construed strictissimi juris. 5 The
state of the law on the subject was aptly summarized in the Esso
Standard Eastern, Inc. by Justice Sanchez thus: "The drive of
petitioner's argument is that marketing of its gasoline product 'is
corollary to or incidental to its industrial operations.' But this
contention runs smack against the familiar rules that exemption
from taxation is not favored, and that exemptions in tax statutes
are never presumed. Which are but statements in adherence to
the ancient rule that exemptions from taxation are construed in
strictissimi juris against the taxpayer and liberally in favor of the
taxing authority. Tested by this precept, we cannot indulge in
expansive construction and write into the law an exemption not
therein set forth. Rather, we go by the reasonable assumption
that where the State has granted in express terms certain
exemptions, those are the exemptions to be considered, and no
more . . . ."
In addition to Justice Tracey, who first spoke for this Court in the
Hastings case in announcing "the cardinal rule of American
jurisprudence that exemption from taxation not being favored,"
and therefore "must be strictly construed" against the taxpayer,
two other noted American jurists, Moreland and Street, who
likewise served this Court with distinction, reiterated the doctrine
in terms even more emphatic. According to Justice Moreland:
"Even though the complaint in this regard were well founded, it
would have little bearing on the result of the litigation when we
take into consideration the universal rule that he who claims an
exemption from his share of the common burden of taxation
must justify his claim by showing that the Legislature intended
to exempt him by words too plain to be mistaken." 6 From
Justice Street: "Exemptions from taxation are highly disfavored,
so much so that they may almost be said to be odious to the
law. He who claims an exemption must be able to point to some
positive provision of law creating the right. It cannot be allowed
to exist upon a vague implication such as is supposed to arise in
this case from the omission from Act No. 1654 of any reference
to liability for tax. The books are full of very strong expressions
on this point." 7
At the time then when the Ordinance took effect in April, 1947,
the strict rule against tax exemption was undisputed and
indisputable. Such being the case, it would be a plain departure
from the terms of the Ordinance to predicate a tax exemption
where none was intended. Wellsettled is the principle ". . . that a
constitutional provision must be presumed to have been framed
and adopted in the light and understanding of prior and existing
laws and with reference to them. 'Courts are bound to presume
that the people adopting a constitution are familiar with the
previous and existing laws upon the subjects to which its
provisions relate, and upon which they express their judgment
and opinion in its adoption'." 8
Respect for and deference to doctrines of such undeniable force
and cogency preclude an affirmance of the decision of the Court
of Tax Appeals. This is not to say that the scope of the Ordinance
is to be restricted or confined. What it promises must be fulfilled.
There must be recognition of the right of the "citizens of the
United States and to all forms of business enterprise owned or
controlled, directly or indirectly, by citizens of the United States"
to operate public utilities "in the same manner as to, and under
the same conditions imposed upon, citizens of the Philippines or
corporations or associations owned or controlled by citizens of
the Philippines."
If the language of the Ordinance applies to tax refund or
exemption, then the Court of Tax Appeals should be sustained. It
does not, however. Its terms are clear. Standing alone, without
any franchise to supply that omission, it affords no warrant for
the claim here made. While good faith, no less than adherence
to the categorical wording of the Ordinance, requires that all the
rights and privileges thus granted to Americans and business
enterprises owned and controlled by them be respected,
anything further would not be warranted. Nothing less will
suffice, but anything more is not justified.
This conclusion has reinforcement that comes to it from another
avenue of approach, the historical background of the Ordinance.
In public law questions, history many a time holds the key that
unlocks the door to understanding. Justice Tuason would thus
have courts "look to the history of the times, examine the state
of things existing when the Constitution was framed and
adopted, . . . and interpret it in the light of the law then in
operation." 9 Justice Laurel earlier noted that while historical
discussion is not decisive, it is valuable. 10 A brief resume then
of the events that led to its being appended to the Constitution
will not be inappropriate.
Early in 1945, liberation primarily through the efforts of the
American forces under General MacArthur, assisted by Filipino
guerrillas, heralded the dawn, awaited so long and so anxiously,
ending the dark night of the Japanese Occupation, which was
only partly mitigated by a show of cooperation on the part of
some Filipino leaders of stature and eminence. All throughout
those years, the Japanese Army in the Philippines enforced
repressive measures, severe in character. What was even more
regrettable, in the last few weeks, the few remaining Japanese
troops in Manila and suburbs made a suicidal stand. The
scorched earth policy was followed. Guerrilla suspects paid
dearly for their imaginary sins. There were recorded cases, not
few in number, or the old and infirm, even those of tender years,
not being spared. The Americans shelled Japanese positions,
unfortunately not always with precision, as would have been
unavoidable perhaps in any case. The lot of the helpless civilians,
already suffering from acts born out of desperation of a cornered
prey, became even more unenviable. They were caught in the
cross-fire.
The toll in the destruction of the property and the loss of lives
was heavy; the price the Filipinos paid was high. The feeling
then, and even now for that matter, was that it was worth it. For
life during the period of the Japanese Occupation had become
unbearable. There was an intolerable burden on the spirit and
the kind of man with all civil liberties wantonly disregarded.
There was likewise a well-nigh insupportable affliction on his
health and physical well-being, with food, what there was of it,
difficult to locate and beyond the means of even the middle-
income groups. Medicine was equally scarce, what was available
commanding prices unusually high. A considerable portion of the
population were dressed in rags and lived under the most
pitiable conditions in houses that had seen much better days.
Moreover in a garrison state with the Japanese kempetai, 11 and
the contemptible spies and informers, there was ever present
that fear of the morrow, the sense of living at the edge of an
impending doom.
It was fortunate that the Japanese Occupation ended when it
did. Liberation was hailed by all, but the problems faced by the
legitimate government were awesome in their immensity. The
Philippine treasury was bankrupt and her economy prostrate.
There were no dollar-earning export crops to speak of;
commercial operations were paralyzed; and her industries were
unable to produce with mills, factories and plants either
destroyed or their machineries obsolete or dismantled. It was a
desolate and tragic sight that greeted the victorious American
and Filipino troops. Manila, particularly that portion south of the
Pasig, lay in ruins, its public edifices and business buildings lying
in a heap of rubble and numberless houses razed to the ground.
It was in fact, next to Warsaw, the most devastated city in the
expert opinion of the then General Eisenhower. There was thus a
clear need of help from the United States. American aid was
forthcoming but on terms proposed by her government and later
on accepted by the Philippines.
One such condition expressly set forth in the Philippine Trade Act
of 1946 passed by the Congress of the United States was that:
"The disposition, exploitation, development, and utilization of all
agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all
forces and sources of potential energy, and other natural
resources of the Philippines, and the operation of public utilities,
shall, if open to any person, be open to citizens of the United
States and to all forms of business enterprises owned or
controlled directly or indirectly, by United States citizens.'' 12
The above was embodied in an Executive Agreement concluded
on July 4, 1946, the agreement being signed by the President of
the Republic of the Philippines and the plenipotentiary of the
President of the United States. The Constitution being in the
way, both the exploitation of natural resources and the operation
of public utilities having been reserved for Filipinos, there was a
need for an amendment. Such an amendment was only
forthcoming. It took the form of the Ordinance now under
consideration, which took effect on April 9, 1947.
The Ordinance thus came into being at a time when the
liberation of the Philippines had elicited a vast reservoir of
goodwill for the United States, one that has lasted to this day
notwithstanding irritants that mar ever so often the relationship
even among the most friendly of nations. Her prestige was never
so high. The Philippines after hearing opposing views on the
matter conceded parity rights. She adopted the Ordinance. To
that grant, she is committed. Its terms are to be respected. In
view of the equally fundamental postulate that legal concepts
imperatively calling for application cannot be ignored, however, it
follows that tax exemption to Americans or to business owned or
controlled directly or indirectly by American citizens, based solely
on the language of the Ordinance, cannot be allowed. There is
nothing in its history that calls for a different view. Had the
parties been of a different mind, they would have employed
words indicative of such intention. What was not there included,
whether by purpose or inadvertence, cannot be judicially
supplied.
One final consideration. The Ordinance is designed for a limited
period to allow what the Constitution prohibits; Americans may
operate public utilities. During its effectivity, there should be no
thought of whittling down the grant thus freely made.
Nonetheless, being of a limited duration, it should not be given
an interpretation that would trench further on the plain
constitutional mandate to limit the operation of public utilities to
Filipino hands. That is to show fealty to the fundamental law,
which, in the language of Story "was not intended to provide
merely for the exigencies of a few years" unlike the Ordinance
"but was to endure through a long lapse of ages, the events of
which were locked up in the inscrutable purposes of Providence."
13 This is merely to emphasize that the Constitution unlike an
ordinance appended to it, to borrow from Cardozo "states or
ought to state not rules for the passing hour, but principles for
an expanding future.'' 14 That is transitory in character then
should not be given an interpretation at war with the plain and
explicit command of what is to continue far into the future,
unless there be some other principle of acknowledged primacy
that compels the contrary. 15
It would seem to follow from all the foregoing that the decision
of the Court of Tax Appeals enlarged the scope and operation of
the Ordinance. It failed unfortunately to abide by what the
controlling precedents require, namely, that tax exemption is not
to be presumed and that if granted, it is to be most strictly
construed. No such grant was apparent on the face of the
Ordinance. No such grant could be implied from its history, much
less from its transitory character. The Court of Tax Appeals went
too far. That cannot be done.
WHEREFORE, the decision of the Court of Tax Appeals is
reversed and the case is remanded to it, to grant respondent
Administrator the opportunity of proving whether the estate
could claim the benefits of Section 142 of the National Internal
Revenue Code, allowing refund to citizens of foreign countries on
a showing of reciprocity. With costs.
Concepcion, C . J . , Reyes, J.B.L., Dizon, Makalintal, Bengzon,
J.P., Zaldivar, Sanchez, Castro and Angeles, JJ., concur.
||| (Commissioner of Internal Revenue v. Guerrero, G.R. No.
L-20942, [September 22, 1967])
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT
OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S
CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC.,
respondents.
SYLLABUS
1. TAXATION; COURT OF TAX APPEALS; FACTUAL FINDINGS,
WHEN SUPPORTED BY SUBSTANTIAL EVIDENCE, WILL NOT BE
DISTURBED ON APPEAL; CASE AT BAR. — It is a basic rule in
taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is
shown that the said court committed gross error in the
appreciation of facts. In the present case, this Court finds that
the February 16, 1994 Decision of the CA did not deviate from
this rule. The latter merely applied the law to the facts as found
by the CTA and ruled on the issue raised by the CIR: "Whether
or not the collection or earnings of rental income from the lease
of certain premises and income earned from parking fees shall
fall under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended." Clearly, the CA
did not alter any fact or evidence. It merely resolved the
aforementioned issue, as indeed it was expected to. That it did
so in a manner different from that of the CTA did not necessarily
imply a reversal of factual findings. cdasia
2. ID.; APPEAL; QUESTION OF LAW AND QUESTION OF FACT,
DISTINGUISHED. — The distinction between a question of law
and a question of fact is clear-cut. It has been held that "[t]here
is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a
question of fact when the doubt or difference arises as to the
truth or falsehood of alleged facts." In the present case, the CA
did not doubt, much less change, the facts narrated by the CTA.
It merely applied the law to the facts. That its interpretation or
conclusion is different from that of the CTA is not irregular or
abnormal.
3. ID.; TAX EXEMPTION; COURT HAS ALWAYS APPLIED THE
DOCTRINE OF STRICT INTERPRETATION IN CONSTRUING
THEREOF; APPLICATION IN CASE AT BAR. — Because taxes are
the lifeblood of the nation, the Court has always applied the
doctrine of strict interpretation in construing tax exemptions.
Furthermore, a claim of statutory exemption from taxation
should be manifest and unmistakable from the language of the
law on which it is based. Thus, the claimed exemption "must
expressly be granted in a statute stated in a language too clear
to be mistaken." In the instant case, the exemption claimed by
the YMCA is expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which mandates that
the income of exempt organizations (such as the YMCA) from
any of their properties, real or personal, be subject to the tax
imposed by the same Code. Because the last paragraph of said
section unequivocally subjects to tax the rent income of the
YMCA from its real property, the Court is duty-bound to abide
strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction. It is axiomatic that where
the language of the law is clear and unambiguous, its express
terms must be applied. Parenthetically, a consideration of the
question of construction must not even begin, particularly when
such question is on whether to apply a strict construction or a
liberal one on statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or institutions." The
phrase "any of their activities conducted for profit" does not
qualify the word "properties." This makes income from the
property of the organization taxable, regardless of how that
income is used — whether for profit or for lofty non-profit
purposes. Verba legis non est recedendum. Hence, Respondent
Court of Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income
it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for
profit but is merely incidental to its operation. The law does not
make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of.
Where the law does not distinguished, neither should we.
4. ID.; ID.; WHEN GRANTED; REQUISITES. — Private
respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation
alone that it is a non-stock, non-profit educational institution is
insufficient to justify its exemption from the payment of income
tax. For the YMCA to be granted the exemption it claims under
the aforecited provision, it must prove with substantial evidence
that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively
for educational purposes. However, the Court notes that not a
scintilla of evidence was submitted by private respondent to
prove that it met the said requisites.
5. ID.; ID.; EDUCATIONAL INSTITUTION, CONSTRUED; WHEN
NOT APPLICABLE; CASE AT BAR. — Is the YMCA and educational
institution within the purview of Article XIV, Section 4, par. 3 of
the Constitution? We rule that it is not. The term "educational
institution" or "institution of learning" has acquired a well-known
technical meaning, of which the members of the Constitutional
Commission are deemed cognizant. Under the Education Act of
1982, such term refers to schools. The school system is
synonymous with formal education, which "refers to the
hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for
which certification is required in order for the learner to progress
through the grades or move to the higher levels." The Court has
examined the "Amended Articles of Incorporation" and "By-
Laws" of the YMCA, but found nothing in them that even hints
that it is a school or an educational institution. Furthermore,
under the Education Act of 1982, even non-formal education is
understood to be school-based and "private auspices such as
foundations and civic-spirited organizations" are ruled out. It is
settled that the term "educational institution," when used in laws
granting tax exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." Therefore, the
private respondent cannot be deemed one of the educational
institutions covered by the constitutional provision under
consideration. ". . . Words used in the Constitution are to be
taken in their ordinary acceptation. While in its broadest and
best sense education embraces all forms and phases of
instruction, improvement and development of mind and body,
and as well of religious and moral sentiments, yet in the
common understanding and application it means a place where
systematic institution in any or all of the useful branches of
learning is given by methods common to schools and instruction
of learning. That we conceive to be the true intent and scope of
the term [educational institutions] as used in the Constitution."
BELLOSILLO, J., dissenting opinion:
1. TAXATION; COURT OF TAX APPEALS; FINDINGS OF FACTS,
WHEN SUPPORTED BY SUBSTANTIAL EVIDENCE, WILL NOT BE
DISTURBED ON APPEAL; EXCEPTION; NOT APPLICABLE IN CASE
AT BAR. — The basic rule is that the factual findings of the Court
of Tax Appeals when supported by substantial evidence will not
be disturbed on appeal unless it is shown that the court
committed grave error in the appreciation of facts. In the instant
case, there is no dispute as to the validity of the findings of the
Court of Tax Appeals that private respondent Young Men's
Christian Association (YMCA) is an association organized and
operated exclusively for the promotion of social welfare and
other non-profitable purposes, particularly the physical and
character development of the youth. cHAaEC
2. ID.; TAX EXEMPTION; WHEN INCOME DERIVED FROM ITS
PROPERTY BY A TAX EXEMPT ORGANIZATION IS NOT
ABSOLUTELY TAXABLE; CASE AT BAR. — Respondent YMCA is
undoubtedly exempt from corporate income tax under the
provisions of Sec. 27, pars. (g) and (h), of the National Internal
Revenue Code, to wit: Sec. 27. Exemptions from tax on
corporations. — The following organizations shall not be taxed
under this Title in respect to income received by them as such —
. . . (g) civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare; (h) club
organized and operated exclusively for pleasure, recreation and
other non-profitable purposes, no part of the net income of
which inures to the benefit of any private stockholder or member
. . . 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. Income derived from its property by a tax
exempt organization is not absolutely taxable. Taken in solitude,
a word or phrase such as, in this case, "the income of whatever
kind and character . . . from any of their properties" might easily
convey a meaning quite different from the one actually intended
and evident when a word or phrase is considered with those with
which it is associated. It is a rule in statutory construction that
every part of the statute must be interpreted with reference to
the context, that every part of the statute must be considered
together with the other parts and kept subservient to the general
intent of the whole enactment. A close reading of the last
paragraph of Sec. 27 of the National Internal Revenue Code, in
relation to the whole section on tax exemption of the
organizations enumerated therein, shows that the phrase
"conducted for profit" in the last paragraph of Sec. 27 qualifies,
limits and describes "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" in order to make such
income taxable. It is the exception to Sec. 27, pars. (g) and (h)
providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other
property is not conducted for profit, then it is not taxable. Even
taken alone and understood according to its plain, simple and
literal meaning, the word "income" which is derived from
property, real or personal, provided in the last paragraph of Sec.
27 means the amount of money coming to a person or
corporation within a specified time as profit from investment; the
return in money from one's business or capital invested. Income
from property also means gains and profits derived from the sale
or other disposition of capital assets; the money which any
person or corporation periodically receives either as profits from
business, or as returns from investments. The word "income" as
used in tax statutes is to be taken in its ordinary sense as gain
or profit. Clearly, therefore, income derived from property
whether real or personal connotes profit from business or from
investment of the same. If we are to apply the ordinary meaning
of income from property as profit to the language of the last
paragraph of Sec. 27 of the NIRC, then only those profits arising
from business and investment involving property are taxable. In
the instant case, there is no question that in leasing its facilities
to small shop owners and in operating parking spaces, YMCA
does not engage in any profit-making business. Both the Court
of Tax Appeals, and the Court of Appeals in its resolution of 25
September 1995, categorically found that these activities
conducted on YMCA's property were aimed not only at fulfilling
the needs and requirements of its members as part of YMCA'S
youth program but, more importantly, at raising funds to finance
the multifarious projects of the Association.
3. ID.; ID.; THE MERE REALIZATION OF PROFITS OUT OF ITS
OPERATION DOES NOT AUTOMATICALLY RESULT IN THE LOSS
THEREOF, AS LONG AS NO PART OF THE PROFITS OF AN
EDUCATIONAL INSTITUTION INURES TO THE BENEFIT OF ANY
STOCKHOLDER OR INDIVIDUAL; CASE AT BAR. — As the Court
has ruled in one case, the fact that an educational institution
charges tuition fees and other fees for the different services it
renders to the students does not in itself make the school a
profit-making enterprise that would place it beyond the purview
of the law exempting it from taxation. The mere realization of
profits out of its operation does not automatically result in the
loss of an educational institution's exemption from income tax as
long as no part of its profits inures to the benefit of any
stockholder or individual. In order to claim exemption from
income tax, a corporation or association must show that it is
organized and operated exclusively for religious, charitable,
scientific, athletic, cultural or educational purposes or for the
rehabilitation of veterans, and that no part of its income inures
to the benefit of any private stockholder or individual. The main
evidence of the purpose of a corporation should be its articles of
incorporation and by-laws, for such purpose is required by
statute to be stated in the articles of incorporation, and the by-
laws outline the administrative organization of the corporation
which, in turn, is supposed to insure or facilitate the
accomplishment of said purpose. The foregoing principle applies
to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income
taxable is when it arises from purely profit-making business.
Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent,
educational or religious purpose for which the corporation or
association is created, such income should be tax-exempt. The
majority, if not all, of the income of the organizations covered by
the exemption provided in Sec. 27, pars. (g) and (h), of the
NIRC are derived from their properties, real or personal. If we
are to interpret the last paragraph of Sec. 27 to the effect that
all income of whatever kind from the properties of said
organization, real or personal, are taxable, even if not conducted
for profit, then Sec. 27, pars. (g) and (h), would be rendered
ineffective and nugatory. As this Court elucidated in Jesus Sacred
Heart College v. Collector of Internal Revenue, (95 Phil. 16
[1954]) every responsible organization must be so run as to at
least insure its existence by operating within the limits of its own
resources, especially its regular income. It should always strive
whenever possible to have a surplus. If the benefits of the
exemption would be limited to institutions which do not hope or
propose to have such surplus, then the exemption would apply
only to schools which are on the verge of bankruptcy. Unlike the
United States where a substantial number of institutions of
learning are dependent upon voluntary contributions and still
enjoy economic stability, such as Harvard, the trust fund of
which has been steadily increasing with the years, there are and
there have always been very few educational enterprises in the
Philippines which are supported by donations, and these
organizations usually have a very precarious existence. ESAHca
DECISION
PANGANIBAN, J p:
Is the income derived from rentals of real property owned by the
Young Men's Christian Association of the Philippines, Inc. (YMCA)
— established as "a welfare, educational and charitable non- respondent] particularly Mr. James
profit corporation" — subject to income tax under the National C. Delote, former accountant of
Internal Revenue Code (NIRC) and the Constitution? cdphil YMCA, that these facilities were
The Case leased to members and that they
This is the main question raised before us in this petition for have to service the needs of its
review on certiorari challenging two Resolutions issued by the members and their guests. The
Court of Appeals 1 on September 28, 1995 2 and February 29, rentals were minimal as for
1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed the example, the barbershop was only
Decision of the Court of Tax Appeals (CTA) allowing the YMCA to charged P300 per month. He also
claim tax exemption on the latter's income from the lease of its testified that there was actually no
real property. lot devoted for parking space but
The Facts the parking was done at the sides
The facts are undisputed. 4 Private Respondent YMCA is a non- of the building. The parking was
stock, non-profit institution, which conducts various programs primarily for members with
and activities that are beneficial to the public, especially the stickers on the windshields of their
young people, pursuant to its religious, educational and cars and they charged P.50 for
charitable objectives. cda non-members. The rentals and
In 1980, private respondent earned, among others, an income of parking fees were just enough to
P676,829.80 from leasing out a portion of its premises to small cover the costs of operation and
shop owners, like restaurants and canteen operators, and maintenance only. The earning[s]
P44,259.00 from parking fees collected from non-members. On from these rentals and parking
July 2, 1984, the commissioner of internal revenue (CIR) issued charges including those from
an assessment to private respondent, in the total amount of lodging and other charges for the
P415,615.01 including surcharge and interest, for deficiency use of the recreational facilities
income tax, deficiency expanded withholding taxes on rentals constitute [the] bulk of its income
and professional fees and deficiency withholding tax on wages. which [is] channeled to support its
Private respondent formally protested the assessment and, as a many activities and attainment of
supplement to its basic protest, filed a letter dated October 8, its objectives. As pointed out
1985. In reply, the CIR denied the claims of YMCA. earlier, the membership dues are
Contesting the denial of its protest, the YMCA filed a petition for very insufficient to support its
review at the Court of Tax Appeals (CTA) on March 14, 1989. In program. We find it reasonably
due course, the CTA issued this ruling in favor of the YMCA: cdtai necessary therefore for [private
". . . [T]he leasing of [private respondent's] respondent] to make [the] most
facilities to small shop owners, to out [of] its existing facilities to
restaurant and canteen operators earn some income. It would have
and the operation of the parking been different if under the
lot are reasonably incidental to circumstances, [private
and reasonably necessary for the respondent] will purchase a lot
accomplishment of the objectives and convert it to a parking lot to
of the [private respondents]. It cater to the needs of the general
appears from the testimonies of public for a fee, or construct a
the witnesses for the [private building and lease it out to the
 highest bidder or at the market 1980 Deficiency Fixed
rate for commercial purposes, or Tax — P353,15;
should it invest its funds in the
buy and sell of properties, real or
personal. Under these
circumstances, we could conclude
that the activities are already 1980 Deficiency
profit oriented, not incidental and Contractor's Tax — P3,129.23;
reasonably necessary to the
pursuit of the objectives of the
association and therefore, will fall
under the last paragraph of
Section 27 of the Tax Code and
any income derived therefrom 1980 Deficiency Income
shall be taxable. LLpr Tax — P372,578.20.

"Considering our findings that [private While the following assessments are hereby
respondent] was not engaged in sustained:
the business of operating or
contracting [a] parking lot, we
find no legal basis also for the
imposition of [a] deficiency fixed
tax and [a] contractor's tax in the 1980 Deficiency
amount[s] of P353.15 and Expanded Withholding Tax —
P3,129.73, respectively. P1,798.93;

xxx xxx xxx 1980 Deficiency

Withholding Tax on Wages —
P33,058.82

"WHEREFORE, in view of all the foregoing, the

following assessments are hereby
dismissed for lack of merit: plus 10% surcharge and 20% interest per
annum from July 2, 1984 until
 fully paid but not to exceed three 1980 Deficiency Income
(3) years pursuant to Section Tax P353.15
51(e)(2) & (3) of the National
Internal Revenue Code effective
as of 1984." 5

1980 Deficiency
Contractor's Tax P3,129.23, &

Dissatisfied with the CTA ruling, the CIR elevated the case to the
Court of Appeals (CA). In its Decision of February 16, 1994, the
CA 6 initially decided in favor of the CIR and disposed of the
appeal in the following manner: 1980 Deficiency Income
"Following the ruling in the aforecited cases of Tax P372,578.20,
Province of Abra vs. Hernando and
Abra Valley College Inc. vs.
Aquino, the ruling of the
respondent Court of Tax Appeals
that 'the leasing of petitioner's
(herein respondent's) facilities to but the same is AFFIRMED in all other respect."
small shop owners, to restaurant 7
and canteen operators and the
operation of the parking lot are
reasonably incidental to and
reasonably necessary for the
accomplishment of the objectives Aggrieved, the YMCA asked for reconsideration based on the
of the petitioners,' and the income following grounds: cdll
derived therefrom are tax exempt, I
must be reversed. cda

"The findings of facts of the Public Respondent

"WHEREFORE, the appealed decision is hereby C o u r t o f Ta x A p p e a l s b e i n g
REVERSED in so far as it supported by substantial evidence
dismissed the assessment for: [are] final and conclusive.

II
"The conclusions of law of [p]ublic
[r]espondent exempting [p]rivate
[r]espondent from the income on
rentals of small shops and parking
fees [are] in accord with the
applicable law and jurisprudence."
8
Finding merit in the Motion for Reconsideration filed by the
YMCA, the CA reversed itself and promulgated on September 28,
1995 its first assailed Resolution which, in part, reads:
"The Court cannot depart from the CTA's
findings of fact, as they are
supported by evidence beyond
what is considered as substantial.
Cdpr
xxx xxx xxx
"The second ground raised is that the
respondent CTA did not err in
saying that the rental from small
shops and parking fees do not
result in the loss of the
exemption. Not even the
petitioner would hazard the
suggestion that YMCA is designed
for profit. Consequently, the little
income from small shops and
parking fees help[s] to keep its
head above the water, so to
speak, and allow it to continue
with its laudable work.
"The Court, therefore, finds the second ground
of the motion to be meritorious
and in accord with law and
jurisprudence.
"WHEREFORE, the motion for reconsideration is
GRANTED; the respondent CTA's
decision is AFFIRMED in toto." 9
The internal revenue commissioner's own Motion for
Reconsideration was denied by Respondent Court in its second
assailed Resolution of February 29, 1996. Hence, this petition for
review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the
following errors:
I
"In holding that it had departed from the
findings of fact of Respondent
Court of Tax Appeals when it
 rendered its Decision dated
February 16, 1994, and llcd
II
"In affirming the conclusion of Respondent
Court of Tax Appeals that the
income of private respondent from
rentals of small shops and parking
fees [is] exempt from taxation."
11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA
Decision reversed the factual findings of the CTA. On the other
hand, petitioner argues that the CA merely reversed the "ruling
of the CTA that the leasing of private respondent's facilities to
small shop owners, to restaurant and canteen operators and the
operation of parking lots are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives
of the private respondent and that the income derived therefrom
are tax exempt." 12 Petitioner insists that what the appellate
court reversed was the legal conclusion, not the factual finding of
the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of
the CTA, when supported by substantial evidence, will not be
disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. 14 In the
present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the CTA and
ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under
the last paragraph of Section 27 of the National Internal
Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely
resolved the aforementioned issue, as indeed it was expected to.
That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings. cdll
The distinction between a question of law and a question of fact
is clear-cut. It has been held that "[t]here is a question of law in
a given case when the doubt or difference arises as to what the
law is on a certain state of facts; there is a question of fact when
the doubt or difference arises as to the truth or falsehood of
alleged facts." 16 In the present case, the CA did not doubt,
much less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or conclusion
is different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the
YMCA from its real estate subject to tax? At the outset, we set
forth the relevant provision of the NIRC: prLL
"SEC. 27. Exemptions from tax on
corporations. — The following
organizations shall not be taxed
under this Title in respect to
income received by them as such
—
xxx xxx xxx
(g) Civic league or organization not organized
for profit but operated exclusively
for the promotion of social
welfare;
(h) Club organized and operated exclusively for
pleasure, recreation, and other
non-profitable purposes, no part
of the net income of which inures
to the benefit of any private
stockholder or member;
xxx xxx xxx
N o t w i t h s t a n d i n g t h e p r ov i s i o n s i n t h e
preceding paragraphs, the income
of whatever kind and character of
the foregoing organizations from
any of their properties, real or
personal, or from any of their
activities conducted for profit,
regardless of the disposition made
of such income, shall be subject to
the tax imposed under this Code.
(as amended by Pres. Decree No.
1457)" Cdpr
Petitioner argues that while the income received by the
organizations enumerated in Section 27 (now Section 26) of the
NIRC is, as a rule, exempted from the payment of tax "in respect
to income received by them as such," the exemption does not
apply to income derived ". . . from any of their properties, real
or personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income . . ."
Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal,
[is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its
objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has
always applied the doctrine of strict interpretation in construing
tax exemptions. 18Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the
language of the law on which it is based. Thus, the claimed
exemption "must expressly be granted in a statute stated in a
language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last paragraph of
then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax imposed by
the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the YMCA from
its real property, 20 the Court is duty-bound to abide strictly by
its literal meaning and to refrain from resorting to any
convoluted attempt at construction. LLpr
It is axiomatic that where the language of the law is clear and
unambiguous, its express terms must be applied.
21Parenthetically, a consideration of the question of construction
must not even begin, particularly when such question is on
whether to apply a strict construction or a liberal one on statutes
that grant tax exemptions to "religious, charitable and
educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be
"subject to the qualification that the income from the properties
must arise from activities 'conducted for profit' before it may be
considered taxable." 23 This argument is erroneous. As
previously stated, a reading of said paragraph ineludibly shows
that the income from any property of exempt organizations, as
well as that arising from any activity it conducts for profit, is
taxable. The phrase "any of their activities conducted for profit"
does not qualify the word "properties." This makes income from
the property of the organization taxable, regardless of how that
income is used — whether for profit or for lofty non-profit
purposes. cdrep
Verba legis non est recedendum. Hence, Respondent Court of
Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income
it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for
profit but is merely incidental to its operation. The law does not
make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of.
Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law, private
respondent submits that Article VI, Section 28 of par. 3 of the
1987 Constitution, 24 exempts "charitable institutions" from the
payment not only of property taxes but also of income tax from
any source. 25 In support of its novel theory, it compares the
use of the words "charitable institutions," "actually" and
"directly" in the 1973 and the 1987 Constitutions, on the one
hand; and in Article VI, Section 22, par. 3 of the 1935
Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present
provision is divisible into two categories: (1) "[c]haritable
institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of
which are, from whatever source, all tax-exempt; 27 and (2)
"[a]ll lands, buildings and improvements actually and directly
used for religious, charitable or educational purposes," which are
exempt only from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited the
exemption only to the payment of property taxes, referred to the
provision of the 1935 Constitution and not to its counterparts in
the 1973 and the 1987 Constitutions. 30 Third, the phrase
"actually, directly and exclusively used for religious, charitable or
educational purposes" refers not only to "all lands, buildings and
improvements," but also to the above-quoted first category
which includes charitable institutions like the private respondent.
31
The Court is not persuaded. The debates, interpellations and
expressions of opinion of the framers of the Constitution reveal
their intent which, in turn, may have guided the people in
ratifying the Charter. 32 Such intent must be effectuated. dctai
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional
commissioner, who is now a member of this Court, stressed
during the Concom debates that ". . . what is exempted is not
the institution itself . . .; those exempted from real estate taxes
are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on
the Constitution and also a member of the Concom, adhered to
the same view that the exemption created by said provision
pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs,
stating that "[t]he tax exemption covers property taxes only." 35
Indeed, the income tax exemption claimed by private respondent
finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of
the Charter, 36 claiming that the YMCA "is a non-stock, non-
profit educational institution whose revenues and assets are
used actually, directly and exclusively for educational purposes
so it is exempt from taxes on its properties and income." 37 We
reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-
profit educational institution is insufficient to justify its
exemption from the payment of income tax. cdtai
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted
the exemption it claims under the aforecited provision, it must
prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and
(2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes.
However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the purview of
Article XIV, Section 4, par. 3 of the Constitution? We rule that it
is not. The term "educational institution " or "institution of
learning" has acquired a well-known technical meaning, of which
the members of the Constitutional Commission are deemed
cognizant. 38 Under the Education Act of 1982, such term refers
to schools. 39 The school system is synonymous with formal
education, 40 which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by the
formal school system and for which certification is required in
order for the learner to progress through the grades or move to
the higher levels." 41 The Court has examined the "Amended
Articles of Incorporation" 42 and "By-Laws" 43 of the YMCA, but
found nothing in them that even hints that it is a school or an
educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal
education is understood to be school-based and "private
auspices such as foundations and civic-spirited organizations"
are ruled out. 45 It is settled that the term "educational
institution," when used in laws granting tax exemptions, refers
to a ". . . school seminary, college or educational establishment .
. ." 46 Therefore, the private respondent cannot be deemed one
of the educational institutions covered by the constitutional
provision under consideration. cdphil
". . . Words used in the Constitution are to be
taken in their ordinary
acceptation. While in its broadest
and best sense education
embraces all forms and phases of
instruction, improvement and
development of mind and body,
and as well of religious and moral
sentiments, yet in the common
understanding and application it
means a place where systematic
instruction in any or all of the
useful branches of learning is
given by methods common to
schools and institutions of
learning. That we conceive to be
the true intent and scope of the
term [educational institutions,] as
used in the Constitution ." 47
Moreover, without conceding that Private Respondent YMCA is an
educational institution, the Court also notes that the former did
not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for
educational purposes. Article XIII, Section 5 of the YMCA by-
laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that "[t]he net
income derived from the rentals of the commercial buildings
shall be apportioned to the Federation and Member Associations
as the National Board may decide." 48 In sum, we find no basis
for granting the YMCA exemption from income tax under the
constitutional provision invoked. LLphil
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its
cause. YMCA of Manila v. Collector of Internal Revenue 50 and
Abra Valley College, Inc. v. Aquino 51 are not applicable,
because the controversy in both cases involved exemption from
the payment of property tax, not income tax. Hospital de San
Juan de Dios, Inc. v. Pasay City 52 is not in point either, because
it involves a claim for exemption from the payment of regulatory
fees, specifically electrical inspection fees, imposed by an
ordinance of Pasay City — an issue not at all related to that
involved in a claimed exemption from the payment of income
taxes imposed on property leases. In Jesus Sacred Heart College
v. Com. of Internal Revenue, 53 the party therein, which claimed
an exemption from the payment of income tax, was an
educational institution which submitted substantial evidence that
the income subject of the controversy had been devoted or used
solely for educational purposes. On the other hand, the private
respondent in the present case has not given any proof that it is
an educational institution, or that part of its rent income is
actually directly and exclusively used for educational purposes.
prLL
Epilogue
In deliberating on this petition, the Court expresses its sympathy
with private respondent. It appreciates the nobility of its cause.
However, the Court's power and function are limited merely to
applying the law fairly and objectively. It cannot change the law
or bend it to suit its sympathies and appreciations. Otherwise, it
would be overspilling its role and invading the realm of
legislation.
We concede that private respondent deserves the help and the
encouragement of the government. It needs laws that can
facilitate, and not frustrate, its humanitarian tasks. But the Court
regrets that, given its limited constitutional authority, it cannot
rule on the wisdom or propriety of legislation. That prerogative
belongs to the political departments of government. Indeed,
some of the members of the Court may even believe in the
wisdom and prudence of granting more tax exemptions to
private respondent. But such belief, however well-meaning and
sincere, cannot bestow upon the Court the power to change or
amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the
Court of Appeals dated September 28, 1995 and February 29,
1996 are hereby REVERSED and SET ASIDE. The Decision of the
Court of Appeals dated February 16, 1995 is REINSTATED,
insofar as it ruled that the income derived by petitioner from
rentals of its real property is subject to income tax. No
pronouncement as to costs. cda
SO ORDERED.
Davide, Jr., Vitug and Quisumbing, JJ ., concur.

||| (Commissioner of Internal Revenue v. Court of Appeals, G.R.

No. 124043, [October 14, 1998], 358 PHIL 562-592)